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Title: Capital Facilities Fee Final Report
Subject: Capital Facilities Fees Report
Keywords: Capital Facilities Fees Report, Rates
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  • CITY OF RALEIGH PUBLIC UTILITIES DEPARTMENT

CITY OF RALEIGH PUBLIC UTILITIES DEPARTMENT

227 W. Trade Street Phone 704 ? 373 ? 1199
Suite 1400 Fax 704 ? 373 ? 1113
Charlotte, NC 28202
April 12, 2018
Mr. Robert Massengill
Public Utilities Director
City of Raleigh Public Utilities Department
One Exchange Plaza, Suite 620
219 Fayetteville Street Mall
Raleigh, NC 27601
Dear Mr. Massengill,
Raftelis Financial Consultants, Inc. (Raftelis) has completed an evaluation to develop cost-justified
water and wastewater system development fees for consideration by the City of Raleigh (City).
This report 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
Mr. Robert Massengill April 12, 2018
City of Raleigh Public Utilities Department 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 report documents the results of the calculation of water and wastewater system development
fees for the City 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.
Mr. Robert Massengill April 12, 2018
City of Raleigh Public Utilities Department Page 3
Summary of Results
To perform the system development fee calculation, Raftelis requested and was provided with the
following data provided by City 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;
Gallons per day per residential unit for both water and wastewater;
System peaking factor for water;
System water loss factor; and
Inflow and infiltration factor for wastewater.
The City has chosen to refer to these system development fees as Capital Facilities Fees, and as
such, the remainder of this report will use this terminology.
The Buy-In approach was chosen as the method to calculate the Capital Facilities Fees. Adequate
capacity currently exists in both the water and wastewater treatment plant facilities and in major
trunk water transmission and wastewater collection lines to address expected demand from new
customers. The City is currently in the process of expanding the Neuse River Resource Recovery
Facility however, at this time, the capacity that is to be provided from that expansion is not
available. For this reason, the costs that have been incurred to date, as well as the debt, and the
capacity that is to be provided from the expansion have not been included in the calculation. In
addition, although the City does project capital improvement plans in five and ten-year increments,
as shown as an attachment to the report, only the budget for year one is officially adopted and
approved by City Council.
Using the Buy-In approach, Raftelis calculated the estimated cost, or investment in, the current
capacity available to provide water and wastewater 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 is 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 Construction Costs (for the
South Atlantic Region). The RCNLD values for the water and wastewater assets also include
accounting for facilities that are in service, but not yet booked to fixed assets due to an internal lag
in recording of completed projects.
The RCNLD value of water assets includes water supply, treatment, storage, transmission and
distribution facilities and land, but excludes non-core assets such as small equipment,
administrative buildings, and meters. The RCNLD value of the wastewater assets includes
Mr. Robert Massengill April 12, 2018
City of Raleigh Public Utilities Department Page 4
wastewater treatment and collection system facilities, disposal facilities and land, and like water,
excludes non-core assets.
Results of the asset escalation by asset category are shown in Exhibits 1 and 2.
Exhibit 1 - RCNLD of Existing Water Assets
Existing Water Assets
Asset Category RCNLD
Buildings1 $ 58,749,663
Improvements $ 69,844,457
Land $ 18,690,522
Water/Wastewater Systems $ 711,613,326
Total: Existing Water Assets $ 858,897,968
1) Includes plants, pump stations and operational facilities. Does not
include administrative or miscellaneous buildings
Exhibit 2 - RCNLD of Existing Wastewater Assets
Existing Wastewater Assets
Asset Category RCNLD
Buildings1 $ 129,619,036
Improvements $ 23,958,369
Land $ 23,093,834
Water/Wastewater Systems $ 838,918,717
Total: Existing Wastewater Assets $ 1,015,589,956
1) Includes plants, pump stations and operational facilities. Does not
include administrative or miscellaneous buildings
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
The listing of fixed assets provided was reviewed to identify assets that were contributed or paid
for by developers, and assets that were grant funded. These assets were subtracted from the
RCNLD value, as these assets do not represent an investment in system capacity by the City. In
addition, the City has annexed many areas in and around its service area, and as a result,
constructed many lines to serve these areas. The City has charged assessments to the customers
that are the recipients of water and wastewater service resulting from these annexations to help
with the cost of the construction of these lines. Because these lines are paid for through a specific
Mr. Robert Massengill April 12, 2018
City of Raleigh Public Utilities Department Page 5
fee designed to recover the costs of these specific lines, and similar to both the developer
contributed capital and the grant funded assets, these assets are not paid for by the City, the costs
for these lines have been included as contributed assets.
Outstanding Debt Service Credit
Utilities often borrow funds to construct assets. The City uses revenues from retail rates and
charges to make the payments on these borrowed funds. To ensure that new customers are not
being double charged for these assets, once through the Capital Facilities Fee and again through
retail rates and charges, the outstanding debt is deducted from the calculation.
The RCNLD values for water and wastewater assets with the adjustments as described above are
shown in Exhibits 3 and 4 below.
Exhibit 3 - Calculation of Water Assets for Capital Facilities Fee Calculation
Summary of Asset Information Water
Total Water Assets $ 858,897,968
Less: Contributed and Grant Funded Assets
Grant Funded Capital $ (485,000)
Contributed Capital: Customer Assessments for Annexations1 $ (12,850,516)
Contributed Capital: Developer paid2 $ (123,996,566)
Subtotal: Contributed and Grant Funded Assets $ (137,332,082)
Total: Net Water Assets $ 721,565,886
Less: Outstanding Principal Debt
Outstanding Principal Debt $ (334,854,031)
Water Assets for Capital Facilities Fee Calculation $ 386,711,855
1) Special assessments to City of Raleigh customers for line extensions due to annexation
2) Contributions paid for by Developers
Mr. Robert Massengill April 12, 2018
City of Raleigh Public Utilities Department Page 6
Exhibit 4 - Calculation of Wastewater Assets for Capital Facilities Fee Calculation
Summary of Asset Information Wastewater
Total Wastewater Assets $ 1,015,589,956
Less: Contributed and Grant Funded Assets
Grant Funded Capital $ (625,694)
Contributed Capital: Customer Assessments for Annexations1 $ (14,736,654)
Contributed Capital: Developer paid2 $ (127,460,259)
Subtotal: Contributed and Grant Funded Assets $ (142,822,607)
Total: Net Wastewater Assets $ 872,767,349
Less: Outstanding Principal Debt
Outstanding Principal Debt $ (395,942,712)
Wastewater Assets for Capital Facilities Fee Calculation $ 476,824,637
1) Special assessments to City of Raleigh customers for line extensions due to annexation
2) Contributions paid for by Developers
The adjusted RCNLD values for water and wastewater were then converted to a unit cost of system
capacity by dividing the RCNLD values by the water and wastewater system capacities. The
combined treatment capacity of the water system is currently 102.0 million gallons per day (MGD)
based on the individual treatment capacities of the City's two water treatment plants (EM Johnson
WTP, 86.0 MGD; and the DE Benton WTP, 16.0 MGD).
The treatment capacity of the wastewater system is 65.2 MGD, based on the individual capacities
of the City's three wastewater treatment plants (Neuse River Resource Recovery Facility, 60.0
MGD; the Smith Creek WWTP, 3.0 MGD; and the Little Creek WWTP, 2.2 MGD).
The cost per gallon per day (GPD) for water and wastewater capacity is shown below in Exhibit
5.
Exhibit 5 - Cost per GPD of Core Utility Assets
Water Wastewater
Adjusted RCNLD $ 386,711,855 $ 476,824,637
Total Capacity [MGD] 102.00 65.20
Cost per GPD $ 3.79 $ 7.31
This measure becomes the basic building block or starting point for determining the maximum
cost-justified level of the water and wastewater Capital Facilities 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.

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