United States: Issues In Calculating Tapping Fees

In the ten years that have passed since Act 203 became effective, only a few judicial decisions have clarified its complicated provisions. However, some common practices have evolved in computing tapping fees. Because the calculations are difficult and complex, it is fortunate that municipalities and authorities have been given a range of discretion with which to establish these fees. Moreover, the plaintiff has the burden of proving that an abuse of discretion has occurred in setting tapping fees. Citizens Against Unfair Treatment v. Scott Township, 151 Pa. Commwlth. Ct. 235, 616 A2d. 765 (1992), appeal den. 533 Pa. 647, 622 A2d. 1378 (1993).

It was proposed during the negotiations leading to Act 203 that governmental entities should be given the option of basing tapping fees on the recovery of past costs or the accumulation of funds to pay for future projects foreseeable within a reasonable time. In its final form the Act authorizes both bases, subject to certain restrictions. However, probably most of the fee structures have been based upon recovering the cost of existing facilities. The reason, as expressed in another state is that "new users should be placed on an equal footing with prior connectors' contributions to the debt service of the initial construction." Meglino v. Township Committee of the Township of Eagleswood, 103 NJ. 144, 510 A2d. 1134 (1986). This is the so-called "buy-in pricing basis," which requires that a new customer contribute an amount of new capital to the system equal to the equity created by prior payments of the existing customers (see article: "Front-end Responsibility for Capital Investment for Government Owned Utilities" R.F. Banker, Partner, Black & Veatch, Engineers, 1986). Charges imposed on this basis have been upheld in decisions in other states. Taylor v. Fall Creek Regional Waste District, 700 N.E. 2d. 1179 (Ct. Appls. of Ind. 1998).

This underlying theory of the Act explains why it contains no limitation upon the use of proceeds of tapping fees. Although the tapping fees may not be based upon operating costs, once the revenue is received, it may be used for general purposes related to the System. This is because it represents a reimbursement received on behalf of existing users. In certain other states, tapping fees may only be imposed to pay for needed expansion or similar future costs. That is based on the contrasting theory that "growth should pay for growth."

The capital costs to be recovered may be measured under the Act by either the original cost plus debt service payments, trended original cost, or replacement cost. There has been little judicial discussion of these formulas, but in one case the Commonwealth Court held that an authority in determining original cost could not use the low bid as originally accepted by the authority, but must determine the final total cost. West v. Hampton Township Sanitary Authority, 661 A2d. 459 (Pa. Commwlth. 1995). In addition, the opinion in that case disapproved the inclusion of the financing costs related to construction. This appears contrary to accepted accounting practices.

The Act requires that certain costs not be included or be deducted. These include grants that have financed the construction. One case dealt with the question of whether the grant should be deducted before the original costs are trended up to current levels or afterwards. Relying on the strict language of the Act, the Court held that the costs should first be trended up and then the original cost of the grant deducted. Builders Association of Metropolitan Pittsburgh v. Marshall Township Municipal Sanitary Authority, (C.P. Allegheny County 1997), No. GDE-07558. This may be explained by the fact that the Act provides for the same deduction to be applied also when the cost is calculated by one of the other permitted methods.

Operating grants such as those under Act 339 mechanically would be difficult to deduct. Commonly they have not been deducted, partly because of their contingent nature, and partly because of the language of Act 339 which describes them as being applied "toward the cost of operating, maintaining, repairing, replacing, and other expenses relating to sewage treatment plants…" 35 P.S. §701. The only grants which must be deducted under Act 203 are those "which have financed such facilities."

The Hampton Township case also considered the question of equipment that had been fully depreciated, as well as equipment that had been removed from service. The Court held that the latter should be excluded but the former should be retained, because the equipment was still operating and therefore was benefiting the users.

The Act contains a faulty assumption about separating the costs of expansion from the cost of upgrading a sewage treatment plant. This is embedded in the requirement that tapping fees may not include the cost of replacing or upgrading facilities to serve existing customers. The idea is that those who are already connected should be paying for their own improvements, rather than thrusting those upon the new arrivals. However, it is sometimes difficult to separate the cost of upgrading from the cost of expansion. The Hampton Township case wrestled with this problem as it relates to the cost of dealing with infiltration. Eliminating infiltration benefits both the existing customers and new ones. In some cases, it may be the easiest way to make available additional capacity in a plant for new users. The Court in the Hampton Case accepted the allocation made by the consulting engineers of 10% of this cost to the new users. In the absence of testimony at the trial level on another cost of upgrading, the Court directed that the Trial Court receive testimony on remand concerning the appropriate allocation of this cost between existing and new users.

Another ambiguity exists concerning the requirement to deduct the amount of debt related to existing facilities. This is appropriate because future debt service to retire that debt will be paid from future sewer rentals. The Act states further that no debt shall be subtracted which is "attributable to facilities exclusively serving new customers." 53 P.S. §306(B)(t). The ambiguity involves the date as of which users are considered to be "new". As a result of this provision, if that debt initially were included, the amount of the tapping fee might have to be recomputed each year, to reflect that the number of "new" users declines each year.

The amount of the tapping fee charged to each new user (in terms of equivalent dwelling units) is derived by dividing the cost by the "design capacity." However, the term "design capacity" is not defined in the Act. It was intended to reflect the number of equivalent dwelling units that could be accommodated in the plant. The opinion in the West case assumed that the number of users who could be accommodated should be measured by the water used at a particular property. However, because of the inevitable infiltration, the number of users determined by water consumption could never be accommodated. In order to recoup the cost of construction by the time the plant has reached practical capacity, either the infiltration must be prorated among all of the users or the capacity must be reduced by that amount. The problem is even more complex when other factors are considered which affect the actual number of users who can be accommodated by the plant. These include the biological oxygen demand (BOD), the level of suspended solids, and other organic limiting factors. Finally, a certain amount may be allocated to accommodate peak flows on a daily or other periodic basis.

The regulations of the Pennsylvania Department of Environmental Protection relating to plant overload recognize two types of design capacity: hydraulic design capacity and organic design capacity. 25 Pa. Code Chapter 94. These regulations determine the practical capacity of a plant, because they provide for imposing a ban on new connections when either hydraulic or organic capacity has been reached. Therefore, municipalities should have the power to base design capacity on either of these recognized definitions.

Methods of allocating costs by creating classes of users have been a subject of litigation in the field of user charges, and there is one case involving tapping fees. Smith v. Athens Township Authority, 685 A2d. 651 (Pa. Commwlth. Ct. 1996). In this case, the Court held that an authority was within its allowable discretion in classifying individual apartment units and mobile home units in a trailer park as residential units for tapping fee purposes. Cases in other states have granted a similar amount of discretion. In one case, the Court held that it was not mandatory to use an actual fixture count in making such determinations. R.R. Bayside, Inc. v. Sussex County, 1999 W.L. 743523 (Del. Supr.).

It has also been proposed that charges be reduced or eliminated for facilities having a special social utility or where a hardship exists on the user. A residential nursing home sought to avoid a tapping fee based partly upon the fact that it had been determined by DER to be a "facility of public need." Life Services, Inc. v. Chalfont-New Britain Township Joint Sewage Authority, 528 A2d, 1038 (Pa. Commwlth. 1987). The property owner's claim did not succeed.

A related allocation issue involves whether supplemental tapping fee may be charged when the use of a property changes. In a case before Act 203, the Court held that such additional charges may be imposed. Milford-Trumbauersville Area Sewer Authority v. Lopez, 56 Bucks Co. L. Rep. 159 (C.P. Bucks County 1989). In that case, a single-family residence was converted to a two-family residence. The same result has been reached in other states. Carlsbad Municipal Water District v. QLC Corporation, 2 Cal. App. 4^th 479, 3 Cal. Rptr. 2^nd. 318 (1992); Bogue Shores Homeowners v. Town of Atlantic Beach, 109 N.C. App. 459, 428 S.E. 2^nd., 258 (1993).

A more difficult question arises when a small private system is acquired by a municipality. These small systems are often inadequate, and the connection to the municipal system will result in substantial benefits. In those circumstances, the additional tapping fee should be appropriate. One lower case court case has so held without much discussion. Mountaintop Area Joint Sanitary Authority v. Serratore, Luzerne County Law Reports, Vol. _____, page 185 (Luzerne Cty. 1980).

Difficult questions have arisen in the related field of user charges, arising from the creation of rate districts. For tapping fees also Act 203 authorizes the use of separate districts. Such an approach has been used. However, an additional issue of uniform application arises, which is illustrated by a New Jersey case. Meglino v. Township Committee of the Township of Eagleswood, 103 NJ. 144, 510 A2d 1134 (1986). The Court's decision in this case recognized the valid purpose of connection fees as placing new customers on an equal footing with those whose user fees have contributed to the construction of the existing works. Recognizing that by their very nature, sewer rates cannot be fixed so that they will apply with exactness, the Court, nevertheless disapproved as discriminatory, a charge imposed upon the last remaining unserved parcel in a municipality where none of the prior users had been charged connection charges. Similar problems of fairness could arise where some earlier-constructed parts of the system may have been financed by front-foot assessment on unimproved property. A credit against the tapping fee would appear to be appropriate for properties that have paid such assessments, depending in part upon the size and antiquity of these assessments.

A few cases in Pennsylvania have interpreted the provisions of agreements between developers and municipalities. Keenan v. Scott Township Authority, 616 A2d 751, (Pa. Commwlth. Ct. (1992). (Upholding agreement between developer and authority exempting homeowners from tapping fees subsequently imposed.); Cumru Township Authority v. Snekul, Inc., 618 A2d. 1080 (Pa. Commwlth. 1992); Citizens Against Unfair Treatment v. Scott Township, 616 A2d. 756 (Pa. Commwlth. Ct. 1992).

The most recent case is interesting. The issue there, although the decision does not discuss it, involves the "reimbursement component" of a tapping fee. Silver Spring Township Authority v. Leary, 46 Cumb. L.J. 77 (Cumb. Cty. 1996), aff'd. per cur. Pa. Commwlth. Ct. 1998 No. 2219 C.D. 1997 (not reported). In this case, a user connected to a line built by a developer that was not directly connected to the authority's system. The authority itself had built an intervening line, and therefore the authority had no duty under the Act to reimburse the developer who had built the line into which the plaintiff connected. The property owner argued that because the authority had no duty under the Act to reimburse the developer, the authority lacked the power to collect a reimbursement component of the tapping fee. However, the authority had a contract to reimburse the contractor in this situation, and therefore, the Court properly held (without discussion) that there was a power to collect the reimbursement component. The authority was merely recouping a cost that it had incurred validly, and therefore its power was the same as it would have been to recoup any other costs.