David R. Tucker is a Project Director at the Environmental Finance Center at the University of North Carolina at Chapel Hill.
My work at the UNC Environmental Finance Center frequently centers around the study, benchmarking, and understanding of rates, especially residential rates: charges per unit across time (such as dollars per kilowatt hour for kWh of electricity used in a month; or dollars per gallon, for thousands of gallons of drinking water used in a quarter; and so on). You can see the results of our work on rates by yours truly and my colleagues in sophisticated tools that we have developed, such as our drinking water and wastewater rates dashboards, our stormwater rates dashboards, and our electric rates dashboards, among many other tools and reports that the EFC has created.
However, at the EFC we sometimes study one-time fees (especially residential fees) as well: fixed amounts charged to the customer at a particular time, as a one-off event. Some interesting examples of such fees are “tap” fees and “impact” fees for drinking water and wastewater systems. We have surveyed tap and impact fees in North Carolina as recently as 2009. And we have conducted our second such survey in the state of Georgia this year, in 2013, in partnership with the Georgia Environmental Finance Authority; the first in GA was in 2007: see pp. 8-9 of final report here. (And while our research in these states has indicated that the great majority of water and sewer utilities’ revenue comes from rates, they still derive a significant portion of revenue from fees as well.) Also, my colleague at the EFC, Jeff Hughes, wrote a great blog post here a few years back on “Thinking about Water and Sewer Impact Fees and Affordable Housing.” But I’m getting ahead of myself: what exactly are tap and impact fees, anyway?
That turns out to be something of a good question. On the surface, at least, the distinction seems clear enough. “Tap fees” are designed to recover all or a portion of the cost (for materials and labor) of connecting a customer to the nearest drinking water or wastewater line. “Impact fees” or “system development charges” are associated with developing the capacity of the system to accommodate the extra demand placed on this system by the new customer. Utilities in both Georgia and North Carolina have considerable flexibility in setting tap fees and impact fees. But that flexibility can result in a certain amount of confusion, even to the experienced researcher.
For example, in our current survey of such fees used in the state of Georgia, we have found that when a utility charges what is theoretically a true “tap fee,” it can go by a variety of names, including:
- connection fee
- cut-on fee
- installation fee
- meter set fee
- new meter connection fee
- new service connection fee
- service fee
- tap fee
- tap-on fee
- turn-on fee
Again, a tap fee is a connection fee used to cover the cost of service installation which may include a tap, service line, water meter, excavation or boring costs, paving costs, etc.
As for “impact fees,” they are connection fees that can involve charges used to expand system capacity, or to offset the impact of the new customer’s connections on system-wide capacity. In the state of Georgia, when fees are used for the latter purpose, they are, in fact, legally considered impact fees subject to the Georgia Development Impact Fee Act (Official Code of Georgia Annotated § 36-71) which dictates the method for calculating and implementing such fees. These impact fees were referred to by the following names by utilities in our current survey:
- capacity fee
- connection fee
- cost recovery fee
- impact fee
- new customer fee
- service fee
- system development charge/fee
You will notice some overlap between the names in the two lists. This highlights the fact that, across all utilities in Georgia responding to our tap and impact fees survey, the names for fees are not used consistently, making it difficult at times to distinguish between the two. We also encountered some cases of a “water fee” being assessed, which seemed to cover both tap and impact.
In any event, our 2013 survey of drinking water and wastewater rates and fees in Georgia yielded 452 utilities responding, with roughly two thirds of them (297 utilities) providing us with their one-time fee structures for new water and sewer connections of one or both kinds described above. From this data, we have found the following median fees for each category (consolidating the “tap” and “impact” fees into aggregated connection fees):
Table 1: Georgia Residential Water Connection Fee Medians (2013)
Table 2: Georgia Residential Sewer Connection Fee Medians (2013)
Looking at the median fees, it is interesting to note that the sewer fees are generally higher than their corresponding water fees; though this is perhaps unsurprising, as the capital costs for a wastewater system are generally greater than those of a similarly sized drinking water system. It should also be noted that not all of the utilities have separate outside connection fees versus their inside the corporate limits connection fees. (More detailed analysis of these and other points may be obtained upon request.)
These results can be compared with those from the EFC’s 2009 survey (our most recent here, conducted in partnership with the North Carolina League of Municipalities) of tap and impact fees in our home state of North Carolina:
Table 3: North Carolina Residential Water Connection Fee Medians (2009)
Table 4: North Carolina Residential Sewer Connection Fee Medians (2009)
In North Carolina, we see that the impact fees are generally higher than the tap fees. And with Georgia and North Carolina being neighboring states, and with utilities in both states having some leeway in if and how they set tap fees and impact fees it is fascinating to see the similarities in the median data for residential drinking water fees between the two states. However, we must here adopt two notes of caution: one being that the North Carolina data is four years older, and thus the impact fees in the state today may be significantly higher than they were in 2009; and the other being the differences in sample sizes.
In conclusion, this remains a far broader subject in terms of how such connection fees are calculated and set by utilities (there are many interesting bases used in both GA and NC); the relative affordability of such fees; and how these fees are set in other states as well. The need for further inquiry on this topic is indicated – so that we might have greater “impact” with our research!
For more information on the current Georgia survey, please contact Stacey Isaac Berahzer, Senior Project Director.
5 Responses to “Tap dancing around impact fees: Residential connection fees for drinking water and wastewater systems in GA and NC”
Impact fees are typically paid by the developers or commercial businesses. Am I correct that in enterprise accounting impact fees are taken to income and not offset to rate base like in utility based accounting? For growing utilities this is a significant revenue stream and municipal utilities like them because they offset expenses that would otherwise be recovered through monthly rates.
Dear Mr. Freitag,
Thank you for your question. Local government owned and operated drinking water and wastewater utilities in GA and NC typically take income from impact fees as non-operating income, rather than operating income. How these utilities use that non-operating income would depend upon the individual utility.
As for rate base calculations, this matter is handled quite differently between local government utilities in GA and NC, on the one hand, and private, for-profit utilities (e.g. Aqua NC) on the other hand. Most local government utilities do not use a return on rate base calculation in their accounting methods the way that a for-profit utility would (e.g. in preparing a rate case to go before the PUC).
Hope this is helpful. Please let me know if there is any way I and the EFC can be of further service. Best regards,
Here’s something that always bothers me…if “tap” fees are, in fact, a reimbursement to the utility for the resources/materials spent connecting a new customer to the system, why, other than gasoline/mileage and a little bit of travel time, is there any difference in in-city and out-of-city tap fee charges?
And why is tap fee more than the cost of building a house in mecklenburg county?
I’m a resident in NC. I’ve been reading about the sad state of water and sewer plants in the Country. The plants in my area were built for WWII an are in bad shape and we can’t imagine how we will not have massive problems in the sense of infrastructure and the lack of modern tech monitoring and treatment equipment. Regardless, as I start reading about these impact fees I no where see any statements of who pays these fees. Do I assume the owner of the property who applies for a building permit will pay the fees?