Coming Soon! A New System Development Charges Manual

Water utilities across the nation are facing the challenge of doing much more with fewer resources. Face it, our industry attempts to recover mostly fixed costs from a mostly variable revenue source, and it is becoming increasingly difficult to do so, especially when you factor in affordability concerns. This is why it is so important for utilities to examine their other sources of revenue. System development charges (SDCs), or impact fees, are a common source of non-rate revenues for funding system expansions and/or improvements required to serve new users. An SDC is a one-time charge assessed to new development to pay for the capacity in the system required to serve them. They can also be assessed to existing customers requiring an increase in capacity. AWWA's M1 Manual, Principles of Water Rates, Fees, and Charges, 7th Edition (M1), provides a high-level discussion of SDCs in Chapter VII.2. To address the increasing interest in an expanded discussion of SDCs, AWWA plans to develop a new manual focused on SDCs and with sufficient detail to be truly helpful to a utility without experience implementing or updating SDCs. SDC BASICS Specifically designed to recover an equitable share of the cost of system infrastructure from growth, SDCs provide a source of capital funding along with user rates, debt financing, and up-front reimbursements from developers. SDCs assign the capacity cost of growth to those causing the growth rather than existing ratepayers. In addition, SDCs can recover a portion of the cost of improvements to the existing system if there is existing capacity available to serve new customers. Infrastructure commonly financed with SDCs include water rights, source of supply, treatment plant facilities, pumping, and transmission lines, sometimes collectively referred to as 'backbone' facilities. Water distribution mains are typically constructed by developers and therefore not usually included. A rational nexus must exist between the SDC amount and the costs associated with serving new users, whether or not the system needs to be expanded to serve them. According to the M1 manual, there are three basic methods for calculating SDCs: (1) the buy-in method, (2) the incremental cost method, and (3) the combined approach. Depending on the utility's goals, objectives, legal constraints, and financial circumstances, one method may be more appropriate than another. KEY TOPICS TO EXPAND ON The SDC chapter in M1 addresses several key topics, including the basic approaches to calculating SDCs and methods of fairly administering SDCs to customers with varying capacity requirements, at a very high level. A manual devoted entirely to SDCs will be able to expand on these topics, as well as many others, to give readers the additional detail they need to develop fair and equitable SDCs to enhance their revenue stream. The SDC manual will include additional examples to help readers understand the calculations for all components of the SDC. The new manual will explore eligible costs related to growth or capacity-related improvements to include as part of the capital improvements plan. Such topics as raw water supply capacity costs, regional transmission costs, interest or financing costs of eligible improvements, and debt service costs related to growth/capacity infrastructure for purchased water treatment services will be explored in greater detail. One key topic that the SDC manual will expand upon is the methods of assessing SDCs to different types of customers, particularly the advantages and disadvantages of each method to help a utility determine which method is appropriate for their service area. With development trends evolving to include accessory dwelling units, mixed-use (e.g. apartments above ground-level retail shops), single-resident occupancy units, and green/low-impact development, there is growing interest in standards for assigning equivalent units to these types of properties to ensure that they pay their fair share of system costs. Another key topic to be expanded upon in the new SDC manual will be defining system capacity. Because system capacity is not available in the same proportions throughout the various functional components of the water system (source of supply, treatment, pumping, storage, etc.) care must be taken to calculate the SDC component cost by functional cost component. This allows the utility to recognize variations in system capacity, system value, and customer capacity needs by functional area. The fundamental formula for calculating an SDC is: (System Value/System Capacity) X New customer capacity demands = SDC Summing the SDC functional component costs yields the water system SDC. The new SDC manual will examine some of the ways a utility can accomplish this task. NEW TOPICS TO INCLUDE The new SDC manual will include the following topics: (1) a summary of legislation by state, which varies widely; (2) guidance for SDCs regarding potential challenges and/or litigation; (3) administrative procedures and accounting requirements for SDCs; (4) land use assumption plans; (5) utilization of potential demand (capacity-based) versus estimated/actual demand (usage-based); and (6) incorporating major changes such as SDC process changes and definitions of Equivalent Residential Units (ERUs). In addition, the new SDC manual will contain more step-by-step examples for the reader. OVERVIEW OF PRESENTATION The presentation will provide a summary of SDC basics, including uses and methodologies for calculating them, as well as explaining the drivers behind development of the new manual. The presentation will provide examples of expanded and new topics and introduce the proposed timeline for developing and publishing of the SDC manual.