What about Impact Fees?
Should your municipal utility establish impact fees? Impact fees produce an additional revenue stream and are designed to shift a portion of the financial burden of growth away from existing customers and onto those presenting new and increased demands upon the utility. There are several utilities in Kentucky who have adopted impact fees for their water and wastewater utilities, but you may still have questions. How do you know if the revenue derived from impact fees will justify the expense of the initial set-up and continued administration of the program? Will an impact fee program discourage growth in your community?
There are many different methods of establishing impact fees but, generally speaking, the basic equation uses your utility’s costs in accommodating growth in the numerator and a quantity (countable units) of growth in the denominator. The result is a per-unit cost of growth. Then, you select a method of associating an average number of those same units with customer classes or types; the product is the impact fee charge to that customer.
That is a very brief and simplistic description of the procedure of establishing an impact fee. There is a myriad of considerations, most notably demonstrating a rational nexus link between the cost of growth and the fees you charge. The establishment of the rational nexus plays to the legal defense of your impact fee program and constitutes the bulk of the work involved in establishing your program. But, getting back to your questions…
If your utility’s recent and/or anticipated capital improvements projects are necessitated in whole, or in significant part, by growth, and if the cost of those projects is weighty (you must define “weighty”), then the numerator (cost of growth) of that basic equation will be substantial. Your program will theoretically recover that numerator. Unless your utility expects developer contribution and grant money to offset the growth costs, an impact fee program will provide a way to shift those costs from your equity customers to those new customers causing them.
If you are worried about discouraging growth, an impact fee program actually sends positive signals to developers and your equity customers. We spoke of the “rational nexus” earlier. The basis of that link is a capital improvements plan that the utility’s governing body officially proclaims and vows to follow. This hints to potential developers and businesses that the utility systems are managed with responsibility and foresight. Developers acknowledge that the one-time charge feeds the viability of the utility upon which they will come to depend.
And there’s a bonus—I’ve used the term “equity customers.” Your existing customers have been funding your capital projects, debt-financed and pay-as-you-go, for decades. They have equity in your system. Charging an impact fee to new customers to offset the costs they cause shows your equity customers that you have considered them in the equation—you recognize their investment in the utility.
An impact fee program is likely not for every Kentucky utility; for those feeling a significant financial burden of growth, it is a revenue opportunity you may want to consider.
Connie L Allen, PE
Salt River Engineering
