To print this article, choose the "Print" option from the "File" menu in your internet browser.

Tapping Fees:
How will Act 57 affect your authority?
Return to the article

{This article was written by Russ McIntosh, HRG's director of financial services, and published in the Pennsylvania Municipal Authority Associations's magazine, The Authority.}

On December 30, 2003, Governor Rendell signed House Bill 51 into law as Act 57. This legislation is intended to update Act 203 of 1990 by clarifying and defining its ambiguous language regarding tapping fees and other water/sewer fees imposed by municipal authorities. In large measure, Act 57 accomplishes this goal, but it also goes well beyond it by adding new powers, new computational alternatives, and new authority procedures.

While no single article can fully address all of the changes in language, additional powers, and computational considerations that are included in this act, the following paragraphs attempt to provide a broad overview of these changes to make you aware of the impact the act will have on your municipal authority. Click on any of the links below to begin.

Timeline of Compliance

Though it may appear we are placing the cart before the horse, we believe it is helpful to identify up front when the provisions of Act 57 will affect your authority.

Effective Immediately
Authorities that are revising, increasing or imposing a connection fee, customer facilities fee, or tapping fee for the first time must comply with the new provisions of the act immediately.

June 30, 2005
Most other authorities that are not revising, increasing or imposing such fees for the first time will have until June 30, 2005 to comply with Act 57. However, some authorities that meet special exceptions will have even longer to comply, as is explained below.

FY 2008
Authorities using tapping fees to support debt service on financing closed prior to July 1, 2003 that has at least a fifteen-year term will not be subject to the per capita flow provisions of Act 57 for five years.

FY 2018
Joint authorities with six or more municipal members that entered into a treatment contract before January 1, 2003 and do not permit an increase in sewer user fees will have fifteen years to comply with Act 57.

No authority will be subject to the refund provisions related to abandoned projects for any fees collected prior to the effective date of the act. Each authority has seven years from the date they begin collecting a fee for future facility costs to place those facilities into service before the refund is due. If, however, the authority provides service to five or more municipalities, it has fifteen years to place the facilities into service before a refund is due. This refund must include interest.

New Powers for Municipal Authorities

Act 57 has broadened an authority's ability to adopt reasonable rules and regulations related to water and sewer lines that are located on private property and owned or leased by a customer. The act also gives the authority the ability to enforce these regulations by referring any violations for prosecution as a summary offense.

In doing so, the act allows the authority to mandate that customers repair or replace leaking water services or broken sewer laterals in order to prevent these malfunctioning facilities from causing infiltration and inflow into the authority's system.

Act 57 also explicitly grants authorities the power to impose a fee for reserving capacity from a property owner who has applied for the service. Although some authorities have already enacted reservation of capacity fees in the past based on Section 9 of Act 203, others hesitated to do so because the fee was not specifically enumerated or authorized in that legislation. Now it is, and specific methodology and limitations are described.

Computational Alternatives

Act 57 offers authorities new computational alternatives to keep certain fees more current without the need for a detailed study or recalculation of the entire fee.

Connection Fees
Under prior legislation, authorities had to base connection fees on the actual cost to connect the new customer or an average of actual costs incurred from similar installations. The actual cost for a particular connection could be calculated in current dollars because the costs were incurred at the time of connection, but detailed records of the cost for every connection were required in order to support the fee. Unfortunately, the average actual cost approach, which establishes a fee based on historical costs for similar connections, was equally troublesome. If these costs were incurred several years, today's cost could be much greater.

Thanks to Act 57, authorities can now escalate their historical costs to today's values without having to recalculate the entire fee. As a result, authorities can adjust their connection fee on an annual basis based upon changes in the overall cost of construction.

Tapping Fees
Act 57 takes a similar approach to increasing initial tapping fees that were imposed for connection to facilities exclusively serving new users. Act 203 offered an exemption from the requirement to subtract outstanding debt when computing these initial fees; however, it was unclear how debt was to be treated for any subsequent recalculation. Language in the new act clarifies this ambiguity, but also allows an authority that has calculated fees on this basis to increase them using the average interest rate on the debt that financed the facilities since the last recalculation.

Essentially, this allows an authority to recover the interest cost that has been incurred until such time as a new customer requests connection to the system. This is a more streamlined approach that allows for annual increases without having to recalculate the entire fee.

Act 57 also allows authorities to substantially recover the cost of extensions they finance and construct to their distribution and collections systems. Under Act 203, authorities were allowed to include the actual cost of extensions in their basis for computing the distribution/collection part of their tapping fee. However, unless these facilities exclusively served new users, debt related to the extension needed to be subtracted. At the very least, the cost of the extension needed to be divided by the design capacity of the entire system, resulting in a small increase in the cost per unit of design capacity upon which the tapping fee was based. This approach burdened all connections to the system-not just those connecting to the extension-with a portion of the cost of the extension.

Under Act 57, the cost of the extension can be divided among the estimated number of connections to be served by the extension. In addition, the initial amount may be increased on an annual basis to reflect the interest cost until such time as a new customer requests connection to the extension. This amount may be added to the authority's distribution/collection part of the tapping fee that they would normally collect. However, the additional amount to be added can only be collected until the estimated number of connections has been made. Therefore, an accurate estimate of the number of new connections that can be accommodated by the extension is very important. If the initial estimate is too high, the authority may not collect all of the cost of the extension since insufficient fees will have been collected. If the initial estimate is too low, the authority is prohibited from collecting the additional fee from the last users to connect since they have already collected the full amount of the cost of the extension.

One of the most discussed computational alternatives is the method by which an authority establishes the number of units of design capacity required by a new residential connection. This has plagued both authorities and developers since Act 203 became law in 1990 and has been the subject of several legal challenges. Act 57 now establishes numeric values as well as study options. A sewer authority wishing to use the numeric value method may use up to 90 gallons per day per capita, while a water authority using this method may use up to 65 gallons per day per capita. The per capita values are then applied to local census data in order to determine the maximum number of units of design capacity a new residential connection will require.

However, some authorities may benefit from one of the study options offered under this act. Water authorities may establish the units of design capacity required by conducting a year-long study of residential water usage per customer. Sewer authorities, on the other hand, can conduct a year-long study of water usage and add 10% or conduct a specific study of wastewater flows to determine design capacity requirements. If the sewer authority elects to conduct a study of wastewater flows, it must do so in at least three subdivisions of at least 10 homes to determine the average annual sewage flow per household.

Changes in Authority Procedures

Act 57 introduces new procedures and definitions to address the reimbursement component of the tapping fee. This aspect of the original legislation has been a source of much discussion and misunderstanding over the years by both authorities who must administer refund procedures and the developers who seek reimbursements. Some misunderstandings will be eliminated by the Service Line definition. Others will be eliminated by a new provision that requires every reimbursement component to be substantiated by a written agreement and specifies that this component can only be collected until all payments required by the agreement have been made to the party receiving the reimbursement.

Act 57 also introduces a disputes resolution procedure, which established an arbitration mechanism to address instances when a developer claims the review fees charged by an authority's professional advisors for various development related services are excessive. The act establishes specific actions that an authority must take once such claims are made and provides for the payment of the cost of the review mechanism based upon the merits of the developer claim. This section will likely be of particular interest to the authority's solicitor since it generally follows procedures that have been established to address disputes between developers and municipalities.

Additional minor changes to the procedures for adopting connection fees, customer facilities fees, and tapping fees are also included in the act. Essentially, the new language describes the mechanism by which these fees are to be adopted, the need to incorporate the calculations supporting the fees into the resolution, and the identification of the manner in which each part of the tapping fee was calculated and the maximum fee allowable for each part.

Other Provisions

Act 57 includes several other provisions that affect how an authority calculates its fees and responds to the needs of developers in the community:

For example, the act preserves the authority's ability to include the estimated cost of future capacity facilities and clarifies the requirements for such inclusion. At the same time, however, it includes a provision designed to prevent authorities from simply including facilities for the sole purpose of increasing their tapping fee. This provision will require the authority to refund that portion of the tapping fee that relates to future facilities when those facilities are not placed in service within seven years (or fifteen years for authorities providing service to five or more municipalities).

Under another provision of the act, certain costs related to improving existing facilities can now be incorporated into the basis of the tapping fee. These costs were previously intended to be excluded when they solely benefited existing users of the system.

Summary of Changes Between Act 203 and Act 57

The table below attempts to summarize some of the major changes resulting from the passage of Act 57, but this table is not complete and does not fully describe all of the impacts. It does, however, provide a general idea of how the act may impact your authority.

Russ McIntosh is an assistant vice president of HRG overseeing the Financial Services Group and a key participant in the groups that authored this legislation. For answers to your questions about Act 57 or other financial issues relative to water/wastewater utilities, please contact us.