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In 2017, the North Carolina General Assembly passed General Statute §162A Article 8 (Article 8) to establish guidelines for how local government water utilities may calculate and charge System Development Fees (SDFs). SDFs are up-front fees charged to new developments connecting to the water system for the first time. They are designed to at least partially recover the cost of infrastructure investments required to provide the water system capacity needed to serve the development. The law required utilities wishing to charge SDFs to perform a supporting analysis to calculate the fee and follow specific guidance laid out in Article 8 by July 1, 2018.

In 2018-2019, the Environmental Finance Center at UNC surveyed local government water and wastewater utilities’ SDFs and connection fees across the state. Out of all local governments with utilities, 81 utilities, serving 63% of the statewide water utility service population, had reviewed their SDFs following the law’s guidance prior to July 2018 and supplied their fee schedules and supporting analyses to the EFC. This blog discusses four takeaways from the survey results.

The majority of both water and wastewater SDFs were calculated using the buy-in method, which is generally used when a utility does not have plans to expand its capacity. An analysis based on the buy-in method does not require a Capital Improvement Plan (CIP) and is based on the cost of improvements that the utility has already made. Alternatively, utilities could calculate their SDFs using an incremental or marginal cost method based on projected future costs of expansion, or a combination of both methods. For more information on calculation methods, see the “Calculating the Fee” section of SOG faculty member Kara Millonzi’s blog post.

Figure 1: Number of Water System Development Fees Based on Calculation Methods

Water meter size is the most common but not the only method used to assess SDFs

Developments that use greater volumes of water place greater costs on the utility for their capacity needs. Article 8 requires utilities to charge SDFs based on a “service unit of new development,” which gives utilities options on fee calculation methods. Of the SDFs collected in the survey, 69% of water SDFs and 63% of wastewater SDFs are based on water meter size. An industrial development using a 4 inch water meter would thus be charged a higher SDF than a residential house using a 5/8 inch meter. Under this method, all developments with the same meter size are assessed the same fee regardless of variations in their actual capacity needs. Alternatively, 23% of water SDFs and 28% of wastewater SDFs are individualized based on customer-type usage schedules. These schedules assess a fixed fee per gallons per day of projected future demand, which is estimated for each development based on a development type-specific metric. For example, a restaurant’s SDF might be based on the number of seats in the restaurant, an office building based on the number of employees, and a hospital based on the number of beds. To project a gallons per day amount for different types of development, utilities most commonly used North Carolina’s water and/or wastewater codes.

While most utilities surveyed charge SDFs based on water meter size or a customer type usage schedule, six utilities charge based on a different metric or use a combination of multiple bases in their fee schedules. For example, the City of Greensboro charges based on heated square footage for homes with less than 1,822 heated square feet but charges based on meter size for other new developments.

Figure 2: Number of System Development Fees by Fee Basis

Several utilities opted to charge less than the maximum justified fee outlined in the supporting analysis

According to Article 8, utilities may charge any SDF amount up to the maximum justified fee calculated in the supporting analysis. A utility might opt to charge less than the maximum fee if, for instance, the cost-justified fee is significantly higher than prior fees. While the majority of utilities charge the maximum justified fee, 43% are charging less than what is justified in their supporting analyses.

Figure 3: Did the Utility Charge the Analysis Maximum?

Wastewater System Development Fees more often increased after the law change than decreased

The EFC, with the NC League of Municipalities, last completed a survey of connection and capacity-related water and wastewater fees in North Carolina in 2015. Comparing each of the utilities’ SDFs in 2015 and 2019, almost the same number of utilities had higher water SDFs in 2015 as those that had higher water SDFs in 2019. However, 34 utilities had higher wastewater SDFs in 2019 than in 2015, compared to 19 that lowered their wastewater SDFs. Some of these increases may have occurred prior to the new SDF legislation, but the required supporting analyses still justified these higher fees into 2019.

Figure 4: How do FY 2019 Residential Water and Wastewater SDFs Compare to the Utility’s FY 2015 Capacity Fee?

Additional Resources

For more information on the System Development Fees in North Carolina in 2018-2019, see the short report and fee tables listing each utility’s July 1, 2018 SDF schedule.

To learn more about the legal aspects of Article 8 and System Development Fees, check out Kara Millonzi’s blogs.

For additional background information on the System Development Fee legislation, watch Kara Millonzi and Jeff Hughes’ recorded webinar on the legislation’s effects on utilities.

Kate is an undergraduate student at the University of North Carolina at Chapel Hill, where she is pursuing a degree in Environmental Science with a minor in Information Science. Kate works with the EFC at UNC as a Research Assistant, assisting on a variety of drinking water and stormwater projects.

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