A Caution Regarding Tap Fees
Tap fees exist as a reimbursement to the utility for costs incurred in establishing a new water (or sewer) service connection for a customer. Revenue generated from tap fees finances the utility’s purchase (or, restocking) of materials and the labor and administrative costs involved in the installation. Any revenue generated in excess of the reimbursement costs is profit from jobbing and likely not authorized by ordinance or fee schedules approved by the Public Service Commission. For convenience, utilities typically estimate the cost of setting meters with regard to the size of the meter and the connection required to access the distribution line. Therefore, tap fees for different meter types and/or sizes should only vary by the difference in the costs incurred. Additionally, utilities should periodically review the costs of setting meters and adjust the amount of the tap fees accordingly.
Sometimes, tap fees are set artificially high—at what the market will bear—to supplement revenue from operations. If tap fees are set arbitrarily, (and not based on actual costs of installing meters and initiating water service), they could be classified as unlawful taxes. Additionally, arbitrarily increasing tap fees for direct, non-owner customers (outside city, for example), above those of owner customers, could constitute an unlawful tax as well.
Most utilities have either established impact fees or have recognized the need to adopt them. Impact fees, like tap fees, are contributions to capital. Tap fees are for normal annual replacements whereas impact fees are, or should be, fenced for major capital improvements financed by contributors and not debt-financed.
Revenue generated from tap fees should be considered as other operating income and revenue generated from impact fees should be classified as contributions in aid of construction (CIAC). The appropriate classification is critical for proper cost allocation in cost of service calculations and for assessments to conformance with budgeting. Additionally, impact fees are generally excluded from revenue forecasting with regard to rate adjustments. Crediting tap fees, having been bundled with impact fees, to CIAC reduces inventory without resupply, creating an additional revenue requirement that compels or accelerates an increase in rates.
To ensure your utility is in compliance with the law and generally accepted accounting practices, follow these rules:
· set tap fees equal to actual reimbursement costs for setting meters regardless of customer class;
· review tap fee schedules often to ensure the generated reimbursement is adequate;
· invoice, (or itemize on the same invoice), impact fees separately from tap fees;
· assign tap fee and impact fee revenue to their appropriate cost centers.
Connie Lea Allen, PE, CCM
Salt River Engineering, PLLC
14 December 2016
