Post updated on September 15, 2016

“To be or not to be?” This is the famous question that haunted Shakespeare’s Hamlet as he struggled with his existence. It is now also the question that may be haunting some municipal water managers throughout North Carolina after a recent North Carolina Supreme Court decision involving water impact fees. The School of Government’s Local Government Finance Attorney Kara Millonzi recently wrote an excellent blog on the case that explains the legal background and repercussions. Read it!

At the heart of the issue is the phrase “to be” that is found in the enabling statutes that authorize water fees for some types of utilities in North Carolina (Water and Sewer Authorities, County Water Districts). These words are not found in the almost identical statutes that authorize fees for other public water utilities (Counties, and Cities):

Municipal (City) Water and Sewer Fee Authorization

  • 160A-314.

(a) A city may establish and revise from time to time schedules of rents, rates, fees, charges, and penalties for the use of or the services furnished by any public enterprise.

Water and Sewer Authority Fee Authorization

  • 162A-9. 

(a) An authority may establish and revise a schedule of rates, fees, and other charges for the use of and for the services furnished or to befurnished by any water system or sewer system or parts thereof owned or operated by the authority

Water and Sewer Authorities are granted the power to charge fees for services “to be” furnished whereas Cities are granted authority to charge fees only for services furnished. The resulting decision means that water fees referred to as system development charges, capacity charges, and impact fees that are calculated and justified based on services (infrastructure) “to be” installed in the future are permissible for Water and Sewer Authorities but (at least some of these fees apparently are not) for Cities such as Carthage, the subject of the case, who had developed their fees to cover future investments.

There are many ways of calculating and labeling up front water fees across North Carolina as shown in a detailed survey of these fees carried out by the Environmental Finance Center in 2015. Industry standards put out by professional organizations (such as the American Water Works Association and the Water Environment Federation) that guide consultants in advising how to calculate system development charges include multiple methods for calculating these charges, some which consider future costs and some which only consider past costs. The North Carolina case highlights how important state law and state cases are in determining acceptable practices. Utilities across the North Carolina now will have to examine how they justified their fees and work with their attorneys to carefully evaluate the legality of their existing fees.

For more information on the court case, see Kara Millonzi’s blog. We will provide more information and guidelines on these and other water charges in future posts.

Note: post was updated 9/22/2016 to reflect that the decision referred to a specific fee that was used by Carthage and does not necessarily rule out the use of all fees for future investments. “Future investments” are not synomous with future services — many future investments are absolutely essential to maintain current services. 

Original May 26, 2015 post:

It varies and it depends. It may cost as little as a few hundred dollars to connect to a rural water system or as much $10,000 or more in other areas such as the coast or fast growing urban centers that are facing high infrastructure costs to add capacity. If $10,000 sounds excessive, consider that connection charges in certain communities in the country facing severe water supply and infrastructure challenges can run as much as $35,000 to $50,000 for a new connection. In North Carolina, the median combined connection cost for a single family water and sewer connection came out to be just under $2,400 (using data from 328 utilities who provide both services and were included in a connection charge survey conducted in 2015).

 

The cost of water and wastewater service in many areas has become a significant component of new housing costs and is likely to grow as communities cope with the rising costs of infrastructure. For organizations like the UNC Environmental Finance Center (EFC) that study how communities pay for environmental services, one of the interesting questions related to providing water and wastewater service is how a particular community decides to pass those costs on to customers. Some communities only charge their new customers modest “tap fees” designed to cover the actual cost of making the connection. Other communities choose to charge capacity or capital charges to help offset the cost of their major facilities (treatment plants, major transmission lines etc.) that will be devoted to serving the new customers (important update: an August 2016 ruling by the NC Supreme Court invalidated certain types of these fees – read this blog post to understand the consequence for NC municipalities and counties going forward). Some communities, particularly those in rural areas that are trying to build their customer base, have new customers cover a fraction of the actual costs of their new service.  Putting aside the portion of treatment facilities devoted to new customers, just covering the costs of setting a water and sewer tap (excavation, piping, meter, meter box etc.) can cost anywhere from $1,000 to $3,000 for a new connection, yet a third of NC utilities charge under $600 for tapping onto a system.

How will your community decide how much it costs to connect each of these homes?

Utilities across the state also vary in how they choose to allocate costs among different new homes. Homes come in all shapes and sizes – consider an 800 square foot modest home on a 1/8 acre or a 3,000 square foot mini-mansion on an acre or more.  In most situations, both of these homes would require the same basic meter size. Since meter size is the dominant method of determining fees this results in the two homes described above paying the same fee in most utility areas. Approximately 75% of utilities in North Carolina treat all typical single family homes the same and charge the same connection charge regardless of the size of home or yard. The remainder of utilities use other information such as size of house, size of yard, and actual usage to determine connection charge for a particular property.

As with many areas of water finance, utilities have a considerable flexibility in designing their connection charge approaches. Some utilities will be driven by a philosophical belief that “growth should pay for growth,” others will be driven by affordability concerns, and still others will simply try to assure they have the resources necessary to cover their costs. As infrastructure costs and community needs change over time, utilities are able to adapt their approaches to meet the ever changing challenges they face.

To see more information on the costs of connecting to water and sewer systems in North Carolina (in 2015), read our report here.

This post first appeared on the UNC School of Government’s Community and Economic Development Blog.

 

Update: in August 2016, the North Carolina Supreme Court invalidated the impact fees (sometimes called “system development charges”) assessed on new development by a North Carolina town. Read this blog post to understand why and to consider the consequence of this ruling on all municipalities and counties in North Carolina.