WHEN ARE CONNECTION CHARGES APPROPRIATE?

Water and wastewater utilities often charge new customers a fee for connection to their systems, commonly called a connection or tap-on fee. Historically, some have asserted that such fees are unreasonable extra charges unrelated to costs of service. Are they correct?

The propriety of connection fees imposed by regulated utilities generally is determined by the particular regulatory commission. However, the reasonableness of tap-on fees imposed by unregulated municipal-owned utilities is for the courts.

The basic rationale for a legitimate connection fee is to avoid subsidization of service to new customers by current customers; and to shift costs and risks incurred to serve new customers to those who benefit or cause risks.

So, for example, a water utility may construct a main extension to serve potential customers in a proposed subdivision. It may then charge a connection fee to new customers as they attach so as to recover a portion of the costs incurred to extend service.

In one case, a court upheld a connection fee imposed on new connections where the fee was used to help finance a new project for an additional source of water. The court concluded that the new customers benefited because without the new water source they could not have been served. (Tidewater Association of Homebuilders v. City of Virginia Beach, 400 S.E. 523 (Va. 1991))

Sometimes, a utility may be unwilling to extend a main to a proposed development because of the risk that the development will not be built out as expected. The developer may assume the risk by constructing the main extension at its cost and contributing the main to the utility. As new customers attach to the main extension, the utility may charge a connection fee which it then refunds in whole or in part to the developer who financed the main extension.

How is the reasonableness of a connection charge to be measured? One Illinois court said that a connection charge is to recover the deferred cost of extending service to new customers. (City of Pontiac v. Mason, 50 ILL.App. 3d 102 (4th Dist. 1977). A Massachusetts court said that connection fees should reasonably relate to the cost of service to new customers, including the incremental cost of additional facilities that are required. (Bertone . v. Dept. of Public Utilities, 583 N.E.2d 829 (Mass. 1992))

Regulated utilities may have main extension rules in their tariffs approved or required by their regulatory agencies. Unregulated utilities may have connection fees governed by developer contracts or annexation agreements, as well as by ordinance.

A challenge to an unregulated utility's connection fee is subject to a heavy burden of proof. Generally, courts accord a presumption of validity to charges set by municipal ordinance (Inland Real Estate Corp. v. Palatine, 146 Ill.App. 3d 92 (1st Dist 1986)) So, in a Vermont case, the court held that plaintiffs did not prove that a connection fee was unreasonable because they did not present a cost analysis showing that it was unreasonable or set in an arbitrary manner. Handy v. City of Rutland, 598 A.2d 114 (Vt. 1990). In a Texas case, the court held that plaintiff failed to establish tap on fees were unreasonable because there was no evidence that the fees were in excess of the costs of providing services. It said that plaintiff did not carry his substantial burden of showing that the connection fee ordinance was invalid. (Black v. City of Killeen, 78 S.W.3d 686 (Ct App Tex. 2002))

It appears that, if connection fees are reasonably related to the costs of serving new customers, they likely will be found to be reasonable.