By. Neil Williamson, President
If you were running a utility and determined a need to raise “hook up” fees by 41%, how would you do it?
Would you alert your customers and slowly implement the change to allow planned projects to prepay fees in order to obtain the current rates and meet previously prepared financial projections or would you “rip off the band aid” and implement the change immediately without concern for projects in process?
On Thursday (8/20) at 9:00 am the Albemarle County Service Authority is poised to “rip off the band aid” and dramatically increase both ACSA system development and Rivanna Water and Sewer Authority (RWSA) capacity fees (the fees paid by new units to buy in to the existing water and sewer system). In addition, ACSA is eliminating the Local Facilities fees assessed on entire developments as they connect to the system.
While the Free Enterprise Forum believes the elimination of the confusing Local Facilities Fee is a good thing, it is important to note the overall fee changes are are designed to significantly increase fee revenue.
The following are the proposed changes that would be effective September 1, 2009 [12 days after the public hearing] if approved:
|Connection Charges Fee
Current Charge (per ERC)
|Proposed Charge (per ERC)
|System Development Charge -Water
|System Development Charge -Sewer
|RWSA Capacity Charge -Water
|RWSA Capacity Charge -Sewer
The National Association of Homebuilders (NAHB) tracks impacts of price increases on housing affordability. In the 2005 “Priced Out Study” they found:
If an impact or other construction-related fee goes up, all else equal, the price of the home will go up and fewer households will be able to afford it. In fact, the final price of the home to the buyer will usually go up by more than the increase in the fee. The reason is that, when costs of construction and development rise, other costs such as commissions and financing charges also rise. Rates of return to home building also need to remain competitive with other investments, or businesses will leave the industry until the rates even out.
As a result, most cost increases are passed on to the buyer with a mark-up. The size of the mark-up depends both on the type of cost increase and when it’s imposed in the development/construction process. NAHB has estimated that a $1 increase in impact fees imposed at the time of development will typically raise the price of a house to its final customer by $1.25.
How would this look to a project? Here is one example from a local engineer:
A 200 unit apartment complex (1/2 ERC charge per connection) would currently pay $708,900 for connection fees for the development; but with the proposed connection fee charges, that cost would increase to $1,029,500.
Escalating the cost utilizing the NAHB figures, the impact of the fee increase will be in excess of $2,000 per apartment in our example. Considering such apartments are often the first step on the home ownership ladder, these increased fees, whenever implemented, will have a negative impact on the availability of affordable housing in our community.
What are these fees?
The ACSA system development fee, poised to increase by 41% is designed to:
defray, in part, the cost to Albemarle County Service Authority of providing major transmission and distribution mains, collection lines, pumping stations and storage facilities which are necessary to provide service to new customers
The increase in the ACSA includes all FY2010-FY2018 capital improvements associated with increasing capacity.
The RWSA capacity fees are also poised to increase by 41% to cover the capital costs of the US Route29 Pump Station and Pipeline, The Ragged Mountain Dam, The Meadowcreek Interceptor as well as the nutrient improvements at the Moore’s Creek water treatment plant. It is important to note these increases do not include all the capital costs that will be associated with implementing the approved community water supply plan.
Over the years, the Free Enterprise Forum has been highly impressed with the manner in which ACSA operates. As an organization, they are customer focused and tend to remove politics from their decisions. In the case of the connection fee increase, they commissioned a rate study to examine their pricing structure and the proposed fees have come out of that study.
The Free Enterprise Forum does not question the need for the capital projects. To date, we have not examined the integrity of the study’s cost division of capital expenditures between new and existing users. Such joint cost allocations always require some level of subjectivity.
We are very concerned the potential chilling effect the implementation of these changes may have on development projects already in the works.
When operating a business, you must regularly review your product or service pricing structure to make sure you are both covering your costs (including a gross profit margin) and remaining competitive. If you find your costs escalate dramatically, you must make a decision regarding how to best pass on those costs without losing market share. In some cases, this may mean increasing your prices slightly every month rather than a huge increase at onetime. While this may eat into your gross profit margin over the short term, you enable yourself to retain market share.
Market share is not an issue for a monopoly such as the Albemarle County Service Authority, or is it?
Clearly it is Albemarle County’s stated goal to densify the urban core (the ACSA service area). Such urbanization is designed to relieve development pressures on the rural areas. If the cost of buying into the water system infrastructure increases by 41% (after significant increases just last year) some development may be forced into the rural areas. If however these increases were stepped in over time, it would allow for the market to adjust to these changes just as it adjusts to other price increases.
In a perfect world, the Free Enterprise Forum would like to see these increases postponed and then stepped in on a monthly basis over the course of a year. Understanding the administrative costs associated with such a stepped increase would be significant, one option worthy of consideration is to implement 50% of the increase be effective June 1, 2010 with the balance of the increases to be considered at a public hearing in July 2010, with implementation scheduled for January 2, 2011.
Absent such an innovative implementation schedule, the few projects that have been able to arrange financing in this challenging market may lose such funding due to the dramatic cost increase. Many approved (and desirable) projects, and the jobs that go with them, will remain on the drawing boards due to the unanticipated increased fees.
It is our free market belief that a delayed fee increase will spur economic development, postpone housing affordability issues, and actually increase the number of connections in FY2010. Beyond just good economic development, such leadership would be ACSA protecting its marketshare from rural area leakage promoting Albemarle County’s goals of density in the urban ring.