HomeMy WebLinkAbout02-07-2017 Item 01 - Study Session Regarding Water and Sewer Capacity and Connection Fees Meeting Date: 2/7/2017
FROM: Carrie Mattingly, Utilities Director
Prepared By: David Hix, Deputy Director, Wastewater
Aaron Floyd, Deputy Director, Water
Jennifer Metz, Utilities Projects Manager
SUBJECT: STUDY SESSION REGARDING WATER AND SEWER CAPACITY AND
CONNECTION FEES
RECOMMENDATION
Receive a presentation on the development of a Water and Sewer Capacity and Connection Fee
Study in a study session and provide feedback on the proposed approach.
DISCUSSION
Report-in-Brief
The City’s Utilities Department is in the process of updating the fees charged to new
development for water and sewer service. Previously, the City calculated development impact
fees for water and sewer services using only major system assets (generally projects that were
debt financed). After the presentation on this subject, staff is requesting feedback on whether or
not to incorporate both existing and future assets that provide capacity for new growth is
desirable. Staff is also seeking direction on changing the name of the fee from development
impact to capacity and connection to more clearly communicate what the fee is assessed what the
fee actually is for, as well as eliminating sewer catchment area or “add-on fees.” The study may
result in higher fees depending on the guidance received. As a result, staff is seeking policy
direction as to the desired approach before the study takes place.
Background
In the City, customers are provided water service through a multi-source water supply, raw water
conveyance systems, the Water Treatment Plant, and a water distribution system that includes
treated water storage reservoirs and tanks, pump stations, and pipelines. Wastewater service is
provided through a collection system of pipelines and lift stations, and the Water Resource
Recovery Facility. The community has made an investment in its water sources and its water and
wastewater infrastructure incrementally over many years. These facilities require upgrades from
time to time to meet new regulatory requirements or replacement at the end of their service life.
These systems and facilities must be sized to provide necessary capacity as the City grows and
may need to be expanded over time, or relocated, to provide the capacity necessary to serve new
annexation areas or as densities increase through infill development.
The purpose of water and sewer development impact fees is to recover the cost of the portion of
those improvements that benefit future development. To impose a water or sewer development
impact fee, the City must determine the relationship between the need for the public facility, its
cost, and the amount attributed to future development. The City’s water and sewer impact fees
are based on growth under the General Plan used in conjunction with capital improvement
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planning to ensure adequate water supply, water treatment capacity, wastewater collection
infrastructure, and wastewater treatment capacity.
According to the 2015 Housing Element, the City’s
population has grown at a slow, steady pace since
1980, at an average rate of about one percent per year,
with periods of faster or slower growth reflecting
national and statewide economic cycles. The City
experienced a much slower annual average growth rate
of 0.3 percent between 1990 and 2013. Revenue from
water and sewer development impact fees varies with
this rate of growth, however the water and sewer
infrastructure needed to support growth in the City is
either already in place or has been planned.
Generally speaking, with a 2016 population of
approximately 46,000 residents and an estimated future
population of 57,200 residents, 80 percent of the City’s
population is existing and 20 percent is planned.
Past and Current Fee Studies
The City conducted previous water and wastewater development impact fee studies in 1991,
1994, 2004, and 2013 to identify the cost of serving future development. The 2013 fees used
population estimates, growth projections, project costs and the application of water and
wastewater policy available at that time. In the past, impact fees only included the costs of major
infrastructure and specific capacity expansion projects and did not include the existing water
distribution and wastewater collection systems. Also, under the existing sewer fees, “add-on”
fees are charged to development in areas that benefit from sewer lift station service.
Funding for the Water and Sewer Capacity and Connection Fee Study was approved by the City
Council as part of the 2015-17 Financial Plan, Significant Operating Program Change, Water and
Sewer Administration and Engineering Contract S ervices, and described on page 3-25.
The proposed fees will be based, in part, on growth anticipated under the General Plan Land Use
Element adopted in 2014 and water and wastewater master planning efforts completed in 2016.
In accordance with State law, existing approved tracts with “vested rights” will not be affected
by the update to these fees (approximately 600 housing units).
Current Approach
The terminology used for this fee – capacity and connection rather than development impact – is
proposed to better convey the concept of the facilities and systems associated with the provision
of water and wastewater service by the City. In some communities, these fees may be referred to
as system development charges, impact fees, capacity reserve charges, or infrastructure
investment fees. Regardless of the term used to identify them, their objective is the same. That is,
these charges or fees are intended to provide funds to the utility to finance all or a part of the
capital improvements needed to serve and accommodate future growth.
Water and wastewater
systems and facilities provide
capacity to serve:
80%
Existing population
20%
Planned growth
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This study identifies the cost to provide capacity for new development in the City’s existing
water and wastewater systems and facilities. In some cases, expansion costs are identified where
future improvements are necessary facilities to provide adequate capacity to serve new
development.
In establishing capacity and connection fees, there are differing methodologies.
“The buy-in method is based on the value of the existing system’s capacity. This method is
typically used when the existing system has sufficient
capacity to serve new development now and into the
future.
The incremental cost method is based on the value or
cost to expand the existing system’s capacity. This
method is typically used when the existing system has
limited or no capacity to serve new development now
and into the future.
The combined approach is based on a blended value of
both the existing and expanded system’s capacity. This
method is typically used where some capacity is
available in parts of the existing system (e.g. source of
supply), but new or incremental capacity will need to
be built in other parts (e.g., treatment plant) to serve
new development at some point in the future.”
The City’s existing water development impact fee includes
the proportionate share of a limited list of water assets
including:
Nacimiento Pipeline Project,
Water Reuse Project,
1994 Water Treatment Plant Upgrade,
2006 Water Treatment Plant Improvements and
Sedimentation Process, and
2007 Bishop Tank replacement project.
The City’s existing sewer development impact fees include
the following wastewater assets:
1991 upgrade of Units 3 and 4 at the Water
Reclamation Facility (now referred to as the Water
Resource Recovery Facility, and
all phases of the planned upgrade of the Water
Resource Recovery Facility.
This study proposes to analyze those additional water and
Water Capital Assets not included
in current fees
Water - Source of Supply
Existing Whale Rock Reservoir
capital assets and planned capital
improvements
Existing ground water capital assets
and planned capital improvements
Water Treatment
Existing Water Treatment Plant
capital assets (prior to 1994
upgrade) and planned capital
improvements
Potable and Recycled Water
Storage/Distribution
Existing Potable Water
Storage/Distribution capital assets
Existing Recycled Water
Distribution capital assets
Planned Potable Water
Storage/Distribution capital
improvement
Planned Recycled Water
Storage/Distribution capital
improvement
Wastewater Capital Assets not
included in current fees
Wastewater Collection System
Existing and planned Wastewater
Collection System capital assets
Water Resource Recovery Facility
Existing Water Resource Recovery
Facility assets (prior to 1991
upgrade)
Planned Water Resource Recovery
Facility Upgrade
NOTE: Existing water and wastewater
assets are valued using the asset’s
replacement cost less depreciation.
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wastewater capital assets that provide capacity for future development, but were not included in
the prior fee study.
Attachment A provides an overview of the City’s present development impact fees and the
detailed methodology for the capacity and connection fee study.
Area-Specific Fees
Area-specific fees create charges of different amounts to new development in various parts of the
City. The City’s current sewer development impact fees include five area-specific catchment
area charges where an area is served by sewer lift stations. The catchment area fees are charged
to new development for its proportionate share of the City’s capital costs for sewer lift station
construction. For example, new development in the Calle Joaquin lift station catchment area is
charged the fee as the development is served by the lift station. In the City, these fees currently
range from approximately $500 per unit in the Laguna catchment area to approximately $3,700
per unit in the Tank Farm catchment area making the cost to develop in these areas higher. The
City has similar transportation area fees.
Although there may be technical justification to support area-specific fees, like the City’s sewer
catchment area fees, these fess can be more cumbersome to implement than applying one
citywide sewer impact fee. It is appropriate when updating these fees to consider whether the
catchment area fees remain as the most effective method of charging new development for sewer
service.
Outreach Efforts
In addition to this Study Session, staff has engaged the development community to discuss the
scope and schedule of the Capacity and Connection Fee Study at the Developer’s Roundtable on
October 20, 2016. Staff has scheduled another meeting with that group to discuss progress on the
Capacity and Connection Fee Study on February 13, 2017.
Legal Basis and Policy Nexus for Capacity and Connection Fees
In establishing capacity and connection fees, an important requirement is that they be developed
and implemented in conformance with state and local laws. The laws for the enactment of
capacity fees in California, passed by AB 1600, are codified in California Government Code
sections 66013, 66016, and 66022, which are interspersed within the ‘Mitigation Fee Act.’ The
Mitigation Fee Act is comprehensive legislation dealing mainly with impact fees, although the
above sections set forth the various requirements for imposition of capacity fees in California:
calculation of the fees, noticing, accounting and reporting requirements, and processes for
judicial review.
The City’s proposed capacity and connection fees are “capacity charges” as defined in the
California Government Code. The basic principle that needs to be followed is that the charge be
based on a proportionate share of the costs of the system required to provide the service and that
the requirements for adoption and accounting be followed in compliance with California law.
The City also has existing General Plan policies and programs related to the cost of growth and
development impact fees. Policy 1.13.9 (Costs of Growth) in the Land Use Element states:
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The City shall require the costs of public facilities and services needed for new
development be borne by the new development, unless the community chooses to
help pay the costs for a certain development to obtain community-wide benefits.
The City shall consider a range of options for financing measures so that new
development pays its fair share of costs of new services and facilities which are
required to serve the project and which are reasonably related to the new growth
attributable to the development.
Program 1.14.7 (Maintain Development Fee Program) in the Land Use Element states:
The City shall maintain a development fee program that covers the costs
associated with serving projects with City services and facilities. This maintenance
will include periodic review of the fees collected to ensure they are adequate to
cover City costs.
Total Fee Burden
As the City considers updates to its impact fee structure, it is important to keep the total fee
burden experienced by a given development project in context. As part of the infrastructure
financing strategies identified in the City’s Economic Development Strategic Plan, a series of
study sessions have been presented to the City Council that outline the various options available
for financing important infrastructure. For example, with single-family residential development,
a rule of thumb is that the fee burden should not exceed 15 percent of the cost of the unit. This is
illustrated in the following graphic. The City’s water and sewer capacity and connection fees will
include an analysis of the overall fee burden on various types of development projects to
maintain overall financial feasibility. The following graph illustrates the findings presented to the
City Council in 2015. The full report is included in the Council Reading File. While this
information is helpful as context, it is not the only but significant one in shaping future decisions.
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The City’s Community Development Department is concurrently preparing a Capital Facilities
Fee Program Nexus Study. This Study will update the City’s existing Transportation and Parks
development impact fee programs and consider new impact fee programs for General
Government and Public Safety facilities. City staff working on these program updates will
coordinate efforts to ensure consistency and compatibility across the fee program from the
standpoint of fee administration and financial feasibility.
Summary and Next Steps
The table below provides a summary of the approaches under consideration.
Current Water and Sewer
Development Impact Fees
Potential Water and Sewer
Capacity and Connection Fees
Meets legal requirements Meets legal requirements
Lower fee with buy-in of certain water
and sewer assets providing capacity for
new development
May result in higher fee with buy-in of
all water and sewer assets providing
capacity for new development
Includes area specific sewer catchment
area fees in locations served by lift
stations
One citywide water and sewer fee with
area specific water or sewer fees
The consideration of the Final Capacity and Connection Fee Study is on the Council Agenda for
May 2, 2017 with implementation of the new fees planned for July 1, 2017.
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ENVIRONMENTAL REVIEW
This is a study session, so staff is not recommending Council take any action on the Water and
Sewer Capacity and Connection Fee Study at this time. Modification of rates and charges by
public agencies is statutorily exempt from the California Environmental Quality Act (CEQA)
under Section 15273 of the Public Resources Code because changes in fees is not intended to
fund expansion of capital projects not otherwise evaluated under CEQA.
FISCAL IMPACT
This is a study session and there is no fiscal impact associated with it. Fiscal impacts will be
developed for consideration of the Final Capacity and Connection Fee Study for City Council
consideration.
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FOCUSED QUESTIONS FOR CITY COUNCIL DIRECTION
Staff has provided the following focused questions to facilitate City Council direction to help
guide the City Council in their deliberations:
Questions for City Council Direction
Yes No
1. Is the name change from Water and Sewer Development Impact
Fees to Water and Sewer Capacity and Connection Fees helpful
to more clearly communicate the service provided?
2. Should the City’s Water Capacity and Connection Fee include:
a. The water assets identified in the prior water development
impact fee study?
b. All existing and future water assets that provide capacity to
serve new development?
3. Should the City’s Sewer Capacity and Connection Fee include:
a. The wastewater assets identified in the prior sewer
development impact fee study?
b. All existing and future wastewater assets that provide
capacity to serve new development in the Sewer Capacity
and Connection Fees?
4. Should the City eliminate area-specific sewer Catchment Area
fees in favor of one citywide Sewer Capacity and Connection
Fee?
The presentation at the Study Session will include a similar decision matrix to help focus
Council direction.
Attachments:
a - WSC and HDR SLO Capacity Fee - Final
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City of San Luis Obispo 1
Water and Wastewater Capacity and Connection Fee Study
Technical Memorandum
To: Jennifer Metz – City of San Luis Obispo
From: Shawn Koorn – HDR
Judy Dean – HDR
Joshua Reynolds, PE - WSC
Date: 1/09/17
Subject: Water and Wastewater Capacity and Connection Fee Study
Introduction
Water Systems Consulting (WSC) with HDR Engineering Inc. (HDR) as a subconsultant was
retained by the City of San Luis Obispo (City) to develop water and wastewater capacity and
connection fees. The purpose of capacity and connection fees is to bring equity between existing
customers and new customers connecting to the City’s water and wastewater systems. By
establishing cost-based capacity and connection fees, the City will be taking an important step in
providing adequate infrastructure to meet growth-related needs, and more importantly,
providing this required infrastructure to new customers in a cost -based, fair and equitable
manner.
The City’s water and sewer development impact fees were last updated in 2013. As part of the
process, HDR was retained to provide a peer review of the 2013 study. Based on that peer review,
HDR was of the opinion that the City appears to be using a reasonable and appropriate
methodology to calculate the fees, given available data and that the fees are in compliance with
California State law. HDR further recommended that in the f uture the City consider including
existing water distribution and collection system infrastructure that will aide in providing service
to new customers and that the City consider collecting data that can facilitate developing the fee
on a cost per gallon/unit basis. The recommendations from this peer review in 2013 will be used
to develop the proposed capacity and connection fees for the City’s water and wastewater
utilities which will replace the City’s current Development Impact Fees for the water and se wer
utility.
In addition to the 2013 peer review recommendations, all capacity and connection fees should
be updated every five years or when planning documents are updated to assure fees are updated
and based on a cost basis. In addition to the City’s General Plan being updated since the 2013
study the Utilities Department has also completed several key planning documents including the
Final Potable Water Distribution System Operations Master Plan which was completed in
December 2015, the City’s 2015 Urban Water Management Plan which was adopted in June of
2016 and the Wastewater Collection System Infrastructure Renewal Strategy which was
completed in December of 2015. In addition, the Recycled Water Master Plan is currently being
updated and will be incorporated into the analysis as needed and as available. These studies will
be used to update key growth and infrastructure planning components for both the water and
wastewater capacity and connection fees.
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Overview of Capacity and Connection Fees
At some utilities, capacity and connection fees may be referred to as system development
charges, impact fees, capacity reserve charges, or infrastructure investment fees. Regardless of
the label used to identify them, their objective is the same. That i s, these charges or fees are
intended to provide funds to the utility to finance all or a part of the capital improvements
needed to serve and accommodate new customer growth. The purpose of a capacity and
connection fee is to provide equity between existing customers and new customers connecting
to the system (i.e., new development). For the purposes of this discussion, the capacity and
connection fee is defined as follows:
“System development charges are one-time charges paid by new development to finance
construction of public facilities needed to serve them.”1
Simply stated, capacity and connection fees are a contribution of capital to either reimburse
existing customers for the available capacity in the current system, or help finance planned future
growth-related capacity improvements. Absent these fees, many utilities may be unwilling to
build growth-related facilities (i.e., burden existing rate payers with the entire cost of growth-
related capacity expansion).
To understand why capacity and connection fees are an equitable method of assessing new
customers for the cost of available capacity (i.e., infrastructure) one must consider the issue of
time. As an example, consider a water facility that was built in 2006 and sized to accommodate
both existing customers and future anticipated growth. Now, consider the customer that
connects (develops) to the system in 2016. Up to this point, and for the last 10 years, the existing
water ratepayers have been paying for the value of the excess capacity (i.e., carrying costs/debt)
which is available for future development. When a new customer “connects” to the system in
2016, the capacity and connection fee must take into consideration the impact of the
development, the value of the available excess capacity, and potentially, the value of any other
needed (future) improvements required to accommodate customer growth. Depending upon
system characteristics and available excess capacity, a capacity and connection fee will likely have
a component related to reimbursing the existing customers for the value of the excess capacity
in system that they have been funding up to the current point in time, but also for the potential
future improvements needed to continue to accommod ate growth.
Purpose of Capacity and Connection Fees
Capacity and connection fees are generally imposed as a condition of service. The objective of
capacity and connection fees is not to generate money for the utility, but to create fiscal balance
between existing customers and new customers so that all customers seeking to connect to the
utility’s system bear an equitable share of the cost of capacity that is invested in both the existing
and any future growth-related expansions. Through the implementation of equitable and cost -
based capacity and connection fees, existing customers will not be unduly burdened with the
cost of new development. If cost-based capacity and connection fees are not implemented by
the City, then the existing customers will bear (i.e., pay for) a greater portion of the costs
associated with new development. Ultimately, the adoption of the final capacity and connection
1 Arthur C. Nelson, System Development Charges for Water, Sewer, and Stormwater Facilities, Lewis Publishers,
New York, 1995, p. 1,
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Water and Wastewater Capacity and Connection Fee Study
fees is a policy decision by the City Council regarding the sharing of costs between new
development and existing customers. The adoption of a cost-based capacity and connection fee
implies that “growth pays for growth”. Economic theory suggests that equity and fairness is
derived when those that create the costs, pay for the costs.
Legal Basis for Capacity and Connection Fees
In establishing capacity and connection fees, an important requirement is that they be developed
and implemented in conformance with local laws. In particular, many states have established
specific laws regarding the establishment, calculation and implementation of capacity and
connection fees. The main objective of most state laws is to assure that these fees are
established in such a manner that they are fair, equitable and cost -based. In other cases, state
legislation may have been needed to provide the legislative powers to the utility to establish the
fees.
The laws for the enactment of capacity and connection fees in California are codified in California
Government Code sections 66013, 66016, and 66022, which are interspersed within the
‘Mitigation Fee Act.’ The Mitigation Fee Act is comprehensive legislation dealing mainly with
capacity and connection fees, although the above sections set forth the various requirements for
imposition of capacity and connection fees in California: calculation of the fees, noticing,
accounting and reporting requirements, and processes for judicial review.
A summary of the relevant statutes required in the calculation of capacity and connection fees is
as follows:
“66013 (a) Notwithstanding any other provision of law, when a local agency imposes fees
for water connections or sewer connections, or imposes capacity charges, those fees or
charges shall not exceed the estimated reasonable cost of providing the service for which
the fee or charge is imposed, unless a question regarding the amount of the fee or charge
imposed in excess of the estimated reasonable cost of providing the services or materials
is submitted to, and approved by, a popular vote of two-thirds of those electors voting on
the issue.”
“66013 (b) (3) ‘Capacity charge’ means a charge for public facilities in existence at the
time a charge is imposed or charges for new public facilities to be acquired or constructed
in the future that are of proportional benefit to the person or property being charged,
including supply or capacity contracts for rights or entitlements, real property interests,
and entitlements and other rights of the local agency involving capital expense relating to
its use of existing or new public facilities. A “capacity charge” does not include a
commodity charge.”
The City’s proposed capacity and connection fees are “capacity charges” as defined in the
preceding provision. The basic principle that needs to be followed under California law is th at
the charge be based on a proportionate share of the costs of the system required to provide
service and that the requirements for adoptions and accounting be followed in compliance with
California law.
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Water and Wastewater Capacity and Connection Fee Study
Proposition 218 and 26 and Capacity and Connection Fees
In 1996, the voters of California approved Proposition 218, which required that the imposition of
certain fees and assessments by municipal governments require a vote of the people to change
or increase the fee or assessment. Of interest in this part icular study is the applicability of
Proposition 218 to the establishment of capacity and connection fees for the City.
In Richmond v. Shasta Community Services Dist., 32 Cal.4th 409 (2004), the California Supreme
Court held that water connection fees (capacity fees) are not “assessments” under Proposition
218 because they are imposed only on those who are voluntarily seeking water or wastewater
service, rather than being charged to particular identified parcels, and therefore such fees are
not subject to the procedural or substantive requirements of Proposition 218. The court also
held that such fees can properly be enacted by either ordinance or resolution.
In November 2010 the voters of California passed Proposition 26, an initiative based state
constitutional amendment that provided a new definition of the term “tax” in the California
Constitution. Under Proposition 26 a fee or charge imposed by a public agency is a tax unless it
meets one of seven exceptions. Capacity and connection fees fall within exception 2 – i.e., it is a
charge imposed for a specific government service. Provided that a capacity and connection fee
does not charge one fee payor more in order to charge another fee payor less (i.e., a cross -
subsidy), and it does not exceed the reasonable costs to the local government of providing the
service, the fee is not a tax within the meaning of Proposition 26. Under proposition 26, the local
government bears the burden of proving by a preponderance of the evidence that a levy, charge,
or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable
costs of the governmental activity, and that the manner in which those costs are allocated to a
payor bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from,
the governmental activity.
Methodology for Development of Capacity and Connection Fees
In establishing capacity and connection fees, there are differing methodologies. The AWWA M-1
Manual discusses three generally accepted methods;
“The buy-in method is based on the value of the existing system’s capacity. This method is
typically used when the existing system has sufficient capacity to serve new development
now and into the future.
The incremental cost method is based on the value or cost to expand the existing system’s
capacity. This method is typically used when the existing system has limited or no capacity
to serve new development now and into the future.
The combined approach is based on a blended value of both the existing and expanded
system’s capacity. This method is typically used where some capacity is available in parts of
the existing system (e.g. source of supply), but new or incremental capacity will need to be
built in other parts (e.g., treatment plant) to serve new development at some point in the
future.”2
2 AWWA M-1 Manual, p 6th Edition, p. 265-266.
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Water and Wastewater Capacity and Connection Fee Study
At the present time, both the water and wastewater system have available capacity to meet
present and future demands with identified improvements from the recent master planning
processes. Therefore, the “combined approach” methodology will be utilized for the
development of the capacity and connection fee. This will be a change in the approach to setting
cost-based capacity and connection fees as the City currently uses a modified combined approach
in the development of the current development impact fees. As noted in the 2013 peer review,
the City has historically only included the costs of major infrastructure and specific capacity
expanding projects, which does not include the total system value or costs associated with
providing service to new customers connecting to the system.
There are “generally accepted” methodologies that are used to establish capacity and connection
fees. Within the “generally accepted” methodologies, there are a number of different steps used
to establish cost-based and equitable capacity and connection fees. These steps are as follows:
1. Determination of system planning criteria
2. Determination of equivalent dwelling units (EDU)
3. Valuation of system component costs
4. Determination of any financing credits
Step 1 – Determination of System Planning Criteria
The first step in establishing capacity and connection fees is the determination of the system
planning criteria. This implies calculating the amount of water or wastewater capacity required
by a single-family residential customer. The use of an adopted facility plan or master plan for the
utility provides the basis for the fee’s system planning criteria. These plan documents provide
the rational planning basis and criteria for the facilities and investment needed to properly and
adequately operate and maintain the system.
Generally for a water system, two different criteria are determined due to differences in planning
criteria. The first planning criterion is the peak day water usage per EDU and the second is a
water storage requirement per EDU. These two different planning criteria are developed since a
majority of the water system infrastructure is sized to meet the peak day demand, and water
storage is sized to meet equalizing, emergency and fire flow requirements.
For wastewater systems, average daily demand (wastewater contribution) per EDU is most often
used, since this total flow represents the flow, imposed by the customer. Average inflow and
infiltration is added to the customer’s flow since this represents the total volumetric flow and
hence capacity requirement at the treatment plant.
As previously mentioned the City’s recently approved documents the 2015 Final Potable Water
Distribution System Operations Master Plan, the 2015 Urban Water Management Plan, the 2015
Wastewater Collection System Infrastructure Renewal Strategy, and the Water Resource
Recovery Facility plan will be used to develop key growth and infrastructure planning
components for both the water and wastewater capacity and connection fees.
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Step 2 – Determination of Equivalent Dwelling Units (EDU)
The next step is the determination of the equivalent dwelling units or EDUs. An EDU provides a
“common denominator” for assessing the impact on a utility system. The determination of the
total system EDUs is an important calculation in that it provides the linkage between the amounts
of infrastructure necessary to provide service to a set number of customers. This implies that if
the system is designed to provide service for demands up to the year 2035, then the
infrastructure costs are divided by the EDUs in 2035 to determine the equitable and
proportionate cost per EDU.
The City’s aforementioned planning documents will be used to update the EDU definition. The
capacity and connection fee will follow the time frame outlined in these documents for the
projected capital improvements needed and will be the basis for establishing both the existing
EDUs and future (new/additional) EDUs.
Step 3 – Valuation of System Component Costs
The next step in the analysis is to determine the valuation of the system infrastructure. There
are different methods for the valuation of the existing assets (buy -in component). A common
methodology for the valuation of existing assets is to use each asset’s ori ginal cost and place
them at current replacement value in order to more fairly reflect the carrying costs associated
with the excess capacity. By using this valuation method, all assets (existing and future) are
brought up to current day dollars. The inclusion of any expansion related assets (i.e., future
expansion-related capital projects) within the analysis are based upon an adopted capital plan or
master plan and valued at today’s cost, regardless of the timing of when the facility will be built.
The calculation of the capacity and connection fee generally includes both historical assets and
planned future assets. Essentially, the capacity and connection fee analysis determines the value
of the total assets and the capacity and connection fee is composed of a “buy-in” component
(i.e., existing assets) and an expansion component. The expansion component is related only to
future capital projects which provide an expansion of capacity to accommodate future growth.
Given a value for capacity and the number of equivalent capacity units, the basic formula for
calculating the capacity and connection fee is relatively straight-forward. The basic formula for
calculating a capacity and connection fee appears as follows:
System Value (Existing or New Facilities) = Capacity and Connection
Fee/Equivalent Dwelling Unit System Capacity (Equivalent Units)
In the determination of the capacity and connection fee, the cost per equivalent dwelling unit as
shown above is the “gross capacity and connection fee”. The “gross capacity and connection fee”
is calculated before any credits for debt service.
The City’s asset inventory record listing will be used to establish existing assets and will be value d
at replacement cost based in 2016 base dollars. The only exception to this is the land assets will
be based on original asset cost value and date put in service and escalated to current dollars using
a cost index (e.g. the Engineering New Record, Construction Cost Index; ENR CCI).
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City of San Luis Obispo 7
Water and Wastewater Capacity and Connection Fee Study
The updated planning documents for both water and wastewater detailed facilities that will be
decommissioned or facilities that may be upgraded. A review is being undertaken to make sure
the inventory record listing used to calculate the capacity and connection fee will only include
those assets considered part of the operations of the water and wastewater system. The capacity
and connection fee will follow the time frame outlined in these documents for the projected
capital improvements needed and will be the basis for establishing both the existing EDUs and
future (new/additional) EDUs.
Step 4 – Determination of Any Financing Credits
The last step in the calculation of the capacity and connection fee is the determination of any
credits. The provision of debt service credits, if applicable, is a calculation to prevent customers
from paying twice for an asset; once through the valuation of the asset contained in the capacity
and connection fee and then again through any debt service payments included within the
utility’s rates. A similar crediting mechanism is also utilized if general obligation or tax revenue
has been used to finance the infrastructure. In addition, any contributed capital through
developer contributed facilities or grant funded facilities will not be included in the capacity and
connection fee calculation.
Overview of the City’s Present Water and Wastewater Development Impact Fees
The City currently has water and wastewater development impact fee in place. The fees include
a fee class for secondary dwelling units (studio units less than 450 square feet) that is 30 percent
of one equivalent dwelling unit based on water demand and wastewater generation for similar
units. The fees also include an updated multi-family unit development impact fee that is 70
percent of one equivalent dwelling unit based on water demand and wastewater generation for
similar units. Provided below in Table 1 is a summary of the City’s present water development
impact fees.
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City of San Luis Obispo 8
Water and Wastewater Capacity and Connection Fee Study
Table 1
Summary of Present Water Development Impact Fees ($/EDU)
Land Use Type
Equivalent Dwelling Unit
(EDU)
Water Development Impact Fee
Residential
Single family Unit 1.00 $11,023
Multi-family Unit 0.70 7,716
Mobile Home 0.60 6,614
Studio Unit, 450 square feet or less 0.30 3,307
Non-Residential (Meter Size)
3/4” inch 1.00 11,023
1” inch 1.70 18,739
1-1/2” inch 3.40 37,478
2” inch 5.40 59,523
3” inch 10.70 117,944
4” inch 16.70 184,081
6” inch 33.40 368,162
The current wastewater development impact fees are based on a city wide fee for service plus
additions for catchment areas. These catchment areas are regions with wastewater mains, lift
stations, and force mains that collect wastewater from identified areas of the City. Each
catchment area varies in the amount of flow contributions to the W RRF, due to its applicable
topography and land uses. The wastewater catchment areas are Margarita, Tank Farm, Silver
City, Calle Joaquin and Laguna, each corresponding to a lift station service area. All fees for the
various residential and non-residential land uses are determined by multiplying the single family
residential wastewater fee for the City wide and each catchment area by its applicable EDU
factor. Table 2 provides the citywide fee and summarizes the add-on fees for each catchment
area for both residential and non-residential development.
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City of San Luis Obispo 9
Water and Wastewater Capacity and Connection Fee Study
Table 2
Summary of Present Wastewater Development Impact Fees ($/EDU)
Land Use Type
Equivalent
Dwelling
Unit (EDU)
City
Wide
Margarita
Tank
Farm
Silver
City
Calle
Joaquin
Laguna
Residential
Single-family Unit 1.00 $3,815 $2,808 $3,713 $1,387 $1,871 $501
Multi-family Unit 0.70 2,670 1,966 2,599 971 1,310 351
Mobile Home 0.60 2,289 1,685 2,228 832 1,123 301
Studio Unit - 450 sq. ft or less 0.30 1,144 842 1,114 416 561 150
Non-Residential
3/4” inch 1.00 3,815 2,808 3,713 1,387 1,871 501
1” inch 1.70 6,485 4,774 6,313 2,358 3,181 852
1-1/2” inch 3.40 12,970 9,548 12,626 4,716 6,362 1,704
2” inch 5.40 20,600 15,164 20,053 7,490 10,104 2,707
3” inch 10.70 40,818 30,047 39,734 14,843 20,020 5,364
4” inch 16.70 63,707 46,896 62,015 23,166 31,247 8,371
6” inch 33.40 127,413 93,792 124,031 46,332 62,494 16,472
As a part of updating these fees, the City’s existing methodology is proposed to be revised and
updated for current costs and other planning parameters. There are a number of key
assumptions being reviewed as a part of the study as discussed in the memo. Among the key
assumptions currently being reviewed are the following:
The valuation of existing water and wastewater facilities (assets) will be based upon
replacement cost less their depreciation (booked) value.
The development of future equivalent dwelling units (EDUs) will be based on the City’s
annexation policy, planning maps, and land use designation.
Assumed future growth will be based on the growth assumptions as developed in the City’s
general plan.
Future expansion related water and wastewater capital projects will be based upon the City’s
current capital improvement plan and planned future capital improvements needed to
service future growth.
The capacity and connection fees for both water and wastewater will be reviewed based on
components for water of supply, reservoirs, treatment, storage, distribution and wastewater
treatment and collection.
Annual adjustments of the Capacity and Connection Fee should be based on an industry
standard index (e.g., ENR CCI).
The final report to be developed for this study will document these and any other key
assumptions of the study.
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City of San Luis Obispo 10
Water and Wastewater Capacity and Connection Fee Study
Summary
This discussion paper has provided an introduction and overview of the development of water
and wastewater capacity and connection fees. Development of capacity and connection fees is
an equitable method to finance the cost of growth and expansion facilities. The water and
wastewater capacity and connection fees will be updated to reflect the City’s current costs and
value of capacity. The intent is to provide a calculated cost-based water and wastewater capacity
and connection fees that are fair to both existing customers and future development. There are
no proposed changes to implementation or administration of the water or wastewater capacity
and connection fees when compared to the current Development Impact Fees.
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Study Session: Water and Sewer Capacity and Connection FeesFebruary 7, 2017
Study Session: Water and Sewer Capacity and Connection FeesRecommendationReceive a presentation on the development of a Water and Sewer Capacity and Connection Fee Study in a study session and provide feedback on the proposed approach.
Presentation byShawn KoornAssociate Vice President, HDR Engineering, Inc.* Within the presentation we have identified the material related to Focus Questions with this icon Study Session: Water and Sewer Capacity and Connection Fees
Presentation Overview:Definition and purpose Financial impact Methodology and componentsReview existing feesOverall fee burdenFeedback on approachStudy Session: Water and Sewer Capacity and Connection Fees
Other Common NamesDevelopment Impact Fees System Development ChargeTap FeesHook-up FeesCapacity FeesPlant Investment FeesAvailability FeesGeneral Facility ChargesConnection ChargesStudy Session: Water and Sewer Capacity and Connection Fees
Fee for new customer demand only Fee required of all new customers desiring water or sewer service or existing customers requesting increased water or sewer service capacityCharge based on the value of the utility’s capacity and the amount of capacity needed by the new customer Study Session: Water and Sewer Capacity and Connection FeesDefinition
To fairly balance the burden of costs between existing rate payers and new development that connects to the system New development pays a “buy-in” for existing assets and an “incremental” fee for future or new expansion related facilities•These are a one-time fee paid into the system•Represent a proportionate share of the current value of the system and any future expansion-related facilities needed to serve them•Does not include any operation and maintenance expensesStudy Session: Water and Sewer Capacity and Connection FeesPurpose
The fee is determined by: Current assets, bringing them into current-day dollars (replacement/cost indices) Plus the share of future capital related to growthStudy Session: Water and Sewer Capacity and Connection FeesFee Calculation
Financial ImpactsCapacity and connection fees provide an alternative revenue source to water and sewer rates and help to minimize rates over timeCapacity and connection fees restricted to use for future growth related capital or debt service Factors to consider:•Potential unstable revenue source•Fees are “growth-dependent” meaning if growth does not occur, rates will bear the cost burden (i.e., risk)Study Session: Water and Sewer Capacity and Connection Fees
Time is the Key Difference Between Rates and Capacity and Connection FeesStudy Session: Water and Sewer Capacity and Connection FeesAnnual Budget= RatesAnnual UsageRate x Customer Usage = BillCapacity Value= Capacity Unit ValueGrowth Related CapacityCapacity Unit Value x Customer Capacity = FeeOne-year timeframeMultiple-year timeframeRates are based on recovering annual costsCapacity and connection fees are based on recovering capacity costs as it is depleted
How Capacity and Connection Fees Are UsedStudy Session: Water and Sewer Capacity and Connection FeesTotal Capital Improvement ProjectsLess: Outside Funding Sources– Capital Reserves–Growth Related Impact Fees–Grants– Long-Term Debt– Other Capital Funding Sources= Total Capital Improvements Funded From Rates (I + term)
Capacity Issues Impact Method of Determining FeesMethods of determining fees Which method is most appropriate to use?•Buy-in Methodology•Incremental (Marginal) Methodology•Combined MethodologyStudy Session: Water and Sewer Capacity and Connection Fees
Buy-in MethodologyExisting Capacity Will Meet Current and Future NeedsStudy Session: Water and Sewer Capacity and Connection FeesDemandSupplyCapacity Availableto Serve Build Out
Incremental MethodologyNo Existing Capacity for Future Needs; Need to Build CapacityStudy Session: Water and Sewer Capacity and Connection FeesDemandSupplyNo Available Capacity for GrowthCapacity Needed for Growth
Study Session: Water and Sewer Capacity and Connection FeesCombined MethodologySome Capacity is Available, But More Capacity is NeededDemandSupplyCapacity Availablefor GrowthPlus, Additional Capacity Needed
Criteria Used to Determine FeesSystem Planning CriteriaDetermination of an Equivalent Dwelling Unit (EDU)Capital Improvement PlansSystem FinancingVarious MethodologiesLegal RequirementsStudy Session: Water and Sewer Capacity and Connection Fees
Legal ConsiderationsState laws and regulationsRational Nexus - relationship between the price and cost incurredReasonable relationship to the burden imposed to provide capacityReasonable relationship does not mean mathematically exactStudy Session: Water and Sewer Capacity and Connection Fees
Current Water Development Impact FeesFee includes project cost plus financing:Nacimiento Pipeline Water Reuse Project 2006 Water Treatment Plant Improvements2006 Water Treatment Plant Sedimentation Process2007 Bishop Tank 1994 Water Treatment UpgradeFee does not include the cost/benefit of the existing backbone infrastructureStudy Session: Water and Sewer Capacity and Connection Fees
Study Session: Water and Sewer Capacity and Connection FeesCurrent Water Development Impact Fees (cost per equivalent dwelling unit) Land Use Type Equivalent Dwelling Unit (EDU) Existing Water Development Impact Fee $/EDU Residential Single family Unit 1.00$11,023Multi‐family Unit 0.707,716Mobile Home 0.606,614Studio Unit, 450 square feet or less 0.303,307Non‐Residential (Meter Size) 3/4” inch 1.0011,0231” inch 1.7018,7391‐1/2” inch 3.4037,4782” inch 5.4059,5233” inch 10.70117,9444” inch 16.70184,0816” inch 33.40368,162 •A single family home and 3/4” non-residential water meter equals one equivalent dwelling unit.•Fees shown are as of FY 2015-16.
Current Sewer Development Impact FeesWRRF capital improvement costs plus financing1994 UpgradePlanned Upgrade expands WRRF to 5.4 MGDFee does not include the cost/benefit of the existing backbone infrastructureStudy Session: Water and Sewer Capacity and Connection Fees
Land Use Type Equivalent Dwelling Unit (EDU) City Wide Margarita Tank Farm Silver City Calle Joaquin Laguna Residential Single‐family Unit 1.00 $3,815 $2,808 $3,713 $1,387 $1,871 $501 Multi‐family Unit 0.70 2,670 1,966 2,599 971 1,310 351 Mobile Home 0.60 2,289 1,685 2,228 832 1,123 301 Studio Unit ‐ 450 sq. ft or less 0.30 1,144 842 1,114 416 561 150 Non‐Residential 3/4” inch 1.00 3,815 2,808 3,713 1,387 1,871 501 1” inch 1.70 6,485 4,774 6,313 2,358 3,181 852 1‐1/2” inch 3.40 12,970 9,548 12,626 4,716 6,362 1,704 2” inch 5.40 20,600 15,164 20,053 7,490 10,104 2,707 3” inch 10.70 40,818 30,047 39,734 14,843 20,020 5,364 4” inch 16.70 63,707 46,896 62,015 23,166 31,247 8,371 6” inch 33.40 127,413 93,792 124,031 46,332 62,494 16,472 Current Sewer Development Impact Fees (cost per equivalent dwelling unit) Study Session: Water and Sewer Capacity and Connection Fees•A single family home and 3/4” non-residential water meter equals one equivalent dwelling unit.•Fees shown are as of FY 2015-16.Area Specific Fees
General Plan PolicyGeneral Plan Policy 1.13.9 (Costs of Growth) in the Land Use Element states:The City shall require the costs of public facilities and services needed for new development be borne by the new development, unless the community chooses to help pay the costs for a certain development to obtain community-wide benefits. The City shall consider a range of options for financing measures so that new development pays its fair share of costs of new services and facilities which are required to serve the project and which are reasonably related to the new growth attributable to the development.Study Session: Water and Sewer Capacity and Connection Fees
Capacity and Connection Fee Basic FormulaStudy Session: Water and Sewer Capacity and Connection FeesValue of Available New Customer System Capacity XCapacity Demands=Available Capacity (EDU)Capacity and Connection Fee
Fee ComponentsBuy-In Component -Original cost of existing assets adjusted to a replacement valueExpansion Component -Planned future capital improvements needed to serve future capacityDebt Service Component -Financing cost associated with expansion-related projects Study Session: Water and Sewer Capacity and Connection Fees
Methodology for Determining FeesUse “combined methodology”Capacity in existing backbone system plus future improvementsBuy-In (Existing assets)Use system asset inventory recordsReplacement cost new less depreciationUse only those costs that are capacity fee eligibleDivided by build-out equivalent dwelling unitsIncremental (Future assets)Use current capital improvement planInclude only capacity fee eligible projectsDivided by future equivalent dwelling unitsStudy Session: Water and Sewer Capacity and Connection Fees
Capacity and Connection FeesEstablish the reasonable relationship between system capacity and needs of development and the fee to be imposedShould not exceed the calculated costAre restricted to use to growth related capital and debt serviceStudy Session: Water and Sewer Capacity and Connection Fees
Water and Sewer Development Impact Fees are part of total fee burden on new developmentThe City was provided a recommendation that the total fee burden should not exceed 15 percent of the single family residential unit costStudy Session: Water and Sewer Capacity and Connection Fees
RecommendationReceive a presentation on the development of a Water and Sewer Capacity and Connection Fee Study in a study session and provide feedback on the proposed approach.Study Session: Water and Sewer Capacity and Connection Fees
Questions for City Council DirectionYes No1. Is the name change from Water and SewerDevelopmentImpact Feesto Water and SewerCapacity and ConnectionFeeshelpful to more clearly communicate the serviceprovided?2. Should the City’s Water Capacity and Connection Feeinclude:a. The water assets identified in the prior water developmentimpact fee study?b. All existing and future water assets that provide capacity toserve new development?3. Should the City’s Sewer Capacity and Connection Feeinclude:a.The wastewater assets identified in the prior sewerdevelopment impact fee study?b.All existing and future wastewater assets that providecapacity to serve new development in the Sewer Capacityand Connection Fees?4. Should the City eliminate area‐specific sewer CatchmentArea fees in favor of one citywide Sewer Capacity andConnection Fee?Study Session: Water and Sewer Capacity and Connection Fees
Study Session: Water and Sewer Capacity and Connection Fees $- $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000Annual Development Impact Fees CollectedWater Annual Average: $1,482,339Sewer Annual Average: $483,390WaterSewer