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.

LOOKING FOR LOVE? SAY IT WITH SEWAGE

Our Valentines Day was rather sedate...no flowers, no candy, no jewelry, no special dinner. My wife and I each were out of town at separate meetings, at which she celebrated with a sandwich and I with grocery fried chicken. I did get home in time to watch re-runs of Swamp People, and for some live mud wrestling on the Forlorn channel.

When I was a young kid, as in first and second grade, I really looked forward to Valentines Day-- not because it meant candy but because it meant that I might get a card from some girl in my class with pigtails on which I had a crush. You know, one of those mass-produced cards that came in a box of 100 that probably cost a dollar. But, alas, romantic disappointment always arrived at my desk, as I received cards only from Gertrude, Cedric and Henry.

After some life review, I brightened as I read this week a Wall Street Journal article telling how 100 people spent a romantic Valentines Day visiting the largest New York City sewage treatment plant. The facility treats 1.5 million gallons of wastewater per day. The visitors were shown how the plant operates and toured control rooms and digesters. One man said it was something fun to do together, as he kissed his girlfriend.

Of course, some persons noticed a certain rotten egg smell. ( I will not repeat my wool suit at a sewage treatment plant story, as with causal days maybe people do not wear that much wool anymore).

Odor leads me to another story I read this week. It appears that scientists at the City College of New York have discovered that a material made from used coffee grounds can absorb hydrogen sulfide gas--the stuff that smells like rotten eggs at sewage treatment plants. Actually, the process is called "adsorption." Caffeine in the grounds facilitates the process because it contains nitrogen.

So, next Valentines Day, or if you are looking for romance anytime, forget the flowers, candy, jewelry and special dinner. Just go visit a sewage treatment plant and have a cup of coffee there. It can be stimulating, and is so organic!

WATER CONSERVATION MEETS RATE INCREASE...COMING SOON TO A THEATRE NEAR YOU

No--not another Godzilla movie. Rather, a potential dramatic confrontation that is not fictional.

A hot topic currently in the water industry is water sustainability and, consequently, its conservation. Generally, it appears that efforts to promote conservation of water can be either voluntary or mandatory.

Voluntary conservation can range from educational programs to inform customers how to avoid wasteful water use to financial incentives for installation of more efficient or low flow appliances and to promotion of downspout rain barrels.

Mandatory water conservation can arise through regulatory requirements for the use of low flow toilets, faucets, shower heads, and appliances; irrigation and sprinkling restrictions, and limits on sources of supply. One form of mandatory water conservation can occur when a regulatory agency imposes conservation requirements on a water utility and its end users as well. Such regulation can raise an interesting potential conflict between a utility's legal obligation to serve the demands of its customers and its legal obligation to impose restrictions on those very demands. See, for example, Arizona Water Company v. Arizona Department of Water Resources, 91 F.3rd 990 (AZ 2004).

A customer of a water utility may conclude that if less water is used due to conservation, the water bill should be lower. However, this belief is not necessarily true; and, in point of fact, in the case of a well managed water system, likely will not be true. Water utilities may be finding that conservation is resulting in decreasing system water demand. Lower water sales translates into less revenue to cover fixed costs, debt service and funding of reserves for repairs and replacements. Further, if a utility is compelled to meet tight limits on unaccounted for water, less revenue also makes leak detection, main repair and meter replacement programs more difficult to perform.

As a result, a utility that experiences declining revenue due to conservation will have to increase rates to satisfy its ongoing revenue requirements. And, customers who may be using less water may end up paying more for the water they do use. Again, rates should be sufficient to cover all costs of service.

If conservation results in such a reduction in system demand that system capacity may be viewed as excess, a question can arise as to recovery of costs associated with that excess capacity. That is a question for another day!