Rate of Return Generator (RORGEN) User Manual | NRCS Economics
General Description and Vision of RORGEN
The Rate of Return Generator (RORGEN) is an Excel workbook which is used to interview homeowners about fuel load reduction on their residential properties. The answers which homeowners give are used in RORGEN to estimate the benefits and costs to that homeowner from doing fuel load reduction. RORGEN uses not only the homeowners' answers, but also uses fire assumptions and cost assumptions. The fire assumption values are created by firefighters in the geographic area in whichRORGEN will be used. The fire assumptions relate fuel load reduction activities to the survival of mature trees, structures and their contents. The cost assumptions are the generalized costs of installing and maintaining fuel reduction practices. The cost assumptions are created by local agency personnel.
The vision of RORGEN is to encourage homeowners to assess for themselves the rate of return to them from spending money to reduce wildfire fuels on their residential property. RORGEN requires homeowners to answer about 16 questions. Some questions are very difficult to answer. One example is: What is the value of your sentimental belongings such as baby photos? By presenting such difficult questions, RORGEN helps homeowners imagine their wildfire losses before a fire burns their homes. This imagination helps homeowners decide whether or not the cost of fuel load reduction can be justified when viewed as an investment. For example, suppose the rate of return to a particular homeowner is 20%. That homeowner can now compare the 20% rate of return with alternative investments they could make with the same money. Rate of Return Generator (RORGEN) User Manual
Please contact Madalene M. Ransom with your suggestions for improving this manual.
User Manual written by:
Madalene M. Ransom, ENTSC Economist
USDA Natural Resources Conservation Service
Before using RORGEN, copy the workbook rorgen.xls to your hard drive
General Description and Vision of RORGEN
Costs and Benefits in RORGEN
Assumptions in RORGEN not Otherwise discussed
Details about Homeowner Questions in RORGEN
Please Note: This document is a draft. As such, very little has been written. As interest in RORGEN grows, this document will grow to meet the new needs. For now, please contact me with any ideas for improving RORGEN or this documents and please feel free to call with questions which are not yet answered by this document. Thank you.
1. Open the Excel workbook named field_office_rorgen.xls.
2. Use the File, SaveAs commands in Excel to create a new workbook, perhaps named my_rorgen.xls, which you can use.
3. Save field_office_rorgen.xls in its original form. Do not use it.
Create Your First Scenario: RORGEN allows you to process more than one scenario
for a homeowner during the interview. The following steps are used for the first scenario.
1. Type the homeowner name in cell A11. The new homeowner name will overwrite the ï¿½our name hereï¿½which is the default for cell A11.
2. Look at cell A16. You will see ï¿½ase caseï¿½is written in that cell. This is the first cell in row 16 which will contain the first scenario.
3. You will enter your first scenario by typing answers in row 16. (Additional scenarios for the same homeowner will be entered in Rows 17 through 21. Row 21 is the last row for entering scenarios. Thus you will be able to evaluate six scenarios.)
4. The interview questions are contained in the column headers for columns C through T. The first scenario answers will be typed into cells C16 through T16. The following steps briefly explain what to do. For more detail about each homeowner question, please turn to the section of this document entitled Homeowner Questions in RORGEN.
(a) Place the mouse cursor in cell C16.
(b) Read the question which is just above cell C16.
(c) Type the answer in cell C16.
You will notice that when you enter the cell C16 number, RORGEN types numbers into cells D16 and E16. These are default values for treatment zones. If you want to change these numbers, simply type in different numbers. When you type a different number into cell D16, you will notice that the number in cell E16 changes. You may also overwrite the contents of cell E16. Warning: If you type a number into either cell D16 or E16 you will overwrite the formula which is in each cell. This is OK if you donï¿½ mind losing the formula.
(d) Move to the next cell, F16. Read question. Type answer in F16.
You will notice that when you enter the cell F16 number, RORGEN types numbers into all of the remaining cells of row 16. RORGEN calculates default values for all of the remaining cells in row 16. However, you may change every cell value from G16 to T16. Warning: However, each time you type in a number, the formula which created the default value will be overwritten.
(e) Cell T16 is the last data entry for row 16, the last question for the first scenario.
5. You have now completed entering the data for the first scenario. You are now ready to read the results.
6. Cells U16 and V16 contain Total Cost estimates for installing and maintaining the fuel reduction practices. A subsequent section of this manual will explain how these costs are estimated.
7. Cell W16 contains the Total Benefit estimate of the first scenario. A subsequent section of this manual will explain how these benefits were estimated.
8. Cell X16 and cell Y16 contain a Rate of Return. These are the bottom line numbers for the homeowner.
9. Click onto File, Print Preview to see what the homeowner will get when you print the interview at this point. Notice that you will see only columns A through Y on the print preview. These are the only columns the homeowner will see.
10. The rest of the columns, up to column CK, are not printed for the homeowner. They contain the intermediate numbers. As you scroll to the right, you will see data in all columns of row 16 up to column CK.
Columns A through Y contain homeowner input youï¿½e just completed and the final numbers the homeowner will receive on the print out.
Columns Z through BL contain cost assumptions and calculations.
Columns BM through CA contain benefit intermediate calculations.
Columns CB through CG contain fire assumptions
Columns CI through CK contain general economic assumptions.
Create Another Scenario: To enter another scenario for the same homeowner, click on cell A17. Type some words in cell A17 which describe your next scenario for the same homeowner. For example, type more tree value (suppose the homeowner were to place more value on the trees). Notice that after you enter the new words into cell A17, all the cells in row 17 become filled with the values which are in row 16. Thus, now you have two rows, 16 and 17, which display the same values. However, you will notice that the underlying formulae are different. The formulae for row 17 instruct Excel to copy values from row 16.
Thus, in order to enter the next scenario, all you have to do is overwrite the values in row 17 which represent the next scenario. In our case of increasing the value of trees, all you would have to do is go to cell H17, type in a new value, then proceed to cells U17 through Y17 to see the effect of the new value on costs, benefits, and rates of return.
Costs and Benefits in RORGEN
The rate of return is that annual rate at which the dollars paying the fuel load reduction costs grow in order to equal the value of the benefits whenever those benefits are realized. Think of it this way: If one dollar spent on fuel load reduction in 1999 saves two dollars in damages in 2000, then the rate of return equals 200% because each dollar spent doubles itself in benefits realized. Thus, in order to estimate a rate of return, RORGEN must estimate the costs and the benefits of fuel load reduction.
Costs: The only costs which are considered in RORGEN are the installation and maintenance costs of fuel load reduction activities. Thus, RORGEN does not count fire insurance costs, for example. This is because RORGEN is estimating the rate of return for fuel load reduction and not the rate of return for anything else. The cost values which are currently in RORGEN are for the geographic location of one NRCS field office. The cost values are dollars per acre for installation and annual maintenance. In order to more accurately estimate costs in another geographic location, one would have to work with local staff to estimate the cost per acre values.
There are two cost estimates, each is an extreme in a range. The first cost estimate assumes the homeowner does all of the work and incurs dollar costs when renting unusual equipment or purchasing items such as herbicides. The second cost estimate assumes the homeowner hires professionals to do all the work. The two cost estimates are given to the homeowner in order for the homeowner to have both a lower and upper bound of the dollar costs. Each cost estimate generates its own rate of return. Thus, the homeowner receives two rates of return: one rate of return when the homeowner does the work and one rate of return when the homeowner hires all the work done. Most likely, the homeowner's costs will be somewhere within this range and not at either extreme.
Currently, the cost structure is very simple because simplicity was appropriate for the geographic area which requested RORGEN. In future it may be appropriate to include more variety in the cost structure. For example, the future may include one set of cost parameters for fairly flat terrain and another set of cost parameters for steeply sloped terrain.
The costs used in estimating a rate of return are all of the fuel load reduction costs which accrue from the time of installation to the time a fire occurs. The time a fire occurs is given by the homeowner. This is discussed below.
Benefits: Because most homeowners already have fire insurance which replaces the structures and most of the contents, RORGEN does not count a structure and most of its contents as the benefits of fuel load reduction. Rather, RORGEN counts those aspects of the residential property which are not covered by fire insurance: mature trees, sentimental items such as photos, pets, hobbies and heirlooms. If a homeowner does not have fire insurance, then RORGEN counts all potential losses as fuel load reduction benefits. If a homeownerï¿½ insurance coverage is less than 100%, then the uncovered portion is counted as potential fuel load reduction benefits.
Fire assumptions play the critical role in determining benefits. Currently, one community assumes that there is still a 10% chance that the structures and their contents will be lost in a wildfire. Thus, the benefits which are counted in the RORGEN for that community are less than they would be if there was a zero chance of destruction.
Although there are two cost estimates, there is only one benefit estimate. This is because an assumption is made that the fuel load reduction effects are the same whether the homeowner does the work (with guidance from technical people) or the homeowner hires the work done.
Currently, the benefit categories are very few. Likely, a community may have its own characteristics which may make fuel load reduction very desirable. For example, if a community has very exhaustive permitting requirements, and if permitting costs are not covered by the fire insurance policies, then the permitting costs (for site clearing, for heavy equipment in rebuilding, for construction, for construction material disposal, etc) may be significant enough to be included in the benefits. The benefit would be the savings of permitting costs because fuel load reduction saved the structures and prevented the permitting costs from being incurred. Permitting costs in some communities may be so high that they alone justify the fuel load reduction costs. Additional benefit categories, such as unrealized law suit costs, would be easy to add.
Another publication identifies benefit categories which could be added to RORGEN.
The benefits used in estimating a rate of return are directly derived from the answers homeowners have given to the RORGEN questions. If a homeowner says that the photos are worth $3,000, then the irreplaceable portion of that $3,000 is a benefit. The benefits come into being at the time a fire occurs as given by the homeowner.
Assumptions in RORGEN not Otherwise Discussed:
Minimum Size of Property: Currently, the homeowner property must be defensible by itself. That is, an individual homeowner must be able to install fuel load reduction and experience an identifiable increase in the probability of the structures and mature trees to survive a wildfire. Thus, the property must be large enough to defend by the one homeowner. Right now, the minimum property size is two acres. If a homeowner has a smaller property, the current version of RORGEN will overstate the benefits thereby producing a rate of return which is too high.
There are two alternatives for removing the parcel size restriction. The first is to work with local firefighters in order to discern if there is a smaller minimum acreage which is defensible by the homeowner regardless of the vegetation density on adjacent properties. The second is to rewrite RORGEN so as to evaluate a rate of return which is dependent upon the neighbors' actions. This would be a community version of RORGEN (C-RORGEN). Initial work has begun on this project.
Maximum Size of Property: Currently, the fuel load reduction cost per acre is appropriate for properties smaller than 15 acres. If a homeowner has a larger property, the current version of RORGEN most likely overstates the costs thereby producing a rate of return which is too low.
There are two alternatives to remove this restriction. First, local experts might state that fuel reduction costs are linear no matter what size the property. If this were true, then the cost per acre for 10 acres would equal the cost per acre for 100 acres. However, if this were not true, and the cost per acre for 10 acres is greater than the cost per acre for 100 acres, then RORGEN can be modified to include a Zone 3 of fuel load reduction. Zone 3 vegetation management might be less intense thus requiring a lower cost per acre.
Details about Homeowner Questions in RORGEN
Currently, RORGEN contains 15 questions which homeowners answer. This section explains each question, the type of answer which is expected and how the answer is used to estimate the costs and benefits. As you will see, homeowners only have to provide answers to three questions (their name, their property size, and the approximate value of the whole property). The idea is to ask the homeowner as few specific questions as possible in order to make the interview as easy as possible. RORGEN creates default answers to all of the remaining questions. The idea is that homeowners, initially, only have to decide whether or not the default answers are "ballpark" answers. If they are ballpark answers, the homeowner can just leave them unchanged. Otherwise, the homeowner can supply whatever value they want to. Thus, the homeowner is in the position to critique a number that has been supplied. It seems much easier for homeowners to critique a number which is supplied than to create each number all by themselves. The default values allow the interview to move along much more quickly.
Question 16 (Column T): How many years do you expect to wait before there is a wildfire in your neighborhood? You will notice that RORGEN has supplied a value. Is this value in the ball park? If not, what value would be more correct?
Note: People have been able to answer this. We actually use this answer to create different scenarios during the interview. We often take the default value as the base case. Then, create a scenario in which the fire happens sooner, then much sooner. Thus far, of the 30 people interviewed, none has felt they had to wait longer than 20 years for a wildfire.
Type of answer expected: whole number.
How the default answer is created: Arbitrary.
How to answer is used to estimate costs and benefits: This number is used in the compounding/discounting processes for both the costs and the benefits. The smaller this number is, the higher the rate of return. That is, the smaller the number, the sooner the wildfire happens and the sooner the fuel load reduction benefits accrue.