Important Water Impact Fee Development in North Carolina: To be or not to be, that is the question…

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“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 be furnished 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: blog 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. 

Image source: https://gordoncstewart.com/2016/01/04/the-question-to-be-or-not-to-be/ 

3 Comments

  1. Do you know why the statutory language is different for authorities?

  2. Dan McLawhorn, Associate City Attorney, Raleigh

    September 21, 2016 at 1:41 pm

    I disagree with the shorthanded version of the opinion stated above. The Supreme Court clearly allowed for “necessary improvements” to be included in connection fees and other authorized rates for cities. It said:
    “Furthermore, Carthage has the authority to charge tap fees and to establish water and sewer rates to fund necessary improvements and maintain services to its inhabitants, which is sufficient to address its expansion needs. See Bissette, 305 N.C. at 251–52, 287 S.E.2d at 853 (concluding that the town validly increased rates on all customers to pay for “a necessary improvement to the already existing sewer system without which the Town could not continue to provide sewer service”).
    Quality Built Homes Incorporated v. Town of Carthage, 789 S.E.2d 454, 459 (N.C., 2016)

    • I agree that the “shorthand” blog version tells a very small part of the story and i urge everyone to read the entire decision, read Kara Millonzi’s blog, and above all consultant your local attorney! For the reasons Dan cited — this decision continues to be a challenge to interpret from a traditional water pricing perspective (I am a water pricing specialisth not an attorney). The longhand version also includes the very important concept of proportionality — looking at what someone is being asked to pay versus what others may be asked to pay. The terminology for different charges and fees is quite variable in North Carolina where the use of the term “tap” fee vs. “connection charge” vs. impact fee is not nearly as consistant as in some states and in some other state regulations. A common distinction in other states and in some utilities in NC is that a “tap fee” is strictly a fee to cover the costs of making a tap and “rates” refer to monthly charges. The sentence cited above stressing that Carthage has authority to use rates and tap fees to cover future costs leaves out the large family of non tap and rate fees and charges (what i was referring to in my shorthand as “fees” — I have modified the blog to add that clarification which I think was needed) that go by other names. I also agree that it is hard to imagine that a utilty not be able to use rates to cover future costs — that is a fundamental component of operating a utility in the US and our system of financing water improvements depends on that ability so I agree with Dan that it is hard to imagine the “to be” language could be intended to rule that process out. My point in the blog is to bring people’s attention to the “to be” phrase and stress that it was part of the decision. There are a lot utility professsionals that work in pricing that are trying to understand how to intepret this decision in the context of established pricing practices and hopefully we’ll get more clarity in the future. I repeat my urge to read the decision yourself and consult your attorney….

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