Hot Topics in Utility Finance Jeff Hughes Environmental Finance Center School of Government jhughes@unc.edu July 17, 2017

How you pay for it matters Supporting the fair, effective, and financially sustainable delivery of environmental programs through: Applied Research Teaching and Outreach Program Design and Evaluation A member of the US Environmental Protection Agency Supported Environmental Finance Center Network How you pay for it matters

Hot Topics Update on Public Funding Programs HB 436/System Development Fees Big Picture Take-aways Devilish details…. Rates!! Open Discussion Stormwater Cost trends Sales/usage trends Partnership trends/challenges Alternative Service Delivery Models Energy Bill

Funding Quiz Which of the following were funded in the president’s proposed budget? USDA Water and Wastewater Grant and Loans Housing and Urban Development Community Development Block Grants (CDBG) Environmental Protection Agency State Revolving Loan Programs WIFIA LIHEAP

Funding Quiz Which of the following were funded in the president’s proposed budget? USDA Water and Wastewater Grant and Loans Housing and Urban Development Community Development Block Grants (CDBG) Environmental Protection Agency State Revolving Loan Programs WIFIA LIHEAP

What is WIFIA? Water Investment Finance Authority Water Infrastructure Finance and Innovation Act A new gluten free waffle energy bar A new creative federal government loan program that provides long flexible term debt at low rates

Which of these could impact your borrowing costs? Lower federal income tax rates? Modification of tax exemption policies? Getting a Green Bond Designation for your next environmental bond? Increase in federal reserve interest rates?

Water and Wastewater System Development Fees

Big Picture Implications Utility finance practices continue to be closely studied The risks and rewards of “open to interpretation” vs. “carefully specified”

A Public Enterprise Service Fee is Born 162A-201 (9) System development fee. – A charge or assessment for service imposed with respect to new development to fund costs of capital improvements necessitated by and attributable to such new development, to recoup costs of existing facilities which serve such new development, or a combination of those costs, as provided in this Article. The term includes amortized charges, lump-sum charges, and any other fee that functions as described by this definition regardless of terminology.

Some of what HB 436 does Clarifies statute of limitations for collection of “unlawful fees” Allows public enterprise fees and charges for services or use of services “to be furnished” Categorizes capital projects Capital improvement driven by growth Capital rehabilitation project Defines System Development Fees (SDFs) Sets requirements for calculating SDFs (fee analysis) Sets requirements for using revenue from SDFs Describes when SDFs can be collected Creates need for designated SDF capital reserve fund Allows SDFs revenue to back bonds

Prior to HB 436 “may establish and revise from time to time schedules of rents, rates, fees, charges, and penalties for the use of or the services furnished by any public enterprise.” G.S. 160A-314; G.S. 153A-277

HB 436 “may establish and revise from time to time schedules of rents, rates, fees, charges, and penalties for the use of or the services furnished by or to be furnished by any public enterprise.” G.S. 160A-314; G.S. 153A-277

Prior to HB 436 Impact Fees Contractual Charges Capacity Fees System Development Fees Tap Fees User Fees Capital Fees Capital Facility Fees System Buy-in Charges Capital Investment Fees Capital Recovery Fees Capital Reserve Fees Capacity Use Fees Development and Technology Fees Acreage Fees Privilege Fees Initial Hook-up Fees Monthly Fees System Capacity Charge ???

HB 436: Specifically Defined Terms Impact Fees Contractual Charges Capacity Fees System Development Fees Tap Fees User Fees Capital Fees Capital Facility Fees System Buy-in Charges Capital Investment Fees Capital Recovery Fees Capital Reserve Fees Capacity Use Fees Development and Technology Fees Acreage Fees Privilege Fees Initial Hook-up Fees Monthly Fees System Capacity Charge ???

System Development Fee Analysis Conforming deadline Sunday July 1, 2018 for fees in effect on October 2017 Stand alone written analysis or component of capital improvement plan Prepared by a qualified financial professional or a licensed professional engineer Reasonably detailed Employs “generally accepted accounting, engineering and planning methodologies” Identifies all assumptions and limiting conditions Produces a maximum per unit service fee that can be applied/adapted to different customer classes Posted on web site and process for receiving comments/suggestions 45 days before fees are considered Public hearing Adopted by governing board Published in annual budget or rate plan or ordinance Updated every at least every 5 years

Calculation Methodologies: Elevator Pitches Incremental/Marginal cost method. We are going to have to invest in expensive infrastructure to serve that big new development and we want new customers to pay their proportionate share of the capacity they will be using for those future investments. Buy-in method. Our existing customers have been paying the costs of maintaining excess capacity for years. We would like new customers that are going to use that capacity to cover some of those costs since they will be the ones using that capacity. Combined method

Basic Approach Identify the assets and their capacity that have unused capacity to serve growth or which will serve growth Assign a value to the assets that have capacity to serve growth Adjust the value based on standard practices and language in HB436 Calculate a per unit cost of the capacity Develop conversion approach to apply to different types of new customers

Methods “The basis for the buy-in calculation for previously completed capital improvements shall be determined by using a generally accepted method of valuing the actual or replacement costs of the capital improvement for which the buy-in fee is being collected less depreciation, debt credits, grants, and other generally accepted valuation adjustments."

Use of SDF Revenue Deposited into capital reserve fund Incremental Method Future capital needs Other capital costs if no capital projects expenses within 5 years Buy-in Capital costs associated with previous projects that have available capacity Rehabilitation projects

TBD… A Few Questions Can developers voluntarily pay their SDFs early in order to reserve capacity. Can capacity allocation/reservation linked to SDF payment be transferred to other developers. Can capacity reservation linked to SDF payment be set to expire if services are not purchased within a specific period. Stormwater System Development Fees How can SDFs be financed/paid in installments Use of factors other than meter size or residence to determine service area unit (number of bedrooms, square footage etc.) Methods for adapting service unit fee to other classes of customers (types of residential units etc.)

Resources AWWA M1 EFC Blog Coates Canon

Fees in North Carolina http://www.efc.sog.unc.edu/reslib/item/how-much-does-it-cost-connect-water-and-wastewater-utility-north-carolina-residential

Rates and Revenue https://efc.sog.unc.edu/reslib/item/north-carolina-water-and-wastewater-rates-dashboard#

Affordability https://efc.sog.unc.edu/sites/www.efc.sog.unc.edu/files/2017/NCLM_EFC_Annual_Rates_Report_2017.pdf

Inside vs. Outside Rates https://efc.sog.unc.edu/sites/www.efc.sog.unc.edu/files/2017/NCLM_EFC_Annual_Rates_Report_2017.pdf

Discussion Stormwater Cost trends Sales/usage trends Partnership trends/challenges Alternative Service Delivery Models Energy Bill

Take Aways Costs and cost per service unit are going up fast Financial planning and documentation is important Public funding programs are shifting towards debt

Continue the Discussion 10/1/2017 Subscribe to our Environmental Finance Blog http://efc.web.unc.edu Follow us on Twitter: @EFCatUNC

NC Finance Connect www.ncfinanceconnect.com

Utility Finance Questions? Jeff Hughes Lecturer and Director of Environmental Finance Center School of Government jhughes@sog.unc.edu 919.843.4956 www.efc.sog.unc.edu Kara Millonzi Associate Professor of Public Law School of Government millonzi@sog.unc.edu 919.962.0051 www.sog.unc.edu