New Process and Disclosure Requirements for Certain Outside Water and Wastewater Rates

Session Law 2026-32 (HB 376) makes a few changes affecting local government-owned water and wastewater utilities. This post focuses on Section 3, which adds a new statute, G.S. 162A-19.2, related to setting rates for outside services (water and wastewater services provided outside the utility’s territorial boundaries). It makes two changes to existing law. First, it codifies the authority of most local government water and wastewater service providers to charge different rates for services provided outside their corporate limits or service districts. Second, it creates new procedural and disclosure requirements when those outside rates exceed inside rates by more than 25 percent.

For many utilities, these changes may not result in different rates. They may, however, prompt utilities to revisit how outside and wholesale rates are calculated and how those decisions are explained to the governing board and the public.

The post begins with an overview of outside utility rates and why they often differ from inside rates. It then explains when the new public hearing and disclosure requirements apply, including how the 25 percent threshold is determined, and describes the information that must be publicly disclosed before or at the hearing.

Why Utilities Charge Different Outside Rates

Charging different rates for different classes of service is a common feature of utility ratemaking. Residential, commercial, and industrial customers often have different rate schedules. Utilities regularly also distinguish among customers based on meter size, usage patterns, or the type of service provided. 

Another common distinction is whether the customer is located inside or outside the utility’s jurisdictional boundaries. Many local government utilities charge more for service outside their boundaries than they charge customers inside those boundaries. How they do that varies considerably. Some utilities charge outside customers a fixed multiple of the inside rate. Others develop outside rates using cost-of-service studies or by allocating infrastructure costs associated with serving outside areas.

The reasons for higher outside rates also vary. In some systems, outside customers simply cost more to serve because they are farther from treatment facilities, require longer transmission or distribution lines, or are located in lower-density areas. In others, higher rates reflect the capital costs of extending infrastructure to outside service areas or long-standing policy decisions about how the costs of developing and maintaining the utility system should be shared.

There is no single method for establishing outside rates. Local governing boards have historically had broad discretion to establish customer classifications and set rates consistent with their statutory ratemaking authority. Session Law 2026-32 does not change that. Instead, it adds new procedural and disclosure requirements when certain outside rates are adopted.

Outside Retail Rates and Wholesale Rates Are Different

The new law applies to rates charged to water and sewer customers outside a utility’s jurisdictional boundaries. In practice, those customers generally fall into one of two categories: outside retail customers and wholesale or bulk customers.

Outside retail customers receive service directly from the utility. They may be homeowners, businesses, industries, schools, or other institutions located outside the utility’s boundaries. The utility provides the service, owns and maintains the infrastructure serving the customer, reads the meter, sends the bill, and provides customer service.

Wholesale customers are different. In a wholesale arrangement, the customer is usually another utility or local government rather than the ultimate user of the water or sewer service. For example, one municipality may sell treated water to a neighboring town, or one utility may provide wastewater treatment services for another utility system. The purchasing utility then distributes water or collects wastewater through its own system and bills its own customers.

This distinction is important because wholesale service often includes only part of the services included in a retail rate. A retail water rate may recover the costs of treatment, transmission, distribution, meter reading, billing, customer service, and other utility operations. A wholesale water rate may include only treatment and transmission because the purchasing utility performs the remaining functions. Likewise, a retail sewer rate may include both collection and treatment, while a wholesale arrangement may involve treatment services only.

What Session Law 2026-32 Changes

Section 3 of Session Law 2026-32 makes two principal changes. First, it expressly authorizes most local government service providers to charge rates, fees, and charges for water and sewer services outside their jurisdictional boundaries that exceed those charged to customers inside their boundaries. Specifically, it applies to counties, municipalities, water and sewer authorities, metropolitan water districts, metropolitan sewerage districts, metropolitan water and sewerage districts, sanitary districts, and county water and sewer districts. It does not expressly apply to the two local act-created local government utilities and it does not directly apply to a utility created as a joint agency, pursuant to G.S. 160A, Art. 20 (although it is possible that it applies to a joint agency indirectly because it applies to the county(ies) and/or municipality(ies) that formed the joint agency.)

For municipalities and counties, that explicit authority is not new. Existing statutes have long authorized those units to charge higher rates for outside service. See G.S. 153A-277 (counties); G.S. 160A-314 (municipalities). Other local government-owned utilities have generally relied on broader ratemaking authority and common law principles recognizing that utilities may classify customers differently when there are reasonable differences in service conditions or costs. Session Law 2026-32 now makes the authority to charge different rates for outside customers explicit for all the local government service providers listed above.

Second, the law creates new public hearing and disclosure requirements. “If the total of all rates, fees, and charges, excluding tap fees and impact fees, exceeds the rates, fees, and charges to customers inside its boundaries by more than twenty‑five percent (25%), the local government service provider shall hold a public hearing and explain how the rates, fees, and charges for customers outside its boundaries were determined.” G.S. 162A-19.2. If the outside charges do not exceed inside charges by more than 25 percent, no separate hearing or disclosure is required beyond any hearing otherwise required for inside rates.

The statute excludes tap fees and impact fees from the calculation. Although it is not entirely clear, the reference to “impact fees” likely refers to system development fees, authorized by Art. 8 of G.S. 162A. As a result, the comparison appears to focus on recurring charges for utility service rather than one-time capital contributions.

The new requirement does not require utilities to use a particular ratemaking methodology. If the statutory threshold is exceeded, the governing board must hold a public hearing and explain how it determined the proposed outside rates, fees, and charges.

Calculating the 25 Percent Threshold

The new law requires a public hearing and disclosure only if the proposed total outside rates, fees, and charges exceed the total inside rates, fees, and charges by more than 25 percent. Although the concept is straightforward, applying the threshold raises some practical questions. The discussion below explains how the calculation may work for both outside retail and wholesale rates.

Calculating the 25 Percent Threshold for Outside Retail Rates

Applying the threshold to outside retail customers presents fewer interpretive questions than applying it to wholesale service. The statute compares the total rates, fees, and charges imposed on outside customers with the total rates, fees, and charges imposed on inside customers, excluding tap fees and impact fees. This suggests that the comparison should be based on the customer’s total recurring bill rather than on any single component of the rate.

For example, suppose an inside residential customer pays a monthly base charge of $20 and a volumetric charge of $8 per 1,000 gallons. At 5,000 gallons of monthly usage, the customer’s total bill is $60. Now suppose an outside residential customer pays a $30 base charge and $10 per 1,000 gallons. At the same usage level, the total monthly bill is $80. To determine whether the hearing requirement applies, multiply the inside bill by 1.25. In this example, $60 × 1.25 equals $75. Because the outside bill of $80 exceeds $75, the public hearing requirement applies.

Although the calculation itself is simple, the statute leaves several practical questions unanswered. Because many utility charges are based on consumption, the total bill depends on how much water is used or wastewater is billed. The statute does not specify what usage level should be used for the comparison. A utility might use average monthly residential usage, a standard billing assumption such as 5,000 gallons, minimum bill usage, or another consistent benchmark.

The statute also does not expressly address whether the comparison should be made separately for each customer class. In practice, comparing residential rates to residential rates and commercial rates to commercial rates will generally produce a more meaningful comparison than using a blended average across all customer classes. But it is possible that the statute requires summing across all the inside rates and comparing to a sum of all the outside rates.

Calculating the 25 Percent Threshold for Wholesale Rates

Applying the threshold to wholesale or bulk service is more complicated. Unlike outside retail service, wholesale service often does not have a direct inside counterpart. A wholesale customer may purchase treated water at a master meter, wastewater treatment services, or treatment capacity while providing its own distribution system, collection system, meter reading, billing, customer service, and local maintenance. In other words, the wholesale customer often receives only part of the services included in a retail rate, and the statute does not explain how the comparison should be made in that situation.

One possible approach is to compare the wholesale rate to the utility’s full inside retail rate. This approach is straightforward because it uses an existing rate as the benchmark. For example, if the inside retail water rate is $8.00 per 1,000 gallons, the 25 percent threshold would be $10.00 per 1,000 gallons. Under this approach, a wholesale rate over $10.00 would trigger the hearing requirement.

The challenge with this approach is that it compares different service packages. The inside retail rate may recover costs for distribution, meter reading, billing, customer service, and other functions that are not included in the wholesale arrangement.

Another possible approach is to compare the wholesale rate only to the comparable components of the inside retail rate. For example, assume the inside retail water rate of $8.00 per 1,000 gallons includes $3.00 for treatment, $2.00 for transmission, $2.50 for distribution, and $0.50 for billing and administration. If the wholesale customer purchases only treatment and transmission services, the comparable inside charge could be viewed as $5.00 rather than the full $8.00 retail rate. Using that approach, the 25 percent threshold would be calculated from the $5.00 treatment and transmission charge. A wholesale rate above $6.25 per 1,000 gallons would exceed the threshold, while a rate of $6.25 or lower would not.

The same issue may arise with sewer service. If the inside retail sewer rate includes both collection and treatment, but the wholesale customer receives only treatment services, the comparable inside charge may be the treatment component rather than the full retail sewer rate.

The statute does not expressly resolve which comparison should be used. Utilities increasing wholesale rates should therefore carefully consider how they apply the statutory threshold and be prepared to explain the methodology they use to calculate the 25% threshold.

What is Required for the Public Hearing

If the 25 percent threshold is exceeded, the governing board must hold a public hearing before adopting the increase.

The statute does not establish a separate procedure for conducting that hearing. Unlike some North Carolina statutes, it does not require publication in a newspaper, mailed notice, or a specified notice period before the hearing. Nor does it require the hearing to be held at a separate meeting. Accordingly, the hearing may generally be conducted during either a regular or special meeting of the governing board.

Even though the statute does not prescribe specific notice requirements, the requirement to hold a public hearingnecessarily contemplates that the public has a meaningful opportunity to attend and comment before the governing board acts. As a practical matter, that requires advance public notice that the hearing will occur.

At a minimum, the meeting at which the hearing is held must comply with North Carolina’s Open Meetings Law. If the hearing is held during a regular meeting, the governing board’s regular meeting schedule and meeting agenda may provide the necessary notice. If the hearing is held during a special meeting, the notice requirements applicable to special meetings under the Open Meetings Law would apply.

Because Session Law 2026-32 does not prescribe a specific notice procedure, utilities may wish to consider whether additional notice is appropriate under their normal practices. Posting the proposed rates and the hearing on the utility’s website, including the hearing on the published meeting agenda, or using other customary methods of informing customers may help ensure that interested persons have a meaningful opportunity to participate.

Explaining How Outside Rates Were Determined

The new law does more than require a public hearing. If the 25 percent threshold is exceeded, the governing board must also explain how the outside rates, fees, and charges were determined.

The statute does not specify what level of detail that explanation must include. Nor does it require utilities to prepare a formal engineering report or cost-of-service study. But it does suggest that the utility should be prepared to describe the methodology used to establish the proposed rates.

Utilities across North Carolina use a variety of approaches to calculate outside rates. Some rely on relatively simple formulas. Others use more detailed financial or engineering analyses. Session Law 2026-32 does not endorse one approach over another. Instead, it leaves the choice of methodology to the local government while requiring greater transparency about how that methodology was applied when the statutory hearing requirement is triggered.

The following sections describe several of the most common approaches used by local government utilities.

Common Methods for Calculating Outside Retail Rates

One of the simplest approaches for calculating outside retail rates is the multiplier method. Under this approach, the outside rate is set as a multiple of the inside rate. For example, a utility might charge outside customers 1.5, 2, or 3 times the inside rate. If the inside volumetric rate is $8.00 per 1,000 gallons, a 1.5 multiplier would produce an outside rate of $12.00, while a 2.0 multiplier would produce a rate of $16.00.

Multiplier approaches are relatively easy to administer because outside rates automatically adjust whenever inside rates change. The rationale behind the multiplier, however, varies from utility to utility. Some systems use a multiplier because outside customers did not contribute to development of the original system. Others use it because outside service generally costs more to provide. In some cases, the multiplier has simply been part of the utility’s rate structure for many years.

Another common approach is an infrastructure recovery model. Under this method, the utility identifies capital investments associated with serving outside customers and allocates some or all those costs to outside service.

For example, a utility may have constructed a transmission main, elevated storage tank, or pump station specifically to serve an area outside its jurisdictional boundaries. Rather than spreading those costs across all customers, the governing board may determine that they should be recovered primarily through outside rates.

Some utilities use a cost-of-service study. These studies allocate utility costs among customer classes based on the actual costs of providing service. A study may separately identify treatment costs, transmission costs, distribution costs, administrative expenses, debt service, capital reserves, and other operating costs before allocating those costs among customer classes.

Cost-of-service studies can provide a detailed analytical basis for outside rates, particularly where outside customers are demonstrably more expensive to serve. They may also identify situations in which outside customers are not materially more expensive to serve than inside customers.

Some systems establish geographic or service zones. Under this approach, rates vary depending on where the customer is located or the infrastructure needed to provide service. Customers located immediately outside the jurisdiction may pay one rate, while customers located farther away pay a higher rate because they require longer transmission lines or additional facilities.

Utilities may also combine these approaches. For example, a utility might use a cost-of-service study to establish its base rates while applying an additional infrastructure surcharge to customers in a newly developed outside service area. Another utility might use a multiplier for most outside customers but negotiate different rates for large industrial users with unique service characteristics.

Again, Session Law 2026-32 does not favor one methodology over another. Instead, it requires the governing board to explain how the outside rate was determined whenever the statutory threshold is exceeded.

Common Methods for Calculating Wholesale Rates

Wholesale rates often rely on different methodologies because the services being provided differ from retail service.

One common approach is a fully allocated cost model. Under this method, the utility identifies the full cost of providing the wholesale service—often treatment and transmission—and allocates those costs across the volume of water or wastewater associated with the wholesale customer.

Another approach is an incremental or marginal cost model. Rather than allocating all system costs, this approach focuses on the additional costs the utility incurs to provide the wholesale service. This method is often used when the utility has excess treatment capacity and the wholesale arrangement does not require significant new infrastructure.

Some utilities use a capacity reservation model. Under this approach, the purchasing utility pays a fixed charge to reserve treatment or transmission capacity and a separate volumetric charge based on actual usage. Capacity reservation models are common in long-term regional partnerships where maintaining available capacity has value even if it is not fully used every day.

Other wholesale agreements use hybrid approaches, combining fixed capacity charges, volumetric charges, capital contributions, minimum purchase requirements, or periodic adjustments tied to operating costs. Because wholesale agreements often involve unique operational relationships between utilities, the methodology may be tailored to the specific circumstances of the arrangement.

What About Rates Already Adopted Before Session Law 2026-32 Became Effective?

One question many utilities are likely to ask is whether they must revisit outside rates that were adopted before Session Law 2026-32 became law (on July 2, 2026).

The statute applies when a local government service provider is “establishing an increase” in rates, fees, or charges for customers outside its jurisdictional boundaries. It does not expressly require utilities to reopen or readopt rate schedules that were lawfully adopted before the new law became effective simply because those rates exceed the 25 percent threshold.

Accordingly, the better reading appears to be that the new procedural requirements apply prospectively when a governing board establishes a future increase in outside rates. If a utility adopted its fiscal year 2026-27 rate schedule before Session Law 2026-32 became effective, the statute does not appear to require the governing board to go back and hold a public hearing solely because the adopted outside rates exceed the statutory threshold.

The legislation does, however, leave some transition questions unanswered. For example, it is not entirely clear how the statute applies if rates were adopted before the effective date but become effective afterward. Utilities should work with their attorneys when evaluating how the new procedural and disclosure requirements apply to their rate schedules.

Looking Forward

Session Law 2026-32 does not change how local government utilities establish outside rates. Utilities retain broad discretion to classify customers and determine appropriate rates based on the characteristics of their systems, the costs of providing service, and other ratemaking considerations.

The legislation instead focuses on process. It expressly confirms the authority of most local government service providers to charge higher rates for outside service and establishes a new public hearing and disclosure requirement when those rates exceed a specified threshold.

For many utilities, the most significant questions may not involve how outside rates are calculated, but rather how the new 25 percent threshold should be measured, particularly in the context of wholesale service where there may be no direct inside comparison. Those implementation questions will likely become clearer as utilities begin applying the new law in practice.