Item - Agenda w-Hillsborough 03-22-2004

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infrastructure and develop the west fork Eno River reservoir and its loss of utility revenues with the closing of the Town's largest utility customer (Flint Fabrics, approximately 40% of the Town's total water consumption). The Town's Water and Sewer Advisory Committee has further acknowledged that it is difficult, perhaps even impossible, for the Town to fully justify the use of double utility rate for out -of -town customers The standard financial model for North Carolina municipal water /sewer utilities is that of an enterprise operation or one in which all utility costs (capital reserve, equipment replacement, debt service, personnel, maintenance, power, chemicals, billing, etc.) are recovered entirely through a utility's rate and fee structure. It is not uncommon, however, for shortfalls in utility revenues or a municipal utility fund to be addressed by transferring funds from a municipality's general fund or fund balance reserves. Furthermore, some portion of most utilities' capital and operating costs have historically been subsidized by sales tax revenues legislatively earmarked for that purpose for from other municipal funding sources such as bonds or grants. Anecdotal evidence indicates that charging double or nearly double the in -town utility rates for out -of- customers is the norm for nearly every municipally owned and operated utility in North Carolina. Utilities local to Orange County (with the exception of OWASA, which in independent of a local government) including Durham, Oxford, Mebane, Graham, Pittsboro, and Burlington utilize a utility rate structure in which the out -of -town rate approaches or even exceeds double the in -town rate. The historical precedents of utility funding and rate - setting procedure are undoubtedly a primary cause for continuing the practice of charging out -of -town customers a much higher rate than in -town customers. Aside from the fact that any municipality's general fund is the ultimate guarantor of the solvency of its utility operation, there is unlikely to be significant present -day evidence that would demonstrate that the cost of providing utility service to out -of -town customers is more than marginally greater than providing service to in -town customers for most municipal utilities. In general, capital costs incurred in the extension of utility service to new out -of -town development are paid in full by that development (and recovered in sale /rental prices of new homes and building space). Capital costs incurred in the extension of utility service to existing out -of -town developments or neighborhoods are paid or by assessments on the individual property owners in those existing neighborhoods. Capital costs associated with improvements to or expansion of treatment facilities are generally captured by capital facilities fees. Actual operating costs for a collection sub - system generally depend on the type of collection system, the topography and geology of the service area(s) and its physical proximity to a utility's maintenance facilities (out -of -town service areas could actually be closer than across -town but still in -town areas). The BOCC has communicated its concern and Hillsborough's out -of -town water customers have communicated outright dissatisfaction to Town officials as to the Town's practice of applying double utility rates to out -of -town customers. However, the Town has continued to decline to modify the practice. The Town's decisions against changing the rate structure is not particularly counter - intuitive in the sense that, with half the customer base in town and half out, modifying the rate structure such that in -town customers receive a 50% rate increase would provide out -of -town customers with only a 25% rate decrease. draft