An impact fee, called a capacity fee, system development charge or connection fee depending on the state, is charged once when a property connects. It recovers the cost of the capacity that property will occupy, so that existing customers are not paying through rates for capacity built for someone who has not arrived yet.
Three ways to calculate one
- Buy-in. The new connection buys a share of the existing system at its value, on the reasoning that it is joining a system somebody else already paid for.
- Incremental cost. The fee is the cost of the next increment of capacity that has to be built.
- Combined. Buy-in for the components with capacity available, incremental for the components that have to be expanded.
Which method is defensible depends on where the system actually is. A system with substantial unused treatment capacity and no room in its distribution mains is buy-in on one component and incremental on the other.
What the statute usually adds
State enabling acts commonly impose requirements a rate does not carry: a capital improvements plan the fee is tied to, a service area within which the money must be spent, a period after which unspent money is refunded, and a prohibition on using the fee for operating cost or for rehabilitating existing assets. Requirements vary substantially between states, and the enabling statute is the governing document rather than any general treatment of the subject.
Why it interacts with the rate
Every dollar of capital funded by impact fees is a dollar the revenue requirement does not have to raise, and revenue bond covenants frequently exclude impact fee revenue from the coverage calculation. Both effects have to be in the forecast, and they point in opposite directions.
Sources
American Water Works Association, Principles of Water Rates, Fees, and Charges, Manual M1, 7th ed. (2017), on system development charges and the buy-in and incremental cost methods. The controlling requirements for any particular utility are in its state’s enabling statute.