Funding Future Water System Expansions

Water Capital Recovery Fees Explained

What Are Capital Recovery Fees?

Chester Metropolitan District is moving forward with Capital Recovery Fee charges.  Capital Recovery Fees are charges imposed by a water utility upon new development to tie onto the water system and use existing water supply capacity that has already been paid for by the existing customer base. Capital Recovery Fees easily and fairly distribute the burden of providing additional potable water capacity from the water utility and its existing customers to new customers as a result of new development. The fees are collected from new industries, new commercial businesses, new residential construction, and new water taps, and they allow the new customer to “buy-in” to the remaining water capacity that Chester Metropolitan District (CMD) has available. The Capital Recovery Fees will also help fund large-scale water system capital improvement projects such as water treatment plant expansions, upsizing water transmission mains, and water line extensions that will be necessary to keep pace with future economic development and residential growth in Chester County.

Who Do Capital Recovery Fees Impact?

Capital Recovery Fees impact new development and new connections. For the purposes of this fee, a “development” can be a new home, apartment complex, business, industry, or other establishment which connects to the public water system. The fee itself is normally paid by the developer before the resident or business moves into the building. In some cases, established residents and businesses who were previously on private wells may be impacted, as the fee is assessed to any new connection to our system.

Capital Recovery Fees are not charged to current customers with existing connections to the system; however, current customers will be assessed the Capital Recovery Fee for new or additional water taps.

What Do Capital Recovery Fees Do?

Capital Recovery Fees are a source of capital financing used to help water systems recover the investment in capacity allocated to new customers. Capital Recovery Fees paid to the water system are earmarked specifically to offset the capacity related costs, which include expanding the water filtration plant, installing new mains, or adding booster pump stations and new water tanks to serve growth.

The Capital Recovery Fees can be used to pay construction costs or to help pay back notes, loans, and bonds that are used to fund large water system projects to increase capacity. The implementation of the fees will not eliminate normal, periodic water rate increases to account for inflation, materials cost increases, increased operations and maintenance expenses, and ongoing repair and replacement of aging infrastructure.

How are Capital Recovery Fees Calculated?

Chester Metropolitan District recently contracted with Raftelis Financial Consultants (Raftelis) in Charlotte, North Carolina to perform a Capital Recovery Fee Study. The results of this study explained, in the simplest terms, how the fees are calculated and what Fee is considered fair for CMD to charge.

RFC collected historical data from CMD, including fixed asset data, outstanding debt, a complete list of water capacity infrastructure (water plant capacity, size and length of mains), and estimated daily water loss. Using the historical data to determine the value of CMD’s system assets, Raftelis calculated a “Replacement Cost” of the infrastructure we currently have, which values the system in today’s dollars. The Replacement Cost is reflected as a “Cost per Gallon per Day”, or “Cost per GPD”, and was calculated to be $1.99 per gallon per day to replace core system assets.

Second, RFC collected customer usage data to develop an “Equivalent Residential Unit”, or ERU. This is the estimated level of demand per customer based on a ¾” water meter. Residential average daily demand was determined to be 300 gallons per day per residence.  RFC also computed a “System Peaking Factor”, or the ratio between average water production and maximum water production (maximum annual daily peak demand).  This is to account for periodic high water usage a customer may have from time to time and the System Peaking Factor was calculated to be 1.40.  A Water Loss Factor was also developed to account for lost water resulting from water theft, water line flushing, firefighting, and water system leakage that is estimated to occur throughout the water system.  The Water Loss Factor was determined to be 1.25.  To compute the cost of an ERU you must first calculate the number of gallons that make up an ERU.  The number of gallons is calculated as follows:

Adjusted GPD = 300 gal. per day X  1.4 (System Peaking Factor) X 1.25 (Water Loss Factor) = 525 GPD

 

To calculate the cost of an ERU, the cost per gallon per day for water ($1.99) is multiplied by the the Adjusted GPD.  The cost of an ERU is as follows:

 

ERU = $1.99 (Cost per Gallon per Day) X 525 GPD = $1,044.75 (Rounded to $1,045.00)

 

The cost of one ERU is $1,045.00 for a single ¾” residential water meter. As meter size increases, the number of ERUs associated with that meter also increases.

To Calculate Capital Recovery Fees for 1” and 2” water meters, a “Capacity Ratio” is used to determine the number of ERUs associated with that meter size based on a ¾” water meter. For example, a 1” water meter has a Capacity Ratio of 1.6667, which means a 1” meter can flow 1.6667 times more water than a ¾” meter under normal conditions.  A 2” water meter has a Capacity Ratio of 5.3333, which means a 2” meter can flow 5.3333 times more water than a ¾” water meter under normal conditions.  Therefore a 1” water meter has a Capital Recovery fee of (1.6667 X 1,045.00) = $1,741.70 (rounded to $1,740.00) and a 2” water meter has a Capital Recovery Fee of (5.3333 X 1045.00) = $5,573.30 (rounded to $5,575.00).

The Capital Recovery Fee for  large commercial and industrial connections with water meter sizes ranging from 3” to 10” will be based on the requested average water demand in gallons per day times the Cost per Gallon per Day of $1.99.  Average water demands will be adjusted using the system peaking factor and the water loss factor.  The capital recovery fee for a prospective industrial customer with an average daily water demand of 100,000 gallons per day is computed as follows:

100,000 GPD X 1.4 (System Peaking Factor) X 1.25 (Water Loss Factor) X $1.99 =$348,250.00

The Bottom Line

Capital Recovery Fees are not new. Water utilities and municipalities across the country have been charging Capital Recovery Fees for years to help pay for expansions to water and wastewater systems to serve new growth. York County, the City of Rock Hill, and Lancaster County charge capital recovery fees for new development. It is the fairest way to pass on the cost of new growth to those who are developing new sites. History has proven that Capital Recovery Fees do not adversely impact growth. Fort Mill and Indian Land are two examples.

The full Capital Recovery Fee report and draft Capital Recovery Fee Schedule will be available on our website in mid-April 2018. Chester Metropolitan District will conduct a public hearing in April 2018 to receive comments on the proposed Capital Recovery Fees and Capital Recovery Fee Schedule.  Comments can be mailed to Chester Metropolitan District at P.O. Box 550, Chester, South Carolina 29706 or submitted by Clicking Here.