1. Hot Topics in Utility Finance
Jeff Hughes
Environmental Finance Center
School of Government
July 17, 2017

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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?

8. Water and Wastewater System Development Fees

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

10. 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.

11. 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

12. 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

13. 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

14. 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
???

15. 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
???

16. 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

17. 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

18. 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

19. 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."

20. 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

21. 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.)

22. Resources
AWWA M1
EFC Blog
Coates Canon

23. Fees in North Carolina

24. Rates and Revenue

25. Affordability

26. Inside vs. Outside Rates

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

28. 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

29. Continue the Discussion
10/1/2017
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30. NC Finance Connect

31. Utility Finance Questions?
Jeff Hughes
Lecturer and Director of Environmental Finance Center
School of Government
Kara Millonzi
Associate Professor of Public Law
School of Government