CITY COUNCIL REGULAR MEETING AGENDA PACKET

WATER CAPACITY AND MISCELLANEOUS FEE STUDY 8 The basic economic philosophy behind connection fees is that those who receive utility from the product should pay for service costs. To effect fair distribution of the system's value, the charge should reflect a reasonable estimate of the cost of providing capacity to new users and not unduly burden existing users through a comparable rate increase. Accordingly, many utilities make this philosophy one of their primary guiding principles when developing their connection fee structure. The philosophy that service should be paid for by those who receive utility service is often referred to as “growth- should-pay-for-growth.” The principle is summarized in the American Water Works Association (AWWA) Manual M26: Water Rates and Related Charges: “The purpose of designing customer-contributed-capital system charges is to prevent or reduce the inequity to existing customers that results when these customers must pay the increase in water rates that are needed to pay for added plant costs for new customers. Contributed capital reduces the need for new outside sources of capital, which ordinarily has been serviced from the revenue stream. Under a system of contributed capital, many water utilities are able to finance required facilities by use of a ‘growth-pays-for-growth’ policy.” This principle, in general, applies to water and wastewater systems. In the excerpt above, customer-contributed capital system charges are equivalent to connection fees. Legal Framework and California Requirements In establishing connection fees, it is important to understand and comply with local laws and regulations governing establishing, calculating, and implementing connection fees. The following sections summarize Raftelis’ understanding1 of the regulations applicable to developing connection fees for the City. Connection fees must be established based on a reasonable relationship to the costs and benefits of the development or expansion. Courts have long used a standard of reasonableness to evaluate the legality of development charges. The basic statutory standards governing connection fees are embodied by California Government Code Sections 66013, 66016, 66022, and 66023. Government Code Section 66013 contains requirements specific to determining utility development charges: “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 the fee or charge 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.” Section 66013 also includes the following general requirements: x Local agencies must follow a process set forth in the law, making certain determinations regarding the purpose and use of the charge; they must establish a nexus, or relationship, between a development project and the improvement being financed with the charge. x The capacity charge revenue must be segregated from the General Fund to avoid commingling of connection fees and the General Fund. 1 Raftelis does not practice law, nor does it provide legal advice. Our discussion provides a general overview of Raftelis’ understanding as utility rate and charges practitioners and is labeled “Legal Framework and California Requirements” for literary convenience only. The City should consult with its legal counsel for clarification and/or specific guidance. Page 155 of 893