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Act 57:
What Every Builder and Land Developer Should Know
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After more than two years of negotiation between the Pennsylvania Builders Association (PBA) and the Pennsylvania Municipal Authorities Association (PMAA), new tapping fee legislation has officially been signed into law by Governor Rendell. This legislation (formerly known as House Bill 51, but now referred to as Act 57 of 2003) more clearly defines the calculations, terms, and requirements that had previously been embodied in Act 203 of 1990. Though no single article can fully address all of the changes in language included in this legislation, the following paragraphs attempt to provide you with a broad overview of the act and its impact on builders and land developers in Pennsylvania.

Some of the act's provisions are effective immediately, but others will not take effect until 18 months after the bill was signed (or June 30, 2005 ). Though all authorities enacting fees for the first time or changing existing fees will have to comply with the new act, the effective date for certain provisions may be delayed for up to five years for some authorities (such as those that serve multiple municipalities and those that have relied upon tapping fees to repay a portion of their long-term debt).

With the dates this legislation will take effect more clearly defined, the question now becomes: What impact will it have on your business?

Act 57 Imposes Limits on the Maximum GPD an Authority Can Assign to an EDU
For the first time, builders and authorities have a working definition of numeric values for an Equivalent Dwelling Unit (EDU). For years, authorities and municipalities have routinely established the number of gallons of capacity for a new single family dwelling (or EDU) with values that far exceeded the number of gallons of capacity that new connection actually required. Some fees were based on 350 gallons per day per EDU, which resulted in a higher tapping fee and the ability to “resell” the unused capacity. Now, Act 57 imposes a maximum on the number of gallons per day (gpd) that an authority can assign to an EDU. While there are some alternatives ( summarized in this table ), the limit is essentially 65 gpd per capita for water and 90 gpd per capita for sewer. These values are multiplied by the average number of persons per household, as determined by the most recent census. In each authority's service area, the census figures will differ, but the statewide average is 2.48 persons per household, which results in an EDU value of 161.2 gpd for water and 223.2 gpd for sewer. Individual authority values may be higher or lower.

These parameters are maximum values unless an authority uses one of the alternative methods for calculation of an EDU summarized here . Act 57 still requires authorities to base their tapping fees on the number of units of design capacity that a new user requires and specifically allows authorities to establish a lower value for multi-family connections. If an authority establishes a higher EDU value using an alternative method, the act provides a procedure for appealing that value.

Act 57 Clarifies Reimbursement Provisions
For years, a great deal of confusion over reimbursements has plagued the industry. Questions abound as to when builders are entitled to them and how much money they should be reimbursed. Some authorities have collected a reimbursement as part of their tapping fee that they were no longer required to pay to the person who constructed the facilities. Now, however, Act 57 requires authorities to make a written agreement with the person constructing the facilities before that authority can add a reimbursement part to their tapping fee. The act also allows the authority to collect the reimbursement part of their tapping fee only if they are obligated to pay it over to the person who paid for the facilities. If you are required to construct facilities and turn them over to the authority or municipality, you should probably attempt to negotiate a reimbursement agreement – especially if potential exists that the facilities you build can be used or extended by others some time in the future.

While Act 203's provision for an automatic reimbursement that is paid without a written agreement still exists in Act 57, its applicability has not changed. A builder or developer is entitled to a reimbursement only when a property connects a “service line” directly to the main the builder constructed. The authority is responsible for tracking these reimbursements and remitting them to those who paid for the main extension, but there is a 10-year limitation. Also, since the amount of the reimbursement is represented by the “Distribution or Collection Part” of the tapping fee, those authorities that did not include such a part in their fee may not have to pay a reimbursement at all.

Act 57 Adds New Provisions for Refunds
If a tapping fee is based, in part, on future facilities that are never constructed, Act 57 requires the authority to pay builders a refund of that portion of the fee related to the un-constructed facilities. This amount must be refunded after seven years for most authorities, but those that serve more than five municipalities have a grace period of 15 years.

In general, authorities may only include the cost of future capacity related facilities, and they cannot include the future cost of distribution, collection, or special purpose facilties. To the extent that future facilities increase system capacity, the increased capacity must be included in the fee calculation. Fortunately, Act 57 clarifies the requirements for including the cost of future capacity facilities in the tapping fee calculation.

Act 57 Prohibits Authorities from Requiring a Tapping Fee when a Planning Module or Waiver Approval is Requested, then Billing for Service
Until now, some authorities required builders to pay tapping fees when capacity was committed and then began billing for service before construction began. Under Act 57, however, this will no longer be permitted. Instead, authorities will have two options. They may collect a tapping fee when the building permit is issued or when planning approval is granted. If they collect a tapping fee when the building permit is issued, they may collect a reservation of capacity fee that does not exceed 60% of the average sewer bill for a residential customer. If, however, they choose to collect the tapping fee when planning approval is granted, they cannot collect a reservation of capacity fee or any other similar fee.

Act 57 Addresses Review Fees with a New Disputes Resolution Mechanism
In the past, many developers believed they were being treated unfairly when authorities charged them review fees for various development related services addressed by their professional advisors. Under Act 57, a disputes resolution process is introduced that requires authorities to make a timely review of disputed amounts and establishes an arbitration mechanism if the authority and developer cannot reach agreement. Act 57 also establishes specific actions that an authority must take once such claims are made and provides for the payment of the review cost based upon the merits of the developer's claim.

Though the authority is not permitted to withhold approval of any application or permit while the claim is being reviewed, it can withhold approval if the developer fails to make any required payments.

Act 57 Clarifies Several Confusion-Causing Calculations from Act 203
Because several calculations included in Act 203 of 1990 caused confusion for authorities and builders alike, Act 57 attempts to clarify these issues. One of the most significant areas of confusion concerned the need to subtract outstanding debt for new systems. Act 203 had exempted authorities from subtracting debt related to facilities that exclusively served new users, but it was silent on the treatment of debt for subsequent calculations. The original intent of the law was to limit authorities to a “single bite at the apple,” but this intent was not incorporated into law. Act 57 corrects this omission. It also prevents authorities from reaching back to pre-1990 facilities in order to claim the exemption from subtracting debt on the basis of exclusively serving new users. While some authorities that are entitled to an exemption which allows them to index their tapping fee based on interest cost will see relief, they are not entitled to update the historical cost of facilities.

Act 57 also clarified the order of calculation when subtracting grants. Previous legislation did not indicate clearly whether an authority should trend its historical costs first and then subtract grants or subtract the grants first and then trend the net amount. Act 57 requires authorities to subtract grants before trending, and the result will be lower tapping fees.

Other clarifications:

• Certain costs related to improving existing facilities can now be incorporated into the basis of the tapping fee. These costs were previously intended for exclusion when they solely benefited existing users of the system.
• Minor changes have been made to the procedures for adopting connection fees, customer facilities fees, and tapping fees. Essentially, the new language describes the mechanism by which these fees are adopted and establishes the need to incorporate the calculations supporting the fees into the resolution as well as the manner in which each part of the fee was calculated and the maximum fee allowable for each part.

The discussion above has focused on the tapping fee, but this is just one of three fees that are permitted under Act 203 and Act 57. Knowing what fees you are paying is important because each fee is to be based on the cost of specific types of facilities, as illustrated in the figure below.

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 you.

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 at info@hrg-inc.com.