SDCs for Regulated Utilities
A system development charge means a one (1) time charge assessed by a water utility on a real estate developer, on a new customer, or on an existing customer who significantly increases its demand for water service to finance construction of a system improvement necessary to serve that customer or a proposed real estate development. from 807 KAR 5:090
System development charges (SDCs) are one-time charges paid by new development to finance the construction of public facilities needed to serve it. Arthur C. Nelson
Last March, the Kentucky Public Service Commission published 807 KAR 5:090, a regulation to specify how system development charges may be assessed to customers of regulated utilities and charged to wholesale (regulated) customers by municipalities. The requirements are onerous for sure, but they are consistent with the principles set forth in the book, “System Development Charges for Water, Wastewater, and Stormwater Facilities,” a well-known text on the subject by Arthur C. Nelson.
The regulations are meant to ensure that if a utility charges a customer a SDC, the revenue is to pay the costs of the existing capacity consumed by that customer or used to construct capacity in the future to provide an equal capacity—and no more. That explanation is drastically over-simplified, but the idea is to have growth pay for growth. To determine if that goal is met, the utility must document the costs growth is causing and how it will ensure that revenue generated from SDCs will be spent on that growth capital and not intermingled with operating and other capital funds.
If the governing board of your utility is contemplating SDCs, or if you currently charge SDCs or impact fees and are concerned of the defendability of your procedures, the first item to address is your utility’s capital improvements plan. All too often, the CIP is a superficial planning tool or just a chapter in a planning document. However, if carefully constructed, the CIP provides the basis for a proper SDC program.
The CIP has to include the percentage of each project that is required for growth, since that is what you are to fund with your SDCs. Further, the CIP (for CWIP) and the capital inventory (for existing facilities) must specify grant funds and other CIAC for each project. You cannot charge reimbursement (a SDC or impact fee) on capital that obtained at no cost to the utility. Your design engineer can assist you with the percentage of each project required for growth. Further, to comply with PSC’s regulation, the utility assigning SDCs to regulated utilities or the regulated utilities with SDC programs must file annual reports with PSC as to the disposition of the charges and expenditures, as well as updating the status of capital projects included in the CIP.
Is it more trouble than it’s worth? Perhaps, but every utility would be well-advised to maintain a dynamic CIP and have a good handle on if, or how, growth is driving capital projects. Whether or not you choose to initiate a SDC or impact fee program, a robust CIP is indispensible. Beyond creation and maintenance of a CIP, the remainder of the effort of a SDC program is largely record-keeping. When weighing the costs and benefits of initiating such a program, the administrative effort should be measured against the need for a program to fund capital necessary to accommodate growth in the community.
Connie Lea Allen, PE
Salt River Engineering
8 June 2020
