227 West Trade Street Phone 704 373 1199 www.raftelis.com Suite 1400 Fax 704 373 1113 Charlotte, NC 28202 April 19, 2018 Ms. Rhonda Haskins, CPA Director of Financial Planning Fayetteville Public Works Commission 955 Old Wilmington Road Fayetteville, NC 28301 Dear Ms. Haskins Raftelis Financial Consultants, Inc. (Raftelis) has completed an evaluation to develop cost-justified water and wastewater system development fees for consideration by the Fayetteville Public Works Commission (PWC). This letter documents the results of the analysis, which is based on an approach for establishing system development fees set forth in North Carolina General Statute 162A Article 8 System Development Fees. As one of the largest and most respected utility financial, rate, management, and operational consulting firms in the U.S., and having prepared system development fee calculations for utilities in North Carolina and across the U.S. since 1993, Raftelis is qualified to perform system development fee calculations for water and wastewater utilities in North Carolina. Background System development fees are one-time charges assessed to new water and/or wastewater customers, or developers or builders, to recover a proportional share of capital costs incurred to provide service availability and capacity for new customers. North Carolina General Statute 162A Article 8 (Article 8) provides for the uniform authority to implement system development fees for public water and wastewater systems in North Carolina, and was recently passed by the North Carolina General Assembly and signed into law on July 20, 2017. According to the statute, system development fees must be adopted in accordance with the conditions and limitations of Article 8, and those fees in effect as of October 1, 2017 must conform to the requirements set forth in the Article no later than July 1, 2018. In addition, the system development fees must also be prepared by a financial professional or licensed professional engineer, qualified by experience and training or education, who, according to the Article, shall: Document in reasonable detail the facts and data used in the analysis and their sufficiency and reliability. Employ generally accepted accounting, engineering, and planning methodologies, including the buy-in, incremental cost or marginal cost, and combined cost approaches for each service, setting forth appropriate analysis to the consideration and selection of an
Fayetteville Public Works Commission Page 2 approach appropriate to the circumstances and adapted as necessary to satisfy all requirements of the Article. Document and demonstrate the reliable application of the methodologies to the facts and data, including all reasoning, analysis, and calculations underlying each identifiable component of the system development fee and the aggregate thereof. Identify all assumptions and limiting conditions affecting the analysis and demonstrate that they do not materially undermine the reliability of conclusions reached. Calculate a final system development fee per service unit of new development and include an equivalency or conversion table for use in determining the fees applicable for various categories of demand. Consider a planning horizon of not less than 10 years, nor more than 20 years. This letter report documents the results of the calculation of water and wastewater system development fees for PWC in accordance with these requirements. Article 8 references three methodologies that can be used to calculate system development fees. These include the buy-in method, the incremental cost method, and the combined cost method. A description of each of these methods follows: Capacity Buy-In Approach The Capacity Buy-In Methodology is most appropriate in cases where the existing system assets provide adequate capacity to provide service to new customers. This approach calculates a fee based upon the proportional cost of each user s share of existing plant capacity. The cost of the facilities is based on fixed assets records and usually includes escalation of the depreciated value of those assets to current dollars. Incremental Cost Approach The second method used to calculate water and wastewater system development fees is the Incremental Cost (or Marginal Cost) Methodology. This method focuses on the cost of adding additional facilities to serve new customers. It is most appropriate when existing facilities do not have adequate capacity to provide service to new customers, and the cost for new capacity can be tied to an approved capital improvement plan (CIP) that covers at least a 10-year planning period. Combined Approach A combined approach, which is a combination of the Buy-In and Incremental Cost approaches, can be used when the existing assets provide some capacity to accommodate new customers, but where the capital improvement plan also identifies significant capital investment to add additional infrastructure to address future growth and capacity needs.
Fayetteville Public Works Commission Page 3 Summary of Results To perform the system development fee calculation, RFC requested and was provided with the following data from PWC staff: Water and wastewater fixed asset data; Outstanding utility debt and associated debt service; Capital projects not yet booked to fixed assets; Contributed capital; Capacity in water and wastewater systems; Daily water production data; Inflow and infiltration data; and Average demand data. The Capacity Buy-In Approach was chosen as the method to calculate the system development fees for PWC, since in general, PWC s existing water and wastewater treatment facilities have adequate capacity to accommodate the anticipated growth in the near term. It should be noted that PWC has chosen to refer to these system development fees as Facility Investment Fees (FIF), and as such, the remainder of this letter will use this terminology. Using the Capacity Buy-In approach, Raftelis calculated the estimated cost, or investment in, the current capacity available to provide utility services to existing and new customers. This analysis was based on a review of fixed asset records and other information as of June 30, 2017. The depreciated value of the assets was first adjusted to reflect an estimated replacement cost to determine the replacement cost new less depreciation (RCNLD) value for the assets. The asset values were escalated using the Handy Whitman Index of Public Utility Construction Costs (for the South Atlantic Region). The RCNLD value of the water assets includes water supply, treatment, storage, transmission and distribution facilities and land, but excludes small equipment, vehicles and meters. The RCNLD value of the wastewater assets includes wastewater treatment, collection system facilities, disposal facilities and land, but excludes small equipment and vehicles. Results of the asset escalation by asset category are shown in Exhibits 1 and 2.
Fayetteville Public Works Commission Page 4 Exhibit 1: RCNLD of Existing Water Assets Existing Water Assets Asset Category RCNLD Land & Land Rights - Water $ 4,913,427 Structure & Improvements - Glenville Pt $ 16,007 Reservoirs Col/Impd $ 6,653,067 Raw Water Pump Station $ 7,330,487 Glenville Lake Water Treatment Plant $ 19,092,104 P.O. Hoffer Water Treatment Plant $ 48,986,510 Filter Plant Expansion - PO Hoffer Plt $ 10,643 Filter Plant Equipment - PO Hoffer Plt $ 32,411 Water Storage Tanks & Reserves $ 8,250,248 Water Transmission and Distribution System $ 260,282,643 Total: Existing Water Assets $ 355,567,547 Exhibit 2: RCNLD of Existing Wastewater Assets Several adjustments were then made to the estimated water and wastewater RCNLD values in accordance with Article 8, which included adjustments for contributed assets, and outstanding debt service as described below. Contributed Assets Existing Wastewater Assets Asset Category RCNLD Land & Land Rights - Wastewater $ 5,600,134 Wastewater Collection System $ 424,345,710 Cross Creek WW Treatment Plt - Equip $ 529,845 Cross Creek WW Treatment Plant $ 17,356,587 Cross Creek WW Treatment Plt - Expansion $ 66,836,039 Rockfish Treatment Plant $ 62,200,524 Total: Existing Wastewater Assets $ 576,868,839 The listing of fixed assets provided was reviewed to identify assets that were contributed or paid for by developers, and these assets were subtracted from the RCNLD value, as these assets do not represent an investment in system capacity by PWC. In addition, assets that were grant funded were also subtracted from the RCNLD value. It should be noted that the implementation of GASB 33 (Accounting and Financial Reporting for Non-Exchange Transactions) and related accounting changes in 2002 directly impacted the timing
Fayetteville Public Works Commission Page 5 and method of recordation of assets. After the accounting changes, fixed assets records were maintained in more detail, which included documentation of which assets were contributed. Contributed water and wastewater lines were determined for all assets originating after 2002. The proportion of developer contributed water and wastewater lines to total water and wastewater lines from this point forward was then used and applied to water and wastewater lines prior to 2002 to determine the total value of contributed water and wastewater lines. Outstanding Debt Service Credit Utilities often borrow funds to construct assets, and revenues from retail rates and charges can be used to make the payments on these borrowed funds. To ensure that new customers are not being double charged for these assets, once through the Facility Investment Fee and again through retail rates and charges, the outstanding debt that is paid for through retail rates and charges should be deducted from the calculation. It should be noted that $21.2 million dollars in outstanding debt was used to pay for meters for PWC. Meters were not included in the RCNLD asset value in accordance with Article 8, and therefore this debt was not included in the total outstanding debt for water. The RCNLD values for water and wastewater assets with the adjustments as described above are shown in Exhibits 3 and 4 below.
Fayetteville Public Works Commission Page 6 Exhibit 3: Calculation of Water Assets for FIF Calculation Adjustments to Water Assets Total Water Assets $ 355,567,547 Less: Contributed and Grant Funded Assets Col/Impd - Grant funded by CWMTF $ (1,592,053) Fort Bragg main funded by Fed contribution $ (6,646,199) Land - Grant funded by CWMTF $ (583,806) Main - Harnett County Contribution $ (958,743) Spring Lake Booster Pump Station Fed Contribution $ (1,776,143) Lines prior to 2002 (contributed or developer paid) 1 $ (27,077,411) Developer Contributions/Non-Customer Contributions 2 $ (49,028,127) Customer Assessments for Annexation Reimbursements 3 $ (618,978) City of Fayetteville Annexation Contributions 4 $ (296,043) Subtotal: Contributed and Grant Funded Assets $ (88,577,502) Total: Net Water Assets $ 266,990,045 Less: Outstanding Principal Debt Outstanding Principal Debt 5 $ (92,513,858) Water Assets for Facility Investment Fee Calculation $ 174,476,187 1) Contributed or developer paid lines prior to 2002 2) RCNLD of contributions from developers and non-customers from 2002-2017 3) Water allocated portion of customer assessments for annexations 4) Water allocated portion of the City's contribution for annexations 5) Does not include $21.2 million in water debt that was used to purchase smart meters
Fayetteville Public Works Commission Page 7 Exhibit 4: Calculation of Wastewater Assets for FIF Calculation Adjustments to Wastewater Assets Total Wastewater Assets $ 576,868,839 Less: Contributed and Grant Funded Assets Cross Creek WWTP - Fed grant - Residual Handling $ (923,446) Cross Creek WWTP - Grant funded assets $ (13,557,754) Lines prior to 2002 (contributed or developer paid) 1 $ (40,443,742) Developer Contributions/Non-Customer Contributions 2 $ (68,604,201) Customer Assessments for Annexation Reimbursements 3 $ (36,696,500) City of Fayetteville Annexation Contributions 4 $ (14,286,134) Subtotal: Contributed and Grant Funded Assets $ (174,511,776) Total: Net Wastewater Assets $ 402,357,063 Less: Outstanding Principal Debt Outstanding Principal Debt $ (136,946,363) Wastewater Assets for Facility Investment Fee Calculation $ 265,410,700 1) Contributed or developer paid lines prior to 2002 2) RCNLD of contributions from developers and non-customers from 2002-2017 3) Wastewater allocated portion of customer assessments for annexations 4) Wastewater allocated portion of the City's contribution for annexations The adjusted RCNLD values for water and wastewater were then converted to a unit cost of capacity by dividing the RCNLD value by a basic unit of measure of cost per gallon per day (GPD) for water and wastewater capacity, as shown in Exhibit 5. Exhibit 5: Cost per GPD of Core Utility Assets Water Wastewater Adjusted RCNLD $174,476,187 $265,410,700 Total Capacity (MGD) 57.5 46.0 Cost per GPD $3.03 $5.77 This measure becomes the basic building block or starting point for determining the cost-justified level of the water and wastewater Facility Investment Fees. Fees for different types of customers are based on this cost of capacity multiplied by the amount of capacity needed to serve each type or class of customer. The level of demand associated with a typical, or average, residential customer is referred to as an Equivalent Residential Unit, or ERU. For purposes of designing the water and wastewater systems, common industry standards assume a typical residential unit requires 400 gallons per day for
Fayetteville Public Works Commission Page 8 water 1, and 360 gallons per day for wastewater 2. To calculate the maximum cost-justified Facility Investment Fees, PWC would use design standards. However, PWC has elected to use the average demand for a PWC residential customer, and set the fees below the maximum cost-justified level. The average demand for a PWC residential customer, as provided by PWC staff, is 138 gallons per day for water and wastewater. To calculate the water ERU, the average demand of 138 gallons per day was used and adjusted to account for peak day water use and water loss for PWC s customers. For water, one ERU of peak day capacity was defined to be 209.18 GPD as shown in Exhibit 6. For wastewater, demand of 138 gallons per day was used and adjusted to account for inflow and infiltration resulting in an ERU of 191.82 gallons per day as shown in Exhibit 6. Exhibit 6: Water and Wastewater Equivalent Residential Unit Assessment Methodology Water - gallons per day per ERU Wastewater gallons per day per ERU GPD per RU 138 138 System Peaking Factor 1.43 n/a Infiltration and Inflow (I&I) n/a 1.39 Loss Factor (Leakage) 1.06 n/a Equivalent Residential Unit 209.18 191.82 The analysis provides a cost-justified level of Facility Investment Fees that can be assessed by PWC. For residential customers, the calculation of the Facility Investment Fee is based on the cost per GPD multiplied times the number of gallons per day required to serve each ERU, as shown below in Exhibit 7. 1 In accordance with the daily water flow capacity design standards defined in the North Carolina Administrative Code (15A NCAC 18C.0409), the level of service requirement for a residential connection is 400 gpd. 2 In accordance with the daily wastewater flow capacity design standards defined in the North Carolina Administrative Code (15A NCAC 02T.0114), the level of service for a 3-bedroom residential connection is 360 gpd.
Fayetteville Public Works Commission Page 9 Exhibit 7: FIF Calculation for Water and Wastewater Systems Facility Investment Fee Calculation Water Calculation Net Water Assets for Calculation $ 174,476,187 System Capacity [MGD] 57.5 Cost per Gallon $ 3.03 GPD per ERU 209.18 Facility Investment Fee for 3/4" meter $ 634 Wastewater Calculation Net Wastewater Assets for Calculation $ 265,410,700 System Capacity [MGD] 46.0 Cost per Gallon $ 5.77 GPD per ERU 191.82 Facility Investment Fee for 3/4" meter $ 1,107 For non-residential customers (or customers with larger meters), the fees for the smallest residential meter can be used and then scaled up by the flow ratios for each meter size. PWC has elected to scale up the meter sizes based on flow ratios of the meters that it typically installs. The flow ratios were determined by analyzing the max operating flow for each meter size as specified in the attachment provided by PWC. This method provides a straightforward approach that is simple to administer and reasonably equitable for most new customers. Exhibit 8 shows the resulting cost-justified Facility Investment Fees by meter size for meters ranging from 3/4 inches to 12 inches. For these calculations, the Facility Investment Fees have been rounded to the nearest dollar.
Fayetteville Public Works Commission Page 10 Exhibit 8: Calculated Facility Investment Fees for Water and Wastewater Customers Meter Meter Size Ratio Water Wastewater Combined 3/4" 1.00 $ 634 $ 1,107 $ 1,741 1" 1.57 $ 995 $ 1,738 $ 2,733 1.5" 4.29 $ 2,720 $ 4,749 $ 7,469 2" 5.71 $ 3,620 $ 6,321 $ 9,941 2.5" 10.00 $ 6,340 $ 11,070 $ 17,410 3" 14.29 $ 9,060 $ 15,819 $ 24,879 4" 28.57 $ 18,113 $ 31,627 $ 49,740 6" 57.14 $ 36,227 $ 63,254 $ 99,481 8" 100.00 $ 63,400 $ 110,700 $ 174,100 10" 157.14 $ 99,627 $ 173,954 $ 273,581 12" 198.30 $ 125,722 $ 219,518 $ 345,240 PWC is electing to use a reduced-gallons per day per ERU which results in a lower calculated Facility Investment Fee for the residential customer. Since all larger meters are scaled up from the smallest meter, all customers receive the benefit of the lower Facility Investment Fee. In the future, PWC may elect to use a design day demand for the ERU. Fees based on the design day demand will result in the maximum cost-justified fees. Multi-Family Residential Customers For multi-family customers, mainly apartments and condominiums, where a single building with one meter serves multiple residential units, there is concern about charging a Facility Investment Fee based on the meter size required for those buildings. In most cases, the meter ratio does not adequately reflect the actual amount of water usage expected from these customers when compared to the level of usage for a standard ERU. In addition, there is not consistency in the size of the meter used and the number of residential units served such that not all new customers were being charged a similar fee. As an alternative approach, it would be possible to charge each residential unit as if it were a separate ERU, similar to the single-family residence. However, this approach tends to significantly overstate the expected water demand from apartments and condominiums. The relationship between single family residential usage levels and usage levels for multi-family units varies significantly among different communities depending on a variety of economic and demographic factors. To determine the relationship between the two, PWC staff pulled actual billing records for a number of apartment and condominium developments, water usage for each residential unit averaged 70% of single family residence usage. These results reflect the actual usage patterns demonstrated in Fayetteville, and therefore provide an equitable and reasonable basis for setting the level of facility investment fees charged to new multi-family developments connecting to the water and sewer systems.
Fayetteville Public Works Commission Page 11 For both apartments and condominiums, the recommendation is to use an adjustment factor of 70%. The facility investment fee would be calculated by multiplying the number of residential units to be constructed by 70% to determine the ERUs associated with the project and then charging the facility investment fee based on that number of ERU. For example, an apartment complex, with 100 residential units, the facility investment fee would be based on 70 ERUs, or $44,380 for the water facility investment fee and $77,490 for the wastewater facility investment fee, regardless of the number of buildings or number and size of meters installed. We appreciate the opportunity to assist the Fayetteville Public Works Commission with this important engagement. Should you have questions, please do not hesitate to contact me at (704) 373-1199. Very truly yours, RAFTELIS FINANCIAL CONSULTANTS, INC. Melissa Levin Senior Manager
Attachment A Water Meter Operating Ranges Model Name ipearl (Residential i ) OMNI R 2 (Commercial ii ) OMNI T 2 (High-Flow iii ) OMNI F 2 (Fire Line iv ) Size (inch) Max Operating Flow (gpm) Head Loss @ Max Flow (psi) ¾" 35 7.4 1" 55 7.7 1 ½" 150 6.7 2" 200 7.0 3" 500 2.5 4" 1,000 3.0 6" 2,000 4.0 8" 3,500 5.0 10" 5,500 6.0 4" 1,000 6.4 6" 2,000 6.7 8" 3,500 5.0 10" 5,500 7.0 The information in this chart is taken from Sensus data sheets. i The iperl is the Smart Meter replacement for the traditional displacement meter, which measures typical residential flow rates. The iperl is an electromagnetic flow meter with no internal moving parts. This allows the meter to operate continuously at the max flow if needed. ii The OMNI R 2 is the Smart Meter replacement for the traditional compound meter, which measures a broad range of flow rates (low domestic flows and large commercial flows). The OMNI C 2 is Class II turbine meter. iii The OMNI T 2 is the Smart Meter replacement for the traditional turbo meter, which measures very high flow rates (large commercial or industrial flows). The OMNI T 2 is a Class II turbine meter. iv The OMNI F 2 is used on some fire lines, and will measure very high flow rates. The OMNI F 2 includes a sturdy screen to protect the meter, the fire suppression system, and firefighting equipment from debris stirred up by quick activation of the fire line. The screen produces greater pressure losses in the F 2 as compared to the T 2. The OMNI F 2 is a Class II turbine meter.