tates
Office QiWater
EPA 833-R-98-OO1
^onrnenital Protection (4203)
193JL
Accounting And Budgeting
{proved Wastewater
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Cost Accounting and Budgeting
for Improved Wastewater Treatment
Prepared for:
Office of Policy, Planning and Evaluation
and Office of Water
U.S. Environmental Protection Agency
401 M Street, SW
Washington, DC 20460
Prepared by:
Industrial Economics, Incorporated
2067 Massachusetts Avenue
Cambridge, MA 02140
February 1998
FINAL REPORT
Common Sense Initiative
Metal Finishing Sector
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ACKNOWLEDGMENTS
This report was written by Doug Koplow with research assistance from Alexi Lownie
Both are with Industrial Economics,.Incorporated in Cambridge, MA. The report was prepared
for Robert Benson of the U.S. Environmental Protection Agency's Office of Policy Planning and.
Evaluation and Pat Bradley of EPA's Office of Water. Research was supported by the the
Environmental Protection Agency's Common Sense Initiative for the Metal Finishing Sector.
The report would not have been possible without the cooperation and input of scores of
people, especially those in Escondido, California and the Massachusetts Water Resources
Authority who provided us with so much of their time.' We would especially-like to thank Dan
Gushing, Smokey Lohnes, Kevin McManus, and Fred Rowlen for their work in assembling the
data we needed and arranging for us the opportunity to speak with personnel throughout then-
respective sewerage agencies. 'Finally, we would like to thank the peer review panel for then-
useful feedback on the draft version of this report.
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TABLE OF CONTENTS
INTRODUCTION....... . , ..... ........... .... . .;.....{
1. OVERVIEW OF BUDGETING AND COST ACCOUNTING
FOR WASTEWATER TREATMENT...... ......... . ....... .. 1-1
Budgeting Systems.......... . . 1-2
Linking Budgeting With Cost Accounting .-. , 1-4
Steps Towards Improved Budgeting and Cost Accounting.... .., , 1-7
*, f '
Strategic Components...... . <... 1-7
, Implementation................. 1-8
Evaluation.. ,. 1-9
2. OVERVIEW OF TOOLS. ........... , ......... . ... . . ..2-1
Capital Budgeting , 2-1
Calculating a Charge for Capital Equipment. , 2-2
Protecting Capital Recovery......... .....; 2-3
Activity-Based Costing and Wastewater Treatment 2-6
Mechanics of Activity-Based Costing ,-. .» 2-7
" . Implementing an ABC System at a WWTP 2-8
Caveats.............;........., . : , 2-16
Resource Pricing and Debottlenecking ...: 2-17
Process Mapping ....... ... 2-20
Benchmarking , 2-22
3. TOPICAL DISCUSSIONS OF COMMON PROBLEM AREAS....... ............ 3-1
Cross-Subsidies In General 3-2
Specific Types of Discharges May Force POTW > :
to Incur Higher Costs . 3-4
Biosolids Management -. ;....... 1 ,.'... 3-4
Effluent Reuse 3-6
Fats, Oil and Grease (FOG) Discharges and
System Maintenance Costs ,. 3-8
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TABLE OF CONTENTS
(continued)
Specific Types of Customers May Cost More to Service than Others ... .............................. 3.9
Permitting Costs 3.^0
Serving Industrial, Commercial, and
Residential Customers. , 3_U
Discharger Location and Multi-Plant Systems ..J 3.15
Capacity Limits to Existing Plant May Drive Up System Costs 3-16
, '.'... ' ' ' . , , : i : , . '; v?!;
Inflow and Infiltration (I/I) 3_19
Large Dischargers and Seasonal Peaks . 3_22
System Expansions May Create New Challenges 3-23
System Expansion to New Areas/Customers 3-24
Differential Impacts of System
Expansion by Customer Class ..... 3.25
rnterjurisdictional Agreements 3_2g
4. DETAILED CASE STUDIES .. ....... .'. ....... 4-1
! . i : ' " ."' :.' , ' . ' . < . '" :' , , . '": """""""" . . /!
The City of Escondido, CA ; 4.!
General Approach Towards Cost Accounting and Budgeting 4.3
Managing and Optimizing Key Shared Assets 4-6
Controlling Constituents of
Concern with Fragmented Control... ..: 4.7
Full Cost Recovery f 4_jj
Massachusetts Water Resources Authority (MWRA), Boston, MA 4-12
." - " ' ' ' ' ' " , "*" .'" ""'i'1
General Approach to Cost Accounting and Budgeting 4-13
Dilution of Price Signals , "^" 4.15
Wholesale Rate Methodology 447
Centralization of Industrial Pretreatment 4.22
Outsourcing of Biosolids Management 4.24
Summary _
S. SUMMARY
, " """ ." ""«.«»".""»........
GLOSSARY
APPENDIX : MEMO FROM THE WATER QUALITY ASSOCIATION
REFERENCES
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LIST OF EXHIBITS
Exhibit 1-1: Wastewater Treatment Process Overview......... ......,.'........ 1-5
Exhibit 2-1; Hypothetical Example of Activity Based Costing .; 2-10
Exhibit 2-2: Allocation of Key POTW Costs....'....,.;. ...., ., .'."ZZZ 2-13
Exhibit 2-3: Boundaries of Activity-Based Costing Assessments , .... 2-16
Exhibit 2-4: Sample Process Map _ 2-21
Exhibit 2-5: Interrelationship of Metric and Process Benchmarking .. 2-23
Exhibit 2-^a: Key Outcome Performance Measures
Identified by Focus Group..... . .....2-25
Exhibit 2-6b: Key Efficiency Performance Measures
Identified by Focus Group 2-26
Exhibit 2-6c: Key Effectiveness Performance Measures '".","
. Identified by Focus Group. 2-27
Exhibit 3-1: Possible Cross-Subsidies in POTW Pricing and
. Resulting Distortions ... ... 3-3
Exhibit 3-2: Biosolids Management.. ...: .. 3.5
Exhibit 3-3: Effluent Reuse........... .....,.. 3-6
Exhibit 3-4: Effluent Reuse Options ... ... 3.7
Exhibit 3-5: Management of Fats, Oil, and Grease 3-9
Exhibit 3-6: Permitting Costs . .,..., '.....,. 3_10
Exhibit 3-7: Sampling and Laboratory Fees ..: ... 3.13
Exhibit 3-8: Enforcement Activities .'. .'. . 3.14
Exhibit 3-9: Wastewater Treatment and Water Treatment/Delivery........ ....;. 3-15
Exhibit 3-10: Distance from Plant/Multi-Plant Systems t 3-16
Exhibit 3-11: Hypothetical Impact of Peaks on Plant Sizing...... . 3-17
Exhibit 3-12: Differential Rates for Peak Leveling "."".".". 3-19
Exhibit 3-13: Aggregate Flows of 107 POTWs........!. ZIZZIZZZ!" 3-20
Exhibit 3-14: Inflow and Infiltration Control in Lower Paxton
Township Authority, PA ... 1.... , 3.21
Exhibit 3-15: Inflow and Infiltration.. ...;......;... 3-22
Exhibit 3-16: Large Dischargers/Seasonal Peaks 3-23
Exhibit 3-17: System Expansion/Centralized Versus
Decentralized Treatment -. 3.26
Exhibit 4-1: Sample Program Areas Tracked by Escondido WWT Program. . 4-5
Exhibit 4-2: Program Areas in MWRA Sewerage Division '. ; 4.15
Exhibit 4-3: MWRA Rate Factors as a Percent of Total Charges (FY 1998)... 1 Z" 4-19
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INTRODUCTION
.Publicly-owned -treatment works (POTWs) face a challenging task. They must take
polluted discharges from a variety of customers and treat it to a level that will not harm human
health or the environment. They are regulated both at the state and federal level, and directly
regulate discharging industries. POTW managers do not always have accurate or timely
information on the economic performance of the treatment system. Pretreatment managers, often
somewhat isolated in their own section of the POTW, may have even less information on which to
base decisions. ,
This guidance manual aims to show POTW managers how effective budgeting and cost
accounting systems can help them do a better job running their plants with limited resources.
Although POTWs are commonly divided into different operating departments, activities of one
group often have substantial impacts on others. For example, effective pretreatment plays a vital
role in preventing plant upsets, thereby keeping plant operating costs low. Because decisions in.
one part of the POTW affect other departments, we have chosen to analyze budgeting and cost
accounting systems holistically rather than within pretreatment alone.
The impetus for this project came out of the Common Sense Initiative for the Metal
Finishing Sector. A number of industry participants in the initiative noted that POTW pretreatment
programs had an extremely large impact on their business, but that the efficacy with which POTWs
were operated varied considerably across geographic regions. During the first part of 1996, the
; Agency visited fourteen POTWs in three states to identify what factors made pretreatment
programs successful, and what barriers prevented struggling programs from improving. Nearly
every program, including mose widely recognized as having top-tier pretreatment, had important
weaknesses in their cost accounting and budgeting systems that impeded their ability to make
optimal decisions. Our. goal in preparing this report is to demonstrate how poor cost accounting
and budgeting systems can lead to sub-optimal outcomes, to educate POTW staff about common
problem areas to evaluate in their own programs, and to provide guidance on how to implement
improved cost accounting and budgeting systems.
The report contains five chapters. Chapter one explains cost accounting and budgeting in
more detail, including what it is, how it works, and why it is important. Chapter two provides'
background information on important tools that program managers can use in their utilities to help
them prioritize their activities. Chapter three discusses common issues associated with POTW cost
accounting and budgeting. Chapter four examines two plants in detail, illustrating the multiple
issues that arise at real facilities. Chapter five contains the summary.
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i. OVERVIEW OF BUDGETING AND COST ACCOUNTING
FOR WASTEWATER TREATMENT
Much of the historic emphasis at Publicly-Owned Treatment Works (POTWs) has
been on the engineering: building new capacity, preventing plant upsets, and ensuring that
treated .effluents and biosolids meet permit requirements. Less attention has been paid to
budgeting and cost accounting, which involve the financial side of wastewater treatment:
what are the utility's available resources (budgeting) and how do costs vary with different
activities (cost accounting). The engineering and the financial aspects of the enterprise are,
not surprisingly, closely miked. Different engineering approaches will have very different
impacts on the cost of running the plant.
Budgeting and cost accounting themselves should also be closely linked. Budgets
, report the allocation of POTW resources to particular expenses., A budget document serves
as a written expression of management's resource allocation decisions and as a benchmark
against which on-going operations can be measured. Cost accounting is the process by
which these expenses are allocated to particular activities. Whereas a budget line item
might simply be "pretreatment inspector salaries," cost accounting defines activities of the
POTW more broadly. Under the pretreatment activity, pretreatment salaries would be
included along with a host of other costs that are sometimes overlooked, such as computer
programming provided by the town's information systems department or laboratory tests
required for particular industrial users. By reworking existing budget categories to better
reflect the core activities the enterprise provides (even if they cut across existing budget
accounts or departments), insights from cost accounting can be integrated into the budget
planning process. ;
Neither budgeting jtior cost accounting tend to rank among most people's favorite
activities. Budget time in any organization can be hectic and stressful, with staff having to
justify every dollar of their budget request before their managers, sometimes a year or more
ahead of time. Cost accounting may be less visible within the utility. When it is
encountered, it may be viewed somewhat perjoratively, using terms such as "bean
counting." Stepping back from their implementation, both budgeting and cost accounting
are critically important to the effective operation of the treatment plant. They are simply
tools that help managers and their staff decide how to prioritize limited funds across the
many competing options for those funds. When implemented creatively, these systems
provide important and timely information to decision-makers. For example:
What are our short- and long-term financial constraints on
activities? These constraints need to be recognized not only at the
utility-level, but at the program-level as well. '
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Including all inputs, what is the annualized cost of our services,
and how do we expect this to change over time? To remain a
healthy enterprise, the POTW needs to understand its total cost of
treating wastewater. Evaluating how the costs will change over
time enables the staff to plan for required upgrades over a longer
horizon, avoiding sudden spikes in the rates or large revenue short-
fells.
there differences in our cost of service across regions of the
utility district, or across different customers? Unless managers
understand how their costs of service vary based on the location or
characteristics of a discharger they will not be able to prioritize
what areas deserve their focus first. It is important for managers to
separate the economic from the political here. For example, the
economic cost of handling the same type of discharge in different
parts of a complex, multi-plant treatment system may vary widely.
Nonetheless, managers may still decide, for political or equity
reasons, to have uniform charges for customers in different parts of
the system. However, they may focus inspection and outreach
activities in the portion of their district where cost impacts are the
highest.
How do current or proposed actions by dischargers affect our
costs and performance? Prioritizing management attention also
requires understanding how certain types of discharges affect the
treatment system, and estimating how particular changes in
discharge levels or types will affect system operation and costs.
Our focus in this report is on powerful applications of cost accounting within the
POTW, and on ways to change the structure of the budget and the budgeting rules to allow
greater flexibility for program managers to run their programs.
Budgeting Systems
Budgets serve a variety of purposes within an organization.1 They help the
organization to plan for the future by estimating the resource requirements of different
portions of the enterprise. They help managers communicate priorities and constraints to
staff, as well as illustrate what items fall under the control/responsibility of which
departments. Budgets can also be used to help evaluate performance, for example, by
comparing budgeted and actual performance. Variances between budgeted and actual
performance can also help the organization to identify areas where their market or
Anthony and James Reece, Accounting Principles, (Irwin: Homewood
EL, 1989), pp. 603, 604. .'...'
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performance is changing. These purposes can sometimes work in conflict, so it is
important to consider the most important goals for a particular POTW when designing a
new budgeting system.
Our visits to POTW pretreatment programs found an extremely wide range of
budgeting systems currently in use. Some pretreatment program managers never even saw
their budget. Rather, operating as a small part of a larger utility district, pretreatment staff
would simply put in budget requests until an "invisible line" of spending was passed and
their requests were denied. This line varied year-by-year, and applied not only to aggregate
spending but to individual purchases as well. -The larger the individual purchase, the more
likely it was to be denied. This type of budgeting approach meets none of the goals of
effective budgeting. Department level managers were not educated by the information; nor
could they be reasonably evaluated based on their budgetary performance since they had
little idea about what their budget was. The lack of information made planning for longer-
term changes extremely difficult.
At the other end of the spectrum were POTWs with finance or budget departments
that carefully tracked spending by many different areas. Managers in these programs did
know how much funding they had, and the budget information generally allowed them to
plan much more effectively. Nonetheless, even the more sophisticated budget systems had
room for improvement. Four central goals of a budget system should be to:
Help programs balance repairs against capital replacement.
Some POTWs pay for large investments that will be used for
multiple years out of a single year's budget. This makes budget.
outlays "volatile," fluctuating widely from year to year.
Alternatively, private corporations (as well as soine POTWs) use
accrual accounting, where the cost of multi'-year purchases is
spread over the useful life of the asset. This approach is used for
tangible assets, such as new digesters, as well as intangible assets
such as a headworks analysis used to set local limits. When capital
costs are annualized, managers can make better trade-offs between
the cost of new equipment and the cost of repairing existing
equipment.2
Provide program managers with spending flexibility across
budget accounts and budgeting years. Traditional budgets are
"use or lose" affairs; any money left at the end of the year reverts
back from the department to the utility or town. Use-or-lose
systems provide little incentive for managers to save money one
year to apply towards something more useful next year. Similar
2 For a detailed description of this problem, see U.S. General Accounting Office, .
Budget Issues: Budgeting for Federal Capital, November 1996. '
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dynamics apply when budget line items are adhered to rigidly. By
focusing managers on the results of their enterprise, budget
flexibility can help managers spend available funds much more
efficiently. Managers may be allowed to use saved funds in the
next fiscal year, set up contingency accounts to fund unexpected
needs, or apply funds more broadly to their needs than can be
reflected in standard line item budgets.
' , .. ' " " * ' '' ' ','","'"',' i !'; ' '! '.*'', '
Improve long-term planning and expansion. Effective budgets
should also allow managers to examine trends in spending patterns
and to estimate spending in the future.* Though estimates of future
spending are rarely perfect, they can identify large changes on the
horizon for which the POTW should begin planning immediately.
For example, one Indiana POTW had been operating under an
expired NPDES permit for over five years. Staff knew that then-
new permit would require substantial changes to their operations,
but had never examined in detail what those changes were likely to
be, how much they would cost, and whether there were alternative
ways to achieve compliance mat were less expensive.
" ' . WT ' , -
Illustrate how changes in spending in one department will
affect resource requirements in other departments. A budget
.document solely for pretreatment might encourage pretreatment
managers to cut back on inspections in. order to meet the budget
targets they've been given. Without an understanding of how such
a cutback might affect the influent contamination levels, and
therefore the costs of operating the POTW and disposing of
residuals, department-level efficiency might lead to utility-level
inefficiencies. This link between departmental action and
implications across departments should be reflected in
departmental budgets.
Linking Budgeting With Cost Accounting
;,'!|ii , - " , " ' ' ' " . . ' ' : ,' " : "
Like !ud§ets> cost accounting systems are designed to provide critical information
Jo decision makers. Therefore, an important first step hi setting up a cost accounting system
is to compile a list of the types of management decisions the organization expects to make.
Examples might include: when to expand plant capacity; what user fees to set; where to
allocate limited inspection budgets; and what activities will most improve the quality of
effluent.
r organizations long accustomed to fairly rigid lines between departments,
implementing a holistic cost accounting system may require a bit of work. Rather than
grouping costs by topic (e.g., information systems, legal, laboratory) as many budgets do,
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cost accounting systems should delineate the core activities of the organization. The
primary function of a wastewater treatment plant (WWTP) is to protect human health and
the environment by treating wastewater to safe standards (as defined by each plant's
National Pollutant Discharge Elimination System, or NPDES, permit). To support this
primary function, WWTP core activities might include supply-side functions such as
collecting wastewater from discharge points and treating it to meet permitted discharge
levels. On the demand-side, the plant could work to manage influent quality, quantity,
and timing through its pretreamient, conservation, and inflow and infiltration programs.
Each of these areas would, in turn, have .subactivities associated with the broader
function. For example, collecting wastewater would involve broader issues of managing
the collection system, including sewer lines, seepage, oil and grease, and metering.
Exhibit 1-1 outlines these major and sub-functions. ,
Exhibit 1-1
WASTEWATER TREATMENT PROCESS OVERVIEW
Primal
NPDE
fl
ii
ry Function: Ensure wastev
S standards
(Treat incoming
wastewater)
lediice quantity of influent,
nprove 'quality of influent)
rater treated to
-Collection System
Treatment Works 1
r Re
-Discharge
L^Te-
i
Pretreatment -
- Inflow/Infiltra
Sewer Lines t-li
- Septage '
Oil and Grease
Metering
-System Expansion
-Expansion
-Maintenance
-Storm Water
r Wet Weather/Peaks
' Maintenance
Flint ili -T
sting H Toxicity Other (Air, Methane recovery)
1 *
1 Other
Local Limits/Effluent Trading
Permitting
T . i Site'Visits
Inspection
' Sampling/testing
I -Enforcement , Sampling/testing
Education ' Review of past reports
ion.SSOs . 1 Litigation/Other Enforcement Activity
Cross-cutting functions: Management and Information Systems, Legal, Laboratory, Billing, Human Resources,
Management/Administration, Finance (raising debt, budgeting, managing accounts payable and receivable).
.Detailed activities of the POTW are not shown in the chart, but are.important in
assessing the full cost of a particular activity. In fact, completing a task within any of these
areas could require the use of resources from a variety of POTW departments, for example,
billing or finance. Cost accounting will help managers track what resources are required to
complete a particular task, such as permitting a large industrial user, and how much those
resources cost the POTW. Linking the details of how much time and resources .are required
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from all parts of the organization in order to, for example, permit an industrial user or
expand a lateral collection line, is called process mapping. Creating process maps can be
t%e CX)nsiSinS and expensive. Thus, gathering this information is only cost effective if it
helps the POTW operate more efficiently and effectively. Whereas cost accounting answers .
the question "How much does it cost us to do activity x or to make product y?" process
mapping can be used to determine why certain products or processes are expensive, where
there are inefficiencies (e.g., data needs to be manually transferred multiple times), and how
the activity might be streamlined to make it more efficient. The goals of a cost accounting
system should be to:
Inform managers and staff. This is the primary fiinctibn of a cost
accounting approach. The system should give managers and staff
information on the cost of performing core activities and help
managers evaluate the tradeoffs associated with different
management strategies.
Illustrate the basic activities of the organization. The process
of shifting from budget line items to activity-based measures
should help managers define the core functions of the organization
in a consistent way and communicate these core functions to other
staff.
Link activities with costs. By linking specific activities with the
resources required to complete them, the POTW can get a much
clearer picture of the costs and benefits of particular service
delivery approaches.
Reduce the magnitude of "overhead" expenditures. Many
organizations have a substantial percentage of their operating costs
lumped into a general budget, category called "overhead" or
"administration." In reality, many of the activities allocated to
these accounts support services to POTW staff and operations. A
central goal of activity based costing, discussed in more detail in
the next chapter of the report, is to link overhead costs with the
activities they support so that managers can see the total cost of
specific goods and services provided.
Illustrate cross-departmental links in service delivery.
Departmental lines often group similar functions in an organization
(legal, personnel, laboratory, etc.) Day-to-day activities, however,
regularly draw on resources from a variety of departments. Cost
accounting systems need to reveal these links to help managers
make sound decisions for the enterprise as a whole.
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Once in place, a cost accounting system can:
Demonstrate cost, effective ways to reduce system costs, optimize
resource allocation, and prioritize activities towards achieving a
particular goal (e.g., environmental improvement or cost
reduction).
. Illustrate the economic value of pretreatment; evaluate spending on
pretreatment versus treatment at the POTW and on supply-side
management versus demand-side management.
Justify increases in charges to particular customers of
, municipalities and decreased charges to others.
Provide the information heeded to negotiate terms for
interjurisdictional agreements, network expansion, or industrial
user (IU) permits.
Identify areas of poor resource utilization within the utility and
help to rationalize system capacity.
Help managers evaluate alternative mechanisms of service
provision (e.g., in-sourcing, outsourcing).
Steps Towards Improved Budgeting and Cost Accounting
While the basic tools for improved budgeting and cost accounting are consistent
across organizations, the goals of implementing improved systems must be tailored to the
specific needs and circumstances of each POTW. Managers need to. invest adequate time
up-front to ensure that the questions a new budgeting and cost accounting system answers
are the questions that are most important to them and their organizational health. Some
general steps one can take towards improving these systems are presented below. These
steps mclude bom strategic, implementation, and evaluative components.
Strategic Components
Determine key measures of success. As stated above, it is critical
to focus measurement on items that are central to the
organization's mission.. These measures can be both financial and
non-financial. However, even non-financial measures, such as
"reduce copper loadings by 50 percent" can be more saleable if an
economic component is added. For example, "reducing copper
loadings by 50 percent will improve recreational fishing in our
discharge river, boosting tourism."
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Determine key decisions needed to achieve success. What
milestones are necessary in order to achieve goals? Do key
strategic decisions need to be made now to facilitate reaching these
goals? For example, if reducing metals loadings is a central goal,
improved data on loadings might be a milestone, -with this'
improved data integrated into a cost accounting system that
allocates the, excess costs of these loadings back to the sources of
problem metals.
. l| ' ''',.,' I' ' ' ,1 ''' ' ' ' ' ' '":{ ' ' I,' ' ' ' '
Develop a list of core activities of the organization. If budgets
are to be activity based, and new cost accounting systems are to
allocate costs onto specific activities, work needs to be done up
front to insure that all managers define the core activities of the
POTW in roughly the same way.
Determine ground rules. The very purpose of improved cost
accounting is to identify areas of inefficiency within the POTW.
There are winners and losers with these discoveries. For example,
the importance of pretreatment in reducing total POTW costs may
be highlighted. Alternatively, some departments may appear
inefficient or redundant under the new method of assessment. If
people are afraid they will be demoted or fired based on the results
of the system, they will not participate hi the implementation
phase, and their knowledge of POTW processes will not be shared.
One possible ground rule to address these concerns is a "no layoff
policy.
Implementation
1 ;i i ' i ' , . ' , ' ,, n ' , i ' . i ' ''"' .,.
Strategic issues help to determine what the improved budgeting and cost accounting
system should accomplish, and to obtain initial buy-in from plant staff. Implementation is
where these decisions get translated into organizational changes:
* Accrual accounting. Annual costs for capital spending is a very
important input into a cost accounting system. Organizations that
now pay for multi-year purchases out of their current budget need
to implement techniques used in the private sector to measure
capital services, as described below in the section on capital
budgeting.
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Cost accounting. Using annualized capital costs and other
spending information, the POTW will need to implement an
, activity-based costing system (also explained in the next chapter),
to better allocate costs to the activities/customer classes that drive
those costs. .
Changes to budgeting rules. Where rigid budgeting rules restrict
saving funds from one year to the next or applying unused funds
from one line ite'm to another (where it is more needed),
modifications are in order. Changing budgeting rules provides
additional flexibility to department managers, but requires utility
managers to be able to evaluate the results of departmental efforts.
Performance benchmarking may be useful in this regard, enabling
managers to track trends over time and compare performance with
external organizations.
Changes in budget presentation. Once costs are tracked by
activity, it may make sense to present budget data by activity as
. well. This presentation will provide a more useful picture of where
resources are being used than do current topically-organized
budgets.
When implementing any of these tools, managers should consider the costs and
benefits of doing so. Substantial increases in administrative complexity and costs make
little sense if gains in efficiency and understanding are small. On the other hand, care
should be taken to evaluate the costs and benefits of the transition over a relatively long
period. Difficult changes may increase complexity in the short term but greatly enhance
POTW operations once they are in place.
Evaluation
Cost accounting and budgeting are tools for better decision making. How well are
they working? Are decisions improving over time? How are managers using the
information these systems give them to do their jobs better? Periodic evaluation of both
these tools and the POTW's operations is important to build into the accounting/budgeting
system from the outset. Performance benchmarking can be useful in measuring
improvement over time. Annual reviews of improvements, as well as periodic interviews
with staff at various levels of the organization, is important for garnering the type of
feedback that will enable managers to improve the systems over time.
To facilitate the implementation process, the next chapter provides a more in-depth
introduction to the analytical tools needed for improved cost accounting and budgeting.
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Sll'i" ' ' , "Si
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2. OVERVIEW OF TOOLS
This chapter provides an overview of a number of tools that POTWs can use to implement
improved budgeting and cost accounting. Books are written on each of these tools; the information
here should be viewed as a general introduction. The tools fall into three main categories:
determining the cost of service, evaluating cost impacts of changes in the operating environment or
service mix offered,.and evaluating program efficiency.
Determining the cost of service. The basic element in making sound
decisions within the POTW is .haying accurate informationonhow much it
costs to provide particular services to particular customers. Two tools for
this purpose are discussed below: capital budgeting and. activity-based
costing (ABC). Cost data must be supported by solid underlying scientific
data as well, such as that on headworks loadings.
' . .1 '.'
Evaluating cost impacts of changes. Measuring the cost of service helps
managers see which activities are more or less costly. One additional tool,
resource pricing (also referred to as shadow pricing) can help the
organization identify parts of existing operations that have extremely large
cost impacts and estimate savings associated with operational changes.
Often, these areas are bottlenecks in the system: a single resource that
impedes efficient use of much of the rest of the plant. Resource pricing, in
conjunction with the cost accounting system, can be used to evaluate
competing options, such as increasing system capacity versus trying to
reduce demand for existing capacity.
Evaluating program efficiency. How Well is your program providing
. , wastewater treatment services? Two useful tools are Process Mapping
and Benchmarking. Process mapping helps illustrate the complexity of
seemingly simple functions within the organization and .provides useful
insights on how those processes might be simplified. Benchmarking, in
which aspects of operations are compared to those ponducted within other
organizations, can be a useful tool in identifying areas for improvement
within the utility. .
Capital Budgeting
A fundamental concept of accounting is the matching of costs to the period over which
benefits associated with those costs are received. When this is not done, managers are unable to
assess their cost of providing goods and services (vital in order to decide what goods and services
make sense to produce). From this need, costs have been divided into operating expenses and
capital expenses. Operating expenses encompass costs that generate benefits in the current year. '
2-1
-------
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Coital costs, such as new equipment or plants, create a stream of benefits that span multiple years.
These multi-year benefits need to be annualized so that the portion of the benefit stream in any one
year can be estimated.
Capital budgeting accomplishes two important functions. First it, annualizes capital
spending, allowing capital to be compared to single-year purchases and to be included in a cost
accounting system. This process is fairly mechanical, incorporating the cost of the purchase and the
expected service life into an annual expense. In reality, however, capital purchases lock an
organization's resources into a particular purchase for many years. Although annualized capital
*x>sts 9*5 usefi^pficators of the annual cost of capital services, the decision in year one to make the
purchase is thereafter, for .the most part, irreversible. For example, expanding the collection system
|o a new mdustrial park is a sunk cost. The money is gone even if no industries decide to move in,
p one ^d"W^tern POTW found out. The long-term nature and large expense of these
Investments requires that the decisions be made carefully. This is the second strength of capital
Budgeting: it provides a standard basis of comparison for alternative capital purchases. For this
reason, many organizations have a separate capital budget that shows only capital purchases to help
rnanagers choose among many suggested options.
Calculating a Charge for Capital Equipment
To calculate an annual charge for a capital purchase (let's assume a new digester), the plant
first groups all expenses 'associated with the design, purchase, and installation of the digester into a
single account Expenses that support this capital asset, even labor, are capitalized. If particular
items are improperly excluded from the cost of an asset, the capital will seem less expensive than it
really is. Consider the following common issues:
* Financing Costs. The asset cost should also include the cost of financing
the capital, as this is often a large portion of the total cost of the asset.
This cost may be visible and easily included if the city issued a bond to
pay for the new investment. However, even if the town decided to pay for
the asset outright, out of a single year's tax collection, it still makes sense
t6 jrapute a financing cost to reflect the lost opportunity to use this money
in an alternative way. In private firms, this imputed interest is referred to
as "hurdle rate," the return below which a capital purchase can't be
justified because it diverts funds from more, productive uses.1
Incorporate life-cycle costing. If current activities create future costs, such
as decommissioning or remediation, these need to be allocated to the
current product/process and accrued over its operating life.
1 Note that a hurdle rate will generally include not only the break-even return necessary
f9r to6 ft to pay for the capital it is investing, but a profit margin above that level as well.
Since most POTWs are publicly-owned and do not earn profits, the imputed interest rate will
likely be somewhat lower than if it would be for privately-owned plants.
2-2
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Replacement Costs versus Historical Costs. The use of replacement cost
pricing violates the cost of service principles normally used in rate setting
atPOTWs. However, if replacing a capital asset is much more expensive
than it was to install it in the past, the use of historical costs in estimating
the rates will encourage overuse of the capital. Capital charges based on
/ replacement cost will encourage all current users to constrain their use of
the capital, delaying the tune when capital expansion at the much higher
pricewill be necessary.2 Note that replacement costs can be higher for a
. number of reasons, including inflation, the loss of government-subsidized
financing options, or new technical requirements.
The sum of these costs becomes the cost basis of the asset that is depreciated. The purpose
of depreciation is to reduce the value of the capital asset over time, as its useful service life is
exhausted. Thus, the depreciation period should be set equal to the estimated service life.3 For
simplicity, let us assume that the asset wears out evenly over time (known as straight line
depreciation).4 If the digester was expected to last 20 years, than l/20th of the total cost basis
would be recovered from users in each year. Annual costs (or revenues) associated with the asset
would be added to the capital charge in order to obtain a total cost of a capital asset that should be
recovered from customers. Annual costs, often referred to as operations and maintenance costs,
include such items as energy and repairs. Revenues might include by-product sales or reuse (for
example, methane recovery and reuse from a digester) that should be deducted from the total annual
cost. .
Protecting Capital Recovery
The purpose of capital budgeting is to accurately estimate the cost of capital services to
managers and customers, hi this way, rational decisions can be made about when to replace old
equipment with new, and what the proper mix between capital and operating costs is. Users can be
. 2 This occurs naturally in competitive markets, where the market price is equal to the
marginal cost of the least-efficient producer still able to stay in business. Since POTWs don't
compete with each other to treat wastewater, marginal cost rationing needs to be added
artificially. . , .. '.
Private firms depreciate, assets as quickly as allowed under the tax code in order to
reduce their effective tax rates. For pricing capital services, however, the assets should be
depreciated over the service rather than the tax lives, as this is the best approximation of the
annual cost of using the capital.
4 There are a variety of other depreciation methods, all of which generally depreciate a
higher percentage of the asset value in the early years. The actual pattern by which an asset
depreciates in value Will vary by asset type.
2-3
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charged the true cost of the capital they use, giving them an incentive to use the capital efficiently.
POTWs will be able to accrue funds steadily so they can finance replacement capital at the end of
the old capital's service life.
1 '' " 'i,,i" !,N' " . " '''"»' ' ' ' ' ": ' ',, *''ii' * .... , , , ' ;,;
Unfortunately, this system begins to break down in the real world politics of sewage
freataient. No matter how "perfect" the capital charges are, if the funds collected for capital
^replacement are diverted for other uses, the plant will not make efficient capital allocation
decis^ While this problem is relatively common in WWTPs, our limited sample of site visits
suggests it is more acute in municipal systems than in special sewer districts. Funds collected from
within the POTW for capital replacement are diverted to the general fund of the municipality to
meet some immediate need in another part of the budget.
Linking collections to specific uses is important if the system is to provide proper
incentives. Fpj; example, if plant managers know that capital replacement funds will not be
available when they need them, they begin to "game" the budget system to buy capital equipment
whenever they can obtain funds, rather than when they really need it. The type of capital
equipment they buy may be driven as much by the amount of funds they can obtain in a given year
as by the problem they are trying to address.
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Municipalities have adopted a number of techniques to minimize the problem of funds
diversion. All of these techniques restrict how capital recovery funds may be used, reducing or
eliminating the latitude for town officials to divert the monies for other uses. Some examples:
Lease or outsource. For utilities where the political process makes
accruing for capital purchases arid replacement nearly impossible, leasing
equipment or outsourcing functions can bypass some of the problems.5
Once in place, funds for wastewater treatment no longer go to the city,
where they could be diverted, but .rather to the lessor or private provider.
This type of decision (outsourcing more so than leasing) has implications
We encountered a number of smaller POTWs where strategic decisions with any
financial implications had to be approved by a utility board, comprised of many members of
Significant Industrial User (SIU) companies. These members sometimes use their leverage to
impede effective POTW enforcement of discharge violations or to block improvements in
staffing or equipment that would have increased the POTW's enforcement capabilities. Leasing
or^ outsourcing specific functions is unlikely to solve these conflict of interest problems, as the
utility boards can still intervene to block the initial leasing or outsourcing decision.
< i, ";J i, J
2-4
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on other aspects of POTW operation, so should .not be undertaken lightly.6
In addition, unless outsourcing contracts are written carefully, the private
provider may have disincentives to long-term capital investment as well.7
Bond financing. By issuing bonds for capital projects, the POTW creates
a legal obligation that funds from users support bond repayment to an
external agent. Bond financing is commonly used by POTWs for large
capital expansion. Ideally, the bond life is matched to the service life of
the asset being financed. In this circumstance, annual bond repayments
are a fairly good indicator of the cost of capital services. In reality, bond
life is generally driven by interest rate conditions rather than service life,
so may be a weak proxy for the cost of specific capital services,
Revolving Funds. Revolving funds are often run by external agents,
although they can also be run by the utility. A loan is made to the POTW
for a specific project, then repaid over time from user fees. The up-front
costs of bond issuance, however, make bonds a more effective tool for
large scale capital projects; revolving funds are economic at a lower level
of funding.
Internal Accounts. Some utilities have set up internal accounts for asset
replacement funds. Collections go into these accounts and are somewhat
protected from being "raided" by other parts of ,the municipality. Funds
are earmarked for specific purchases, and do not revert back to the general
fund at the end of each budget cycle as do most unspent departmental
funds.
Working Capital Funds. Also an internal account, working capital funds
operate as a savings account for new capital purchases. Contributions by
managers are voluntary, rather than based on mandatory capital charges.
However, the approach provides managers with flexibility to do multi-year
planning.8
6 For an in-depth discussion of issues associated with POTW privatization, see AMSA,
'Evaluating Privatization: An AMSA Checklist, 1996.
7 The payback on major capital investments can be five to ten years or more. If a private
operator has only a five year operating lease, it will choose not to invest in assets with long-term
paybacks unless absolutely necessary. > "
8 U.S. General Accounting Office, Budget Issues: Budgeting for Federal Capital,
November 1996, p. 52. ,
2-5
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To be effective, internal accounts and revolving funds must allow managers to purchase and
sell assets as need dictates. Positive balances should earn interest if these funds are used in the
interim for any other purposes. Managers also need to be free to implement replacement cost
pricing in order to send the proper price signals.9 Because these systems reduce the power of
central utility boards to control successive spending (i.e., after the initial capitalization of the fund
or account), the central boards sometimes resist the implementation of these approaches.
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Activity-Based Costing and Wastewater Treatment
Activity-based costing (ABC) is a simple but powerful idea: allocate costs to processes,
products, or projects on the basis of the activities that generate these costs. To do so, one must
group spending by activity rather than by department, as is often done. When ABC is successfully
implemented, many costs now termed "overhead" are linked to the activities that generate them,
and are allocated accordingly to products, customers, or other cost "objects." The end result is cost
information that provides accurate and complete costs for a particular area of business activity. The
full costs of generating particular products or services can be quite surprising. Many private sector
firms have discovered they were selling products for less than it cost them to make, once support
services and capital requirements are included.
This type of an outcome is possible because the intensity of demand for support services
and infrastructure varies widely by customer and time period. Wastewater treatment abounds with
examples of this type of behavior. Additional capacity may be needed at the plant to handle
seasonal dischargers, either due to industry cycles or tourist peaks. Where infrastructure is old or
poorly built, large inflow and infiltration during rainstorms can dramatically increase capacity
requirements at the treatment plant. In terms of differing demands on support functions, certain
industries such as those in non-compliance - will require a much higher level of laboratory
support and inspector time. Large industries may require more time to permit than smaller, less
complicated ones. These are but a few examples. Overhead costs, and costs in general, are driven
by variety, complexity, and activities.10 Variety reduces opportunities for achieving economies of
scale and adds complexity. Complexity increases opportunities for mistakes and increases the time
spent trying to prevent mistakes. The more activities that need to be done to create a saleable
product, the higher the costs are likely to be.
i
Cost distortions are more likely when:
An enterprise provides both high- and low-volume services from the same
facility.
9 Ibid., pp. 44-50.'
10 Michael Ostrenga, et al, The Ernst & Young Guide to Total Cost Management (NY-
jiphn Wiley & Sons, 1992), p. 38.
" " ', 'l!1 ' ' '''',,' .''''''
2-6
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A single plant provides services to different customers of varying
complexity. .
Some dischargers require, higher standards of treatment, or higher
treatment capacity, than others. -
Mechanics of Activity-Based Costing
ABC involves linking resources to activities to cost Objects. Resources include the basic
inputs to production: time, labor, capital, and energy, all of which cost money. These resources are
allocated within an organization to support particular activities: inspecting a discharger, testing an
effluent sample, preparing and mailing a customer's bill. These activities, in turn, are conducted for
the benefit of the "cost object." A cost object is a rather bland term that describes the goal for
which resources are being used. Most commonly, cost objects are products or services. Service to
a particular type of customer (a customer class) can be a useful cost object as well.
Unlike a factory, which might produce seven varieties of blue jeans, WWTP output is more
difficult to define. At a most basic level, the plants produce clean water and safe biosolids.
However, the plants provide a host of services to support this output, and these services are not at
all uniform. For example, treatment of wastewater is a different service for different types of
customers. The service required by a significant industrial user is quite different from that required
by a small residential customer. Even within the SIU, a range of services are provided depending
on the type of industry and the nature and timing of the discharge. By tracking these distinctions,
ABC provides managers with new insights into their operations.
The overall process of ABC is presented in the event-chain shown below. Each element of
the chain is described in turn.
COST MEASUREMENT -> COST ALLOCATION -> TRUE COSTS OF
PRODUCTS/SERVICES -> BETTER DECISIONS
Cost Measurement
Allocating resources to activities requires that the organization accurately measure costs.
For many expenditures, this data can be obtained from WWTP's general ledger, which lists each
purchase or payment. Capital costs must be adjusted to reflect the real cost of using scarce capital
resources, as described under the capital budgeting section above. Labor costs, often grouped into a
single expenditure, need to be tracked based on what activity the time was spent on. For some
organizations, implementing a system of tracking time (such as by using timesheets) can be a big
change.
2-7
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Cost Allocation
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Costs are grouped into activity cost pools, which are simply the summation of all
expenditures related to a particular organizational activity. The allocation of costs involves two
important decisions: what the activity cost pools should be, and how general costs should be
allocated among cost pools.
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Defining Activity Cost Pools. There is a trade-off between more refined
activity cost pools (which allow costs to be allocated more precisely) and
the cost and complexity this proliferation adds to the. organization.
General categories are usually best unless compelling information
indicates costing would be much improved through additional categories.
Assigning Costs. Costs must be assigned from activity cost pools to cost
objects in a manner that reflects the behaviors that actually drive the costs
(referred to as cost drivers). Thus, costs should be charged to a customer
or product directly whenever possible for example, if a specific person
was hired only to service a particular customer. When this is not possible,
Sosts should be allocated based on the level of service provided, such as
the use of labor or machine hours. Only when data exist with which to
estimate the degree of workload created by a particular product or
dustomer should costs be allocated based on a general volume measure
(e.g., share of revenues or production volume).
"True" Costs of Products/Services
The full cost of a cost object is equal to the sum of its direct costs plus a fair share of
applicable indirect costs. Direct costs include materials, labor, energy, and capital that can be
directly attributed to creating or servicing a particular cost object, such as an industrial discharger.
While all POTWs must have their rates approved, for which they conduct a cost-of-service study,
the resultant rates rarely represent the true costs of providing services to particular customers.
Much of the problem lies in how costs are assigned to particular cost object. Activity-based costing
can greatly improve the accuracy of costing. While the results will not be the "true" costs (as
judgments are always required in assigning indirect costs), they will provide customers and
managers with substantially better cost information on costs with which they can make decisions.
Implementing an ABC System at a WWTP
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Implementing an ABC system can be an extensive undertaking. An important first step is
to think critically about the desired outcomes of the endeavor. Is the goal to track specific services
inore closely? Specific service families? Specific customers? What types of decisions do you
hope to make with the output from the system?
2-8
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An activity-based costing system for a publicly-owned treatment,work can focus less on
product line profitability than would be required in such a system for a private firm. However,
. tracking the costs to serve particular types of customers is quite valuable.. This information can
help managers evaluate their current charges, focus their outreach and enforcement, and identify
high cost activities within the POTW for streamlining. '
Exhibit 2-1 below provides a hypothetical example /of the cost of conducting a routine
inspection at an IU. Activities required to conduct the inspection are broken down into the
resources they use. The cost of these resources is then used to estimate the full cost of the
inspection. The value of ABC is that it can demonstrate the often large impact that "support"
functions have on the service provided. In this example, laboratory costs are particularly high.
The first step in most POTW cost of service assessments is to allocate costs to rather broad
functional area cost pools.. There is some variation across POTWs in terms of what cost pools are
chosen.. The functional areas outlined in Exhibit 1-1 could be used. Managers may decide initially
to use fewer allocation pools, including such items as treatment, transmission, collection, disposal,
billing, customer service, accounting and finance, and administration.11 The Massachusetts Water
Resources Authority (MWRA), a very large integrated utility, has additional categories such as
public affairs, procurement, and human resources. These activities would likely be accomplished
by a single person (or fractional FTE) at a small POTW. ,
Regardless of their exact categories, cost pools need to provide managers with their desired
level of information without creating an undue information collection burden on their staff. It is
important to note that not all functional areas are the same with regard to their contribution to direct
and indirect costs. For example, most costs associated with wastewater collection and treatment are
directly related to services provided to dischargers. Functions such as human resources or public
information have a more indirect link. In terms of prioritizing implementation of activity-based
costing, it is best to begin with large costs linked more closely to customers, as these are the areas
where costing problems are most likely to distort discharger behavior.
Assigning costs to functional areas has traditionally been done within customer 'classes -
for example, residential, commercial, industrial, institutional, other government utilities, and
customers outside the city.12 In many situations, customer class is not the best allocation base, as
important cross-subsidies may remain. POTW managers should think carefully about cost drivers
in determining how to allocate particular costs. To the extent costs can be allocated to particular
dischargers rather than to customer classes, this should be done.
11 George Raftelis, Comprehensive Guide to Water and Wastewater Finance and Pricing
Second Edition, (Ann Arbor, MI: Lewis Publishers, 1993), p. 178.
12
Ibid.
2-9
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Exhibit 2-1
Hypothetical Example of Activity Based Costing
Cost Object: Routine Inspection at ACME Eraser Company
Activities
Pre-Inspection Data
Review
Resources Required
-Clerical time to pull files
Possible Costing Basis
Labor time
Cost Allocation
Units Rate Cost
-MIS Resources for data storage and Computer time
access; and for scheduling
inspections
-Review by inspector Labor time
-Phone contact to schedule inspection Labor time (clerical) +
telephone time
0.2 hours
0.5 hours
0.5 hours
0.2 hours
$12.00
$4.93
$17.00
$2.40
$2.47
$8.50
$3.od
Travel to and from Site -POTW vehicle, gas, repairs,
insurance .
-Inspector travel time
-Sampler travel time
Average charge per mile 13 miles
traveled
$0.31 $4,031
Inspection of Site
Sampling
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Analyzing Samples
-Inspector time
-Assistant time
-MIS costs for expert sysi
inspections
-Chemicals and supplies
rSampler Time
Labor time
Labor time
Labor time
Labor time ;
Number of inspections
0.4 hours
0.4 hours
1 .5 hours
0 hours
1
$1.7.00
$12.00
$17.00
$22.50
$6.80
$4.80
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$25.50
$0.00
$22.50
Direct costs
Labor time
Labor time
0.4 hours
1.2 hours
-Lab technician time
-Machine time (includes all costs Pro-rated share of total 1.0 hours
related to purchase and upkeep of cost of particular
machine and rental of space to house equipment used
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-Chemicals and supplies Direct costs
-Residual management and disposal Direct costs
costs
-MIS costs for Laboratory Information Transactions processed 3 samples
Management System' .
$35,00 $35.00
$12.00 |4.8p
i' r:l''V -?i I
$17.00 $20.40
34500 $345.00
43.00 $43.00
17.00 $17.00
5.81 $17.43
Post-Inspection Write- -Inspector time
up ' ] _ '
^-Manager review
-Data verification and entry
-Follow-up communication with
industry
-MIS costs
Total Cost to Inspect ACME
Labor time (inspector)
Labor time (manager)
Labor time (clerical)
Labor time (inspector)
Computer time.
0.5 hours
0.25 hours
0.4 hours
0.3 hours
1.0 hour
$17.00
$23.00
$12.00
$17.00
$8.50
I5-75
£:.!';.
$4-80
$5.10
$4.93 $4.93
$591.71
2-10
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Exhibit 2-1 (continued)
Summary of Cost Factors
.abor Rates ($/hour, including fringe benefits)
Inspector
Sampler
Manager
Clerical
Lab Technician
Computer Time
.aboratoty Information Management System (Hardware and software)
Total Cost/Year
Transactions Processed/yr
Cost/transaction
General MIS Support (other than LIMS and project-related support)
Total Cost/Year
Number of staff-hours used , " s
Average cost/MIS hour ;
:xpert System for Inspectors
Total annualized cost
Number of inspections/year '.'-.'
Cost/inspection
elephone System
Long-distance
Local calls
Total costs/year
Total minutes of calling
Avg. cost/minute
Rate
$17
$12
$23
$12
$17
$25,000
' 4,300
$5.81
$74,000
15,000
$4.93
$9,000
400
$22.50
direct billed to projects
$950
19,000
$0.05
2-11
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Exhibit 2-2 illustrates the cost divers for key functional areas of the POTW. Similar
services can haye very different cost drivers, depending on whether they are baseline versus peak
opacity, or capital versus operating costs. Some general rules have been used in developing the
:*:«xhibit: ' ""' '.'.'.' , ' ' . '',,...
Minimum size rule. The minimum scale of operations required to service
' _Sn average customer is defined.as the "baseline" system, for which the
costs are spread equally across customers. This minimum size needs to be
determined by each POTW, but should incorporate two important
considerations. First, variability in the "average" discharge suggests that
* the minimum size should be slightly higher than the average to handle
standard deviations in discharges. Second, given the large costs and
difficulty of retrofitting POTW infrastructure if it is undersized, a prudent
baseline system should also include some level of oversizing to provide
. flexibility, the cost of which would be shared among all customers. These
caveats aside, the additional capacity required should then be allocated
among specific customers (or customer classes) based on their demand for
the incremental services. , .
Disaggregation of service provided. By breaking services into smaller
units, it becomes easier to differentiate the cost of servicing different
customers (this process is often called''unbundling"). Collection costs are
a good example. In very large POTW systems, the sewer line distance and
the pumping costs can vary widely across customers. Unit costs can be
higher not only due to distance, but due to utilization of particular portions
of the network as well. With disaggregated costs, the POTW can calculate
the carrying charge from any particular location fairly easily, and use this
information in rate setting, to identify areas for decentralized treatment, or
to promote growth in order to increase utilization of infrastructure within
particular regions.
Polluter pays principle. Wherever possible, the dischargers of
Constituents that reduce the quality of residuals (and hence their market
value) should bear me financial burden of those lost revenues.
Support functions, such as administration or finance, will generally require some use of process
mapping in order to estimate the costs associated with particular services to customers or
customer classes. Process mapping is described in more detail at the end of this chapter.
;' , ' ' '''si ' " .. IV ' . ".' "' .'''. ""','' " ',. ' !:','' . .. '
2-12
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Exhibit 2-2
f OF KEYPOTW COSTS
- 3
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Lateral sizing determined by rndividual peaks of each customer.
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Trunklines can average differing peaks by discharges. Thus, best allocation is b
on peak flow level for the POTW.
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The full cost of extending the collection system should be borne by the beneficii
industries or neighborhoods. POTW can set up a longer-term payment so that
future users in the new zone also pay a portion of the cost.
,
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Each pumping station can have a charge that is a function of rnfluent pumped.
Dischargers farther from the plant may go through a sequence of pump stations,
thus will pay a higher total pumping fee.
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among all oil and grease dischargers equally.
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Any incremental costs for inspection, enforcement, or damages (e.g., system clei
out) should be direct-charged to the facility. If facility can't be identified, charg
should be borne by all FOG permittees.
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Base fees to set up a basic program should be reflected in permit fees to haulers.
Incremental costs of handling specific loads should be charged directly to the ha
through a tipping fee (price per gallon or pound) and/or strength surcharge. In
districts with multiple drop-off sites, the incremental costs might include locatioi
specific surcharges for pumping costs.
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Using the minimal size rule, the baseline cost of providing the treatment plant
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and inflow/infiltration. Incremental costs of building and operating a larger facil
should be borne by these causal agents, in proportion to their contribution to the
problem. I/I charges may need to be prorated to certain zones of the system (e.g
specific towns) based on their contribution.
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ffiY POTW COSTS (continued) I
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If there are incremental costs of having to landfill or incinerate biosolids, or of not
being able to resell effluent, they should be borne by the dischargers that created
that need, based on their contributory share of that constituent. 1
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the Clean Water Act. Thus, allocating costs to all customers based on quantities of
discharge requiring treatment is a simply and fairly accurate method.
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Exhibit 2-2
LEY POTW COSTS (continued)
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Caveats
This guidance provides a general overview of ABC applied to WWTPs. We draw on work
done for electric and gas utilities on cost allocation, and encourage readers seeking more detailed.
information to examine that literature as well. Application of even relatively simple ABC systems
can greatly improve the cost information that managers within the plant, as well as customers
relying on the plant, use to make decisions; It is important to remember that ABC is a tool for
decision making, not me determinant of a decision; interpretation of the results is always necessary
|o use this information most effectively. The following caveats help to place the information in
context:
Externalities excluded. Activity-based costing generally stops at the
enterprise walls; external costs are not rolled into the calculation as is
done with environmental accounting or lifecycle costing. As a result, the
environmental costs of particular industrial discharges for example
declining fish populations will not be picked up as a cost to be allocated
to particular dischargers unless program managers expressly decide to do
so.
Exhibit 2-3
BOUNDARIES OF ACTIVITY-BASED COSTING ASSESSMENTS
Less Tangible, Hidden,
Indirect Company Costs
Conventional Company Costs
| | Internal Cost Domain
External Cost Domain
Total Company Costs
(Captured by ABC)
Full Life-Cycle Costs
Source: Based on White et aL, 1995, p. 21.
2-16
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Cost Rigidity. Not all cost components are easy to reduce, even with the
proper price signals. In the longer-term, more of the costs can be
influenced than hi the shorter-term. Thus, ABC signals are likely to be
more valuable in rationing .constrained capacity or sizing new capacity
than in changing use patterns for infrastructure that is already in place but
i oversized.
ABC measures average costs, not marginal costs or market value.
Although ABC allocates costs based on which customers/services drive
the demand .for extra resources, the resulting cost allocation is an
averaging of the incremental cost among users. For example; if handling
peak flows in a collection system increases costs by 50., percent over the
baseline, this 50 percent would be allocated across the users of that peak
capacity. For existing capital infrastructure that is underutilized, ABC
may suggest a higher-than-rational allocation of costs to particular users.
; In the collection system example, if there is spare capacity in both the
collection and treatment system, charging a new user full ABC value
would signal scarcity when in fact hone is present. Resource pricing,
which is a marginal analysis (and is described below), can be a useful
, supplement to ABC m situations such as this. . ,
- Cost of flexibility. As noted above, flexibility, in the form of some
surplus capacity at the time of construction, is generally a prudent strategy
with large, difficult to modify, capital infrastructure. Managers need to" .
interpret ABC information in such a way as to recognize the value of this
flexibility.
Resource Pricing and Debottlenecking
,\ _ '
Soda bottles have narrow necks that slow the flow, of liquid. The narrower the neck, the
slower the flow from the container. This analogy has been applied to factories where the output of
the entire system is limited by the speed of the slowest part. If a POTW has a treatment capacity of
16 mgd, but the trunkline system pipes are so narrow that they can deliver only 5 mgd for
treatment, much of the expensively built treatment capacity will sit unused. (In all likelihood,
sewage will also be flowing out onto the streets or back into people's houses due: to the lack of
collection as well).
"Debottlenecking" expands the limited constraint, allowing the system to operate with a
higher throughput. A logical solution to the above example would be to expand the trunklmes to
carry greater flow. This adaptation might solve the problem for some POTWs; for others, the
bottleneck might simply shift from the trunkline to the laterals in certain parts of the service area
The laterals that are constrained may shift as well, depending on the production cycles of
discharging industries, rainfall (due to I/I), or other factors.
2-17
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This simple example illustrates two important points about the POTW system:
Bottlenecks can "float" from one area to another depending on what
problem is corrected and the current activity of the system.
To eliminate all bottlenecks at once, one must examine the system
holistically and model capacity constraints under various conditions.
Unused capacity in the treatment system can drive costs of treatment up substantially. For
example, according to a recent survey by the Association of Metropolitan Sewerage Agencies
(AMSA), the average POTW needed to pay $23.2 million in principal and interest per year, or more
than $63,000 per day. The revenue requirements are substantial. In a 20 mgd plant, this translates
fo roughly 0.3 cents of debt service per gallon treated if the plant were running at full capacity,
funds that are lost if constraints in the process prevent this capacity from being used. If the plant
was oversized to handle storm surges, the cost per gallon could be substantially higher, affecting all
tisers. Thus, it is important to eliminate bottlenecks to ensure that the expensive infrastructure put
In place can be used effectively.13 However, the desire to reduce wasted capacity must be balanced
against the ease with which capacity can be expanded later. Thus, it is more important to have
spare capacity in collection systems (which require digging up roads to replace) than in digester
capacity, since digesters can be added one-by-one as demand for them rises.
Not all bottlenecks are as obvious as below-size trunklines, Any resource used in the plant
can be constrained^ If this constraint impedes the use of other assets, the constraint can be
expensive indeed. Consider the case of skilled engineering labor. If the POTW is using all its
skilled engineers to design the collection system in a new industrial park, staff may not be available
to retrofit the aeration unit with more energy efficient fine bubble diffusers. Should the POTW
rhanagers pull engineers from the industrial park design and get them to work on the diffuser? The
answer is not always obvious. In fact, it is in situations where the same asset (including skilled
labor) can be deployed in many ways, or the expansion of a very expensive asset can be delayed via
many alternative strategies, that resource pricing becomes most valuable.
Accurate jesource pricing gives managers price signals that help them to decide the most
effective manner to deploy scarce internal resources. Just as an expensive price for biosolids
landfilKng tells managers to look for less expensive options, so too do expensive internal prices on
key resources, such as treatment capacity, help focus attention on ways to conserve that
commodity. Resource prices determine the opportunity cost of using resources in one area as
opposed to another. If we change one scarce resource to project 2 (installing the fine bubble
13 For new construction or plant expansions, this means be sure that the capacity of the
equipment installed is proportionate to what is needed in the other, connected, parts of the
treatment process!
2-18
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diffuser) from project 1 (designing the industrial park collection system), what will happen to
POTW margins (revenues minus costs)? Will accelerated implementation of project 2 make the
overall POTW system better or worse off than rapid completion of project I?14
An undersized trunkline in the 10 mgd plant can illustrate how resource pricing works. The
pipe sizing prevents 50 percent of the treatment capacity from working. This lack of trunkline
capacity is the constraint. If the daily debt service on the plant is $63,000, the cost of leaving 50
percent of it unused is $31,500 per day (0.3 cents per gallon per .day), or more than $11 million per
year.15 In industries with large fixed investments and linear processes (where all material flows
through the same equipment), costs of bottlenecks can be enormous. The value of increasing
trunkline capacity in this example would be roughly $1.10 per annual gallon of capacity.16 That is,
in this highly simplified example the resource price for expanding capacity in the trunkline is $1.10
per annual gallon. (The resource price for any input which is not constrained - for example
.treatment capacity ~ is always zero. This is because increasing the amount of this resource
available will do nothing to increase plant output).
This cost information can be used,in a variety of ways: ;
If expanding the trunkline costs substantially less than $1.10 per annual
gallon of capacity, and the lack of additional capacity is preventing flow
from reaching the plant, expanding the line makes sense.
If the plant has not yet been built and me cost information was gathered to
help properly size the plant, the information helps managers see the cost of
oversizing the treatment plant (or the cost of uhdersizing collection
systems) and to plan accordingly. For example, if projected peak flows
can be reduced for less than $1.10 per annual gallon (such as through I/I
control), resource pricing helps to demonstrate that these alternative
strategies are cost-effective.
14 Resource pricing evaluates technical constraints. There may be strategic reasons to
continue with project 1. even if doing project 2 sooner would increase POTW margins. As with
all of the tools described here, management insight is still required in order to make a sound
decision. . .
' . . ' ''-''"
15 This is a rough approximation. In reality, not all of the capacity will be used even in
well-balanced plants, and the annualized cost of capacity may not be equal to the debt service. In
addition, costs other than debt service would also be spread over the new capacity, increasing the
value of removing the constraint. Finally, were the POTW a private entity, the cost of unused
capacity would not be higher costs, but rather forgone profits, usually a higher figure.
',l6 Equal to 0.3 cents per gallon per day multiplied by 365 days/year.
2-19
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Implementing a comprehensive resource pricing system is much more complicated than this
simple example. Linear algebra programming is used to map out the many constraints in the
POTW systems and the goal to be maximized (known as the objective junction). Equations are set
up to describe the various outputs, their contribution margins, and their production constraints.
However, unlike industrial processes such as petrochemical plants and oil refineries that have
scores of product output options, POTWs provide a much smaller diversity of services. Therefore,
applying the concept of resource pricing to key assets (especially those shared by multiple
municipalities), even in a simplified way, can help to greatly improve system efficiency.
Process Mapping
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Process mapping is a systematic tracking of physical processes, key task flows, and
information flows within an organization. The purpose is to step back from day-to-day activities
and try to track what resources are actually used in providing a certain type of service or product. A
process map is a picture of the variety, complexity, and activities that commonly drive up costs.
Each step of the map is a resource input, to which units (labor hours, machine hours, material
inputs) can be attached. By monetizing these inputs using information on the cost of these inputs,
the total cost of providing the cost object can be estimated.
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An example of a POTW process map is included as Exhibit 2-4. This map is one of more
than 50 that the Louisville and Jefferson County Metropolitan Sewer District (LMSD) created as
part of their current cost accounting initiative. Each of the maps takes a specific activity that is
often lumped into general overhead accounts or, in this case, general capital and general
operating expenditure line items, and analyzes work flow in detail. Examples of other processes
mapped out include the bidding process, callbacks and agency letters, the construction change
order process, and reviewing a plan of the sanitary sewer to answer a particular question.
The left side of the map illustrates the various departments within the plant utilized to
complete the task in question. The steps in completing the task begin on the left and are
completed on the right This picture is one part of a complete process costing. To estimate the
cost of corrective and preventive maintenance planning, for example, POTW staff would track
the staff, machine, or other resources at each step to evaluate the total overhead cost generated
each tirne an equipment defect report (see chart) is filed. Accurate costs for these general
activities can be. used to generate more accurate costing estimates for higher-level activities
requiring these tasks.
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Process mapping is also an invaluable tool in identifying how to improve operations.
Perhaps the map is extremely complex, with many areas of duplication. Perhaps the costed activity
is extremely expensive, suggesting that investments in improved information technology, for
example, might help reduce costs. In both these situations, a careful process map can illustrate
fruitful areas in which to begin improving operations. LMSD has shaded the portion of this
particular process that they felt offered the most room for improvement. Process maps are also
useful supports to process benchmarking (described below), where specific portions of plant
operations are compared to other entities using a similar process.
2-20
-------
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Benchmarking
Benchmarking can be used to identify weaknesses in the POTW's products or production
processes, and ways to improve on these weaknesses. Metric benchmarking compares performance
quantitatively: inputs, outputs, outcomes, and the relationships among them. Basic comparisons
betvveen prices or financial ratios are commonly used metrics. Metric benchmarking can be a quick
Vay to identit^ if there are problems. For example, if Manufacturer A spends more on
mMw^toing his product man Manufacturer B sells it for, simple price benchmarking
demonstrates very clearly that Manufacturer A has a serious problem. Identifying what that serious
problem is, a critical step in being able to solve it, requires more refined metrics and the use of
process benchmarking. Process benchmarking maps ones own process against competitors that
have the best performance using a similar process in order to identify, where and why mere are
difFerences.17 Exhibit 2-5 illustrates the connection between the two approaches.
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Whether using metric or process benchmarking, great care needs to be taken to be sure that
you are comparing the same thing. Thus, when comparing costs, you need to be sure everybody
L has proper costing data. If one POTW benchmarks its costs for basic service against similar
utilities and finds it is far less expensive, managers need to take their analysis to a second stage.
Are there problems with how these costs are calculated (e.g., water revenues cross-subsidize
is^vastewater trea^ipent costs) that account for the discrepancy? Other factors may also be relevant.
Is capital infrastructure older? Does your town have a better bond rating than the competitors (and
Jhus a lower cost of financing debt)? Some of these factors may be 'used to adjust the comparison
So that operating efficiencies can better be compared. Other factors may be used to describe why
performance is worse than expected, perhaps to justify improvements or upgrades to these, factors.18
; " WERg (Water Environment Research Foundation), Benchmarking Wastewater Treatment
Plants Operations: Interim Report, 1996, p 1-5.
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18 The WERF study has attempted to normalize benchmarking for these factors by
creating models for various portions of POTW operations. This approach can help identify how
portions of the operation within managerial control compare across utilities. It is important not
to rely solely on normalized comparisons, however, as inefficient operations whether due to
!*embedded" conditions such as the age of equipment or not, need to be improved over the longer
term. '' ' " ' . ' ' ""'' ' " " '"
2-22
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Exhibit 2-5
INTERRELATIONSHIP OF METRIC AND PROCESS BENCHMARKING
BENCHMARKING PROCESS
BENCHMARK
METRICS
I
BENCHMARK
PRACTICES
1;
BENCHMARK GAP
- HOW MUCH
WHERE
WHEN
HOW CLOSE TO THE GAP
IMPROVED KNOWLEDGE
- IMPROVED PRACTICES
- IMPROVED PROCESSES
'MANAGEMENT COMMITMENT
ORGANIZATIONAL COMMUNICATION
EMPLOYEE PARTICIPATION
SUPERIOR PERFORMANCE
Source: WERF, Benchmarking Wastewater Treatment Plant Operations, 1996.
The benchmarking process is often creative in what is used as a comparable: the central
goal is to identify who does the process/product of interest best, and how their approach be copied
and used to improve your own operations. Comparisons can be internal (across divisions or within
the same unit over time), with direct competitors (function or.entire organization), with the industry
functional leader (specific function against leaders in that function, even if not a direct competitor),
and finally based on a generic process (against process leader, even from a different industry).19
19
WERF, p. 2-6.
2-23
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Process mapping often pulls best practices for particular operations from a wide range of
other industries, some fairly far afield from their direct line of business. For example, a comparison
of billing operations might compare POTW billing to that used by major telephone companies or
package delivery services. Peak leveling efforts or management information systems would likely
use a cutting-edge electric utility, where demand-side management efforts and geographic
information systems have been established for longer than in the POTW arena. For other areas,
(Such as pretreatment benchmarking efforts would likely focus on cutting-edge POTWs, such as
recent EPA pretreatment award winners. Benchmarking is normally done as a continuous process
[in order to ensure that the POT% operations also contmuously im^
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Most POTWs undertake some form of benchmarking. For example, tracking trends .in
metals loadings over time is almost universally done. A study now underway by the Water
Environment Research Foundation explores the many additional uses of benchmarking within
POTWs and is an extremely good reference for utilities who plan to undertake an extensive
benchmarking exercise. Exhibits 2-6a - 2-6c below, developed .by WERF, illustrate a variety of
ineuics managers can use to track theur performance. These metrics include outcome measures,
efficiency measures, and effectiveness measures. Outcome measures focus for the most part on
how external agents evaluate POTW performance, such as through complaints or bond ratings.
Efficiency performance measures 'are cost ratios per unit of service provided, and help identify
higher cost parts of the POTW's operations. Finally, effectiveness performance measures include
nieasures of Ifbor input per unit output, or the technical effectiveness of existing plant and
equipment. The sheer number, of metrics identified by WERF focus groups illustrates the
importance of choosing the most important metrics for a particular utility.
'WERF, p. 2-4.
2-24
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Exhibit 2-6a: . ,
KEY OUTCOME PERFORMANCE MEASURES IDENnFTEI) BY FOCUS GROUP
Functional Area
Automation
Collection Systems
Customer Service
Biosolids Management
Finance, Administration, & Planning
Labor and Staffing '
Wet Operations
Outcome Measures
Degree of Automation
Effectiveness of automation
Number of collection system complaints
Number of claims per year
Number of overflows per year
Moratorium due to collection system
Time to repair collapse (in hours)
Percent of system inspected per year
Time per call
Abandonment rate
Average agent availability . ,
Average time to clear:
-complaint ,
- service call, etc.
New account cycle time
Walk-in average time to serve
Plan review/turnaround time
Time to billing adjustment "
Customer satisfaction (survey/focus group, etc )
Number of odor complaints
Number of citizen complaints (related to dry process)
Quality of biosolids (Class A or B) , *
Dry tons produced/strength factor
Permit violations
Redundancy in land applications
Forecasted life of biosolids arrangements
Residential flow per capita at plant (over time)
Audit exceptions and comments ~
Bond rating
Operating reserves
On time payments
Injury days lost per full time employee
Number of grievances processed
Number of exceedences
Number of complaints
Slumber of odor complaints
Total hours lost to injury
Source: WERF, Benchmarking Wastewater Treatment Plant Operations, 1996
2-25
-------
Exhibit 2-6b:
KEY EFFICIENCY PERFORMANCE MEASURES IDENTIFIED BY FOCUS GROUP
Functional Area
Automation
Collection Systems
Customer Service
Biosolids Management
%
Finance, Administration, & Planning
Labor and Staffing
Wet Operations
Efficiency Measures
Cost of automation projects (one time/annual)
Maintenance cost per mile
Maintenance cost per Mgal/day
Maintenance cost per kWh installed
Training expenditure ($) per agent
Customer service costs per day
Customer service costs per customer
Customer service costs per total overhead and
maintenance (O&M) cost
Dollars per dry ton
Dollars per ton mile
Chemical costs per dry ton
Power costs per dry ton
Maintenance costs per process
Fuel cost per dry ton (incineration)
Revenues from product sales
Gas utilization credit (dollars)
Overhead costs per total O&M costs
Labor cost per total O&M costs
Contract services O&M costs per total O&M costs
Debt service per total budget
Annual materials cost per inventory
Training cost per capita
Fleet costs per total O&M (by function)
Return on assets
Value of main replaced per total value of main
Value of capital additions/net asset value
Replacement value of plant (annual)
Overtime cost per total labor costs
Training costs' per employee
Total benefits costs per total labor (by type)
Cost per Mgal
Cost per lab analysis
Cost per customer account
Maintenance costs per Mgal
Overtime costs
Source: vyERF, Benchmarking Wastewater Treatment Plant Operations, 1996
2-26
-------
Exhibit 2-6c
KEY EFFECTIVENESS PERFORMANCE MEASURES roENTIFIED BY
FOCUSGROUP
Functional Area
Effectiveness Measure
Automation
Instrument per Mgal/day
Instrument engineers per Mgal/day
Number of operats per shift
Number of shifts per week
Number of operations automated
Number of administration operations automated
Number of information operations automated
Number of processes mat run automatically per total
number of processes
Collection systems
Full-time employees per mile
Full-time employees per MG
Level of infiltration/inflow (I/T)
Number of blockages per year per mile
Number of collapses per year per mile
Percentage of work orders completed in
days
Customer Service
Complaint calls per 1,000 customers
Percentage of calls that are repeats
Percentage of problems cleared in _ days
Percentage of billings collected in __. days,
Biosolids Management
Full-time employees cost per dry ton (each unit process)
Operations.cost '
Maintenance cost
Percent volatile suspended solids (VSS) reduction
(digestion)
Cubic feet gas per pound VSS (anaerobic digestion)
Percent moisture reduction (after dewatering)
Tons product sold per total tons solids
Percent planned per total maintenance
Equipment availability (breakout by .process)
Source: WERF, Benchmarking Wastewater Treatment Plant Operations, 1996
2-27
-------
Exhibit 2-6c
KEY EFFECTIVENESS PERFORMANCE MEASURES IDENTIFIED BY
FOCUS GROUP (continued)
Functional Area
Finance, Administration, & Planning
Labor and Staffing
Wet Operations
Effectiveness Measure
Budget to actual :
- Total expenses
- Capital improvement program (CDP)
expenditures
Major project costs per encumbered amounts
Forecasted per actual demand
Debt to equity ratio
Quick ratio
Coverage (debt service ratio)
Billable flow per actual flows at plant
Revenue distribution (fixed charge/variable)
Percent reuse as reclaim (growth over time)
Projected demand per projected capacity at end of
planning horizon
Ratio influent/capacity
Definable work rates (over time)
Number of operators per shift
Full time employees per Mgal/day (Permanent, part-
time, contract)
Number of labor classifications
Percent removal
Full-time employees per Mgal
Full-time employees per customer account
kWh/Mgal
Number of analyses per technician
Cubic feet of air treated per Mgal
Connected HP/gal
Source: WERF, Benchmarking Wastewater Treatment Plant Operations, 1996
2-28
i Hi,'ill i in Bllr IMIiil1 in,!
-------
3. TOPICAL DISCUSSIONS OF COMMON PROBLEM AREAS
This Chapter discusses a number of areas of common concern for POTWs, though it is not
intended to be, an exhaustive listing. In addition, not every issue will apply to every plant.
Nonetheless, .we hope that these examples provide useful illustrations of the value of cost
accounting and budgeting tools in achieving tangible gains inprogram performance.
The underlying theme for both budgeting and cost accounting modifications is getting the
price signals right. Cost accounting essentially creates price signals yvitfyfn the organization that
help managers rationalize then- use of scarce resources. Budgeting organizes this information to set
constraints on the resources available to these managers and groundrules on how the resources can
be used. Often, this internal pricing information supports changes to external prices (through rate
changes), sending the proper price signals to customers of the POTW. '
Given the importance of this signaling hi modifying behavior to conserve resources and
better protect the environment, it.is important to briefly mention a couple of general steps the
POTW can take to improve the impact of price signals:
Timing and Frequency of Measurement Many discharge fees are based
on periodic measurements of influent andAffluent. The Clean Water Act
sets statutory minimums for the type and frequency of testing. However,
these minimums are unlikely to be frequent enough to. (1) rapidly track,
changes in effluent characteristics; and (2) create certainty that all of these
changes will lead to adjustments in the surcharge levels. Thus, more
frequent measurement can be .expected to provide better signaling to
dischargers about what part of then- operations is most important to
address quickly.1
- Frequency of Billing. As with the frequency of measurement, if
customers receive large bills infrequently (e.g., quarterly or annually), they
are unable to react quickly to changes in rates and unable to associate
specific behavior with increases in their discharge levels. This situation
, . also applies in communities that commingle wastewater charges with then-
overall property taxes. All of these circumstances tend to reduce
discharger responsiveness to price signals.
1 One POTW with large industrial user flows allocated much of the plant's fixed capital
based on the strength of contributed wastewater. Since the'financial implications of this
measurement were so substantial, the lUs tested their wastewater strength on a daily basis.
3-1
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Cross-Subsidies In General
As notfd above, poor cost accounting matters because it sends both managers and
customers the wrong signals about the financial impact of decisions. These signals can lead the
POTW to invest in the wrong parts of its treatment system and for dischargers to underinvest in
pretreatment or conservation. Normally, POTW rates are set to recover the cost of providing
WWT services. Thus, in the aggregate, revenues may equal expenditures. However, quite often
certain customers, types of customers, or geographic regions are paying too little, while others
are making up the difference by paying too much. The existing discharge fees therefore include
^{p-oss^sub/sidiej^ Exhibit 3-1 below presents a range of possible cross-subsidies within POTWs
that we visited. Important issues to consider when evaluating cross-subsidies include:
4: i : ,,!, .' ! i>4 " ' ; .. "';,' ,1,;' ,'. 'i.'1.', '; ', ;.' ':' ;';-'' t,'"«" ' -, :" '.' ,'..,.,. '; ; '! i '>:;::,,.'.".'
Magnitude. If the price signals aren't perfect, but are fairly close, the cost
;j|ll" , : ''.''I,'Iii,! IJ. " '" '..i .Ml' '""',, . ,,l.?"^ i ' ,1 , i',!,' I , i ( i| , . , ' 'i I ', , >. i, . " , i,, ,
and disruption associated with eliniinating them may not be worth the
gains. Magnitude should be evaluated in an absolute sense, however. For
example, if every residential and commercial customer is paying only 2
percent moire each month to subsidize the oversight of industrial
dischargers, this may not seem significant. However, since there are so
fiiahy customers, this 2 percent could constitute a 50 or 100 percent
subsidy to particular lUs, which would likely have a substantial impact on
the level of pretreatment investment. . .
Distortions, How important are the distortions created by the existing
cross-subsidie^jin impedmg strategic goals of the POTW? For example, if
water is scarce in your region but you can't reuse your effluent for
irrigation due to discharges of one or two constituents by a handful of
Industries, the resulting distortions are likely large both financially and
environmentally. In contrast, if rates to one IU are slightly higher than
they otherwise would be, but wastewater fees are an insignificant cost of
business for that discharger, large investments by the POTW to correct the
problem are clearly unwarranted.
Impact Correcting cross-subsidies will change the cost of wastewater
treatment to dischargers, encouraging them to modify behaviors that cause
the POTW to incur the highest costs. The impact of these changes can
ffiduce or delay the need to expand expensive capital infrastructure.
However, for POTWs that have already built capacity large enough to
handle discharges under the distorted pricing, eliminating cross-subsidies
will not be quite as "efficacious. The capital costs must still be paid
whether or not the capital is being used by dischargers. Thus, cross-
subsidies are most important to eliminate when capacity is constrained.
' ., , . . % i ,' «. ' .. , , '., , ;' .«', .. ', ",'",, nilfT V , , , . , , ( , ', ., .,,, ,!i;i
System Boundaries. The boundaries of analysis can affect which cross-
subsidies appear the largest and most in need of correction. For example,
a cost accounting analysis of POTW dischargers may illustrate that lUs are
3-2
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-------
Exhibit 3-1
POSSIBLE CROSS-SUBSIDIES IN POTW PRICING AND RESULTING DISTORTIONS
Cross-Subsidies
Explanation
Resulting Distortion^)
Among Industrial Users
Costs of pre-treatment may be
allocated equally across Ills, rather
than based on which specific firms
create costs for the POTW.
-Industries discharging effluent that is most
costly for the POTW to handle will pay less than
they should and underinvest in pretreatment.
-Relatively clean lUs.will pay more^ serving as a
barrier to new industries locating in the region.
Among different parts of the POTW
service area
Fees for service may be equalized
for all dischargers (industrial,
commercial, and residential) within
the Sewerage District, despite large
differences in the cost of providing
this service. Examples include
multi-plant systems where one
treatment plant is at capacity and
others are not; or collection areas
with particularly high pumping
costs.
-New dischargers will not receive price signals
to locate in the less expensive portion of the
service area. -
-POTW managers will not see which parts of
their systems are most costly to run and factor
that into future expansion decisions. For
example, peripheral areas may be better served
through decentralized modular WWT rather than
collection system expansion.
Among lUs and other wastewater
treatment (WWT) customers
Charges on industrial users may be
too low to cover (a) the costs of
permitting and overseeing them;
and (b) the cost impacts they have
on the system.
-Industries don't receive the proper price signals
about how their discharges affect the treatment
system and will underinvest in conservation and
pretreatment.
Between different municipalities
-Agreements with surrounding
municipalities may not allow
POTW to set fees at levels that
adequately cover the cost impacts
of the. imported discharge.
-Customers in the periphery of a
service area may be charged more
because they are in a different
political jurisdiction] This
surcharge may have nothing to do
with the cost of service.
-Dischargers in the surrounding area will
underinvest in conservation and/or pretreatment.
-Dischargers in the periphery may be hesitant to
hook into the central system even if it is
economically efficient. Dischargers in the center
may receive artificially low rates and
underinvest in conservation and/or pretreatment.
Between water consumers and waste
water treatment customers
Integrated water and wastewater
utilities, sometimes subsidize new
WWT expansion or construction
with surplus revenues from water
sales.
-Dischargers may underinvest in conservation
and/or pretreatment. :
-POTW may be under less pressure to improve
the efficiency of their operations.
Between the general taxpayer and
the industrial users; between the
general taxpayer and WWT
The POTW may receive general
taxpayer support (e.g., state or
federal grants, general taxpayer
funds) to finance WWT or
pretreatment. Construction grants
or subsidized revolving fund loans
for plants with a high ratio of IU
flow to total flow essentially
subsidize industrial WWT.
-Dischargers may underinvest in conservation
and/or pretreatment.
-Polluting industries, through reduced WWT
costs, improve their relative competitive position
vis-a-vis industries that pollute less.
Between agricultural consumers of
fresh water and WWT
In water scarce regions, federal
policies often subsidize the
extraction and delivery of fresh
water to agriculture. As a result,
treated effluent from POTWs
becomes less competitive.
-Effluent management is more expensive.
-Market incentive for farms to seek out and
exploit treated effluent is weakened or
destroyed. ;
-Efficiency of water utilization in the region
declines.
3-3
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moderately subsidized through higher charges on residential and
commercial dischargers. However, if a watershed perspective were used,
it may become evident that the largest cross-subsidies are actually going to
industrial direct dischargers. Managers should keep this boundary issue in
mind as they consider where to focus their resources.
Below we have classified the types of situations where distortions in costing are particularly
likely. Included are differences in the cost of treating discharges or dischargers, difficulties
associated with peak discharges and system expansions, and problems from rigidities inherent in
political agreements between municipalities such as interjurisdictional agreements.
/.I.., : ' ,, ;l :;;;!! .y - ,,', /. '.' !li ' . ; ,' / ,.'. ' . . ,' ''.:.', - ;: '\: \ '.'.' , , ' ' n
Specific Types of Discharges May Force POTW to Incur Higher Costs
i i ':, '" -' ,!i i ' ,i!' ' ' : ' ", ': '':," ,:",'.",', "' ». .'"; !,' ,. "1M ' '" " " : , , ' , , ' '» ' f'M'1
Where specific types of discharges contaminate either the plant's collection system or its
residuals, treatment costs can rise substantially. The incremental management costs should be
tracked and allocated back to the source that is driving the cost increases. Biosolids management,
effluent reuse, and oil and grease discharges provide three useful illustrations of this point.
Biosolids Management
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Solid residuals (biosolids) from wastewater treatment can be managed in a number of
different ways ranging from beneficial reuse as soil amendments to incineration and landfilling of
ash. The cost implications of these practices differ widely. Since biosolids management comprises
between 25 and 30% of WWT operating costs,2 contaminants that force higher-cost management of
the material can.have large dollar impacts on me cost of running a POTW.
EPA sludge regulations stipulate the maximum allowable concentration of numerous
contaminants (metals, pathogens) in biosolids that are land applied. Restrictions on contamination
levels are even more stringent to meet EPA's highest grade ranking, and may be higher still to meet
the demands of particular customers willing to accept the residuals. As soon as contamination
levels in any one area exceed the allowable threshold, the POTW must dispose of the biosolids as a
lower grade product, or, in some cases, pay to incinerate it or dispose of it in a permitted landfill.
Consider the example at Massachusetts' Water Resources Authority (MWRA). The facility
invested in a sophisticated sludge pelletization facility that normally produces a product sold as
fertilizer. Yet, during the summer months molybdenum (Mo) from air conditioning cooling towers
drives Mo concentratipns high enough that the pellets cannot be distributed in the state, preventing
the POTW from utilizing its biosolids in an optimal manner. POTW management can rectify this
constraint by increasing the amount of biosolids over which the same amount of Mo is distributed
(not a real option) or by reducing the amount of Mo that remains in the residuals through source
reduction.
2 "Biosolids: A Business by Any Other Name Would Smell as Sweet," Environmental
Business Journal, February/March 1996, p. 9.
3-4
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Exhibit 3-2
BIOSOLIDS MANAGEMENT
Common Practice
Improved Cost Accounting/Budgeting
Cost Accounting
-Costs of biosolids management recovered through
general user fees on all dischargers.
-Where biosolids quality is poor, more expensive
management options are pursued. -Cost of these are
spread among all dischargers. Voluntary reduction plans
or new local limits are implemented to bring contaminant
levels down.
rCost for highest, quality sludge allocated to all dischargers
based on quantities discharged.
-Incremental costs associated with poor sludge quality
allocated to dischargers of constituents) for which the
biosolids don't meet the highest standards.
-If POTW unable to allocate full charges to these
dischargers, they can evaluate outreach or financing
pretreatment upgrades that reduce overall WWTP costs.
Budgeting , "
-Biosolids management costs, are listed as a line item.
-Residuals testing costs may be listed under general
laboratory costs.
-All related biosolids costs would be grouped together.
Proper cost accounting should allocate the entire extra cost of biosolids management to the
activity that created that cost: Mo dischargers. Mo emissions are but one example; other POTWs
may have exceedances in a variety of metals. These emissions can often be linked to specific
industrial users, or to lUs as a group. For example, one plant on the East Coast, receives a very high
proportion of its flow from industries. The level of contaminants in this flow is such that they need
to incinerate biosolids prior to disposal to destroy any remaining organics. The full extra cost of the
treatment is properly borne by the IUs rather than spread among all customers.3
What POTW managers choose to do with this information is up to them; the cost
accounting system merely tells them how much a particular occurrence costs them. Traditionally,
exceedences were met with regulatory reductions in allowable discharge levels. Many alternative
options are available:
The POTW could increase discharge fees for the constituents of concern,
encouraging dischargers to implement better controls. This could be .done
- through direct fees, or through some typeof effluent trading system.
. If thejcosts to the system from particular discharges are extremely high,
but delays associated with modifying permits or increasing discharge fees
too long, the POTW might actually find it economic to pay to install
3 This statement assumes that land application is less expensive than incineration. For
POTWs that already have incineration equipment, the variable costs of burning biosolids could
well be less than the total costs of land application ~ at least until the burner needs to be
replaced.
3-5
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treatment equipment on the sites of large dischargers. This approach is
analogous to demand-side management programs used for years by
electric utilities.
If the costs of controlling the discharge are extremely large in comparison
to the cost of incinerating rather than land applying biosolids, the POTW
may decide that its current practice makes the most sense economically
(though not necessarily environmentally).
Effluent Reuse
The issues related to effluent reuse are quite similar to those associated with biosolids. A
weU-functioning POTW will generally produce an effluent that is of sufficient quality that it can be
reused for some beneficial purposes. However, contaminants in effluent such as metals, salt, or
microbes, may prevent reuse of effluent for irrigation. Where are these contaminants coming
from? A detailed study of sources of salinity in Escondidp, CA found that water softening plants
Were among the largest sources of salinity in the discharge area. The salts introduced by these
plants were increasing the salinity of effluent to the point that the water was unattractive to farmers.
Exhibit 3-3
EFFLUENT REUSE
Common Practice
Cost Accounting
-Effluent is often discharged in compliance with NPDES
permit and forgotten about
-Foregone opportunities to resell the effluent not
evaluated.
$ttd£fttifl£
-Effluent testing (e.g., Whole Effluent Toxiciry) is often
grouped under the laboratory costs.
-Revenues from effluent resale go into general fund.
Improved Cost Accounting/Budgeting
-In water scarce regions, the cost of managing clean
effluent is allocated among all customers based on volume
of discharge.
-Lost cost savings from reselling the treated water to
farmers or other bulk users is allocated directly to the
dischargers responsible for discharging the constituents
that make the water unattractive to these alternative
outlets.
-If interest in reusing the treated effluent is low, POTW
needs to evaluate whether existing subsidies to clean
water (e.g., due to federal water projects) is artificially
depressing the value of reclaimed water for non-potable
uses.
-All costs associated with monitoring and marketing
effluent should be grouped under an effluent management
category.
-Revenues from effluent sales should be credited to
effluent management
Escondidp is a useful illustration because the plant is located in a water-scarce region of the
country (near San Diego, CA), where demand for fresh water is extremely high. Logic suggests
that there would be many users interested in the region's effluent, especially for non-potable but
"" i
3-6
-------
higher value uses such as irrigation (see Exhibit 3-4). Yet this is not the case. The quality of
Escondido's effluent is not yet high enough for agricultural usage, due to the discharge of
constituents such as total salts, chloride, boron, nitrogen, bicarbonate, manganese, and fluoride.4
Boron and chloride are of particular concern to avocado growers, a large potential irrigation
customer.5 These discharges are predominantly from industrial and municipal dischargers; the rates
charged to these dischargers do not reflect the lost opportunity to resell the water.
Exhibit 3-4
EFFLUENT REUSE OPTIONS
Higher ^
Quality
Lower
Quality
Potable Uses
Irrigation
Recharge Surface or Groundwater
Artificial Wetlands
Saline Buffer Flows
Ocean Discharge
Geothermal Field Recharge
Despite these contaminants, side agreements'between farmers and dischargers would likely
work to reduce the loadings of these constituents if the reclaimed water were sufficiently valuable.
Despite widespread shortages, Escondido's effluent is not sufficiently valuable to farmers to induce
these types of arrangements. This is an arena where price distortions within the POTW combine
with price distortions outside to encourage wasteful use of natural resources.
Reclaimed water is most applicable for re-use in irrigation. Yet, it must compete with
irrigation flows from other sources. In most of the southwestern United States, this water comes
through heavily subsidized federal irrigation projects. Many of the federal water projects do not
charge irrigation users the interest on the debts incurred to. construct the facilities. Many do not
even recover the full costs before interest.6 Historically, irrigators have repaid only about 47
HYA Consulting Engineers, City of Escondido Brine Management Feasibility Study,
August 1995. Prepared for the San Diego County Water Authority, pp.3-5.
5 Ibid., p. 3-5. . '
6 U.S. General Accounting Office, Water Transfers: More Efficient Water Use Possible,
If Problems are Addressed, May 1994, p. 23.
3-7
-------
percent of the total costs allocated to them.7 This percentage would be much lower if interest were
'^&pbunded on the capital costs of water projects (which the farmers do not have to pay), as is
normally done with capital investments.
Thus, farmers have received water rights well below the cost of delivering that water. If the
farmers could then turn ,. around, and sell their water rights to other users, they would receive a
, windfall, but water would be priced efficiently. However, historically, farmers have not been able
to sell their water rights in federal projects to other users, and thus faced a cost of using it on their
1 crops far below what others were willing to pay for those rights. With artificially cheap fresh water
to use on their farms, farmers have little incentive to invest in creative strategies to reuse treated
sewage. With artificially low discharge fees, the dischargers of the cbnstitttents' of concern face
little incentive to reduce their discharges. '
. . . . . .
Fats, Oil And Grease (FOG) Discharges And System Maintenance Costs
I i. : . , ..... > ...... '' . ;. '.,'. ; ..... , '. ...... !| ..... , ; ;r :,/. ''',',:. . " ; -, ; ..' , , .':(, ]'
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FOG discharges affect the ^collection system by clogging up pipes and pumping stations.
Sources include restaurants, auto shops,, and food processing plants. As with biosolids and effluent
quality, discharges from a subset of system users can create large costs for the POTW. Unless these
costs are measured, utility staff may not invest the adequate resources to deal with the problem. For
example, one POTW in the Washington, DC area had numerous restaurants as KJs. Despite efforts
by the pretreatment program to control FOG discharges, main pumping stations required expensive
degreasing on a regular basis. »
No tracking of how much materials, labor, and downtime associated with these clogs cost
|he POTW per year was done. In fact, the pretreatment coordinator expressed frustration that the
maintenance staff assumed the work was costless, since they were salaried employees. This
pabiBty to recognize the opportunity cost of time is often at the root of poor allocation decisions
within a POTW, While the maintenance staff were salaried, and thus did have to be at work
anyway, they could have been usefully employed on other tasks.
Once the cost is recognized, POTW staff can determine the most effective follow-up
strategy. In many cases, allocating the full cost of dealing with a problem such as oil and grease
clogs back to the contributory restaurant provides an extremely effective deterrent to improper
managSmeni liti the case of mis particular POTW, however, political pressures made it difficult to
pass any substantial charges back onto restaurants due to a strong local restaurant lobby. However,
I^P^iy ac^unting for the costs might have shown POTW managers that more outreach and
education in this area was likely to pay off.
7 U.S. General Accounting Office, Bureau of Reclamation: Information on Allocation
and Repayment of Costs of Constructing Water Projects, July 1996.
3-8
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For example, the POTW could have educated the restaurants about the growth in biodiesel,
a blend of diesel and bio-derived diesel originating, in part from waste cooking oil.8 Biodiesel
blends, in conjunction with a catalytic converter, can reduce emissions of existing diesel vehicles so
they meet CAA standards and reduce air pollution in non-attainment zones.9 This growing outlet
for FOG creates a lower cost disposal option than previously existed, potentially reducing illegal
discharges.
Exhibit 3-5
MANAGEMENT OF FATS, OIL, AND GREASE
Common Practice
Improved Cost Accounting/Budgeting
Cost Accounting
-FOG dischargers are forbidden from discharging these
constituents to the collection system.
-They pay a permit fee which may or may not reflect the
full cost to permit and oversee them.
-They may or may not be charged substantial penalties for
failure to empty their grease traps or when they clog a
collection pipe. When costs are charged back, they often
exclude indirect costs^ such as staff time, travel costs, etc.
-Permit fees should cover the full cost of permitting FOG
dischargers and the full posts of any uncovered FOG-
related cleaning of the collection system.
-Full costs of addressing clogs should be charged back to
the firm causing -the problem.
-If unrecoverable FOG costs are large, POTW should
increase outreach to explain new options for FOG
management
Budgeting
-Cost associated with oil and grease are often lumped
under the general collection system line item. Permitting
for oil and grease is often in the pretreatment line item.
-A. line item for the entire FOG management program
should be included in the budget, and contain all costs
related to permitting, outreach, and FOG-related
maintenance.
-Any costs related to system downtime during a grease
clog should also be charged to the FOG program.
Specific Types of Customers May Cost More to Service than Others
, Not all customers are created equal. POTWs need to recognize differences in the demands
that these different types of customers put on their staff and on then- system. This is generally done
to some degree by all POTWs. For example, monthly service fees are higher for larger sewer
mains, and surcharges are usually levied on high strength wastewater. However, there are many
other ways that the costs associated with particular customers are not reflected in rates. When
POTWs do not recognize all of the important differences across customer classes, their fee
structures will contain a variety of behavior-distorting cross-subsidies. It is common that
8 Waste oil fractions of bio-derived fraction are currently about 50 percent, with the other
-half from virgin soybeans.
9 U.S. Department of Energy, Biofuels Update, Winter 1997, p. 3; Fall 1996, p.l.
' 3-9
-------
>!'
residential usgrs end up subsidizing industrial dischargers.10 Since it is the industries that generally
discharge most of the difficult or impossible to treat contaminants (e.g., metals), cross-subsidies
often end up subsidizing polluters, violating the polluter pays principle.
Pennatting Costs
At least every five years, each industrial discharger must receive a new discharge permit.
T^ cost to provide this permit can vary widely. Small, standardized industries, such as one-hour
photo shops, have the same processes and the same issues in every shop. In addition, the emissions
from any single facility are unlikely to be large enough to cause operational or compliance
problems for the treatment plant. Permits can be standardized, and site visits are not always
needed, MWRA, for example, has adopted a group permit for all small photo shops and printers,
that applies automatically. This "group permit" approach saves substantial staff time.
Exhibit 3-6
PERMITTING COSTS
Common Practice
Improved Cost Accounting/Budgeting
Cost Accounting-
-Permit fees cover a portion of total permitting costs.
-Where fees do cover the full cost of the program, the fees
for any specific permittee may be substantially different
from the time required to permit them.
-Residential and commercial customers should not cross-
subsidize lUs.
-IU permit fees should be grouped by class of facility,
should include administrative support costs (such as
computer systems).
-Labor costs, including those to write the permit and those
required for inspecting the plant, should be charged
directly to the customer. Thus, complex firms would pay
higher permit fees.
Budgeting
-Permitting costs are often lumped into the general
pretreatment budget, if pretreatment has its own budget
section at all.
-Permitting, regular inspections, and enforcement
inspections are sometimes lumped together, or simply
included in the overall labor line item.
-Permitting, regular inspections, and enforcement
inspections should all be separate line items in the
pretreatment budget.
rn contrast, consider a large automotive manufacturer. This manufacturer will have
multiple processes, and sometimes multiple discharge points. The impact of this plant's discharges
on the POTW system can be substantial, but there are no other similar plants in the service area. It
is obvious that developing a permit for this type of company will require far more time for staff,
inspectors, and administrators than the small, simple plant. A cost accounting system that properly
measures how staff time is used and the costs associated with various steps of the permitting
''.''$[' , '.'...'^v.': '*.' :'..'': ,:',.:/' ' ' " ., :'! ''?> :i: - " 'ii!0 !'v- ' '"'' " , - : ;.',' . "''>: ' ';i'::f1f:B
n. ''"'Hi i ,n ,i . ' " ,'",!'" ,, ', ! Ill:
10 In terns of'total charges, residential users often subsidize industrial users. In some
cases, as noted below, the fixed service charges on residential customers are subsidized as well.
3-10
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process, can give POTW managers a much better feel for the incremental cost of this type of
discharger. This information can then be used to justify charging such a firm for these permitting
costs, reducing the burden on residential customers and small businesses.
Serving Industrial, Commercial, and Residential Customers
Providing metering and billing services, and operating and maintaining lateral collection
lines, are fairly fixed costs. For larger customers, meters might be a bit more expensive, and the
collection lines might be larger. However, many of these basic service costs are the same whether
one discharges five gallons of water per month or fifty thousand. In their basic rates, many POTWs
have tried to recognize this fact by charging fixed monthly service fees. A more sophisticated cost
accounting system will allow the utility to understand these differential rates more clearly, perhaps
refining their charges. Cross-subsidies with basic service tend to undercharge small residential
; customers. This, practice is dictated by a desire to make at least basic wastewater treatment service
available to all homes. By targeting universal service based on consumption rather than income,
this approach also unnecessarily subsidizes small residential customers who have more than
adequate income to pay the full charge.
Residential customers, however, require very little in the form of additional services from
POTW staff than hookups, metering, and billing. In contrast, industrial customers require an entire
pretreatment program. Aside from permitting costs already mentioned, a pretreatment program
expends substantial resources to inspect, enforce against, and educate industrial users. In providing
these functions, the POTW incurs substantial support costs related to litigation, information
management, and laboratory testing. Many plants track only very basic pretreatment costs such as
direct pretreatment staff. The substantial costs associated with the infrastructure that is used to
support the pretreatment program (e.g., staff training, legal, space rental, even sometimes laboratory
fees) are often lumped in the general overhead of the POTW rather than allocated back to specific
industrial dischargers.
The result can be a complicated mix of cross-subsidies among customer classes. In some
cases, the costs of running the pretreatment program exceed collections from industries from
permitting fees, other fees, and surcharges on discharge. In other cases, while industrial users
overall do cover the costs of pretreatment in total, payments by specific industries bear little
relationship to the costs they place on the POTW infrastructure. Subsidies tend to flow to large,
complex industries (who are charged the same flat rate as smaller firms) and to small categorical,
industries (who require substantial regulatory oversight but are too small to afford a large user fee).
Insights on Regulatory Efficiency
Cost accounting systems can help the POTW evaluate the efficiency of regulatory
requirements and the efficiency of its own implementation of pretreatment requirements. Consider
the following two examples: '
3-11
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Small Categorical Industries. Small categorical industries provide an
instructive example for evaluating environmental cost/benefit tradeoffs.
EPA currently requires that all categorical industries be permitted and
monitored, simply because of the industrial processes they use. In some
cases, however, the firms are so small relative to the POTW's flow that
their operations are irrelevant to wastewater quality in the region. Yet the
Staff time required to permit and inspect these firms can be substantial. In
this situation, allocating these costs directly to the small firm may be
unworkable, as the charges would be excessive. However, tracking the
costs can help the POTW illustrate the relatively poor cost/benefit trade-
off associated with {he current regulatory regime for small CIUs, and
provide useful input to EPA's current streamlining effort that may change
Some of these requirements.
Cost of Pretreatment Program. A well respected POTW on the west
coast wanted to better allocate the cost qf its pretreatment program to the
industriai dischargers. It undertook a fairly extensive effort to assess the
1 differential workload to implement its pretreatment program for different
classes of customer,s (e,g., large industrial dischargers, small industrial
dischargers). Included was time spent on permitting, sampling,
inspections, report reviews, enforcement activities, laboratory analysis,
and administration. The resulting numbers showed increases in allocated
fees for most industries of between 27 and over 1Q?000 percent. The upper
eld of this range was for categorical industries with extremely low flow.
However, even relatively large firms would have received substantial rate
"increases. Faced with these figures, the POTW decided to retain a
substantial portion of the cross-subsidy between residential/commercial
i " cu,?tPmers and lUs, increasing IU charges only slightly. Managers did not
seem to consider the extremely high fixed costs of the program per
discharger as an indication that (1) some of the regulatory requirements
were inefficient; or (2) that their implementation of the requirements could
be streamlined. Retaining the cross-subsidy removed the financial
pressure to address these other factors.
Improving Charge Backs for Cost of Service
Even if industrial users do pay the entire cost of the pretreatment program, there may be
distortions 'within this group of users. This occurs because the oversight requirements can vary
widely across different industries due to the size, type, or complexity of a particular plant.
Improving the tracking and charge backs for these types of services can greatly reduce cross-
subsidies. Below, we present a number of activities that could benefit from this approach.
I1" -. . 1 nil - " " "" , ' ,' :, ' ' ''' ,-' ' ";i ", .' if".1";1' ' , '' ' ,' . ff . ,.
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3-12
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Sampling and Laboratory Support
Federal law requires sampling IU discharges a minimum number of times per year. These
samples must then be analyzed. Many POTWs add up their laboratory fees, divide by the number
of lUs, and recover these costs in fees. This approach is relatively simple, but does not accurately
reflect the costs to the POTW associated with sampling and testing. First of all, not all procedures
are the same complexity (or cost). For example, testing for pH is straightforward and inexpensive;
certain metals analyses are not. Tracking costs more carefully provides important information to
thePOTW: ,
Are there certain analytical tests«that we do too few of to justify the capital
equipment needed to do them and should be outsourced? This decision
must be viewed not only in terms of dollar savings, but in terms of how
the speed and quality of results on outsourced testing compares to doing it
in-house and affects the POTWs basic mission^ Many POTWs have
reduced costs substantially by sending some specialized analyses to
outside labs, or by increasing their analytical volume by accepting
samples from other municipal agencies (in-sourcing).
Are there certain lUs that create a substantial cost burden on us because of
the types of materials they discharge? Are there ways to help them
substitute less-problematic materials or switch to zero discharge?
ExhibitS-7
SAMPLING AND LABORATORY FEES
Common Practice
Improved Cost Accounting/Budgeting
Cost Accounting
-Lab and sampling fees absorbed by utility; or
-Lab and sampling fees divided evenly among lUs.
-Costs of actual sampling and analytics required .tracked
and charged back to specific lUs.
-Costs include labor of sampling or lab technician.
-Costs include overhead related to equipment used:
depreciation, rent on laboratory space, etc.
Budgeting '
-Laboratory budget listed as a separate line item.
- Sampling costs hidden in overall pretreattnent budget.
-Laboratory costs related to pretreatment shown as a line
item in the pretreatment budget; laboratory costs
associated with other activities grouped with those
activities. .
-Sampling .costs listed as a separate line item under
pretreatment and enforcement, depending on reason 'for
taking samples.
Because lUs often serid their own samples to private labs for analysis, they will be familiar
with the prevailing charges for particular types of analytical work. This makes benchmarking
laboratory performance both easy to do and quite important. If full costing of laboratory tests
inside the POTW suggests the tests are substantially more expensive than external ones, POTW
3-13
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managers will need to proceed cautiously in terms of what they charge ILJs. They should also
identify the reason(s) that internal services are more expensive and use this information to guide
jheir next steps. ,
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Enforcement Activities
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As soon as a violation is suspected, pretreatment activity for a specific IU tends to increase.
tion. visitsare likely to rise, including some surreptitious sampling. The number of samples
being taken and analyzed will also rise. If litigation begins, legal costs for the POTW will also
increase substantially. The polluter pays principle suggests that all of these costs should be.passed
on to the violator. Where a violation is suspected, but not found, enforcement costs should be
J?owe by the pretreatment program overall, but not charged to the specific facility.
Exhibit 3-8
ENFORCEMENT ACTIVITIES
Common Practice
Cost Accounting'
-Increased inspection costs absorbed in general
pretreatment program costs.
-Increased laboratory analysis often included in general
laboratory spending rather than charged to the IU.
Budgeting
-Costs for inspection, laboratory analysis, and litigation
are generally spread into three functional areas
(pretreatment, laboratory, and legal). This makes it
difficult to track spending per case, an important figure
when setting penalties.
Improved Cost Accounting/Budgeting
-A cost object should be set up for each IU under
enforcement suspicion, with all related work (inspection,
sampling, litigation) tracked and recovered from the IU.
-If a suspected violation turns put not to be real, costs
should be borne by all lUs in general.
-Managers should have the ability to track spending by
case. An enforcement line item that contains all
supporting sub-activities might be a way to accomplish
this.
Costing Wastewater Treatment Separatgly from Water Delivery
Across the country, many districts are served by integrated utilities that provide both water
wastewater services. Integration of the services can offer efficiencies, such as coordinated
- However, many integrated utilities do not make a clear distinction between the costs of the
water and those of the wastewater system. As a result, the fees set by the utility may send the
SEFPng si?133!8to, custon161^- If water is underpriced, customers may not adequately conserve water.
?wastewater isHnderPriced' l^S6 dischargers will have a reduced incentive to improve their in-
plant reuse of water.
3-14,
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Exhibit3-9
WASTEWATER TREATMENT AND WATER TREATMENT/DELIVERY
Common Practice
Cost Accounting .
-Functional services provided to both water and
wastewater customers are not tracked separately.
Examples include administration, laboratory, and
information systems.
Budgeting
-Wastewater and Water services are generally broken out
in budgets. However, each of these budget areas will
often exclude costs associated with support functions. As
a result, there may be substantial overhead costs that have
not been linked to either business service provided.
Improved Cost Accounting/Budgeting
-Activity drivers are used to allocate all joint costs to
respective services provided, *
-Costs are then further allocated to specific lUs based
demand for those services whenever possible.
the
on
-Budget breakouts for wastewater and water should
include administrative support services.
Discharger Location and Multi-Plant Systems
Discharger location within a treatment plant service area can affect the cost of treatment in
three main ways. First, the distance from treatment may generate higher unit costs for collection
systems (more miles of pipe travelled) and may require additional pumping. Second, a large
system, especially those with multiple treatment plants, may have a mix of newer and older assets
that have very different technical constraints and cost structures in different parts of their districts.
Large differences are common in industry. For example, the cost difference between the best and
worst performing plant within a single firm can vary by a ratio of three to one. Even once technical
parameters such as plant age, technology, and location are controlled for, this variation can still be
as high as two to one, indicating the importance of good management in plant efficiency.11 Finally,
since a substantial portion of the cost of wastewater collection and treatment is fixed, differences in
capacity utilization can have large impacts on unit costs.
Understanding and tracking this variation is important in rationalizing .existing capacity.
Where capacity is tight, differential wastewater fees can encourage new development to occur in a
lower-utilized portion of the system.12 These fees can also encourage discharges to conserve the
scarce resources, allowing the infrastructure to last longer. Where a utility wishes to have uniform
rates across the service district despite substantial variations hi the cost of service, improved cost
accounting can enable POTW staff to better target their pretreatment or conservation resources.
11 Chew, W. Bruce, Timothy Bresnahan,' and Kim Clark. "Measurement, Coordination, and
Learning hi a Multiplant Network," in Robert Kaplan, editor, Measures for Manufacturing
Excellence, (Boston: Harvard Business School Press, 1990), p 129.
12 Obviously, water treatment fees are but one of many variables evaluated by a company
when deciding where to locate a plant.
3-15
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_; The ^information, can be usedby managers to plan infrastructure improvements, as well. For
example, one Virginia POTW linked its plants together, enabling them to average demand across
the networjc by diverting streams whenever necessary.13
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Exhibit 3-10
DISTANCE FROM PLANT/MULTI-PLANT SYSTEMS
Common Practice
Improved Cost Accounting/Budgeting
Cost Accounting
-Discharger fees often based on the average cost of
servicing all zones. POTW management may not have a
good handle of differential costs of service due to asset
type, distance from treatment, or utilization levels.
-Although many districts have higher fees for EJs outside
of the city, these rates often have more to do with political
power than with differential costs of service.
-POTW should track differential costs of service based on
distance or zone of the district to use either in rates or in
planning
-Cost surcharges for differential service costs (such as
collection and pumping) may be in order.
Budgeting
-While some POTWs have separate budget information
for different treatment plants, even these may not include
the associated overhead costs.
-Often, infrastructure costs are lumped together.
-Budget line items for specific assets to support peripheral
service may be helpful.
-Budget line items for specific key assets with very
different costs may be helpful. ,
Capacity Limits to Existing Plant Mav Drive Up System Costs
Wastewater treatment system are complex processes with numerous constraints. For
example, collection systems can be too small to allow a district to utilize its entire treatment
capacity. Treatment capacity may be too small to handle the current flow. In both of these cases,
me utility can invest in expansions to solve the problem. Alternatively, cost accounting can give
program managers information on which dischargers are utilizing the largest portions of the
constrained item so they work with these dischargers to reduce their loadings. This is analogous to
demand side management programs in electric utilities, and may be substantially less expensive
than expanding supply.
'" " ' ' " " Sii'"' ' "' ' ' " ' " "" »°~ ' ,i " ' ' ' ' '' ' ' |l!|11 ' '' '' "''; ' ' i ' "
1 Physical flow constraints are but one of many possible parameters that may limit system
Capacity. For example:
Very high strength wastes may require longer residence times than
' l^iR^ar^ .discharges. Since throughput is equal to technical capacity
ifiultiplied by average residence time, longer residence tune can use up
plant capacity in the same way that large flow can.
..;" This mcreased flexibility comes at a cost, however. The cost of the flow diversion
t ^cture is similar to capacity expansions to handle peak flows, and should be allocated to
the customers causing the peaks.
3-16
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Peak loadings in flow, strength, or other parameters, may require larger
scale or more complex treatment plants, driving up costs as well. Cost
accounting can help identify what customers or practices drive up peak
loadings and identify ways that peaks can be reduced.
Pricing capacity is very important if the WWTP wants to send the proper signals to
dischargers, encouraging them to reduce their demand during peak periods. A variety of pricing
schedules have been developed in the electric and natural gas utility industries for this very reason.
For example, peak prices tend to be higher man off-peak prices. Industries that are willing to be
"shut off' during peaks are given discounts. Finally, the allocation of peak system costs among
customers is done to try to reflect which customers drive the peak demand.
Gas utilities allocate infrastructure costs, such as distribution systems (analogous to
collection systems in WWT), using the minimum size theory. The smallest scale system required
to serve a standard customer'is allocated to each customer. The difference between the smallest
scale system and what is actually in place is allocated based on demand. Thus, larger dischargers
pay a higher share of the infrastructure costs.
Exhibit 3-11
HYPOTHETICAL IMPACT OF PEAKS
.' ON PLANT SIZING
0.8x mgd
0.3x mgd safety margin
x mgd capacity
Capacity required to treat peak
flows, including inflow and
infiltration ' .
Variation in dry weather flow plus
allowance for near-term growth
Average Daily Dry Weather Flow
But on top of the larger dischargers is the issue of peak capacity. The additional cost of
handling peak discharges can be substantial. Exhibit.3-11 above suggests that the required
treatment capacity can rise substantially to handle peak flows. Additional collection capacity and
storage facilities need to be built as well. Allocating these costs appropriately can be quite a
challenge. Some rules of thumb:
Basic capacity, plus a safety margin for normal variance in dry weather
flow, should be allocated equally to all customers.
3-17
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Incremental capacity required for above-average dischargers should be
Allocated to customers using that capacity based on flow There, are a
cpuple of common methods to allocate .these demand charges among users
to encourage peak reductions.14
-£ Coincident Demand Method Also known as the peak responsibility
method, costs are allocated to customers based on their demand during
the time of system peak.15 The rationale is that demand patterns at this
point hi time are what drive the utility to build the scale plant it did.
«TJ Noncoincident Demand Method Allocates costs based on the
individual peak for each customer, regardless of when this peak
demand occurs relative: to the peak demand on the treatment system
overall. The noncoincident demand method makes sense when the
sizing of capital is driven more by the individual peak than by the
aggregate'peik, such as may be fee case wi^h the size of portions of the
collection system.
^ Average and Peak Demand Method! Under this method, the average
load rate multiplied by the total demand charges to yield the costs
associated with average use. .These costs are allocated among
dischargers based on share of annual loadings. The residual costs are
assunied to be associated with peak demand and allocated based on the
coincident peak method.
Electric and gas utilities have long worked to manage peak demand through their rate
structures. Some of these approaches have been adapted by wastewater treatment plants; others
maybe valuable peak management tools going forward. These are summarized below in Exhibit 3-
12. A number of peak-related issues for POTWs are then presented in greater detail.
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4 Natipjjal Association of Regulatory UtiUty Commissioners (NARUC), Gas
Distribution Rate Design Manual, (Washington, DC: NARUC), June 1989, p.27.
1" ' ' "'"" ' " " ' " ' / '
To reduce the cost impact of measuring the single annual peak imprecisely, many
P^S6, the contributions to the top five or ten peak periods throughout the year to
calculate the cost allocations.
3-18
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Exhibit3-12
DIFFERENTIAL RATES FOR PEAK LEVELING
Issue
Peak demands create need for
expensive, larger scale capacity,
though this capacity is infrequently
used.
Seasonal populations or production
drive demand far above "normal"
level.
IU has internal treatment, but wishes
to rely on POTW as a backup in case
of problems with in-house system.
'Cost Impacts
POTW must build expensive
collection and treatment capacity to
meet those peaks.
POTW must build expensive
collection and treatment capacity to
meet those peaks.
POTW needs to provide collection
system infrastructure and capacity for
an infrequent user.
Rate Solution
-Interruptible rates provide reduced
charges to customers willing to forgo
services during peak events. For
POTWs, IDs might have storage
capacity on-site enabling them to
delay discharge for a week or so.
-Demand charges based on peak
consumption patterns , forces
consumers of peak capacity to bear
most of the cost of providing it
Seasonal rates charge higher rates
for users during the peak season to
encourage peak leveling. The
coincident demand method of peak
allocation accomplishes this same
goal.
Standby rates recover these
incremental costs through fixed
charges rather than through fees on
discharges.
Source: National Association of Regulatory Utility Commissioners,. Gas Distribution Rate Design Manual, June
1989, pp. 5 1-53.
Inflow and Infiltration (I/I)
Wastewater treatment capacity, is very expensive. While there are economies of scale in
bigger collection pipes and bigger treatment plants, the absolute cost per unit treated remains high.
Given these, costs, the size of the entire treatment system should be built only to the size needed for
the population to be served. Perhaps more than any other source, I/I drives up the capital
infrastructure of wastewater treatment., I/I is comprised of a variety of sources of street runoff,
combined sewer overflows, and leaks that let rainwater into the sewage system. Once these sources
enter the sewer system, they require pipe capacity to be transported to the treatment plant, storage
areas for when the treatment plant is at capacity, and treatment capacity to treat what used to be
relatively clean water.
3-19
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Storm surges can be managed through retainment basins that store peak flows, allowing it
to work it's way through the POTW during the weeks following the storm event. This peak
leveling technique is less expensive than building treatment capacity large enough to treat the storm
peaks. However, it still requires larger sizing of collection systems and pumps, as well as the cost
of building and.maintaining large storage basins.16
I/I is a big problem. According to a recent AMSA survey, inflow and infiltration (along
with stormwater that goes to the plant) comprised almost 25 percent of total flows, increasing the
'treatment capacity required by the same amount This figure represents an average; values for
Specific plants are substantially higher.
Exhibit 3-13
AGGREGATE FLOWS OF 107 POTWS
Flow Type
Infiltration/Inflow
Combined Stonnwater
Total Wet Weather to Plant
Residential
C&I
Total to Plants
Flow(MGD)
2,423
502
2,925
6,826
2,253
12,005
Percent of Total
20.2%
4.2%
24.4%
56.7%
18.8%
100.0%
Source: Association of Metropolitan Sewerage Agencies (AMSA), The AMSA
Financial Survey, 1996, p. A- 17
The costs of extra capacity to handle wet weather peaks associated with I/I should
be allocated as closely to their sources as is possible. Often, the closest one can come to such an
allocation is apply the costs to a particular zone of the collection system, and then allocate within
that zone to each customer. However, careful costing of the I/I events can provide extremely strong
inducements to correct common sources of I/I, such as manhole or sewer leakage, sump pumps, or
faulty sewer connections. A detailed study of I/I control options in the Lower Paxton Township
Authority in Pennsylvania is instructive, shown in Exhibit 3-14.
16 The placement of storage basins is also important. Placing the basins away from the plant
Allows a reduction in the peaking capacity required on the trunklines as well, saving additional
funds, :
3-20
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Exhibit 3-14
/
INFLOW AND INFILTRATION CONTROL IN LOWER PAXTON TOWNSHIP
AUTHORITY,PA v
Control
Approach
Remove Sump Pumps
.Grout Manholes
Grout Sewers
Mainline Replacement
Lateral Repairs
Equalization Basins
-Above ground tank
-Below ground tank
Convey and Treat
-Additional capacity at existing
plant
^ Construct new plant
I/I Contribution
(%)
19
, 25
15
<1
42
N/A
N/A
I/I Control Costs
(S/gallon removed)
$0.04- $0.27
$0.04 -$0.30
$0.05 -$0.36
$0.16,r$2.22.;.
$0.20 -$3.72
$0.98
.. , $1.32 -$4.80
^
$6.16
$3.81 -$18.80
Source: James Elliott :et al, "Removing Private Sources of Infiltration and Inflow," Water
Environment & Technology, August 1997, pp. 55-60.
The implications of this specific analysis are clear. For POTWs facing capacity constraints
due to I/I problems, supply-side options exceed the cost of demand-side options to reduce the
inflow by a wide margin. Proper cost accounting for the cost of handling the peak flows can
provide POTW managers with very clear signals in this regard, giving them leverage to implement
control strategies quickly:
Increase Rates. Charging I/I sources the incremental costs of having to
increase POTW capacity to handle the flows wpuld induce rapid control of
the many private sources of I/I. , - ...
Defer Acceptance of Developer-Constructed Collection Systems. The
Pennsylvania study estimated that over 40 percent of the I/I entering the
plant came from defective lateral lines. These lines are often built by
developers as a condition of allowing the development to,go forward. The .
incentive of these developers is to put in the lateral Ikies as cheaply as
possible so that the POTW will accept the new dischargers and people will
buy the new property. Often these laterals are poorly built and leak from
the beginning. Armed with information on the real cost of I/I, POTW staff
can refuse to accept the new laterals until they have proven to be of sound
quality. The POTW can also require bonding that allows the I/I to be
corrected if the laterals are problematic.
3r21
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POTW-initiated Remediation. Where charging I/I sources their
contribution is impossible due to measurement problems or political
issues, the POTW may still find it less expensive to pay for retrofits
directly in order to avoid the need for ne\v plant capacity.
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ExhibitS-lS
INFLOW AND INFILTRATION
Common Practice
Cost Accounting
-Costs of I/I embedded in the baseline capital costs of the
facility through increased scale requirements.
Budgeting
-POTWs may have I/I or stonnwater divisions that deal
with I/I issues. However, these costs may not include
administrative support needed or the costs of increased
capital sizing.
Improved Cost Accounting/Budgeting
-As facility nears its existing capacity for wet weather
flow, storage, or treatment, I/I issues become far more
important.
-In plants with excess capacity, incremental costs of
handling I/I should be charged back to sources of I/I at
least to zones of the system. In plants with dwindling
capacity, costs of capital expansion to alleviate the
shortage should, be charged back to I/I sources to
encourage comprehensive I/I controls.
-Exceedances associated with SSOs from I/I should be
charged back to I/I sources.
-New capacity required for I/I related peaks should be
budgeted and include all financing costs.
-I/I operations should include supporting administrative
and analytical functions.
targe Dischargers and Seasonal Peaks
' ' '
. , , , ,, , ,, ,,, ,. ,, , , ,, ,, ,
allocates baseline costs of treatment across all customers. Large
create additional demands on the system by the sheer quantity of wastewater
scharged. Collection pipes, pumps, and treatment infrastracture must all be made substantially
larger to handle the additional flows., To encourage efficient decisions regarding on-site reuse or
treatment versus discharge, the incremental costs of the additional equipment needs to be allocated
back to its sources. Most POTWs do this in the form of a discharge fee. Peak rate pricing will
spread the incremental costs of facility size across a smaller portion of the discharging universe, as
a large number of customers (e.g., residential) will not exceed the.level of discharge used in the
minimum sizing of the system. As a result, the rates per unit discharged on these high quantity
dischargers could well be higher than the rates charged for the baseline system.
3-22
i ILJ [mi in
-------
The more variable these large discharges, the larger the incremental units charges are likely
to be. This is because the same fixed capital must be put in place to handle a smaller annual flow.
In resort areas, for example, populations can double or triple during peak months, creating demand
spikes for support functions such as wastewater treatment. (Once again, the spikes for WWT are
more difficult to handle than, for example, those from electrical demand, since services are difficult
to import. Networking plants is one way to better absorb the peaks). Seasonal surcharges
reflecting demand patterns during this peak period can help send the proper signals to dischargers to
conserve capacity more during the peak months. Many POTWs increase rates only to seasonal
customers. This approach, while seemingly more equitable to year-round residents, will not
encourage capacity conservation by all dischargers. This may reduce the opportunities for
minimizing the costs of demand reductions.17 , ,
Exhibit3-16
LARGE DISCHARGERS/SEASONAL PEAKS
Common Practice
Cost Accounting.
-Large dischargers are normally charged a fee per unit
discharged requiring treatment (excluding surcharges for
strength). ,
-Fees for larger users vary from lower than average (a
form of a volume discount) to higher than average
(increasing block rates). It is difficult to ascertain how
closely increasing block rates are linked to cost impacts of
large discharges.
-Many POTWs do not increase rates during peak seasons.1
Budgeting
-No differentiation of peak and baseline costs or revenues.
Improved Cost Accounting/Budgeting
-Unit fee should be based on incremental capacity
required to handle the larger flows.
-Discharge fees, should be higher during seasonal peaks.
These surcharges should be borne by all dischargers
requiring services during the peak months and not exclude
year-round residents.
-Differentiation of peak and baseline costs would help
illustrate the incremental costs of peak-increasing demand
patterns.
System Expansions May Create New Challenges
System expansions create challenges for POTWs for two reasons: the large scale of most
new capital equipment (capital "lumpiness"), and a pricing model that charges users the average
cost of existing capacity'even when adding to that capacity would be substantially more expensive.
Each of these items is explained in greater detail below:
17 Seasonal pricing is a good example of how important the timing of pricing signals is.
Unless dischargers during the peak months know ahead of time that their rates will be
substantially higher than normal, they will have little incentive to reduce their discharge levels
through increased recycling or water conservation.
3-23
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Capital "Lumpiness." Wastewater treatment is a capital intensive
J 1 ' M,, HI-., I ' '" i ' ! ' > i '!. illil' l,'i-:' I" i*" .i, !' '7' , ,
industry with substantial economies of scale. Thus, new capacity is
brought on line slowly, and in fairly large capacity "lumps." Right before
new capacity comes on line, the old capacity is likely to be fully utilized,
with capacity shortages. Right, after the new capacity comes on-line,
utilization will drop substantially, and unit costs (i.e., the capital costs per
unit treated) rise significantly. While all capital intensive markets
experience this dynamic to some degree, it is worse in wastewater
treatment! In thg paper industry, for example, a new plant can export its
production over a wide area. Thus, the new capacity surplus is shared by
multiple plants rather than just one. POTWs provide services in a fixed
area; it is qitite difficult to "import" more wastestreams to treat Thus, the
plants' operate with substantial excess capacity until new growth increases
the wastestreams requiring treatment.18
Average Cost Pricing. Because POTWs are regulated industries with rates
based on their cost of service, the rates charged to customers are, in effect,
the average cost of service. If changes in regulations, financial conditions,
QS construction posts make plant additions (which are the marginal costs
for the utility) more expensive than the average cost of existing plants, the
average cost price could be substantially lower than what the utility will
need to charge once the new plant comes on line. As a result, dischargers
will not get the price signals that would exist in a competitive market that
capacity is becoming tight and they should do what they can to reduce
their discharges.
"SSI"1
System Expansion to New Areas/Customers
!"!!'"i' i ,,,i ' ; 'i 'i " v ,,iiii . ' ' ; ' ''".", i" ni .' :, ' , '' i iii",'11' ' " ' '"i1 " , . 'i1' .if1' " . , ," ' - " "
j!*,1; : ; ..... in,,i.ii ',',,,, ,i '"' .ifjjjii! ,; inji " .' , ','' ;!i;:: 'i1 ' ; ", " ',, ' ';'," "'" ,; ':, ' ,1 ' "'",.'' .,,,; c' 'ii «v ,, .jiJ.]! i , iu' , ' ...... :; , . > .1, ...'' . i
. POTW expansion can bring many capacity issues to the surface. The cost of new lateral
lines to semce Jjese customers , should generally be borne in full by the new customers. More
complicated are issues associated with how the new discharges will affect capacity requirements in
trunk lines, pumping stations, and treatment plants. These impacts may be from normal discharge
rites, or from new peaking demands (including I/I) from the additional load. New discharges may
also affect the quality, and hence the marketability, of residuals.
A common tendency is to want the new dischargers to pay the full costs of extra capacity
associated with their discharges. As noted above, unless the cost of scarce capacity is charged to all
dischargers rather than just new ones, the proper price signals to reduce consumption of the scarce
capacity will not be sent. This being said, proper accounting of the full cost of the expansion is
_j _ | _ Jv ':': ;". '!;.. :':, t'f x-f ; <' :' iM ..i.1.' ''.'': tv ...... :;: :':';:, '. 'M :''.' .tA?s (.
1S Problems associated with capital lumpiness can be mitigated somewhat by coordinating
collection system expansion with new treatment capacity construction, and by installing a series
6f smaller scale treatment units as demand rises.
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3-24
.ilW^^^^^^^^^^^^^^ till hil
in
tl i,]),! Ii: i:i&.iA!il:iifilil!B tjli ,,"<:t Hiiiiii...:::'!',!:, iiii.: ig
-------
needed to compare against alternatives. As in the I/I example above, many alternatives could be
less expensive than simply expanding conveyance and treatment capacity to handle the new
volume. ,
One key issue to be grappled with is the issue of centralization versus decentralization. For
dense, urban populations, centralized treatment of wastewater is generally the most efficient
approach. At some point, as collection systems are expanded into more sparsely-populated districts
and centralized treatment capacity it used up, the full cost of expanding centralized treatment could
well exceed that of using a smaller-scale, decentralized approach.19 One outspoken critic of the
centralized treatment model argues that many viable decentralized methods are overlooked, and
that packet plants under the control of a sewerage" authority, couftf often W used.20 New
technologies, such as artificial wetlands, are also more viable in rural areas where land is more
plentiful and retention times can be increased. Technologically, unless sewerage authorities
recognize the niche, off-grid opportunities for these evolving techniques, the approaches will not
benefit from the trials and incremental improvements that allow them to move into the mainstream
over a period of a decade or so. .
. . . »
Without proper cost accounting, the break-point for alternative treatment is not visible to
plant decision makers. Any costs associated with extensions, including new treatment capacity,
new debt issuance, and increased pumping or collection system capacity need to be compared to the
cost of decentralized alternatives.
Differential Impacts of System Expansion by Customer Class
The available options for addressing new service needs can be constrained by particular
types, of dischargers in the new areas to be served. Unless the full costs of these special
requirements are properly tracked and allocated to their causal factors, the utility may decide to
pursue a less cost-effective option.
! '
Consider the example of a large industry looking to locate in a rural area, and wanting the
POTW to provide service to them. Many residential and commercial customers will receive service
as well, reducing the unit costs of the extension. However, this particular industry discharges
constituents that interfere with the effectiveness of the decentralized options or which contaminates
residuals, precluding their local reuse. In the absence of this discharge, the entire region could be
serviced at a substantially lower cost using decentralized treatment and local reuse of biosolids and
effluent. In this example, ,the entire incremental cost of extending the centralized system over
19 For example, two small towns, one in West Virginia and one in Virginia, realized
substantial savings (42 to 65 percent) using alternative systems rather than installing a
conventional WWTP. See U.S. General Accounting Office, Water Pollution: Information on
the Use of Alternative Wastewater Treatment Systems, September 1994, pp. 3-4.
/
20 See David Venhiuzen, "Paradigm Shift: Decentralized wastewater systems may provide
better management at less cost," Water Environment & Technology, August 1997, p. 49.
3-25
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^building a smaller; less complex decentralized system (plus the lost revenues on residuals reuse),
shoallocated to the 'industry. Town development authorities may decide to go forward
anyway, arguing mat many other industries would soon follow; however, at least the decision
would be made with an understanding of how much servicing the industry was really costing the
municipality in the short-term.21
Exhibit 3-17
SYSTEM EXPANSION/CENTRALIZED VERSUS DECENTRALIZED TREATMENT
Common Practice
Cost dGGQunfing
-Costs of infrastructure assets are not generally
disaggregated in such a way to be able to assess the full
costs of line extensions.
-Incremental costs of capacity expansions may not be
linked to the factors driving that need (e.g., expanding
service to a new area). As a result, system expansion
can't be compared to decentralized alternatives or
demand-side management
-Costs associated with system expansions not always
linked to specific customers or customer classes.
Budgeting
-Costs of extensions are bidden in very general capital
acquisition line items.
Improved Cost Accounting/Budgeting
-Costs of scarce capacity should be borne by all
dischargers contributing to that scarcity, not just to new
entrants.
-The total cost of system expansion, including all impacts
on conveyance and treatment, needs to be compared to
alternative methods to provide service.
-Where these expansion costs are due to specific types of
discharges or dischargers, costs should be borne by those
particular entities.
-Budget line items should provide managers with
information on the full incremental costs of system
expansion.
Interjurisdictional Agreements
, Many POTWs receive flows from dischargers located outside of their jurisdictional
boundaries. In these circumstances, POTWs face a difficult situation: the discharges force them to
incur costs and affect plant performance, yet they have no political authority over the dischargers.
This issue is resolved using a contractual agreement called an Interjurisdictional Agreement (IJA).
JJA? outling: thesrights and responsibilities of the various municipalities in the agreement (there are
sometimes more than two), but often do so in a fairly legalistic and unwieldy way. IJAs do not
inherently increase the distortions associated with POTW management; however, in practice they
Often constrain the ability of the receiving POTW to regulate dischargers or adequately recover
.fipsts, the case study of Escondido, CA in the next chapter provides additional illustration of the
Challenges IJAs can create.
21
A General Accounting Office study of alternative treatment technologies found that
some state and local codes actually required conventional treatment, creating a substantial barrier
tb the use of alternatives. Codes such as these make it hard to attract investment for system
gonsfiruction because not always clear if the plant, will, in the end, be permitted. See U.S.
General Accounting Office, September 1994, op. cit,, pp. 40-43.
3-26
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While ETAs can be changed, doing so requires a fairly complicated political process and is
generally difficult to do. As a result, IJAs are often left in place despite their problems. Costs on a:
system from dischargers in another.municipality may be borne in part by in-system dischargers,
artificially increasing the cost of wastewater treatment to local industries. , \ ';
Cost accounting can be a, useful tool to highlight the cross-subsidies that an IJA may entail.
By tracking the cost impacts of discharges, as described in the various sections above, and then
grouping these costs for all dischargers in another municipality, POTW management can assess if
cross-subsidies exist and how large they are. This evaluation will help managers determine when
cross-subsidies are so large that the UA must be renegotiated, and wheniimproved''outreach or even
in-plant investment in discharger plants can have a positive return to the utility.
'3-27
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IIII
III III ll
Ill
lip i ii i ilium ii
-------
4.
DETAILED CASE STUDIES
To augment the topical summaries, we have conducted case studies of budgeting
and cost accounting systems in place at two actual POTWs.1 The complexity associated
with running a POTW is not quite as apparent in the topical summaries as when the
multiple functions and systems are evaluated together. The case studies illustrate how small
distortions, when combined with others in a POTW, can have a large impact on facility
sizing and operations. The case studies also illustrate how the needs of, and constraints on,
various groups involved with the POTW make compromises in costing (relative to the
theoretical optimum) necessary. POTW managers can use the information contained here
to help them strike their own balance regarding what information they"collect and how this
information is used relative to budgeting and rate setting. As noted throughout the report,
the purpose of improved information is to enhance managerial decisions whether or not
there are any changes made to rates.
We are very appreciative of the many people associated with the City of Escondido,
the Massachusetts Water Resources Authority (MWRA), the City of San Diego, and the
San Elijo Joint Powers Authority who were, willing to give us their time and insights to
make these case write-ups possible. The City of Escondido is a relatively small treatment
plant with important treatment assets shared with its surrounding cities, including San
Diego. MWRA is a large municipal system servicing scores of communities. It acts as a
wholesaler, charging towns rather then dischargers for their services (other than
pretreatment which, is billed directly to lUs). This mix of facilities allows us to present a
wider range of issues than would be possible with very similar POTWs.
The City of Escondido. CA
Escondido, CA is a medium-sized town located outside of San Diego. The city
operates its own wastewater treatment plant, the Hale Avenue Resource Recovery
Facility (HARRF). Escondido participated in EPA's evaluation of pretreatment program
success factors and challenges last year, and agreed to participate in this effort as well.
The city was targeted as a case study due to a number of interesting characteristics
identified during last year's site visit.
Capacity Shortages. The city is at or near capacity for both its
treatment plant and its outfall. Careful allocation of costs, in order
to encourage capacity-conserving behavior on the part of
dischargers, becomes increasingly important as existing capacity is
used up.
Case studies are based on a contribution of written documents, telephone
interviews;, and personal interviews. To protect the candor of interview participants,
specific comments have not been cited to individuals. Citations within the chapter are
limited to written materials.
4-1
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Sharing of Key Assets. "The city shares key program assets with
surrounding communities, including the both the outfall and its
treatment plant. Sharing of these resources is governed via
interjurisdictional agreements, instruments that are difficult to
modify and do not always send the proper pricing signals to
participants.
' \'"'i\ , i:,'r';"; ',.'.',';'. . ':V /'' ''''': Iii-:;':.,;:',:--' vi'/',,:!1",' :'.- [''''"> .< "'<
Informal Conditions Associated with Municipal Discharges.
The city receives discharge from a municipally-owned water
treatment plant (WTP). Although the WTP discharges have
significant impacts on plant operations, the relationship between
the water and wastewater plants is informal and not based on the
I!M ,;;",!' ',.:;i, «,', ,-f , , , ,, , , , ,.. ,. , ., ,,,, ,.., -.. ...
economic value of services being provided. This type of
arrangement is not uncommon in municipalities, but can make
efficient plant operation more difficult.
Sale of Valuable Residuals Constrained by Contaminant
Levels and External Government Subsidies. Located in water-
. "; r '!' T1:"!1 "Si ill:/ ,r '»;'.' if, 'S*111". .! "',"!, ":»' JV'iiVtf W'1. '' (JliniH1 :>>" '' v:, ;>'. li'ti ' i"" '*'.',''
scarce Southern California, Escondido should have ready resale
markets for its effluent. However, a combination of high
contaminant levels (salts and metals) and artificially cheap
alternativesources of fresh water for irrigation impede HARRF's
ability to remarket its effluent.
Whjle th§ discussion below is organized by topic areas, there are a few underlying
issues that bear mentioning. The first, fragmentation of control, impedes Escondido's
ability to rationalize its limited resources. Fragmentation of control dilutes
management's power to regulate and control practices that affect the operation of its
plant. In the city of Escondido, fragmentation issues affect its pretreatment program, its
optimization of key assets (such as the treatment plant and the outfall), and the resale of
effluent. Although cost accounting approaches can help the POTW to identify the costs
of existing practices as well as more efficient solutions, the fragmented control will
require political action to rectify. Staff were well aware of the rigidities that this
fragmentation created for their program; on more than one occasion, interviewees
remarked that long-term planning and expansion would be much easier if the region were
organized as a special utility district rather than governed through interjurisdictional
agreements.
The second common theme in many of the Escondido areas examined is that of
full cost recovery. This includes not only the recovery of aggregate costs from
dischargers, but the use of peak pricing to allocate these costs more directly to specific
dischargers. In some cases, the POTW did not know the full costs of particular activities.
Even where they did have a rough idea of the full costs, however, managers knew that
political realities prevented them from passing these costs back to the parties responsible.
""iiJ!'!1
4-2
-------
In an effort to create a "business-friendly" environment in the town, managers were under
great'pressure to keep rates to industry low. Escoiidido has relatively small flows from
industry. However, their concerns about being business friendly echo those we have
heard from many other programs where lUs flows are much more significant. Without
sending the proper price signals to industry, water pollution will continue to be
subsidized, and industries will underinvest in pretreatment.
General Approach Towards Cost Accounting and Budgeting
Escondido's focus in the cost accounting arena has been on separating water and
wastewater costs, and on ensuring that existing users don't bear the costs of new capital
expansion triggered by new users. With these goals hi mind, the city set up separate
water and wastewater enterprise funds, with a statutorily-defined separation of accounts.
Funds can not be transferred from one account to another, without utility board approval
and the creation of a formal loan agreement. This arrangement prevents cross-subsidies
between water and wastewater operations, ais well as protects any wastewater surpluses
from being raided by other municipal functions, a frequent complaint in other cities.
The POTW relies on the city government for many of its support functions, such
as administration, finance, engineering, ^legal, management and information systems
(MIS), and human resources. Costs for these functions are allocated to wastewater
operations based on the number of staff-hours spent on wastewater activities. Such an
approach, while a reasonable approximation of costs, may be inaccurate for activities
where capital is a large cost component, such as MIS.
The separation of funding sources into existing customers and new connections
for capital expansions helps to ensure that the existing customer base does not bear the
cost of new growth hi the community. New construction is funded through a flat capacity
(currently $4,403) charge per equivalent dwelling unit or "EDU". One EDU allows a
customer to hook into the sewer system and discharge up to 250 gallons per day. The
rationale for this approach is that the older customers have already financed the
infrastructure hi place and should not have to pay for the upgrades as well.
The EDU approach has proven extremely useful in allowing Escondido to expand
during tunes when it could not easily borrow on capital markets. As implemented, the
new connections fee also ensures that older customers do not bear the cost of extending
the collection system to new users, which makes sense. However, some of the other price
signals that the EDU approach, and the new connections fund in general, send have a
couple of weaknesses. First, all projects, related to new connections are. lumped into a
single pool, creating the possibility of cross-subsidies within this group. Such cross-
subsidies can hide important break-points, such as where decentralized treatment
becomes more economic than sewer line extensions. Second, where common assets (e.g.,
a trunkline) becomes constrained due to system expansion, increasing the rates only to
new customers will not send the proper price signals to all users of that scarce capacity,
4-3
-------
some of whom may be older customers who are able to cut their discharge at a lower per
unit cost than new users, Third, dischargers are not able to sell then: EDUs back* to the
system or to other users if they cut their discharge. As a result, they have somewhat less
of an incentive to invest in technologies that reduce their need to discharge to the sewer
system.
Escondido has experimented with a number of budgeting techniques. Zero-based
budgeting, where every program must justify its entire allotment annually, proved too
disruptive to staff. Two-year budgeting, predicated to shift the annual budget-period
crunch into a two-year affair, was also problematic. They had a very difficult time
projecting needs one year in advance; two years was;everr worse. Finally, the city tried
program-based budgeting, which is similar to activity-based costing. With over sixty cost
pools to project, they found the process too unwieldy. Managers also felt that their
projections were simply guesses that did not provide them with additional decision-
making data.
'"', :"'! ': '' , "'"'', /':'"'' '; ' '.' :',',. fi ' '' ": ,": ' ,: -' ' ' " ::£',! ''"; " '..'-,''^' , ''! / !: '''' -"''/ ";V;ii
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As a result, they have continued to use an annual budget process with expenses
grouped into very general categories. Programmatic data continues to be collected even
though it is not used hi budget development. Rather, spending is tracked by the
program/project areas, some of which are shown in Exhibit 4-1, and given to managers in
monthly r^orts. Exhibit 4-1 shows only the program area name; the city also assigns
each a tracking number. This system has enabled the city to provide key information to
managers without making their budgeting process unduly complex. The city recently
integrated labor-hour tracking by project as well, vastly improving its ability to cost out
the resources use,d on particular activities. Managers have found this addition extremely
useful in understanding the dynamics of their programs.
While the project-based tracking greatly improves the information available to
managers; there are many gaps in the data. For example, it remains somewhat difficult to
aggregate spending by program aspect. Some program areas, such as oil and grease
management, are not broken out separately. In addition, capital infrastructure or O&M
costs have not been allocated to their causal areas. Thus, all capital projects required
handle I/I systems are not easily tracked back to I/I using the existing budgeting accounts.
Snmlarly,9&M due to grease blockages would likely show up under "Lateral
, Maint/Repair" or "Jet Rodding/Vacuum" without being linked specifically to oil'and
grease dischargers.
'It ..« I
4-4
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Exhibit 4-1 ,
SAMPLE PROGRAM AREAS TRACKED BY
ESCONDIDO WWT PROGRAM
Program Area
Liquid Processing Maint.
Solids Handling Maint.
Reclaimed System Maint.
Electrical
Instrumentation
Co-Generation Maint.
HARRF Grounds Maint.
Building Custodial Maint.
Safety Equipment Maiht.
Equipment/ Shop Maint.
Influent Pump Station
Lift Station Maint.
Lift Station Grounds Maint.
Land Outfall Maintenance
Jet Rodding/Vacuum
Twisting
Televising
Locates
Manhole MaintTRepair
Lateral Maint/Repair
Mainline Maint/Repair
Program Area
Equipment/Shop Maint
Force Main Maint/Repair
Lift Station Maintenance
Lift Station #7
Over Flows & Emergencies
Service Requests «"«
Large Sectional Twister
Manhole Inspection
Easement Maintenance
Confined Space Maintenance
Trench Compaction
Pretreatment Reporting
Bernado/Ham. Assess. Dist
Liquid Process Operations
Solids Handling
Industrial Waste Adm. & Test.
Storm Water Testing
Laboratory Services
Wastewater. Testing
Ind Waste Test - Escon.
Irid Waste Test - Rancho Bern.
Program Area
. Ind Waste Comp Mon - Escon.
Ind Waste Comp Mon Ran Bern.
Reclaimed Water Testing
Water Reclamation
Solid Sampling/Testing
Copperhead-""
Well Water
MiscvSampling and Testing
QC-QA Testing
Laboratory Administration
Water Connection Rights
Water Reclamation Admin.
Environmental and Safety
, - .
i
Source: City of Escondido Program Chartfield Definitions, 1997.
POTW managers have established, some flexibility' in their budgeting process.
For example, although all wastewater revenues go back into the general wastewater fund,
within wastewater operations, there is some flexibility to shift funds among accounting
line items as needs arise. There is also a multi-year contingency fund used for emergency
and surprise expenses. Capital budgeting is done annually, although the POTW also
utilizes a five year planning cycle for major capital upgrades. The POTW does not have a
formal process of depreciating capital equipment and accruing for replacement during its
life. Rather, most of the capital replacement is funded through a somewhat undersized
"miscellaneous major maintenance" line item (that allows for replacement as well as
maintenance). As a result, a number of staff felt that they never had enough funds to
replace their aging plant (though the POTW works hard to ensure^that staff have updated
analytical tools).
' 4-5
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Managing and Optimizing Key Shared Assets
III I i i \ .,' : . ;' J; :.
More than many POTWs, Escondido shares key assets with surrounding
Communities. Substantial flow conies from the Rancho Bernardo district of San Diego,
and San Diego contracts with HARRF for capacity. The outfall pipe used by the city to
discharge its treated effluent is comprised of a land portion, owned by Escondido, and a
water portion, owned by the San Elijo Joint Powers Authority. The city has an agreement
with San Elijo for 79 percent of the water outfall capacity. The land outfall is implicitly
shared with San Diego, as Rancho Bernardo flows to HARRF must the be discharged
through the outfall.
Capacity in the outfall is already constrained, and is insufficient to jneet demand
during storm events. Some, though not much, spare capacity remains at the treatment
Plant* The ?$?.relies on eiualization b^8"18'used neajfyto capacity, to allow the existing
dry weatberflpws to be treated within the existing capacity at HARRF.
Ciuitgnt arrangements for sharing capacity are through interjurisdictional
agreements among the participating parties. These specific agreements have three main
problems:
.Difficult to Modify. UAs are negotiated among municipalities
and rarely modified. Changes in the peak or average discharge
profiles of participants are difficult to integrate into the contracted
discharge allowances.
Financial Arrangements Do Not Reflect Actual Costs of
Capacity Used. Payments for both the treatment and outfall
capacity are based on the proportion of average flows from the
participating parties that are sent through HARRF and the outfall.
In fact, it is peak flows that drive much of the capital requirements
for the infrastrupfure, While there are restrictions on the peak
, flows that may be discharged, these restrictions are difficult to
enforce and do not have associated financial penalties.
No Surcharges for Constituents of Concern. Flows received
from other municipalities are not surcharged. For example,
Escondido receives waste flows from a San Diego experimental
treatment plant that uses water hyacinths. When these plants are
compressed at the end of the treatment process, the compression
releases salts and metals, and the discharge has a higher than
average BOD. The constituents of the: discharge can affect the cost
to process and/or the value of residuals; charges should reflect
. these impacts.
i in
4-6
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The impacts of some of these limitations on the incentives of particular
dischargers-are not as perverse within Escondido as they could be in other municipalities
operating under legalistic UAs. For example, a central problem,with a lack of peak
pricing is the reduced incentive to curb I/I, often a major component of peak flows. Yet,
recent I/I studies in Escondido, San Diego, and San Elijo service areas suggest that no
single community is responsible for a disproportionate share, of I/I. The implication is
that the use of average rather than peak flows is unlikely to substantially distort relative
charges. In other regions, this may not be the case, and substantial sums may be spent to
increase plant capacity due to improper pricing of capacity.
Nonetheless, some of the tools discussed earlier in this report can51 be* usefully
applied to make UAs more flexible. For example, resource pricing techniques could be
used to quantify the value of the scarce outfall or plant capacity, allowing capacity
allocations to be done via pricing rather than contractual fiat. This approach would ration
the scarce capacity to the parties that need it most. The fact that each party would have to
pay for the capacity it used would encourage each to implement steps that reduced flows
during peak periods whether through better I/I control, improved equalization
capability, or other means. . ; '
Controlling Constituents of Concern with Fragmented Control
POTWs are biological processes, designed to break down organic matter in
sewage into non-hazardous, reusable by-products. The plants .are unable to treat
inorganic constituents such as metals or salts; these pass through the plant or are
entrained in the biosolids. At high enough concentrations, these contaminants can
interfere with the plant's biological process and/or render by-products unusable.
To ensure that influent concentrations of these constituents do not harm the plant
or contaminate residuals, EPA required pretreatment to remove these constituents from
industrial discharges. The focus has been on industrial dischargers, as these are the
largest sources of most elements of concern. Pretreatment programs set limits on
allowable concentrations and enforce:these limits through plant inspections, analytical
monitoring, and litigation where necessary. The specific limits set by a plant vary
depending on the specifics of the treatment plant, the receiving water, and the NPDES
permit. Fragmented control in Escondido's program makes it more difficult for them to
curb constituents of concern and to send the proper price signals to dischargers. Areas
where this is a problem include oversight of dischargers in the Rancho Bernardo service
area, effluent from a municipally-owned water treatment plant in Escondido, and
increasing concerns over brine loadings from non^industrial dischargers. Fragmentation
of control and distorted price signals are also central factors in impeding the sale of
treated effluent in the region.
4-7
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Pretreatment
The Rancho Bernardo district of San Diego has rights to discharge 5.3 mgd of a
total 16.5 mgd of capacity at HARRF, nearly one-third of the entire plant capacity.
Industrial discharge from Rancho Bernardo is over 500,000 gpd, more than twice that
from industries within Escondido. In addition to the general issues regarding peak flows
from Rancho Bernardo overall, discharges from industries located there are important
sources of contaminants such as chloride, sodium, flouride, and boron.2
A|l of these contaminants from Rancho Bernardo impede effluent reuse and
require treatment by HARRF. Nonetheless, it is the city of San Diego that oversees the
industrial dischargers in that region, including permitting, inspections, and charges. To
address HARRF compliance with its NPDES permit, the San Diego pretreatment staff
Jncor|)orate Escondido's local limits too the permits they write for Rancho Bernardo
industries. However, fees levied on IU discharges reflect the standard fates charged to
Ills throughout San Diego, and bear no relation to the costs that these discharges create
for the recipient treatment plant in Escondido. Escondido has extremely limited ability to
independently verify reported discharge levels through surreptitious monitoring or
independent inspections.
While both Escondido and San Diego expressed an interest in transferring the
pretreatment program to Escondido, San Diego pretreatment staff, felt that political
concerns would prevent such a transfer. Nonetheless, some improved tracking of the
impact of Rancho Bernardo discharges on Escondido collection and treatment costs
would be a powerful weapon in renegotiating the IJA or altering the charges for service.
Municipal Dischargers
Government entities often have a very difficult time regulating or charging other
government entities. This issue arose during our site visits last year, where one POTW
had spent years figuring out an effective way.to oversee a large military discharger hi
their district. In Escondido, it is not the military but a water treatment plant (WTP) that
creates the challenges. Since both HARRF and the water treatment plant are owned by
the city, theur relationship has historically been governed by informal negotiation rather
than more formal assessments of the impact that one has on the other. This approach can
be effective for relatively small, lower cost adjustments. However, where the impacts are
larger (or not well quantified) the resistance to changes that disrupt operations or
substantially increase costs to one party increase.
2 Rancho Bernardo percentage loadings are 18 percent for chlorides, 38 percent
for sodium, 90 percent for fluoride, -and 74 percent for boron. HYA Consulting
Engineers,City of Escondido Brine Management Feasibility Study, August 1995,p. 48.
4-8
-------
Consider the specific case in Escondido. The WTP discharges about 50,000
gallons per day to the WWTP for which it is directly charged nothing. Rather, an
imputed value of services is charged using allocations between municipal accounts. This
allocated charge does not incorporate the real cost of the WTP discharges, and hence may
not encourage them to install processes that minimize the constituents of concern. At
50,000 gpd, WTP flow is not a major issue. Rather, it is manganese and solids loadings
that are a problem. The WTP is the source of 85 percent of manganese loadings at the
WWTP, a result of the use of a manganese-based settling compound in the water plant.
These levels may impede the ability of HARRF to resell its effluent. The high solids
content of the effluent is considered by many wastewater staff as a significant factor in
the need to purchase a new digester at their plant. In neither case has a careful cost
accounting been done to evaluate how much treating the effluent from the WTP plant
really costs the WWTP, '
Were such a study to be done, a more formal financial arrangement for discharges
from the WTP might spur behavior change. Although the WTP is currently evaluating
ways to reduce Mn loadings, this transition might occur- more quickly if financial
incentives were in place. Similarly, alternative management of solids in the face of high
, surcharges might, in conjunction with reductions elsewhere in the system^ have enabled
the city to avoid the purchase of the new digester. Even if no behavior change were
possible, modified charges to reflect the real cost of treating WTP residues would be
passed onto WTP customers, such as irrigators. These additional costs would then be
borne by the commercial beneficiaries of the service, rather than by WWTP customers as
is now the case. By increasing the cost of fresh water to better reflect the costs of
providing it, the surcharges would also help to spur demand for the use of reclaimed
water in irrigation.
Resale of Treated Effluent
Fragmentation of control becomes an even more serious problem when it occurs
on a large scale across various levels of government, as is the case in the interaction of
fresh water delivery and effluent reuse. Located in water-scarce Southern California,
Escondido would seem to be in an ideal location to market its treated effluent. Demand
for irrigation water, not only for agriculture but for parks and golf courses as well, is,
high. Yet, the city has discovered that their apparently ideal market is not entirely ideal.
This is partly because the city needs to reduce certain contaminants in then" effluent (e.g.,
flouride, boron, salt). However, much of the problem has to do with the poor functioning
of fresh water markets in the region. There are pervasive subsidies to agricultural use of
fresh water which, as noted by a number of Escondido personnel, greatly reduce the
interest of farmers in trying to use reclaimed water.
Consider the case within Escondido itself. According to utility officials, the cost
to purchase water for local consumption is close to $429 per acre foot. Although the
quality of this water differs substantially in salt content (depending on whether its source
4-9
-------
" Kill
,*:"
is Northern California or the Colorado River), there is no difference in the price that the
city must pay for it. This lack of differentiation provides little incentive to try to reduce
the salt content of water flowing in the Colorado.
i|» - ; "; , ; "; ,r. ' *;- ' , " , ' .' ' ', " >
The base rate for sales to regular customers is $524 per acre foot. With water
treatment costs of $40 per acre foot, this leaves little room forme cost of constructing and
majntaining the water delivery infrastructure. In comparison, agricultural users pay the
city only $371 per acre foot, less than it costs the city to buy the water. Part of this
subsidy is provided by the city; most is provided by the Metropolitan Water District,
ostensibly because the farmers' water supply can be interrupted in a drought. However,
unlike private utilities which actually do cut off interruptible supplies immediately,
municipal supplies to farmers have not been cut off entirely, even in deep drought.
; '' 'M' '.i''"' '.'" ':!'&t <, ';;I >: «.'V'';V;: :";" ''V.'; ., *'- >-,'$ ;^' 'i'^'v1^ ,. ."'','. ;:::' :':; ''/:,'. '
The purpose of this example is to provide a clear demonstration of the
environmental distortions that cross-subsidies can create. Rather than farmers pooling
together to buy reclaimed water from POTWs in Escondido or similar cities, helping to
pay to reduce constituents of concern if necessary, the POtW finds little interest from its
largest potential customers. Repeated throughout Southern California, or through the
Southwest overall, these cross-subsidies lead to oyerconsumption of fresh water and a
suppression of what should be strong economic drivers to recover and resell WWTP
effluent, using pretrearment or other methods to control concentrations of salts and metals
entering the plant. The same tools that help a single POTW identify its true costs to
provide wastewater services can be used by water treatment plants and water delivery
systems to price their products, a process that would encourage more rationale use of
fresh and reclaimed water hi the region.
it!'"'
I'L-!
SB,
jlii!"!,
ML
Non-Commercial Dischargers of Constituents of Concern
Interestingly, Escondido faces increasing challenges hi controlling even the salts
that are added to its effluent by local water softening. The pretreatment program was set
up to curb mdustrial discharges. Controlling constituents of concern from residential
discharges is much more difficult, given their decentralized origin and the focus of
existing statutes on the mdustrial sector.
« ',,,,: ; ,1.;, " , J , , -;,, ,:;!ii ; " ; , ", »: , , , t ., ' ', .". ;,,, ,[,, ,..!, ' i i. ... : , ,,, . '", ." ,'i"
There are two major types of water softening services. Automatic softeners are
installed in residential or commercial properties, with salts added by the property owner.
Brine discharges are flushed into the sewer system, increasing salt loadings into the
POTVy; Tank exchange systems are brine tanks supplied by a third party,.and replaced
periodically'with a new one. The tanks are recharged at a central location. Although tank
1 ,j||,"Vj, ' ii, iiiiiiiwtii ' . >i :,'i , .iu |.'.'i . ' , ! 'ii ,i " - * i ji, i' ,« , ." ' ,l|rr, , , ,,,, , , ,, , ,, , ,, , , , , , V^
exchange firms also discharge brines to the sewer system, they can reclaim a higher
proportion for reuse and are regulated as IUs by the POTW while the homeowner is not.
As a result, salt loadings can be more easily controlled. For example, Escondido is
planning to build a brine diversion line that would avoid contaminating POTW effluent
' 4-10
-------
with salts. Such a diversion line is relatively easy to install for a small number of
industrial brine dischargers, but prohibitively expensive if it must connect to every home
or business with an automatic water softener.
To prevent problems with salt loadings from residential and commercial
customers using automatic water softeners, Escondido banned these machines. A similar
ban was implemented by many communities in Southern California. Recently, a trade
association representing the automatic water softener manufacturers successfully struck
down the ban in a law suit. Led by Culligan, a major manufacturer of this equipment, the
association declared that their victory invalidated all of the other rulings (though this was
not clear from the judgment), and began* selling automatic softeners to residential
customers in all of the previously banned areas. A copy of a memo distributed by the
Water Quality Association explains then- marketing strategy in detail. As the
memorandum provides interesting insights into the evolution of what is likely to be a
substantial barrier to water reclamation in the future, we have included it as Appendix A.
Legally, the city of Escondido is fairly limited in the actions that it can take to
control the discharges. The longer the period of tune for a residential user base of
automatic water softeners to grow, the more difficult controlling the brine levels in
effluent will be. Yet the financial implications of this trend are significant. -In addition to
the planned industrial brine diversion line (costing over $1 million), Escondido is
building a water reclamation plant at a cost of $46 million. Unless non-IU brine
discharges can be controlled., these large capital projects will not be able to deliver the
low-salt effluent needed for resale. Better cost accounting for the cost impacts of brine
dischargers on system economies Would certainly help the city to make the case against
the automatic softeners or brine discharge into the treatment plant in general.
Full Cost Recovery
Escondido managers stated that they try to set rates that will recover the full costs
of their programs, .and have been successful in ensuring that overall wastewater costs are
not subsidized from general tax revenues. However, they acknowledged that going
beyond this to full cost recovery from particular types of customers was much more
difficult due primarily to a "business friendly" environment. This pressure is faced by
many programs around the country. Yet, these same businesses must pay market rates for
all of their other production inputs; it is unclear why wastewater treatment should be
different. _
Within Escondido, industrial dischargers pay a flat fee per 1,000 gallons. There is
no surcharge for constituents such as TSS or BOD because the flow from these
dischargers (less than 2 percent of the total) is too small to be worth the extra effort to
surcharge. There is no attempt to recover the cost of permitting the facilities either. Oil
and grease dischargers, such as restaurants, pay a flat fee of $160 per year, plus a fee per
1,000 gallons of wastewater sent to the sewer. This fee covers less than 2/3 of the cost of
4-11,
-------
the direct time spent monitoring and inspecting oil and grease permittees. The efforts of
program staff have cut the number of overflows and stoppages due to oil and grease in
half over the past ten years. However, staff did note that if the costs of addressing the
clogs were allocated to oil and grease dischargers (a calculation they did not have the
information to make), the permit fees would coyer an insignificant portion of the total
program costs.3 Finally, as noted above, the POTW does not attempt to recover the full
costs of servicing peak demand from the dischargers responsible for creating these peaks.
,'ia!" f, ,", -,
These existing charges reflect a host of factors. Some represent estimates of full
cost recovery fifteen years ago, but have not been updated. Others reflect an estimate of
reasonable charges in the face of incomplete information'qn the real cost of particular
types of discharges or activities. Many others simply reflect a political agreement about
what is fair or acceptable by particular constituent groups within the community. While
these reasons do not correspond to economically-efficient pricing, they do reflect the
political and organizational realities'faced by hundreds of POTWs across the country.
Given these realities, changing me rates overnight is not a possibility. However, if the
POTW itself can better understand the magnitude of subsidies and cross-subsidies within
its operations, it will be well positioned to prioritize its outreach and utility-financed
upgrades. It will also be in a better position to gradually adjust rates over time.
Hi " . ./ ;.. ">. ; ; '. ''.!.':>'; ""' ; '';--'^<:'[-:'..:^!'.*"::-''' ''.':,' '' "' ,' /;" ': ''-'""i^
Massachusetts Water Resources Authority (MWRAX Boston. MA
MWRA provides wholesale water and wastewater services to a large network of
communities in the Boston area. Forty-five communities, comprising an aggregate
ipopulation of 2.5 million people, purchase MWRA's wastewater transport and treatment
services. MWRA own§,tJte,.ire^tipgnt.plants: the recently constructed Deer Island
treatment plant, which provides primary and secondary treatment with enough capacity to
replace two older primary treatment facilities; the Nut Island treatment plant (scheduled
to be taken out of service in 1998); and a smaller, decentralized facility in Clinton, MA
providing service to two communities. MWRA's capital upgrade has been ongoing for
the past several -years. Once complete, this new plant will have a primary peak hourly
capacity of 1.27 billion gallons per day (mgd) and a peak secondary hourly capacity of
788 mgd.4 Several characteristics of MWRA's system and operations related to cost
accounting and budgeting contributed to the selection of MWRA as a case study:
! i?'
months,
m-38.
\^|defroin grease removal, the city flushes portions of its collection system
IP CI2S fr<^uent!y every three months rather than their norm of every 18 to 36
1 MWRA, Fiscal Year Proposed Current Expense Budget, February 24, 1997, p.
4-12
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Role as a Wholesaler. MWRA establishes a wholesale rate
structure used to bill the communities within its service area. The
incentives within MWRA's rate structures may not necessarily
pass through to individual users, as it is up to individual
communities to set local user charges. MWRA centralizes controls
in some operational areas (such as pretreatment) to ensure better
control over its treatment system.
Challenges of Managing a Large and Spread Out System. The
size of MWRA's service area and the variation among
communities within the service area create a complex series of
factors for MWRA to consider in decision making, including
variations in the cost of service and the ability to pay for service.
Reliance on an Old Collection System. The collection systems
within many of the service area communities, as well as many of
the interceptor mains owned by MWRA, are predominantly very
old and in need of repair or replacement. Cost accounting systems
. that help to prioritize system maintenance and replacement become
extremely important.
Themes underlying many of the issues we highlight here are the management
challenges that increase with the size and reach of the POTW, and the difficulty in
establishing the proper price signals for optimizing plant efficiency and protecting the
environment. These issues are discussed in greater detail below.
General Approach to Cost Accounting and Budgeting
With an annual budget of $900 million (capital.and operating combined) and
capital upgrades with a total cost measured in the billions,5 sophisticated financial control
systems are imperative in order for MWRA to function. Although the Authority does
receive some financial assistance through state .and federal grants or loans, the vast
majority of its capital funds must be borrowed on capital markets. Without accurate and
transparent financial reporting, the Authority would never be able to borrow funds. To
ensure accurate budgeting and financial reporting, MWRA has its own internal finance
department with a budget of nearly $4 million per year. The administrative function of
the sewerage division, with 2 budget of $2.6 million in FY95 and which is separate from
5 Although the construction of the Deer Island project is nearing completion, the
Authority is projecting total capital improvements worth $3.0 billion between FY 1998
and FY 2007, Capital improvements over the next three years for the wastewater system
alone are estimated at $680 million. (See MWRA, FY98 Proposed Current Expense
Budget, pp. 1-23 -1-26).
4-13
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tlje MWRA-level finance group, has its own finance unit as well, responsible for
budgeting, financial control, and long-range planning.
:ilMWBA... prepares its accounts in compliance with Governmental Accounting
Standards Board (GASB) procedures for an enterprise fund. GASB procedures provide
outsiders (primarily investors) with the information they need to assess the financial
health of the Authority. Key elements of MWRA's reporting mclude:*
Accrual Accounting. The Authority recognizes revenues at the
point in time they provide services, and expenses at the point in
time they receive services. As noted in Chapter 2, accrual
accounting is especially important in the area of capital budgeting.
MWRA depreciates its capital purchases over their estimated
service life, allowing them to better reflect the annual cost of
capital services used.
/'
Recognition of Liabilities Incurred. MWRA recognizes and
reveals liabilities or potential liabilities they have incurred in the
course of their current operations if they could affect their financial
health or cost of Operations. Some examples include long-term
lease obligations, law suits, environmental h'aba^
to losses on risks that they have self-insured for.
Audited Financial Statements. MWRA prepares
statements that are audited by an independent auditor.
financial
I ><".;,'I
ii.j ill r;
Although much larger than Escondido, there are some similarities in their
approach to budgeting. For example, an important concern within MWRA has been to
create separate sewer and water accounts, as required by its Enabling Act. Transferring
funds between the sewerage division account and the water division account requires
approval of the Board of Directors. This separation is particularly important in those
municipalities and joint authorities, such as MWRA, that do not provide sewer and water
services to the same universe of customers. In MWRA's service area, some communities
receive one service, others receive both. MWRA's budget documents reflect this
separation.
The Authority prepares both a detailed current expense and capital budget on an
annual basis for the sewerage division. The current expense budget provides information
in two ways. First, data are broken out by line item, such as wages and salaries;
maintenance; professional services; etc. Second, this same budget information is broken
out by program area. These program areas are shown below in Exhibit 4-2.
6 See Ibid., Appendix D, "Massachusetts Water Resources Authority Financial
Statements and Supplemental Schedule, June 30,1996 and 1995 "
4-14
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Exhibit 4-2
PROGRAM AREAS IN MWRA SEWERAGE DIVISION
-Administration ,
-Facilities Development '
-Residuals
-Toxic Reduction & Control
-Environmental Quality
-Wastewater Engineering .
-Wastewatef Construction
-Transport .
-North/South Wastewater Treatment Processes (main treatment plant and pump
stations)
-Clinton Wastewater Treatment Plant .
Source: MWRA, FY98 Proposed Current Expense Budget, p. II-5.
The capital budget provides a three-year, detailed assessment of anticipated
capital improvements, and a less detailed projection going out ten years. Projects within
the overall Authority are grouped by program area (Boston Harbor Project, wastewater,
water, business and operations.support). There is one additional category, contingency,
which makes allowances for unanticipated costs for the proposed projects. The
contingency is estimated at roughly 9.5 percent of the budgeted projects.7 Within the
Sewerage Division, projects are further grouped by category, including interception and
pumping, treatment, Deer Island on-going capital improvements, residuals management,
combined sewer overflows (CSOs), and other. The budget then provides project-specific
information on each planned capital improvement.
With a much bigger service base than Escondido, many of the support functions
' (such as engineering, legal, etc.) which Escondido relied on the city to provide are
separate divisions within MWRA. This includes departments such as Human Resources
and Public Affairs. Staff in these functional areas are also sometimes included within
some of the operating divisions. Despite the assumption of these functions within the
utility, cost accounting issues regarding how to allocate vsupport function costs to water
and wastewater customers remain. This allocation is important. In the proposed FY1998
budget, for example, allocated support division and other indirect expenses total $42
million, 27 percent of the sewer division's $154 million in total O&M spending.8
The massive investment into new plant and equipment by MWRA has resulted in
more than a 500 percent increase in combined water and sewer charges for MWRA
customers between 1986 and 1993, increasing water and sewer charges to some of the
highest in the country.9 Who would pay for the upgrade became a hot political question
7 MWRA, Proposed F.Y98-00 Capital Improvement Program, December 30,
1996, p. 3.
8 MWRA, February 1997, op. cit, p. 1-40.
9 Ibid., p. 1-34.
4-15
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in the Boston area, and forced MWRA to revise its rate methodology (discussed hi
greater detail below) very carefully. The rate methodology finally approved resulted
from a detailed evaluation of options given political and technical constraints, and much
consensus b,ui|ding. The data to support this rate structure'relies on the allocation of costs
to specific functional areas and then to customer classes. However, the allocations
involve numerous approximations and averaging of costs; significant cross-subsidies
remain that reduce the incentives for important dischargers to invest in pollution
prevention and flow reduction technologies.
Ill I 1 II ** « - .. ', . ',, , :, .' , , ,: , - ,:,: ;, ,
Dilation of Price Signals
A central focus of this report has been on accurately tracking the cost of providing
\Vastewater treatment services in order to send the proper price signals to staff and to
dischargers. In a private market, price signals pass relatively unhampered through
multiple layers of intermediaries. This is because competition constrains passing through
too much, and the requirement to earn a profit in order to stay hi business prevents
passing through too little. Wastewater treatment is different.
If communities made rate structure decisions purely on economic terms, price
signals from MWRA's wholesale rates would reach individual djschargers. Higher
charges to ffie town due'to]TSS,_Bpp^or high peak flows would be passed back to the
sources of these problems, encouraging future investment to reduce the factor(s) of
cdijcerll, IJg;weyer, once political i considerations influence the process by which local
rates are established, the impact of MWRA's rate methodology is often distorted. Thus,
even if MWRA could perfectly track its costs and translate them into charges to
communities, there is no guarantee that the communities would set rates that sent the
same signals to the key dischargers. Some of the problems that arise are presented below.
Using its wholesale rate methodology, MWRA recovers the funds it needs to
qove| ^xpenses from its member communities. Charges on water and wastewater are
,;i,ca|c,uiate4Jeparately.^^They are calculated annually and paid to MWRA in quarterly
mstallments. It is then up to the member community to levy charges on its citizens. In
iV ' "', :'^i '"' iT1!1!1. "'.. 'in Hniit 'JI1 g ' "" '"' " ' :«" , ?^ ll." lil''i.11|1'1'1" ' "''''i'-'1 '«* . ":',r«',i , » ,... - *& . .. ...
,:: most,,c;aseSj cities ^imust 11add their,iinternal .cost of niwastewater,, services, in terms of
instalimg and maintaining local sewer collection systems, to MWRA's charges. These
two elements become the basis of charges ultimately paid by local dischargers. A
number of distortions in residential rates are common, though not all apply to every
community:
Infrequent billing. Retail customers receive bills as infrequently
as twice a year, unlike most other utilities (oil, gas, telephone,
electric) where bills are sent monthly. This reduces the ability to
reflect seasonal variation in fees or to quickly rectify hidden
changes hi consumption patterns (e.g., leaks).
' 4-16
-------
Payments by landlord rather than service consumer. Both
water and wastewater bills are sent to the property owner not to the
party consuming the water and wastewater, services. While this
system enables unpaid sewer bills to become a lien against the
property, it also dramatically reduces the incentive of those living
in rental properties to reduce their consumption of water (and
hence discharge of wastewater).
/ ~ ' - - .
Average of peak and strength surcharges. Retail customers
generally pay an average amount per hundred cubic feet (equal to
748 gallons) discharged. This amount reflects an averaging of all
peak and strength surcharges levied oh the city, reducing the
incentive of any particular, user contributing to these peaks
(including industrial users) to reduce them.
Hidden charges for wastewater treatment. Although much less
common than it once was, some towns include the capital portion
of water and wastewater charges with the property tax bill levied
on homeowners. This approach can make the actual charges for
wastewater services more difficult to see if the water/ wastewater
element is not listed separately, and hence weakens the ability of
prices to trigger desired behavior changes, such as reduced water
consumption.
10
Derived consumption. In most cases, retail wastewater charges
are calculated based on a fixed percentage of water consumption,
since it is not directly metered at the point of discharge. This
system penalizes customers who use large amounts of water for
non-sanitary purposes (e.g., irrigation). Many towns do not allow
separate metering for irrigation water.
Wholesale Rate Methodology
The translation between MWRA's costs^and its wholesale charges, in and of itself,
involves a number of trade-offs and potential distortions in the rates charged to towns..
This level of price distortion is in addition to the dilution in price signals described above.
We first provide an overview of this rate methodology, and then discuss some of the
potential issues with it.
10 Including the capital charges with town property taxes enables residential
consumers to deduct the payments from their federal income taxes.
4-17
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t
the fact that the cost drivers for capital equipment are not necessarily
the same as those for operating expenses and maintenance (O&M), MWRA uses a
different method to calculate the rates for each. MWRA's "Sewer Cost of Service
Methodology" identifies "functional areas" (e.g., pumping, treatment, residuals
..JP^-.^P601^ costs and/or capital costs in
. The costs associated with these functional areas are
,;:.e Factors" (e.g. wastewater volume, TSS, and BOD) to
develop average O&M andcapital costs of wastewater seryice. MWRA costs of service
3TC lit* ** ** *»-«**»»« I. _ A __.-*-» -r-*.
Q&M costs ; are allocated using total annual metered wastewater flow, total annual
average strength, septage, and high strength flow loads. As shown in Exhibit 4-3, flow is
the largest determinant of O&M charges, comprising nearly 60 percent of the total. This
reflects the importance of the quantity of wastewater in driving operating costs.
Measures of strength such as TSS and BOD increase solids loadings and residence times
f°r treatment and thus comprise the remainder of O&M charges. MWRA's wholesale
rate metho<|ilogy also allocates costs to municipalities that have high strength users. A
high strength user is a permitted industry discharging 25,000 gallons per day and having
an average TSS and/or BOD strength of 400 mg/1 or greater. For FY98, seventeen high
strength users were allocated wholesale sewer charges as part of the annual sewer rate
settmg process. The surcharge rate above 400 mg/1 for either TSS or BOD is constant,
however, for all levels of discharge.
Capital costs are allocated using metered wastewater flow and loadings, along
with _ population. Capital costs are, by their nature, fixed whether or not the capital
capacity is being used. For this reason, MWRA has incorporated two other elements in
its capital rate structure. Monthly peak flow is an attempt to reflect the additional capital
.#e?$?3f; *£P?iTed bv Peak surges, and comprises about 15 percent of total charges.
Population is used to allocate the vast majority of capital costs, 75 percent of the total.
Population served drives both the collection system required and the provision of surplus
capacity to address future growth.
wholesale rate structure includes two important potential distortions. The
first involve^ peak flow surcharges. While MWRA has implemented some degree of
peak pricing, peak dischargers may still be cross-subsidized by other users. The second
involves the allocation of such a substantial portion of capital costs on the basis of
population. Allocating the bulk of capital costs based on the number of people may
overlook other sources of high cost infrastructure such as peak flows or length of
trunklines.
. analyze these distortions in greater detail below, it is important to draw
a distinction between cost allocation in situations of scarcity versus situations of adequate
or excess capacity. Consider the case of I/I. MWRA has already built the necessary
treatment capacity to handle high I/I levels. This infrastructure must be paid for whether
or not it is used Thus, eliminating pricing distortions, if it led to large investments by
4-18
i
-------
" , Exhibit 4-3
MWRA Rate Factors as a Percent of Total Charges (FY1998)
Factor
Annual Flow
Total Suspended Solids
Biochemical Oxygen Demand
High Strength Component*
Monthly Peak Flow
Population
Total
O&M Costs Capital (Debt Service) Charges
($OOOs)
83,048
35,112
24,498
2,770
' ' -
-
42,660
(%)
58.2%
24.6%
17.2%
1.9%
0.0%
- 0.0%
100.0%
($OOOs)
, . '
6,124
6,129
513
_ 18,335-
91,765
122,353
(%)
0.0%
, 5.0%
5.0%
0.4%
15tO%
75.0%
100.0%
(1)
MWRA Inflow and Infiltration as a Percent of Total Flows
60% (2)
Notes: ,.,,..
*Reflects high strength surcharges for flow, TSS, and BOD. Amounts already included in category totals.
Sources:
(1) MWRA, "MWRA's Sewer Service Cost Allocation Methodology," July 15,1997. .
(2) MWRA, "1997 Update ori Infiltration/Inflow Reduction Strategy," Draft, August 6,1997, p. 2.
4-19
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communities to curb I/I, would simply shift the costs of the plant to the remaining users.
In contrast, had MWRA (or its predecessor the Metropolitan District Commission) sent
proper price signalsaboutI/I beginning 20 years ago, investments by "communities may
have enabled the current Deer Island plant to be smaller, saving substantial costs.
Peak Flows \ ' i ' :
Under the current wholesale rate structure, peak flows pay only fifteen percent of
capital charges. In fact, however, inflow and infiltration, a large source of peak flows,
comprises approximately 60 percent of average daily flows (the average vahfe in a survey
of 107 POT^s nationally was 25 percent).11 A year-round average understates the
impact of the problem because peaking capacity requirements are driven by annual peak
flows. MWRA estimates that I/I accounts for roughly 72 to 75 percent of maximum
| monthly wastewater flows, a better; measure: of^ theJmpact on capacity.12 Thus, the
current allocation of capital costs likely subsidizes the sources of large peak flows, and
reduces the incentives for cornmunities with particularly high I/I to invest in sewer
upgrades.13
While quantification of the environmental benefits of I/I reduction is difficult, I/I
reduction will reduce the quantity and frequency of raw sewage overflows upstream of
MWRA facilities: resulting in reduced pollution of local wetlands, rivers, and Boston
n; ...JJarbp^ a^well as reduced incidences .of raw .sewage backups into homes. Staff felt that
the elimination of collection system overflows during severe storm conditions would be
virtually impossible but that the reduction of overflow events during marginal storms was
achievable. , .
When we analyzed MWRA's community-by-community data on peak flows, we
found that communities with the highest I/I percentage of peak month flows are likely to
be the ones receiving the largest cross-subsidies from the current rate structure.
Interestingly, these communities include some of the wealthier suburbs, most of which
can afford to invest jn sew.e|- upgrades to reduce the problem more easily than the. less
affluent communitiesnow bearing a disproportionate share of the higher costs of waste
11 MWRA data from MWRA, "1997 Update on Infiltration/Inflow Reduction
Strategy," Draft, August 6, 1997, p. 2. National survey data from AMSA, The AMSA
Financial Survey, 1996, p. A-17.
12
MWRA, Ibid.
13 Although the recovery rate on peak flows is perhaps too low in the current rate
structure, it is important to recognize that the surcharging for peaks at all is a substantial
Prov5ment, and is only possible within MWRA as a result of a substantial investment
in monitoring equipment installed throughout the collection system.
4-20
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water treatment capital infrastructure.14 Converting raw data on peak flows to cost
accounting estimates of how much these additional flows have cost the system might
enable the Authority to eliminate cross-subsidies .from less-wealthy to wealthier
communities.
Whether or not the political environment will allow higher charges for peak flows
to some of these communities is an open question. In addition, MWRA would need to
carefully evaluate how customer reactions to higher charges would affect the Authority's
allocation of capital infrastructure charges. However, improved accounting for the cost
of peak flows could help the authority to prioritize its own financial assistance for I/I
controls. Currently, their Local Financial Assistance Program distributes money to
communities to use towards reducing I/I, of which 75 percent is used for construction
costs. MWRA has chosen to aggressively address this problem through zero-interest
loans and grants to communities as incentives to repair and replace old wastewater mains.
The funding is substantial $64 million over a ten-year period.15 However, the grant
program funds are allocated among all sewer communities based on respective share of
overall MWRA sewerage system charges rather than based on I/I rates or CSOs. Again,
there is a trade-off: each community wants its "fair share" of the grant program, yet a
different allocation mechanism might well do more to reduce MWRA's aggregate
costs.16
Allocation by Population
As noted above in Exhibit 4-3, the largest factor in allocating capital costs is
population. Half of this charge is based on the sewered population within a particular
town, reflecting their use of current capacity. The other half of the population charge is
based on the census population, including those not currently discharging to .the system.
This allocation reflects the implicit standby capacity that MWRA provides as more and
more of the people in these communities shift from septic systems to sewers.
14 See MWRA, "CY 1996 Community Wastewater Flow Estimates Ranked Flow
Components," August 5, 1997. We compared peak I/I levels to average per capita
income levels and found that many communities with below average incomes were
paying more than their share of peak flows, while many communities with above average
incomes were paying more. ;
15 MWRA, "MWRA Infiltration/Inflow Reduction Strategy: Discussion with
WAC, " August 8,1997, p. 3.
16 MWRA staff also noted that communities that had already invested substantial
sums in reducing their own I/I resented subsidizing communities that had done little in
this regard.
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Ill II
(111
The use of population for allocating overall capital does have its weaknesses,
however. First of all, much of the demand for the current scale of trunklines and
freatment capacity is due to peak flows rather than population.17 Secondly, while
collection system infrastructure is logically allocated based on census population (since it
has to be installed even if few people in a town are currently using it), most of the
collection systems within the towns are owned by the towns themselves, not MWRA.
Other factors that would be likely to drive up collection costs, such as distance from the
treatment plant (requiring more miles of trunklines and more pumping stations) are not
reflected at all in rates.
Mil
The allocation of the t>ujk of the capital costs based on population is useful in that
it minimizes the ^cost ;of jW^ewa.^.tfe^tffi^.per capita, a possible strategy to ensure
universal service. It also ,gpi?u^.tft,Jtei^.st*le rate base, since flow reduction efforts
within a community do not reduce MWRA's recovery of already-spent capital. However,
as noted above, the cost d^yer m^ needed is peak flows. Peak flows,
in turn, are driven by I/I, not by sanitary flows (which are linked to population). Because
it reduces the incentive ;to ; curb peak flows, a population-based charge may not ration
scarce capital capacity in an optimal way. In addition,. the lack of surcharges based on
distance from the treatment plant may hide break-points at which decentralized treatment
alternatives become economic.
Centralization of Industrial Pretreatment
Cross-subsidies between communities and user groups can dilute the signals to
curb wastewater discharges, driving up capital requirements and system costs; however,
they do not threaten the functioning of the wastewater treatment system. Discharges from
industrial users can cause plant upsets or trigger non-compliance with MWRA's NPDES
permit. Thus, despite being a wholesaler, MWRA has maintained (and EPA generally
requires) centralized control of its industrial pretreatment program, known as Toxic
Reduction and Control (TRAC). Through centralized analysis and control not only of
industrial discharges, but of non-industrial discharges of constituents of concern, TRAC
has successfully reduced toxics loadings to the system. For example, levels of industrial
metals released to the system were reduced by more than 50 percent between 1993 and
1996.18 Direct oversight of industrial dischargers has eliminated the large potential
problems that decentralizing oversight to the 45 sewer service communities would have
caused to treatment plant operations and influent loadings of metals and toxics.
17 As noted above. III comprises 72 to 75 percent of maximum monthly flows.
Since peak flows in nearly all MWRA communities occur in December, these peaks drive
the demand for system capacity.
in i
18 Industrial metals include copper, nickel, silver, zinc, chromium, cadmium, lead
and mercury. See MWSJ^Jndustrial WasteReport, October 1996, pp. 5-6.
4-22
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Much of this oversight has relied on regulatory approaches such as permitting,
inspection, monitoring, enforcement, and penalties. Increased fees have not been used as
a tool to modify discharger behavior to the extent they could be. For example, surcharges
on industrial users for TSS and BOD, often an important component of the price signals
that POTW's send to industrial dischargers, are levied on the city within the MWRA
service area.19 It is then up to the city to decide what proportion of the fees to pass on to
industry in general, or to particular RJs. The greater the pressure within a city to be
"business friendly,"; the more likely that other, non-industrial, users bear part of the
charges for TSS and BOD. . .
MWRA also charges industrial dischargers a fee both for permitting and
monitoring, and staff state that this fee has encouraged some RJs to reduce their
discharges. Unlike strength surcharges, permit and monitoring fees are levied directly on
the company, and do not go through the respective city sewer authorities. These charges
use a sliding scale (based, hi part, on a point system) to more accurately reflect the burden
to TRAC of resource-intensive permits. This point system is rather innovative in that it
reflects the relative importance of certain constituents to MWRA's NPDES and sludge
disposal compliance. Those constituents which appear hi concentrations nearest to
MWRA's effluent and disposal limits (including copper, lead and mercury), and which
could subsequently force MWRA into more expensive treatment or disposal options,
receive a greater weight in determining a facility's monitoring charge.
The point system aside, industrial users are subsidized by non-industrial users. In
fact, MWRA made a conscious decision not to create a pretreatment program fee
structure that recovered the full costs of their program as it would have resulted in much
larger industrial fees. The current fee structure (which was only implemented in 1993)
aims to reduce total loadings, but is less concerned with full cost recovery.20 As a result,
permitting and monitoring charges are only meant to capture the full cost of labor time
for each activity (inspecting, permit writing, permit review, and monitoring) as well as
most of the laboratory costs. Users are not charged the costs of litigation and/or
additional monitoring unless it is associated with a significant enforcement action. Nor is
TRAC's share of MWRA administrative and overhead costs included in TRAC's fee
structure.
The point system is an approximation even of the direct costs that TRAC incurs to
monitor lUs. The amount charged for each permit was determined by dividing the total
direct labor, materials, and services costs associated with permitting and inspecting the
regulated facilities by the number of permits issued per year. Currently, this averages
19
Within MWRA, these charges are levied by the Authority's Budget Department
rather than TRAC. MWRA has no authority to force member communities to pass, the
strength surcharges back to the appropriate discharging industries.
20 All else being equal, higher fees on loadings will generally encourage additional
reductions.
'4-23
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$2,860 per permit. Permit length (2-5 years) is dependent on the level of attention and
resources determined appropriate for the category of facility In general, more complex
facilities or those discharging higher levels of pollutants of concern will pay higher
permit fees ($1,430 versus $575 per year) and be issued a shorter permit. While this
system does generally allocate costs back to appropriate classes of permittees, cross-
subsidies within IUs certainly remain. Only recently has TRAC actually tracked (on a
pilot basis) employee time by activity. This would enable them to more accurately assess
how their resources are being used. Whether or not the Authority decides to modify its
fees based on mis new cost information will depend on whether key decision makers
within MWRA believeJhe new fees justify the potential increase in administrative burden
to track costs and justify the change in fees to IUs.
TRAC is funded by MWRA's General Fund, and all permit fees and penalties
collected by TRAC go to the General Fund. Annual budget appropriations to TRAC
from the General Fund have no explicit linkage to fees and penalties collected from users.
There is also no roll-over from year-to-year of surpluses within TRAC (surpluses revert
back to MWRA's Rate Stabilization Fund), reducing the incentive to optimize budget
allocations across budget years.
Ill " .'"..'.'( ' , ,"';'" ' ' '' i;!"1 ' !" , 'I"1'11' 1|'"' , ,''' " 1|!"' '''''!,'' ' '' :" ' ', !'
While fees on IUs may be artificially low (both due to TRAC fees that do not
recover the full cost of oversight and to strength surcharges that towns do not pass back
onto their IUs), TRAC does try to focus its outreach based on the overall impact of
particular discharges on the treatment system. Two examples of this targeting are their
current outreach to hospitals and dental offices to reduce mercury, and to owners of
industrial cooling towers to reduce molybdenum loadings. Although there is no plan to
increase fees on these dischargers to reflect the costs they force MWRA to incur, the
Authority is essentially using a demand-side management approach to control the
cpnstituents pf cpncern.
Outsourcing of Biosolids Management
MWRA has contracted with the New England Fertilizer Company (NEFCo) to
barge its digested and thickened sludge from the Deer Island and Nut Island treatment
plants. NEFCo then de-waters, pelletizes, and arranges for use or disposal of the
biosolids. MWRA's contract with NEFCo, which is valid through 1999, stipulates that
the contractor will be paid per unit of material handled; regardless of the quality of the
resulting pelletized biosolids. Generally, MWRA biosolids meet EPA Table 3
("exceptional quality") standards for land application, thereby allowing the product to be
marketed, distributed, and disposed of nationally. NEFCo ships these pellets by rail to
several different sites for land application or use in blended, fertilizers. Occasionally,
MWRA pellets do not meet the federal lead limit for unrestricted use, When this occurs,
the biosolids are used only at designated land application sites or are landfilled.
II
mi
ml'! I1"!
4-24
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NEFCo has historically spent between $16/ton and $72/ton (or an average of
about $50/ton) for land application or fertilizer blending, depending on sludge quality,
physical properties, and the distance to the consumer (pellets are shipped by rail as far as
Colorado). According to MWRA, the current market price to landfill biosolids is
$76/ton. Additionally, during 1993 MWRA signed a 30-year contract with a landfill in
Utah to guarantee back up disposal capacity. This contract helped MWRA to reach an
agreement with the Commonwealth of Massachusetts, EPA, and the Court to avoid
constructing its own landfill, as previously required as backup for its beneficial use plans.
The contract contains a guaranteed transport and tipping fee that is somewhat above
current market rates. MWRA is not obliged to use this landfill if it has other disposal
options. In fact, the landfill has offered lower spotrates'to compete with less'expensive
alternatives that have been available.
This combination of factors provides an interesting example. It is cheaper to
beneficially use the pelletized biosolids through land application or fertilizer blending
than it is to landfill biosolids. It is therefore in NEFCo's interest to produce pellets that
meet all federal guidelines for unrestricted use. However, the terms of the current
contract do not vary the cost to MWRA based on biosolids contamination levels, even
though reducing this contamination is much more in the control of MWRA than NEFCo.
In the same way that residential pricing for wastewater services diluted the incentive for
residential customers to reduce water consumption, the NEFCo contract terms have the
potential to reduce MWRA's incentive to implement source reduction for contaminants in
their solid residuals.
In this specific example, a number of factors do induce MWRA to act despite a
lack of short-term financial penalty for contamination levels. First, there are regulatory
pressures to bring down metals contamination in biosolids (in this case, Pb and Mo). In
addition, the NEFCo contract is relatively short (five years). Thus, any new contract,
would likely penalize the Authority for contamination levels either directly through
specific provisions, or indirectly through higher bid prices overall, and preparing for that
contract rebid requires that MWRA start trying to reduce metals loadings now.
However, the general issue of a disparity between short-term and long-term
pressures is common in many POTWs, which is why it is worth mentioning here. In the
NEFCo example, MWRA staff noted that the need to obtain a new residuals management
contract within only a few years was an important additional impetus to ensure that.
metals loadings were reduced so that all biosolids met EPA "exceptional quality"
standards year-round. Many other utilities face a disparity between short- and long-term-
pressures from out-of-date NPDES permits or capital infrastructure that is nearing
capacity but that is far more expensive to expand or replace than it was to build in the
first place. It is important that POTW staff recognize how the current situation is likely
to change over time so they can plan accordingly. As noted above, changes in user
discharges can take years to achieve, so adjustments to rate structures, outreach, and
monitoring/enforcement need to occur well in advance of the new requirements if they
are to be effective. .
4-25
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Summary
-«:-Escondido _ andi ^MWRA differ tremendously in size and scope. While local
conditions dictate some of their issues of importance (such as effluent reuse in
California), both face a number of similar challenges in trying to balance political and
economic objectives. Both case studies illustrate how improper price signals can distort
the behavior of dischargers in detrimental ways, driving up total POTW costs and
potentially reducing environmental quality as well. Similarly, both illustrate the
difficulties that program managers face in trying to maintain both proper price signals and
a busmess friendly environment.
The exact issues in your POTW will lively differ from these two case examples.
However, being aware of the types of cost accounting and budgeting issues that can arise
and using information on the costs of existing distortions, can help you prioritize areas for
immediate, medium-term, and long-term improvement.
ilc.'T : < I liiill'l " 1' J i"
4-26
iil^ i I
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5.
SUMMARY
Improved budgeting and cost accounting can be an extremely powerful tool for POTW
managers. Across nearly every aspect of the POTW, understanding how particular dischargers
and discharges' drive treatment costs can improve internal planning, rate setting, and the
incentives to reduce pollution and peak flows. This report has provided an overview of a number
of useful tools to support the transition to improved budgeting and cost accounting as well as
detailed examples of what parts of your operations could likely benefit. We hope you will
customize these examples to your own plants.
Implementing improved budgeting and cost accounting will not be easy. The points
below will hopefully help to keep the process in perspective:
Focus on the Long-term. Any single issue area, once you begin to
address it, will uncover (or create) others in need of attention. The
implementation process will not always be smooth. Thus, it is important
not to expect immediate benefits but to look for systematic gains in
. understanding and control over a 2-3 year period. Implementing changes
(in rates for example) after the new system has identified problem areas
may also take some years. Patience is important, but the new approaches
will make many changes possible that would be inconceivable without the
improved ability to identify and quantify cost drivers.
» Focus on the Utility-Level. Systematic changes in the method used for
cost accounting and budgeting cannot be done within a single division, as
it is affected by, and affects, most of the other divisions in the enterprise.
Changes need to be implemented across the POTW, and with the active
support of top management.
Spend Adequate Time Focusing the Effort New cost accounting and
budgeting systems will alter the information that managers have to make
critical decisions for the organization. The information that these systems
provide, and the format that they provide them in, will greatly'influence
the management of the utility for many years. Spend sufficient time early
in the process to be sure the systems answer the questions that are most
important to you, and provide data in a useful format. Be sure to get
feedback on these important questions from all divisions and from all
levels of the prganization; the view from the utility director's office is
unlikely to convey all that is important.
Treat the Systems as an Input to the Answer, Not the Answer Itself.
There is a temptation to take quantified data as the key input in a decision.
Analytical tools, help managers to structure a problem; they still require
interpretation. Economically-optimal outcomes may need to be balanced
against technical or political constraints. Work with key staff to
5-1
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understand how to interpret the new cost accounting and budgeting
information so that they can use it.to make better decisions without using
it unquestioningly.
Share Lessons Learned. Many firms have implemented the types of
budgeting and cost accounting systems described here. However, the
specific challenges and hurdles faced by POTWs that try to do so will
likely be quite different. Be willing to ask questions of utilities who have
ffibved in this arena sooner than you; you can learn much from them. A
centralized forum (perhaps a special area of EPA's Office of Water Web
site or its PIPES bulletin board for water-related issues) in which to share
questions and advice on implementing improved budgeting and cost
accounting might be extremely useful.
Be Flexible in How ^o Use the New Information. If political realities
prevent you from increasing fees on the large HJs driving your elevated
biosolids costs, the new information on costs can nonetheless be very
useful in prioritizing the use of internal resources. The net result will still
be less pollution at lower cost.
"li":;,.
Mil1 :: ."
5-2
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GLOSSARY AND ACRONYM DIRECTORY
activity cost pools - Accounting groupings that sum all expenditures related to a particular
organizational activity, used in an activity-based costing approach.
activity-based costing (ABC) - Cost accounting approach that allocates all costs within an
organization to processes, products, or projects on the basis of the activities that generate
those costs. Spending is grouped by activity, rather than department as is often done.
AMSA - Association of Metropolitan Sewerage Agencies, the trade association of large, municipal
sewerage agencies.
.average and peak demand method - Method of allocating capital infrastructure costs to system
users by assigning the baseline costs based on average demand for services and allocating
residual costs, assumed to be associated with peak demand, based on peak demand patterns.
benchmarking - A detailed comparison of ones own products or processes to those of other
. competitors or service providers to identify avenues for improvement.
capital budgeting - Process by which the POTW assesses long-term capital needs, and estimates
the costs and benefits of particular capital acquisitions. An important aspect of capital
budgeting is the assessment of the full annualized costs of capital services from particular
plant or equipment investments. '
coincident demand method - Approach used to allocate capital costs to users based on their
; demand for system capacity during the system's peak period. .
cost accounting - Process by which costs are allocated to specific products or services so that
managers can better assess how their costs vary based on different activities.
cross-subsidies - Pricing or fee systems that charge one class of users or certain activities less than
-the real cost of providing service. Generally, cross-subsidies are financed through higher
, charges on other consumers. Cross-subsidies are independent of whether a utility meets its
overall revenue requirement, and tend to exist in regulated markets more often than in
competitive ones.
debottlenecking - Bottlenecks in a plant are the "weak links" in production (or waste water
treatment) where capacity is constrained, preventing an increased production or treatment
capacity. Debottlenecking is the process of identifying and rectifying these constraints.
direct discharger - Industry with an EPA NPDES permit allowing it to discharge waste,water
directly to a river or stream rather than having to send it to a sewage treatment plant.
FOG - Fats, Oil, and Grease discharges into the sewer system. Term is applied to both cooking oil
and petroleum-based products. .
HARRF - Hale Avenue Resource Recovery Facility, the wastewater treatment plant in Escondido
CA.
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, || 11 lull I i1' I'" , ' i ,, I'II.IH' : ,i , "" "' .: ,f , I "' / " i IP , , ' ' ,i< . ',! I/I'M!' I1,, , ir , '"ri'i i ,.n," / ,if i' ,"'',: , f ', ' 'i i ,i v n ,", L'l 'U, I, 'IP i '! , i "II Ilillllll
historical costs - Measurement of the actual cost to install infrastructure. Historical costs, as
I opposed to replacement costs, are often used as a basis for pricing wastewater services and
setting revenue requirements. '
I/I - Inflow and Infiltration. Infiltration includes ground or surface waters entering the collection
system through physical defects in collection system such as cracked pipes, deteriorated
joints, or poor construction. Inflow includes flow entering the collection system from sump
pumps, cross-connections, leaking tide gates, manhole covers or other non-wastewater
source.
UAs 7ulatgrjurisdlctional agreements, the legally-binding contracts municipalities sign with each
Other governing shared services, such as wastewater treatment
Illll I I I illllll I I II I I II III I l|l
indirect discharger - Firms discharging waste water to a sewage treatment plant rather than
directly to a river or stream, indirect dischargers are regulated by the receiving POTW.
lU - Industrial Users. Refers to industries discharging to the municipal sewerage system.
lateral lines - Sjnaller, peripheral sewer lines in waste water collection system.
LMSD - LouisyjUe and Jefferson County Metropolitan Sewer District.
I III I >' ail ' \ t:;, i ii: t ; :,.'' i, > nil*' " , ."'f ; '"'I, 'jv ilit1",: ' > ".," i' 'i ": ,' #;A- !,!" A * :"*" -f-'«,! 11;" '?'f' '» ''''" ':>, ,::., ,., f',, " ' J ; I;" "ii1 "»":= I'lili
life-cycle costing - Process of evaluating not only the direct costs of providing a product or service,
but cps^thrpughout the life-cycle. This would include such factors as the environmental
impacts of producing the product and the cost of disposal.
minimum size rjile - Used to allocate infrastructure shared by many users, the minimum cost rule
assume! |hat the minimpm capacity (plus a safety margin) needed to serve a standard user is
a joint cost, and the incremental costs beyond that level should be borne by the subset of
users requiring the larger capacity.
MWRA - Massachusetts Water Resource Authority, the oversight body for water and wastewater
services for 45 communities in the Boston area.
noncoincident demand method - Approach used to allocate .the costs of capital infrastructure
among users based on the peak demand for the system for each individual large system
user. Often used when infrastructure sizing is driven by customer rather than system peaks,
such as in the size of lateral collection lines.
NPDES - National Pollutant Discharge Elimination System, used by the Environmental Protection
Agency to track discharges to the nation's water bodies.
peak leveling - The need for wastewater collection, storage, and treatment capacity is driven by
peak demand. Peak leveling uses a variety of market and outreach approaches to reduce the
peak surges, thereby deferring the need for additional capacity.
.flPTvv'!'" ^kh'gjy *">wnec* Treatment Work, wastewater treatment plants owned by the public
V!'!,,! ;,!; '::, SCCtO!" " '"" " ' " " "' " ' ''
Hi!!!''1'1 i'! " ''' , .III'"! Hi '''I! , ;" * l!'
-------
replacement costs - Cost to replace existing capital infrastructure at today's prices. Replacement
costs can be lower than historical costs (e.g., if technical improvements have reduced the
costs of new equipment) or higher than historical costs (e.g., if labor costs, interest rates, or
siting costs have risen).
resource or shadow pricing - Linear algebraic analytic approach that estimates the cost to a
production objective (generally .profit) from a scarcity of a particular input or resource.
TRAC - Toxic Reduction and Control Department, the division administering MWRA's industrial
pretreatment program.
trunk lines - Large, central sewer lines in a waste water collection system.
unbundling - Process of disaggregating the various services provided by a utility such as
wastewater collection, billing, stormwater control, ..to be sure that the price, of each service
accurately reflects the cost of providing it. Unbundling tends to remove many cross-
subsidies that exist within the current pricing structure.
WWTP - Wastewater Treatment Plant.
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II II
T l"'i' , i" '
Si",.
i
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'.... Appendix
Memo From Water Quality Association Regarding Automatic Water Softeners
To: WQA Manufacturers
California Retailer Members ,
Interested Parties
From: Cariyn Meyer
Director Public Affairs
Date: May 27,1997
Re: Recent Court Decisions
This fact sheet is intended to answer the'quesfions most commonly asked of WQA about recent court decisions in ;
California. s
Status of California Lawsuits:
As most of you know, the 4th appellate district court in San Diego recently decided in favor of WQA regarding local
water softener bans. The appeal court agreed with a lower court ruling that overturned the Escbndido softener ban
imposed in 1991.
We now have two published and certified court decisions, one from the 2nd appellate district court, the other from the
4th appellate district court The California Supreme Court refused to hear the case, thereby letting the appellate
decisions stand. These decisions are, therefore, precedents that all California lower courts are obliged to follow.
The appeal court's decision ends six years of WQA litigation over softener bans.
Scope of Court Rulings:
. - . \ . "'-.'
When WQA first filed in Escondido, we had anticipated that ail bans before 1978 were 'grand-fathered" into the
California Health and Safety Code. The courts ruled that they are not Therefore, these old bans are subject to the
same interpretation of the law as Escondido and Santa Maria. This means ail California residential softener bans are
unenforceable.
According to WQA attorney Ladd Bedford of McQuaid, Metzierv McCormick and Van Zandt
"With respect to those local ordinances still on the books in California, these two published appellate
decisions create binding legal precedent As a consequence, any trial court considering these local
ordinances would be bound to follow these appellate decisions and conclude that local ordinances banning
or unduly restricting residential automatic water softeners which comply with state standards, are void and
unenforceable/ .
Can Automatic Water Softeners Now Be Sold in Previously Restricted Areas throughout California?
The courts have said yes, as long as they meet a 2850 grains of hardness^temoved/pound of salt used efficiency rating
and provided other requirements of the State Health and Safety Code Section 11678.5 are met Be sure you also
observe the laws of your local jurisdiction, including pulling permits.
A significant number of California cities experience, above-average levels of salts in their source and wastewaters.
Especially when they are pressured by the Regional Water Quality Control Boards to achieve waste discharge
standards/this is a difficult problem for thein?Acxardingly, to help address this problem, WQA recommends selling
only high efficiency DIR equipment fri California. . .
We_should work with local officials and other industries to help mitigate these problems. We can help by selling only
high efficiency equipment and educating consumers to property maintain their water softeners so that units remain
efficient throughout theiruseful Dyes. . ,-. -, ...".. . '-. .- .
-------
'l"!|1',ii ' 'sV,,,, , 'iMill,
i1 ; in!1!" i',!, ' !: I'i'iiiii!
page 2Coal Decisions
How will focal officials resnond to sales of softeners in areas that were once restricted?
This depends on the situation, but few will welcome the court decision with open arms. Some officials will accept the
1 nJng as state law. A couple of cities are already moving to reverse bans. However, even if a city does not officially lift
a ban, the court decisions say those bans cannot be enforced.
Some agencies will understand that salinity problems are larger than water softeners and require much more
3 comprehensive water and wastewater management programs to resolve. Others will be skeptical and challenge
companies selling in their area. Still others will want legal proof or to consult with their respective city attorney. A lot
depends on how much local officials have followed the court case or how big the salinity problem is in their source
water. ' '.-.,''.'
It is extremely important that you educate your local officials. Explain the softening process, especially advances in
technotogy since the bansi were first imposed in the 1960s and 1970s. It can go a long way towards building an
u'nS
§e ""advised that - in dealing with this issue - you should talk directly with the Director of Public
&r^fie City Attorney or otter responsible local official. They should know about the lawsuit decisions. If not,
" e and the appellate court decision itself.
Expect strict enforcement of rules regarding permits, installation specifications, advertising, the "3-day" cooling off
period, etc. And be prepared to respond to any negative consumer information campaign on the part of a city or water
^strict. There is nothing in the tew that prohibits a local agency from "educating" consumers about softener brine and
posrBo'ri on softeners. (They cannot of course, lie and mislead or say softeners are illegal.)
How will state agencies react to the court decisions?
Several state agency associations have already sponsored a "spot bill" (or "shell bill") in the California Senate (SB
350). These include the Association of California Water Agencies, the Association of California Sanitation Agencies,
the League of Cities, and the Water Reuse Association. The bill's language is harmless at this time; however, it was
Introduced as a way to reserve space on the legislative calendar for a future amendment to include language that could
be ' teinmentai to the industry. Although we have assurances from the bill's author that he would not add such
language, we can't rest on that promise alone.
WQAis poised to respond to any legislation that may be introduced by opponents to our lawsuit wins. We have kept
key legislators abreast of developments in the lawsuit and have alerted them to our interests in the issue. WQA's
position also has support from many sizable end-user groups, such as those representing hotels, restaurants,
laundries and hospitals. . ,
We have made it dear that the industry could support legislation containing tougher standards than what presently
exists In state law but which meet current industry capabilities (DIR, 3350 grains removed), provided local jurisdictions
"are not given the authority to ban products. ........... .............................. .............................................. ......................... , ..................
The water and sanitation agencies wi continue to portray their position as serving the public good. However, many
legislators have tax-paying constituencies who would suffer if they were prohibited from using softeners.
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Other issues that may be raised ,
Q: Can a private homeowners association ban water softeners as part of its covenant?
A: They may be able to, depending upon how the covenant is written. Condominium association agreements are
more or less contracts entered into voluntarily by private citizens.
Q: What if my local officials say they are banning brine discharge under the sewer laws, not water softeners
perse?
A: Several districts have brought this up. It may be a way to circumvent the court decisions. However, a district
cannot single out water softeners. It would be in violation of state law.
Q:. My city says that the Regional Water Quality Control Board bans water softeners.
A: This is nonsense. The Regional Water Quality Control Board sets standards for municipal sewage treatment
plants. Some cities believe that if they are in violation of those discharge standards setting TDS limits, it gives them
the right to ban water softeners. It does not. Plus, the Regional Water Quality Control Board does not have the power
itself to ban water softeners or even to tell cities what specific actions to take to comply with board-issued standards.
Neither do the State Water Resources Control Board or the EPA.
To receive a copy of the appellate court decision or the California Health and Safety Code, fax your request to WQA at
630-505-9637. - . '
CAM/al
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