United States        Office Of Water
            Environmental Protection    (WH-556)
                        March 1993
Clean Water And The
American Econnomy
Proceedings: Surface Water
Volume 1
October 19-21,1992
                                     Printed on paper that contains
                                     at least 50% recycled fiber


The mention of commercial products, their source, or their use in connection with
material reported herein is not to be construed as either an actual or implied
endorsement of such products by the U.S. Environmental Protection Agency. The
content of all papers is as presented at the conference. Audio transcriptions are
presented verbatim with no editorial changes.  Format and grammatical changes have
been made where possible for consistency.

The U.S. Environmental Protection Agency wishes to acknowledge the following
organizations for their support and help in conducting this conference.  Resources for the
Future co-sponsored the conference.  The Ground Water Protection Council provided
funding and assistance in scheduling speakers.  This document was prepared under the
direction of Mark Luttner, Special Assistant to the Assistant Administrator, Office of
Water and  Charles Job, Chief of the Ground Water Protection Branch. The following
Radian Corporation personnel provided logistical and technical support in the
development of this document for the Office of Water, under EPA Contract
No. 68-CO-0032:  Thomas Grome, Program Manager; William Sproat, Project Director;
Margaret Masley, Task Leader; Laurie Morgan, Chrisanti Haretos, Margie Gibson, and
Robyn Flanders.

                                           VOLUME I

                                    TABLE OF CONTENTS


 LaJuana S. Wilcher— Welcome Address	 W-l

 David Alan Aschauer—Water Infrastructure and Economic Growth  	1-2

 Gerry E. Dorfman—Clean Water Construction and the American Economy	1-13

 Douglas B. MacDonald— Water Infrastructure and Economic Development	1-18

 Anne Meagher Northup—Environmental Issues	  L-l

 Kenneth D. Frederick—The Future of Irrigated Agriculture	2-2

 John K. Hosemann—Economic Issues for Farmers in the Rewrite of The Clean Water Act	2-11

 Fred Krupp—Evening Address	D-l

 Mary Jo Kealy—Clean Water and Recreational Use Support: Has The Clean Water Act Made
 a Difference?  	3-2

 W. Douglass Shaw—Recreation and Tourism Benefits From Water Quality Improvements:  An
 Economist's Perspective	3-19

 R. Lawrence Swanson—The Costs of Marine Debris Washups On New York and New Jersey Beaches .... 3-34

 Richard Marks—Clean Water: The Seafood Connection	4-2

 Andrew A. Rosenberg— U. S. Living Marine Resources:  Current Status and Habitat Related Issues  	4-9

 Ivar E. Strand—The Contribution of Clean Water to Commercial Fisheries  	4-13

 William T. Lorenz—Export Opportunities in Water Technologies and Services	5-2

Alfred Slatin—Exporting Our Best Ideas: How the U.S. Can Capitalize on  the Global Market for
Innovative Waste Treatment Technologies  	5-19

Donald H. DeMeuse—Luncheon Address	  L-l

Charles  D. Malloch—Pollution Prevention In  Water-Intensive Industries:  One Chemical Company's Views . 6-2

W. Jeffrey Pardue—Balancing Economics and the Environment The Case for Retaining Section 316(a)
of the Clean Water Act  	6-8

Deborah M. Sparks—Environmental Opportunities Missed:  Can The Clean Water Act Make a Difference
in the Future?	6-16

Dennis R. Sasseville— Voluntary Pollution Prevention Initiatives Will Shape U S. Industry's
Regulatory Relationships and Economic  Future	6-21

                                        VOLUME I

                           TABLE OF CONTENTS (Continued)


Claudia Copeland—Funding Water Quality Programs Using Toxicity-Based Discharge Fees	7-2

Scott Farrow— The Existing Basis and Potential for Damage Fees and Tradeable Allowances	7-10

Ray Squitieri—Are Permits and Charges the Last Word in Water Pollution? 	7-19

Zach Willey—Implementing Market-Based Instruments for Clean Water in America	7-27

Robert W. Adler — The Economic Value of Clean Water	8-2

Kenneth Chilton—Clean Water's Muddied Future	8-20

James P. Joyce, P.E—Local Government Perspective on Clean Water and the American Economy	8-30

F. Henry Habicht, II—Luncheon Address  	   L-l

Martha Prothro—Closing Remarks	   C-l


                                                                                   Welcome Address
                                    Welcome Address
                    Integrating the Environment and the Economy:
                 The Challenge  For Clean Water Act Reauthorization

                                         LaJuana S. Wilcher
                                       Assistant Administrator
                                          Office  of Water
                                U.S. Environmental Protection Agency

                I'm delighted to join you for this conference on integrating the environment and the
 economy. The U.S. Environmental Protection Agency is especially pleased to be a co-sponsor with
 Resources for the Future, one of the premier centers  of resource economics expertise in the world. The
 Office of Water hopes that this conference will be the start of an on-going partnership with Resources for
 the Future in which we'll focus on enhancing the role of economic analysis  in environmental water
 policy—something long overdue.

                It's been said that: "Economics...is the one profession where you can gain great eminence
 without being right."  Nevertheless, in environmental policy, economics is now playing a critical role.  When I
 was under consideration for this job more than 3V* years ago, I thought I was fairly well prepared because of
 my background as a biologist and lawyer. But it quickly became apparent that economics was playing an
 increasing role in environmental policy.  So, three years ago, I married an economist. Now, I can hardly
 discuss the electric bill at home without hearing the term "real dollars."  Well, the/re all real to me, and to
 most of the people I know.  And, with the economic downswing we're facing, people are more and more
 concerned with the costs of environmental compliance. Yet they are not ready to sell the environment down
 the river, so to speak.  Last month, Money Magazine  published  a survey of the qualities of life Americans
 want in a place to live.  For the second year  in a row, clean water ranked highest of 44 factors—higher than a
 low crime rate, clean air, and plentiful doctors.  And in a recent Roper  survey, 64% of people surveyed
 picked environmental protection over economic development when forced to choose between the two.

               Yet, in spite of the importance of water, in spite of all  the water quality improvements, and
 in spite of all the economic analyses done, we know little about  the economics of clean water. We need to
 know more.  EPA is seeking information about three  things: First, the  economic importance of the nation's
 water resources and the economic sectors dependent on those resources. Second, the economic effects of
 past and on-going clean water programs. Third, whether the Clean Water Act might better reflect economic
 concerns and issues and, if so, how.

               Issues such as funding the water and waste water treatment infrastructure, controlling non-
 point pollution sources, regulating industrial sources of water pollution,  and implementing market-based
 approaches to water quality problems represent the diversity and complexity of challenges facing water
 programs in  the 1990s. We hope to use the information presented during this conference as part of the
 agency's discussion in the debate next year over the reauthorization of the Clean Water Act.

               Few issues are more important to human or economic health than clean water. We live on
 the Water Planet. Viewed from space,  it is abundantly clear that Earth is a special vessel, unique in the
solar system  because of the life-sustaining presence of water. Although water covers 70% of the earth, over
97% of it is salty.  Less than 1% is readily available fresh water  found in rivers, lakes, and groundwater.
That means that less than 1%  of the world's  water was readily available to the 560 million people who


                                                                                   Welcome Address

inhabited this planet in the 1700s.  And it means that that same small fraction is readily available to the 5.3
billion people who live on earth today. Water is the anchor of civilization and the fount of human


               Shortly after becoming EPA's Administrator, Bill Reilly asked the Science Advisory Board,
a public advisory group of distinguished scientists, to assess and compare  different environmental risks in
light of the most recent scientific data. In addition, Bill asked the Board  to examine risk-reduction strategies
and make recommendations for comparing risks and risk-reduction options.

               In its September 1990 report, Reducing Risk: Setting Priorities and Strategies For
Environmental Protection, the Board made ten recommendations. One of them provided a basis for this
conference.  The Board wrote:

               "EPA Should Develop Improved Methods To Value Natural Resources And To Account
For Long-Term Environmental Effects In Its Economic Analyses."

               With that recommendation the Science Advisory Board was supporting EPA's use of
economic analyses in helping to structure environmental regulations and programs. But the Board was also
telling us to do a better job of assessing the value of the natural resources EPA is charged with protecting.

               The Board's challenge was echoed at the International Conference on Water and the
Environment in Dublin, Ireland last January.  The piirticipants wrote:

               "Past failure to recognize the economic value of water has led to wasteful and environmental
damaging uses of the resource. Managing water as Jin economic good is  an important way of achieving
efficient and equitable use, and of encouraging conservation and protection of water resources."

               The growing international focus on the role of economics in environmental protection was
also demonstrated at the 2nd Annual Meeting of the International Society For Ecological Economics in
Stockholm last August. Bob Wayland, Director of EPA's Office of Wetlands, Oceans and Watersheds,
represented EPA at that symposium, which focused on the growing global realization that the environment
and economy are  intertwined.

               This week's conference is timely because of the current debate about how environmental
policy fits into our nation's economic growth.  While some continue the argument that environmental
protection and economic growth are incompatible goals, we see that  they are both necessary, and that they
are complementary. We find support in this belief from many quarters.  President Bush has  said:

               "In the long run, successful environmental protection is a prerequisite to solid, sustainable
economic growth."

               And Michael Porter, professor at the Harvard Business School, reported in his  book The
Competitive Advantage of Nations, that:

               "Strict environmental regulations do not inevitably hinder competitive advantage against
foreign rivals; indeed, they often enhance it...  Nations, with the most rigorous requirements often lead in
exports of affected products."

               Stephen Farber, formerly a professor of economics  at Louisiana State University and now
with the University of Pittsburgh, reports that the establishment of more  than 500 environmental

                                                                                    Welcome Address
 management, clean up, and manufacturing process control firms in the Pittsburgh area has been a leading
 factor in that city's resurgence from the decline of previously important but highly-polluting industries.


                That's good anecdotal information. Regrettably, that is much the type of information we
 have. Despite 20 years of work and experience, EPA has relatively little quantitative evidence to document
 the benefits of its activities. Our historical lack of focus on economic analysis may partly stem from the fear
 that accurate cost-benefit ratios might show low returns from some programs.

                But we are starting to cast off that way of thinking and to routinely develop  cost-benefit
 calculations, driven by our recognition of the  principle of economic scarcity as applied to the  environment.

                In the Office of Water, minor regulations imposing little or no cost, or which actually reduce
 compliance costs, usually get a brief economic analysis and a passing look at benefits.  But major rules, which
 impose $100 million or more in annual compliance costs or create other significant economic effects, are
 scrutinized very carefully to determine direct  and  indirect costs and benefits for human  and environmental
 protection.  Office of Water economic or regulatory impact analyses typically address:

                •       The projected direct costs of the rule on those regulated, looking for
                        disproportionate effects on segments such as small businesses  or small cities.

                •       Whether the regulations may close businesses, with accompanying job losses and
                        community income tax losses.

                •       And, the larger economic effects of compliance costs, such as  the effect on the U.S.
                        balance of trade or  the long-term stability of the country's  manufacturing base.

                We also test the value of human  health and environmental benefits and we attempt to
 monetize them.  For example, we consider,

                •       The type, number and severity of human disease cases which water  pollution control
                        may prevent.  The Office of Water, like the rest of EPA, has great  difficulty
                        deciding the economic value of these "cases prevented."  That  issue, as well as the
                        monetary value of a human life, has vexed the agency for 20 years, with little
                        agreement or consensus  among our economists and policy  makers.  The result is a
                       great disparity among various regulations in the value placed upon an avoided death
                        or disease case.  In  the most recent group of regulations issued under the Safe
                       Drinking Water Act, for example,  estimated costs per avoided death range from
                       less than a few million to many billions of dollars.

                •      We also attempt to  estimate the degree to which water quality improvement affects
                        other direct beneficial uses of a water body such as enhanced  fishing, boating and
                        swimming, and sometimes commercial use. We attempt to calculate how water
                       quality gains may increase the number of recreational user-days for a water body.
                       In some cases, we can estimate the degree of commercial fishery improvement and
                       can value the increased catch.

                In order to make better-informed decisions about water quality programs and regulations,
the Office of Water is establishing a discrete  Benefits and Incentives Staff.  Two senior economists,
supplemented by natural resource economists from outside the agency on rotating assignment, will conduct
across-the-board analyses of the benefits and  costs of our programs. They will also  consider market incentive

                                                                                    Welcome Address

opportunities. We hope to receive from them rigorous analyses that will help us to prioritize scarce and
thinly-spread Office of Water resources.

                The new economic unit is right in line with the agency's brand-new strategic plan, which
recommends that EPA,

                "Improve  the economic analyses that promote efficiency and cost-effectiveness in our

                You may  be aware of another step EPA has recently taken to improve economics within the
agency. The Science Advisory Board now has the "Environmental Economics Advisory Committee", co-
chaired by Dr. Kerry Smith of North Carolina Stitte University and Dr. Allen  Kneese of Resources for the
Future. This new committee is charged with helping EPA program offices to improve their analytical
capabilities.  The Office of Water plans to take advantage of their expertise.


                The principle of scarcity is certainly in evidence when assessing the economic resources of
the United States for correcting environmental problems. No one argues that those resources should not be
used first for problems of greatest concern.  The question is, which problems are those?  That debate rages,
perhaps most significantly,  in the U.S. Congress.

                The process by which Congress le-authorizes environmental laws, and thus determines
national environmental priorities, sometimes challenges both science and logic. The laws which require EPA
to develop and enforce regulations cover a vast airay of environmental media, pollution problems, and waste
types.  Whether, and how,  each of these laws considers economic effects covers an equally wide range. The
result is a statutory, regulatory, and economic Tower of Babel.  A former EPA administrator once noted
that, while most  organizations set priorities one, two, three, four,  and five, Congress and EPA have
traditionally set priorities one, one, one, one, and one.

                While politics will always be politics, a storehouse of solid factual data from comprehensive
analyses will interject some thoughtfulness into the dialogue, and  provide a common language hi which to
discuss serious questions of resource allocation. The form of major statutes affecting the health and
livelihood of millions of Americans should not rest upon political posturing or the success of propaganda

                EPA and  the nation need a sense of the scientific and economic effects of laws and
regulations, and the benefits  of alternatives.  Since: the agency often lacks fundamental baseline information
on potential environmental harm or benefits, we sometimes develop regulations on the basis of our scientific
ability to measure contaminants, rather than our ability to quantify their danger.  Given the economic scarcity
of resources for environmental remediation, that is foolhardy.  As Dr. Margaret Whelan of the American
Council on Science and Health has pointed out,

                Today, one can detect minute chemical residues measured in parts per million, even parts
per billion.  We are reaching the point where we can find almost anything in anything—where the concept of
'zero' for all practical purposes does not exist."

                Comprehensive analyses would provide both scientific baselines; and economic information.
They would  help EPA justify programs and actions to  a broad constituency including Congress, states, non-
governmental organizations, other federal  agencies and other nations.

                                                                                    Welcome Address
4.0             HOW YOU CAN HELP US

                As I said a bit earlier, we are counting on you, the speakers and attendees of this
conference, to help us further our commitment to good policy-making supported by sound economic
information.  Let me be a little more specific about what we're interested in getting at during the next three

                Today's first conference session, and our luncheon speaker, Anne Northup, will address the
water and waste water infrastructure—one of the more contentious issues expected in Clean Water Act
reauthorization.  How much further should we push municipal waste water  treatment system requirements,
how do we approach combined sewer overflow discharges, what else should we require for treating storm
water discharges and, above all, how do we fund the remaining infrastructure needs?  Total capital needs for
waste water and drinking water needs through the year 2008 will be about $120 billion. Given the magnitude
of these needs and the competing demands for dollars, the question becomes how best to protect the nation's
water resources without  unduly burdening companies, municipalities, and taxpayers.

                Another area of great interest to us is water pollution from agriculture.  The  question is,
how best to accommodate agricultural interests to environmental protection?  According to the states,
pollution resulting from  agriculture is the largest source of impairment in the nation's rivers and lakes.
EPA's 1990 National Water Quality Inventory reports that 61% of water quality impaired stream miles and
57% of impaired lake acres are the result of agricultural runoff.  How do we address these problems without
damaging the productivity of the nation's farmers and ranchers?

                What about economic sectors that are very dependent on clean water for their economic
health,, such as recreation, tourism, and  the commercial fishing industry? It is astounding how much
economic activity is associated with these water-based activities!  Recreational fishers spend on the order of
$32 billion each year on  tackle, gear, lodging and transportation.  Commercial fishing contributes about $16.5
billion to the U.S. economy.  Boaters spend almost $14 billion annually on boats, gear, lodging and other
items.  The U.S. Department of the Interior estimates that about 80 million Americans swim in the nation's
water bodies. All of these economic sectors largely depend on the fundamental health of water bodies, and
clearly benefit from water quality improvements resulting from Clean Water Act mandates.  I'm sure our
speakers will have much to add to these "snapshot" statistics.

                What about exports of  goods manufactured in the United States?  Like  all Americans, we
have a strong interest in the jobs  and economic growth created by exports.  And, as I mentioned earlier, we
believe that a dynamic domestic water treatment industry bolstered by export sales will benefit our own
environment. We just received a report from the National Advisory Council For Environmental Policy and
Technology—otherwise known as  NACEPT—dealing with environmental exports. NACEPT recommends,
among other things, that EPA support U.S. exports of environmentally beneficial technologies to stimulate
environmental improvement and economic competitiveness. NACEPT identified several specific steps that
EPA could take in this area, such as supporting business development centers overseas for U.S.
environmental firms and making information available on international environmental markets.

                Tomorrow, a panel of experts from the water and waste water technology and services
industry will describe the international market for these products and services.  We'll be  interested in your
recommendations and theirs on whether and how a statutory role for EPA  might provide assistance in this
area.  We have no preconceived notions in this regard, and we are sensitive to the view,  expressed by some,
that the federal government has no role in assisting the private sector in this fashion.

                Some industries have seized the reins and are already making profits using pollution
prevention. Tomorrow you will hear Don DeMeuse, Chairman of the Board and Chief Executive Officer of
the Fort Howard Corporation describe how Fort Howard has grabbed those reins.  Others will describe how
their companies instituted pollution prevention practices in their facilities, and made money.

                                                                                    Welcome Address

                We expect to hear some lively debate on economic incentives and other market-based
approaches to environmental management tomorrow and Wednesday.  This is an area in which the Office of
Water is already investing.  Our Point/Non-point Trading Project encourages regulatory agencies and
nutrient dischargers to reach voluntary agreements reducing nutrient loadings to water bodies through a
least-cost strategy. The Office of Water allocated $800,000  this year alone to fund state watershed
management projects including nutrient controls through point/non-point trading systems.

                I suspect that Fred Krupp, our keynote speaker  later this afternoon, might have something
to say in this area as well.

                I'd like to leave you with a few final thoughts about why we think this focus on economics is
so important.  As you can see from our agenda and speaker list,  we have gone out of our way to gather a
diverse group of experts with differing views about the role  of economics in water pollution control. While
we believe that economic considerations must and should be better incorporated into the Clean Water Act,
we know that this opinion is not universally held.  The specific applications of economic considerations and
ideas need to be identified and debated before they are built into the Act or our regulations.  The best way
we know to accomplish this is early and frequent public discussion. The public is ready to participate—a
Times Mirror Magazines survey taken last June finds that 92% of respondents believe that a good balance
can be found between economic progress and the environment.

                Let's  use this conference as an opportunity to better establish the linkage so many of us  see
between the economy  and the environment.  Let's also begin an informed debate over how to consider
economic factors in improving the quality of the nation's waters.  The debate will help us to understand the
close linkage between  economics and the environment, and to begin incorporating; that linkage into the way
we go about protecting the environment. President Bush has made that point, saying,

                "...our ecology and the  economy are interdependent. Environmentalists and entrepreneurs
must see how much their interests are held in common.  It's time to harness the power of the marketplace in
the service of the environment."

                We must also work to overcome the beliefs among some people that using market forces to
control pollution is somehow immoral.  If the market is more efficient and multiplies the work of scarce
resources, surely that is a highly moral policy.

                It's been said that we are entering '...a new world... as strange and new as Columbus
discovered.  It is a world where infinite... demands have  run straight into finite resources."

                At  the United States Environmental Protection Agency, we are prepared to address, with
your help, the challenge of this new world for water resources.

Thank you.

                                                         Session 1
                Monday, October 19, 1992
          Session 1:  The Water Infrastructure and
                   Economic Development

                    SESSION SUMMARY

MODERATOR: Michael B. Cook


David Aschauer— Water Infrastructure and Economic Growth

Gerry E. Dorfman— Clean Water Construction and the American Economy

Douglas B. MacDonald—Water Infrastructure and Economic Development

Heather Ruth—Paper Unavailable

William Stelle—Paper  Unavailable

                                                                                            Session 1

                       Water Infrastructure and Economic Growth

                                         Davsd Alan Aschauer
                              Elmer W. Campbell Professor of Economics
                                            Bates College


                This paper focuses on the role played by the water and wastewater infrastructure in the
post-World War II productivity performance of the United States.  The first substantive section of the paper
reviews empirical evidence on the impact of changes in infrastructure capital and, more specifically, water
and wastewater capital, on productivity, profitability, and costs of production. "The next section of the paper
considers trends in infrastructure spending and goes through standard growth accounting exercises to obtain
an estimate of the contribution of water and wastewater infrastructure to productivity growth. Attention is
focused not just on the direct contribution of infrastructure or productivity but also on the indirect
contribution arising from a spur to private investment and capital accumulation.  It is shown that an
important portion of productivity growth in  the United States has been the direct and indirect consequence
of capital investment in water and wastewater infrastructure. At the same time, it is not the case that any
significant portion of the slowdown in productivity growth can be explained by trends in water and
wastewater investment.  The final section of the  paper proposes an explanation for the sizeable estimated
contribution of water and wastewater infrastructure to productivity growth by focusing on the way such
infrastructure sets the stage for agglomeration economies as well as external effects such as knowledge-

1.0             INTRODUCTION

                In the United States,  there is increasing interest in policies pointed toward the goal of
increasing the pace of productivity growth—annual expansions in output per laborer (or labor input). This
interest is primarily due to two sets of factors. Looking backward in time, the long-term rates of growth of
output and of productivity have fallen below that of the "golden age" of the 1950s and 1960s. Further, the
United States productivity growth rate has been  substantially below that of some of its major economic
trading partners for much of the post-World Wai' II period, leading to the fear—rational or not—that these
other countries pose  a threat to the economic leadership position of the United States.  Looking forward in
time,  the labor  force  growth rate of the United States is expected to slip below the population growth rate
soon after the turn of the century.  In  the decades ahead, the number of workers available to support the
population will  decline, and the maintenance of the historical pace  of improvements in living standards will
require the typical worker to become steadily more productive.

                While there are many potential mechanisms to raise productivity growth, most turn on
boosting the rate of capital accumulation—either tangible capital such as plant and equipment, or intangible
capital such as that generated by research and development expenditures.  Traditionally, the role of fiscal
policy in this process has been to encourage private savings and private investment through tax incentives or
to raise national savings through reductions in the government budget deficit.

                But  the results of recent empirical research offers the possibility of a direct channel by
which fiscal policy can affect national investment and national productivity growth.   It has been recognized
that the public infrastructure—streets and highways, mass transit, water and sewer systems, and the
like—should be  considered as a factor  of production, along with labor and private capital, in the private
sector production process. It has also been recojmized that public infrastructure spending, as a share of total
output, reached a peak in the latter half of the 1960s.  The results of some of the empirical studies1'2 indicate
that this reduction in the pace of public capital accumulation is capable of explaining a very substantial


                                                                                              Session 1

 portion of the slowdown in productivity growth in the United States over the past two decades.  And other
 studies (e.g., Aschauer3 (1989c)) suggest that cross country differences in productivity growth might also be
 partly explained by differences in levels of infrastructure spending.

                This paper focuses on the role played by the water and wastewater infrastructure in the
 post-World War II productivity performance of the United States. The next section of the paper reviews
 empirical evidence on the impact of changes in infrastructure capital and, more specifically, water and
 wastewater capital, on productivity, profitability, and production.  The next section of the paper considers
 trends in infrastructure spending and  goes through standard growth accounting exercises to obtain an
 estimate of the contribution of water  and wastewater infrastructure to productivity growth.  Attention is
 focused not just on the direct contribution of infrastructure to productivity but also on the indirect
 contribution arising from a spur to private investment and capital accumulation.  The final section of the
 paper proposes  an explanation for the sizeable estimated contribution of water and wastewater infrastructure
 to productivity growth by focusing on the way such infrastructure sets the stage for agglomeration economies
 as well as external effects such as knowledge spillovers.

                COSTS OF PRODUCTION

                Over the past few years, economists have conducted a significant  amount of empirical
 research to answer the question:  to what extent does the adequacy of the public capital stock—or
 infrastructure—affect  the performance of the private sector economy. At least three  separate, but
 complementary, approaches to this question have been pursued.  First, economists have estimated production
 functions as technical relationships between economic output and private factors of production—labor and
 private capital structures and equipment—and public capital.  Second, economists have also attempted to
 measure the impact of infrastructure  capital on the profitability of firms. And third,  there has been an
 investigation of the relationship between public capital and firm costs of  production.  All three approaches
 conceive of public capital as a necessary factor of production, which, in turn, generates the following set of

                •       That public  capital should raise private sector output (given private factors of

                •       That public  capital should raise the profitability of private firms; and

                •       That public  capital should lower firm costs of production.

                Table  1 lists the results of studies using the production function approach.  While most of
 the work has focused on the total public capital stock or the core infrastructure, certain researchers have
 separated public capital into highways, water and sewer, and other public capital categories.  The point
 estimates for the impact of public capital on private  output and productivity vary greatly, from a high of
 nearly 0.40 in some of my own work to a low of around less than 0.05 in the work of Randy Eberts4 and
 Charles Hulten and Robert Schwab.*  As the estimates  are elasticities, they indicate the percentage change in
 private sector productivity which will arise from a given percentage change in public  capital. Yet there is a
degree of conformity  to the results. For one thing,  the  estimated elasticities tend to  rise with the geographic
level of analysis:  the  elasticities  are largest for national data sets, are smaller for state level work,  and
smallest for municipalities. This would be expected on  the basis of the argument that infrastructure capital
may have significant spillover effects across geographic boundaries, leading to benefits which are only fully
picked up at higher levels of aggregation. For another thing, the more aggregative the definition of public
capital—running from total public capital to  core infrastructure capital, on down to highways, water and sewer
systems—the larger the estimated impact of public capital on productivity. Indeed, in many  cases, the
estimated elasticity for total public capital equals the sum of the elasticities for highways, water and sewers,
and other public capital, which is a direct implication of the underlying theory.  And  finally,  the effects of

                                                                                             Session 1

public capital are larger the larger the industrial scope of analysis; for instance, the relatively small impact of
public capital on productivity in the Eberts study is partly explained by the constrained geographical
scope—municipalities—but also by the constrained industrial scope—he is picking up effects on manufacturing
industries and not on construction, services, and other industries.

                Focusing on the  estimates of the impact of water and sewer infrastructure on productivity,
we have estimates from work by Alicia Munnell and by Robert Eisner.7  Both Munnell and Eisner find that
water and sewer capital is an important factor in explaining private sector productive performance, with a
rise in water and sewer capital of 1% (about  $2.9 billion as of 1990) associated with a rise in output per
worker of between 0.12% (about  $60 per worker per year) and 0.08% (about $40 per worker per year).
These impacts on productivity are robust to different estimation strategies.  Eisner  obtains comparable
results when he emphasizes the time series variation in his state-level data set as when he emphasizes the
cross-sectional variation in the data.  Furthermore, these results explain away the low estimates found by
Hulten and  Schwab. Specifically, Hulten and Schwab  emphasize the time series variation in the data, arguing
that any association in the data in the levels of variables is mere evidence of a spurious correlation since it
can be expected that output, or productivity, and public capital both grow over time. Yet Eisner obtains
results similar to Hulten  and Schwab's only when he fails to decompose public capital into the different
categories of highways, water and sewers, and other public capital.  So if Hulten and Schwab had taken pains
to similarly decompose total public capital by functional category, it is likely that their results would have
been closer  to the  Eisner results indicated in  Table 1.

                Table 2  shows the results of a  different research strategy of Unking public capital with the
profitability  of private firms. The profit function ass;umes that firms have chosen an optimal level of output
based on the prices of private  factors of production—labor and capital—and on the  availability of public
capital. Deno estimates a profit function of this form  and then derives an output supply function from which
he can calculate  the response of output to public capital.  Deno8  finds that the  impact of public capital on
profits of manufacturing firms, and, thereby, on the optimal level of production is significant, with output
elasticities for highways equal to 0.31, for sewers equal to 0.30, and for water capital equal to 0.07. Lynde
and Richmond9 also look at the importance of public capital to profits, although they only consider total
public capital and not the separate categories of highways, water, and sewers. In general, they find a
somewhat smaller quantitative importance for public capital but one which is highly statistically significant
nonetheless.  So the evidence from the profit-based empirical work is that increases in public capital raise
private sector profits given product prices, wages, arid rental prices of capital.

                A third approach to capturing the impact of public capital accumulation on private
economic activity is to estimate a cost function.  The cost function approach has certain advantages over the
production function and profit function approaches.  In the present context, the primary advantage is that it
effectively deals with a key criticism of the  estimates obtained from production function studies.  Specifically,
a number of economists have argued, in principle correctly, that it is likely that the correlation between
public capital and output or productivity is  capturing not only the productive effect of public capital but also
the effect of higher output  on  the demand by federal,  state, and local governments for infrastructure  capital.
In short, the correlation is likely to be reflective of two-way causation—not only from public capital to
productivity  but also from productivity to public capital. And, to a lesser extent, the same argument can be
made against the profit function studies since profits, productivity and output tend  to be positively correlated.
Therefore, there are valid grounds on which to take the stance that the elasticity estimates in Tables  1 and 2
offer no  substantive evidence in favor of the hypothesis that public capital raises productivity and profits.
Indeed, it would be possible for public capital to detract from productivity and also for a positive correlation
between the two variables to exist; all that would be required would be that the social, or non-economic,
benefits from infrastructure capital be significant enough to generate a sufficient level of demand by federal,
state, and local governments and  that the benefits be in the class of normal goods,, where more is demanded
the higher is the level of income.

                                                    Session 1
            Table 1
Productivity and Infrastructure
Hulten & Schwab
Moomaw & Williams
Garcia-Mila &
Duffy-Deno & Eberts
0.06 0.08
0.12 0.08
Geographic Scope
Metro Area
Metro Area
Water and Sewer
Water and Sewer
            Table 2
   Profits and Infrastructure
Lynde & Richmond
Costa, Ellson & Martin
Metro Area
Elasticity estimate of 0.20 for total
public capital
Elasticity estimate of 0.20 for total
public capital
Elasticity estimates:
total = 0.69
highway = 0.31
sewer = 0.30
water = 0.07

                                                                                            Session 1
                The cost function approach finesses this problem of reverse causation by estimating the
relationship between firm costs of production and public capital while controlling for the level of output. We
have the cost function

                                          C = C(Y, w, r, KG)

where C = cost of production, Y = level of output, w  = wage rate, r = rental rate of capital, and KG =
public capital. The key hypothesis, of course, is that increased public capital lowers costs of production. In
this setting, if the positive association between output £ind productivity from the production  function studies
was merely reflective of a tendency for higher output to induce a heightened demand for public capital, there
would be no reason to expect a separate association between public capital and costs. On the other hand,  if
the true reason for the production function correlation was public capital raising productive efficiency, here it
would be expected that increased  public capital would  lower costs of production.

                Table 3  summarizes the evidence from the cost studies.  Using national data for twelve
manufacturing industries  in the United States, Nadiri and Mamuneas10 find a significant impact of core public
capital—in this case, streets and highways and water and sewer systems—on firm costs of production.  Other
studies at the national level have been undertaken by Conrad and Seitz" for Germany and by Berndt and
Hansson12 for Sweden. Conrad and Seitz find that enhancements to public capital lowers costs of production
in three separate industries in Germany:  manufacturing, construction, and transportation.  Berndt and
Hansson'2 also find that the core public capital stock influences firm costs; still, in the Swedish  case, they also
estimate that there has been overinvestment in the public capital stock. Finally, in a study utilizing state level
data for the United States, Morrison and Schwartz13 find that while on average across states the public
capital stock is associated with reductions in production costs, the shadow value of public capital is  higher in
the Sunbelt regions than  in the Rustbelt.

                                               Table 3

                            Costs of Production and Infrastructure
Nadiri & Mamuneas
Conrad & Seitz
Berndt & Hansson
Morrison & Schwartz
Core public capital and R&D capital
lower costs
Core public capital lowers costs in
manufacturing, construction, and
Core public capital lowers costs;
overinvestment in Swedish public
Shadow value of public capital higher
in West and South than in East and
               An objective, balanced reading of this entire body of work would seem to unavoidably lead
to the conclusion that public capital, in general, and water and wastewater capital, in particular, is of key
importance to the performance to the private economy. This observation raises the question:  how much has
investment in the water and wastewater infrastructure contributed to economic growth over the past four
decades?  A related question follows:  have we been investing adequately in the water and wastewater
infrastructure?  The next section attempts tentative answers to these questions.

                                                                                           Session 1
                Given estimates of the impact of water and wastewater capital stocks on productivity, it is
possible to use the methodology of growth accounting to determine its impact on economic growth. Two
sorts of contributions of water and sewer capital to economic growth can be computed.  First, a direct
contribution to growth arises when water and wastewater infrastructure investment keeps pace with growth in
the labor force and in private capital stocks. A failure of water and wastewater capital to keep pace with
growth in private factors of production will detract from economic growth and development.  Firms which
are unable to fully utilize their capital in the face of limited water supplies, in the presence of water main
breaks, and when sewers back up will be subjected to lower profit  margins and to higher costs of production.
Second, an indirect contribution of water and sewer  capital arises in the form of a spur to private investment
and economic development.  An  improved water infrastructure lowers costs and raises profits for existing
firms making use of their current level of productive capacity. But a higher profit rate on private capital
generates an increase in private investment which, in turn,  boosts private sector productivity and economic

                Table 4 shows estimates of the direct contribution of water infrastructure investment to
economic growth in the United States over the period from 1950 to 1988. Evident in these figures is the
significant slowdown in productivity growth during the last  two decades, with productivity growth down by
1.5% per year in the 1970s and over 1% per year in the 1980s (relative to the 1950-70 period).  On the basis
of decade averages, the growth rate of the stock of water and wastewater capital has been relatively steady
during this period of time, hovering between 3.2% per year during the 1980s to nearly 3.8% per year during
the 1960s.  The direct  contribution of water infrastructure investment to economic growth is obtained by
multiplying the growth rate of the water capital stock and the output elasticity of water  and wastewater
capital.  In these calculations, the smallest elasticity  estimate  has been used and so the results may be
regarded as somewhat conservative.

                                              Table 4

                            Contribution of Water and  Wastewater
                                 Infrastructure to Productivity
(% per year)
Water Capital
(% per year)
Contribution of
Water Capital
(% per year)
               As Table 4 indicates, the direct contribution of the water infrastructure has been in the
range of one-quarter to one-third of a percent per year and, because of the relative constancy of the growth
in water capital, has varied to only a minor extent. At first blush, one-quarter to one-third of a percentage
point difference may not seem to be significant. However, small percentage differences in growth rates can
cause quite large compounded changes in productivity levels over relatively short periods of time. For
example, these numbers would imply that if the average growth rate of the stock of water capital had been
2% per year rather than the actual 3 to 3.5% per  year of the 1970s and 1980s—and nothing else had
changed—the level of output in the economy would be some 5.6%, or $280 billion lower.

                                                                                             Session 1
                Table 5 provides detail on the indirect contribution of water infrastructure to productivity
and economic growth.  These contributions are generated from a model in which:

                1.       The growth rate of the private capital stock depends:

                               Positively on the rate of return to private capital and on the capacity
                               utilization rate in manufacturing (as in Feldstein (1982)); and

                               Holding fixed I he return to private capital, negatively on the public
                               investment rate.

                2.       The rate of return to private capital—which feeds into the investment

                               Positively on time (proxying for technical progress);

                               Negatively on the private capital-labor ratio (a diminishing marginal
                               product of private capital);

                               Positively on the public capital stock; and

                               Positively on capacity utilization (capturing cyclical effects).

Consistent with the previous set of calculations, the most conservative of the estimates of water
infrastructure's importance to firm production technology has been chosen. The model also assumes that
given the rate of return to private capital, a 1 dollar increase in public investment induces a  1 dollar
reduction in private investment.  Only over time,  as the rate of return to private capital rises with increases
in the public capital stock, can a higher rate of public capital investment bring forth an increase in
national—public plus private—investment.

                                              Table 5

                              Direct and Indirect Contributions  of
                    Water and Wastewater Infrastructure to Productivity
(% per year)
(% per year)
(% per year)
                As is indicated in Table 5, the indirect contribution of water infrastructure is significantly
smaller than the direct contribution, varying between 0.08 and 0.10% per year over the past four decades.
Nevertheless, the contribution is significant and ruses the total contribution of water and wastewater capital
to between one-third and two-fifths of a percent per year.  The message is clear; without adequate
investment in water and wastewater infrastructure, our long-term economic growth performance would have

                                                                                               Session 1
 been decidedly poorer. This leaves aside the adverse impacts that lower investment in our water
 infrastructure would have had on the environment and the overall quality of life.

                 Still, unlike total infrastructure investment, trends in water infrastructure investment cannot
 be held accountable for any significant portion of the slowdown in productivity growth experienced in the
 United States over the  past two decades. As the accompanying figures indicate, infrastructure spending by
 federal, state and local governments has fallen since the early or mid-1960s.  Total infrastructure
 spending—on current and capital account—has fallen from 3.5% of gross national product in 1962 to under
 3% of output by 1989.  Yet spending on water and wastewater infrastructure has remained relatively constant
 as a fraction of output  at around two-thirds of a percent of gross national output.

                 A similar pattern shows up in the figures for capital spending on infrastructure.  While the
 slide in overall infrastructure capital accumulation has been quite striking—from nearly 2% of output as late
 as 1965 to around 1.2% of output by 1989—water  and wastewater capital investment has remained stable as a
 share of national resources.  It should be noted, however, that these are measures  of gross investment, with
 no accounting for depreciation of the existing stock of infrastructure capital; consequently, to the extent that
 the water and wastewater infrastructure  is depreciating at a more rapid rate in recent years than in  the 1950s
 and 1960s, a smaller share of the total investment dollars would show up  in net additions to  the water and
 wastewater infrastructure capacity.

                 The point, however, is that recent assertions that there is an infrastructure deficit which has
 damaged the national economy's productive capacity and its competitiveness must be tempered when we look
 at the water  and wastewater infrastructure. The fact that the United States has consistently  invested an equal
 percentage of its output in the water infrastructure does not indicate whether this amount of investment is
 "too high"  or "too low"  to generate and sustain the appropriate level of water capital.  But this fact does
 indicate that our slumping productivity cannot be  explained (without further considerations)  by a lack  of
 attention to this portion of our infrastructure.

 4.0              CONCLUDING THOUGHTS

                 Alicia  Munnell argues that the estimate of the importance of public capital  arising  from the
 state level  data is "sensible in that it implies a reasonable marginal productivity for public capital and equality
 between the  productivity of public and private capital."14 Yet this result pertains to total state and local
 public capital, and when the capital  stock is separated into various functional categories, one finds that the
 marginal productivity of water infrastructure capital exceeds that of private capital  to a substantial degree.
 One could react  to this finding by asserting that these separate elasticity estimates  are implausible.  Or one
 could react by attempting to rationalize why water infrastructure might carry such importance to the

                 One such rationalization would involve synthesizing the literature  on public capital  with that
 of agglomeration economies and knowledge spillovers  to focus on various external effects fostered by
 infrastructure capital.  From this perspective, infrastructure has two key characteristics.  First, infrastructure
 helps tie together different geographic locales. This characteristic of the infrastructure, of course, is
 particularly evident in the case of interstate transportation and communications infrastructure. Second,
 infrastructure allows for significant concentrations of economic activity. This characteristic is evident in the
 case of water, wastewater, and other aspects of the urban infrastructure.  What these  two characteristics have
 in common, however, is that they lower the costs which individuals must bear in order to interact with one

                This is where the new growth theory associated with Robert E. Lucas (1988), Boyan
Jovanovic and Raphael  Rob13 and others becomes pertinent.  The new growth theory emphasizes how the
 sharing  of knowledge and skills between individuals can result in increasing returns to scale  in productive
activities.  That is, a doubling of all  inputs  to production—labor, capital, and the like—leads to more than a

                                                                                            Session 1

doubling of output. A particular example of how these externalities work is reported by Rauch.16 He writes
of a Silicon valley engineer who explained to liim how firms locating in the San Jose metropolitan area were
able to benefit greatly from the "cross-poUinization of ideas" because of the contact engineers and others.
Geographic concentration was seen to facilitate these interactions due  to a reduction in transportation and
other costs of interaction.7

                So, by allowing for geographic concentration, water and wastewater infrastructure may also
allow for a greater "diffusion and growth of knowledge" and a significant boost to productivity and long-run
economic growth.  By this argument, an improvement in the national, regional,  or urban infrastructure
encourages not only the free flow of goods and services but also of skills and information. In such a
situation, the measured effects of infrastructure capital on productive efficiency, on firm profitability, and on
costs of production may be quite significant indeed.

5.0             REFERENCES
1.             Aschauer, DA.  "Is Public Eicpenditure Productive?"  Journal of Monetary Economics.
               Vol. 23, pp. 177-200.  1989.

2.             Munnell, A.H. "Why Has Productivity Growth Declined? Productivity and Public
               Investment," New England Economic Review. January/February, pp. 3-22.  1990.

3.             Aschauer, D.C.  "Public Investment and Productivity Growth in the Group of Seven,"
               Federal Reserve Bank of Chicago Economic Perspectives. Vol. 13, no. 5, pp. 17-25.  1989.

4.             Eberts, R.W.  "Estimating the Contribution of Urban Public Infrastructure to Regional
               Growth." Federal Reserve Bank of Cleveland Working Paper No. 8610.  1986.

5.             Hulten, C.R. and R.M. Schwab.  "Is There Too Little Public Capital?" prepared for
               American Enterprise Institute: Conference on Infrastructure  Needs and Policy Options for
               the 1990s.  1991.

6.             Munnel, A.H. "How Does Public Infrastructure Affect Regional Economic Performance?"
               Is There a Shortfall in Public Capital Investment? Federal Reserve Bank of Boston. 1990.

7.             Eisner, R.  "Infrastructure and Regional Economic Performance: Comment," Mimeo,
               Northwestern University, July.  1991.

8.             Deno, K.T.  The Effect of Public Capital on U.S. Manufacturing Activity.  1970 to 1987,"
               Southern Economic Journal. Vol.  53, pp. 400-411. 1988.

9.             Lynde, C. and J. Richmond. "The  Role of Public Capital in Production," Mimeo, University
               of Essex.  January.  1991.

10.             Nadiri, M.I. and T.P. Mamuneas.  "The Effects of Public Infrastructure and R&D  Capital
               on the Cost Structure and Performance of U.S. Manufacturing Industries," National Bureau
               of Economic Research Working  Paper No. 3887.  1991.

11.             Conrad, K. and H. Seitz. "The Economic Benefits of Public Infrastructure," Institut fur
               Volkswirtschaftslehre  und Statistik, Universitat Mannheim Discussion Paper No. 469-92.

12.             Berndt, E.R. and B. Hansson.  "Measuring the Contribution of Public Infrastructure Capital
               in Sweden," National Bureau of Economic Research Working Paper  No. 3842.  1991.


                                                                                         Session 1
13.            Morrison, C J. and A.E. Schwartz. "State Infrastructure and Productive Performance,"
               presented at the National Bureau of Economic Research.  July 1991.

14.            Munnell, A.H. "How Does Public Infrastructure Affect Regional Economic Performance?"
               Is There a Shortfall in Public Capital Investment? Federal Reserve Bank of Boston, p. 78.

15.            Jovanovic, B. and R. Rob.  "The Growth and Diffusion of Knowledge," Review of Economic
               Studies.  October 1989.

16.            Rauch, I.E.  "Productivity Gains from Geographic Concentration of Human Capital:
               Evidence from the Cities," National Bureau of Economic Research Working Paper
               No. 3905.

               Additional References

Aschauer, DA. "Government Spending and the Falling Rate of Profit," Federal Reserve Bank of Chicago
Economic Perspectives.  Vol. 12, no. 3, pp. 11-17.  1988.

Aschauer, DA. "Does Public Capital Crowd Out Private Capital?"  Journal of Monetary Economics.  Vol.
23, pp. 171-88. 1989.

Duffy-Deno, K.T. and R.W. Eberts. "Public Infrastructure and Regional Economic Development:  A
Simultaneous Equations Approach," Journal of Urban Economics. Vol. 30, pp. 329-43. 1991.

Eisner, R.  "Infrastructure and Regional Economic Performance: Comment," Manuscript dated 7/26/91.

Garcia-Mila, T. and TJ.  McGuire.  "The Contribution of Publicly Provided Inputs to States' Economies,"
forthcoming, Regional Science and Urban Economics. 1990.

     Infrastructure capital spending  1956-89
                                                              Session 1
                    Water &. wastewater
    1956  1959  1962 1965  1968  1971  1974  1977  1980  1983  1986  1989

Source: Congressional Budget Office
    Infrastructure spending 1956-89
    % of GNP
  1 -
                    Water & wastewater
  1956  1959  1962  1965  1968  1971  1974  1977  1980  1983  1986  1989
Source: Congressional Budget Office

                                                                                            Session 1
                Clean Water Construction  and the American Economy
                                          Gerry E. Dorfman
                                    Dorfman Construction Company

                Daily, utility contractors across the country unearth decaying and failed sewer lines and
 domestic water systems.  Out of sight and out of mind in the absence of crisis, our wastewater and drinking
 water infrastructure crumbles while the documented need for new facilities and increased maintenance

                Meanwhile, the construction companies that build clean water facilities operate with
 skeleton crews or simply close their doors, not because they are obsolete or inefficient, but because society is
 unwilling to increase its investment in necessary and expensive projects that pay dividends in the long run, as
 well as the immediate future.  The problem is exacerbated by an ailing private-sector economy.

                The first part of this paper is comprised of short narratives that  describe the state of our
 nation's clean water infrastructure through the eyes of contractors in the field. These eyes can see that our
 clean water infrastructure is in terrible condition.

                The second part of the  paper includes real-world stories that illustrate the relationship
 between clean water capital investment and economic health. These stories demonstrate that investment in
 clean water infrastructure creates employment and strengthens the economy by increasing private-sector
 profitability, labor productivity, and private investment in plant and equipment.

 1.0             INTRODUCTION

                Every day, utility contractors  across the country expose decaying sewer lines and
 deteriorating domestic water systems. Out of sight and out of mind in the absence of crisis, our wastewater
 and drinking water infrastructure crumbles while the documented need for new facilities and increased
 maintenance skyrockets.   Fortunately, we have the expertise of the utility construction industry—contractors
 and supplies together—and  the Clean Water and Safe Drinking Water Acts to arrest and eliminate the

                In this paper, I am going to share the roots of this dire need, as well as my personal
 experience as a utility contractor and the experience of many of the other 2,000 contractors and suppliers of
 the National Utility Contractors Association (NUCA). I am going to describe an appalling problem.  It is
 appalling because we have had and still have the capacity to solve it.  That is why I am going to be able to
 tell you about the solution.

                Because of where I work, I will be giving you examples mostly from the West.  These
problems are not exclusive to the West; on the contrary, my conversations  with contractors across the country
indicate that the problems are national in scope. According to estimates by NUCA, which utilized needs
assessments by the Environmental Protection Agency and  other organizations, the states may have to finance
as much as $167 billion of capital spending for water supply and wastewater facilities over the period 1993-
2000.'  Keep in mind that this is only a baseline, and the needs are expected to increase.

                                                                                          Session 1

               The problem includes deteriorating; and failing sewer systems, leaking water systems,
combined overflows, and consequently, a disappearing fresh water supply.

2.1            Deteriorating and Failing Sewer Systems

               Our sewer systems are dangerously old, deteriorating, undersized, leaking, and inadequately
maintained.  In fact, they cannot be adequately maintained.  How do you clean a sewer that is collapsing and
filled with the rubble of its own bricks?  How does the cleaning machine get through tree roots that collected
debris and form dams? They don't.  There are hundreds of miles of sewer pipeline that are barely
functioning.  You cannot see the millions of gallons of sewage that escape daily and contaminate our
underground aquifers. Unlike the pothole on a highway that jars you into demanding action,  the failing
sewer system is insidious in its silent destruction of our water supply, our lifeline.

               This problem exists in the cities and in the outlying communities. For example, a job we
had in a rural community of 20,000 people in northern California replaced a septic tank system under the
Farmers Home Administration water and waste disposal grant program.  As I prospected the job before
preparing a bid, I was dumbfounded.  When walking through easement lines in families' backyards to
determine the location of the new system, I was walking on saturated ground.  Saturated not with water, but
with wastewater—raw sewage that had overflowed from failed leaching systems.  What is the damage to our
family structure when children home from school or on a weekend cannot play in their backyard? Do people
deserve to be trapped like that, deprived of the use of their own homes?  What do you suppose is the impact
on those  families' productivity? On family life?  It  is immeasurable.

               The problem is not  only rural, but urban as well.  On a project for a major city in southern
California, we recently replaced a sewer pipeline that had failed earlier than expected due to unstable ground
conditions.  But for whatever reason, when we uncovered the existing pipe, we found gaping holes where raw
sewage had been escaping into the surrounding ground for an unknown period of time.  The devastating part
of the story is that this sewer system was less than 100 yards from a fresh waterway.  Therefore,  the problem
was compounded almost beyond reason by tidal action. Twice in a 24-hour period, the water level rose over
the top of the sewer line, so wherever the pipeline had failed, it was accepting fresh water to  be  carried to a
treatment plant. Conversely, when the tide was out, so went the sewage. What we had uncovered was a
daily exchange of raw sewage  and fresh water.

22            Leaking Water Systems

               There are more than 76,000 community and ancillary water systems in the U.S.2 An
astounding number of these systems, because they were installed so long ago, are in a state of disrepair. Let
me tell you I know that.  My son is in charge of a 10,000-foot replacement water line for a small community
in southern California. He has been continually placed with suspension of work because the adjacent line,
which his work  will replace, has been leaking. Work is stopped while the leaking pipeline is repaired. This
kind of situation has enormous costs, as you can imagine, but that is not my point. The important point is
that there are countless holes  in the water system.

               My son only has to contend with what comes out of the pipes.  He does not have to contend
with the loss of water to the community. Nor does lie have to contend with the downstream  contamination
that the leaking water main exacerbates. The leaking water combines with sewage from leaking sewers. The
people who suffer the consequences of the problem are unsuspecting, downstream. They don't know what
they haven't seen. They haven't been forewarned.  I^st year when a railroad car crashed and overturned
into the upper Sacramento River, the effects were immediately known and people downstream were alerted.
You couldn't save the fish, but those using wells could boil their water.  Unfortunately, no one downstream
from the  millions of uncovered miles of failing water lines  can protect themselves.

                                                                                           Session 1
23             Combined Overflows

                A similar problem occurs with combined sewage overflows (CSOs).  There are 1,100
combined sewer systems in the U.S., and more than 300 of them are known to have overflow problems.3
The problem is not one of failing water systems or deteriorating sewer systems. Rather, it is one of
economics.  Communities that designed and built combined sewer/storm drain systems saved money in the
short term, but did not anticipate the decades of growth, which has rendered these systems obsolete. What
was an accepted industry standard in the beginning of this century is now unacceptable.  In fact, it has
become dangerous. The consequence of these combined systems can be as devastating as the problems I
described above.

                On a project in the Northwest, where our firm replaced a large-diameter brick sewer built
in the early  1900s, there were numerous days when work was suspended due to heavy rainfall. This
combined system discharged raw sewage and rainwater directly into a great river.  I can personally tell you
that on more than once occasion, I stood with my superintendent on the river's edge, not believing what I
was seeing—raw sewage flowing into the river because the treatment plant could not process the influx added
by the storm.

                Correcting documented CSO problems, however, is just the first step that must be taken.
All 1,100 combined sewer systems need to be augmented so they are either a storm system or a sewer
system, not both.

                Sewage is escaping and contaminating our aquifers. A marked increase in contaminated
water is infiltrating our open sewer systems to be carried to the  treatment plants.  Therefore, we are paying
to treat contaminated water that should be retained by the aquifers. We try to construct bigger and better
treatment plant facilities, while treating the source of the problem as a "stepchild."  An incisive, rigorous
attack at the source—the failing infrastructure—will swiftly and effectively stop the contamination  of the water

2.4             Summary: Disappearing Fresh Water Supply

                Given the deteriorating state of our water and sewer infrastructure, we must act
immediately. I don't need to  tell you the importance of fresh water to everyday life. Leaking water systems,
deteriorating and failing sewer systems, and combined overflows are jeopardizing that basic need. We are
destroying the water we have, not by using it for drinking, bathing, cooking, and manufacturing, but by not
maintaining  adequate facilities to treat the water after we use it.

                On the positive side, a concerted effort to correct any of these problems automatically
addresses the interrelationship of the other system failures.  Furthermore, along with the immediate benefit
of ensuring a healthy water supply and waste disposal system for all Americans, correcting these  problems
will have an immediate and continued benefit on the economy.  Through the infusion of capital expenditures
into the public works sector, we have the ability to "jump start" the U.S. economy.


                The solution to the crisis of our water and sewer system deterioration is close at hand. We
are at the ready.  And as we solve the  problem, we will be creating employment, increasing private sector
profitability, increasing labor productivity, increasing private investment, and increasing the tax base. The
Clean Water and Safe Drinking Water Acts are good  for the American economy in more ways than one.

3.1              Creating Employment

                There are hundreds of thousands of trained men and women of the construction industry
currently out of work. They too are at the ready. The support groups: pipe manufacturers (clay, ductile


                                                                                             Session 1

iron, steel, concrete, plastic); material suppliers of sand, gravel, cement, asphalt; manufacturers of
construction machinery and related equipment (earth moving equipment, and ancillary industries that supply
parts, labor, engines, tires, hydraulics, etc.) are waiting to turn on their assembly lines. In addition, we have
the necessary engineering support (consulting, design, ^architectural, construction management) and agencies
(inspectors, engineers, administrators). Universal in its impact, the list continues, multiplying and
perpetuating itself with each and every new contract.

                According to a recently released job creation report prepared by Apogee Research, Inc. for
NUCA, as many as 57,400 direct, indirect, and induced jobs are created for every $1 billion invested in water
and wastewater infrastructure.4  Two million able-bodied men and women in the construction trades,
together with thousands of second  and third tier  subcontractors and their employees, are out of work and
ready to go.

32             Profits.  Productivity, and Capital  Stwk

                I  am not an economist, but every day I see the link between water facility investment and
economic growth, both in the short and long term.  It is  an obvious fact that pipes in the ground are a
precondition for housing, consumer services, and industrial and agricultural production.  In a more
immediate sense, each of my construction jobs employs workers, puts food on their tables and clothes on
their backs, generates capital investments in heavy construction equipment, and increases demand for
manufactured and  raw materials.  Further, the federal government's long-term return on investment can be
measured by increased private profitability, enhanced labor productivity, and increased investment  in plant
and equipment.  In other words, the  economy as a  whole is strengthened and the corresponding expansion of
the tax base enables the federal government to recoup its investment.5 There aren't too many federally-aided
endeavors that can boast such positive benefits.

33             The Facts Are In

                The relationship between clean water construction and the economy goes far  beyond the
provision of safe drinking water and sanitary disposal of sewage for the protection of public safety  and
health.  Respected scholars and economists, many of whom are making presentations during the EPA
conference on "Clean Water and the  American Economy," have demonstrated that clean water investment
induces higher private sector profits,  spurs private investment in plant and equipment, improves labor
productivity, and best of all, pays for  itself through  the creation of a larger tax base.

                I  can see it for myself every day on the; job site, and it is clear that our international
competitors are getting the message as well.  Both  Japan and Germany have taken the investment  lead in
public infrastructure, while  the U.S. is ranked 55th  in the world for public capital investment.  It is incredible
to think that Japan will spend over $3 trillion in the next 10 years for infrastructure.

4.0             CONCLUSION

                The sewer and water pipeline infrastructure are often interrelated.  The leaking sewer
system contaminates the fresh water  supply. Leaking water supply systems and combined sewer overflows
create over-capacity problems at treatment plants, resulting in bypassing insufficiently treated sewage, during
periods of high flow, into oceans and rivers, causing furlJier destruction of these natural resources.
Consequently, our  country faces a disappearing and unusable fresh water supply.

                Federal  participation and financing is essential if we are to rectify this national problem.
Over the last 12 years, there has been a lot of controveisy about whether the "trickle down effect"  is working
the economy. I have seen how the "trickle down effect" is working; however, it is not the economic trickle
down.  It is the leaking water and sewer infrastructure that is contaminating our nation's water supply.  The
politicians will hopefully vote to reauthorize the Clean Water Act at a level of $5 billion annually and
redirect the trickle down effect where it belongs: into the economy.  It really all boils, down to making repair


                                                                                           Session 1
and construction of water and wastewater infrastructure a national priority, especially when you consider that
in 1992, the federal government spent more that five times as much on federal program administration ($13
billion) as we did on water and wastewater investment ($2.4 billion).

                Less than a month ago, at a meeting of the National Utility Contractors Association, I
mentioned this upcoming conference. My colleague, a fellow contractor from a northeastern state, turned to
me and said, "Gerry, do you know that in our home we have had to boil water for the past six months?"
Apparently, bacterial contamination in two separate water systems has affected water use for 114,000 people
in Rhode Island.  The simultaneous contamination problems are unrelated, but I was shocked.  That is
unbelievable in the United States in this day and age. Most important, the dilemmas we are living with and
facing are all foreseeable  and all preventable.  Everyone benefits from repairing the water and  wastewater
infrastructure:  environmentalists, labor  management, government, communities, and most of all,  our children
for generations to come.

5.0             REFERENCES

1.              Apogee Research Inc.  America's Environmental Infrastructure:  A Water and Wastewater
                Investment Study.  Clean Water Council, Arlington, Virginia,  p.  5. 1990.

2.              America's Environmental Infrastructure, p. 2.

3.              U.S. Environmental Protection Agency. 1990 Needs Survey Report to Congress. U.S.  EPA,
                Office of Water, Washington, D.C.  p. 1.  1991.

4.              Apogee Research, Inc.   A Report on Clean Water Investment and Job Creation. National
                Utility Contractors Association, Arlington, Virginia.  1992.

5.             America's Environmental Infrastructure, pp. 15-23.

                                                                                           Session 1
                   Water Infrastructure and Economic Development
                                       Douglas B. MacDonald
                                         Executive Director
                               Massachusetts Water Resources Authority
               The Massachusetts Water Resources Authority is the wholesale water and wastewater utility
that serves two and a half million people in sixty-one communities in and around greater Boston. My chief
job as our agency's new Executive Director appointed lasi: January, is to bolster public support for its large
and very costly program of infrastructure replacement and rehabilitation: a program now expected to be paid
for almost entirely from ever-rising water/sewer bills to be sent to homeowners, landlords and businesses in
our service area.

               My hope today is to share with you some simple insights and questions which come from
my short but intense  exposure to the issues before us. I also hope to suggest to you that our experience at
MWRA is one that more and more communities across the nation may face as  numerous unfunded federal
mandates in the environmental area (and other areas) are translated into program burdens for local citizens.

               Here are our major projects in construction as proposed by ourselves or mandated by
Congress or EPA for supposed completion by the end of the year 1999:

               •       Our new Deer Island Sewage Treatment Plant which will be the nation's second
                       largest:  $4.0 billion;

               •       Rehabilitation, modernization arid extension of a 228-mile sewage collection system:
                       $581 million;

               •       CSO remediation:  perhaps $771 million;

               •       A critically-necessary new water supply aqueduct: $387 million;

               •       Rehabilitation and modernization of water supply pipes and pumping:  $395 million;

               •       A new drinking water filtration plant:  $794 million.

               Our funding?  A capital investment program by century's end likely to total $7 billion, with
only $350 million or so currently projected to be derived Irom federal assistance.1  All the rest has been, and
will be, supported by our issuance of revenue bonds secured and repaid with interest by rate revenues
exacted from the ratepayers.

               Our rates?  Ballooning, as the new debt service requirements from each of our periodic
large bond sales first enters and then stretches into the future in our annual operating budgets.  Homeowner
water/sewer rates in  our area have risen an estimated 53(1% since 1986 to the point where our Boston
ratepayers now hold top spot in a recent Ernst & Young national study. Projected escalations for a four
person homeowner family march ahead from $535, the current estimated level for 1992-93, to $12% by the
year 1999 with no promise that will be the end of the upward staircase.2

               Our political environment? Our rate increases and the perception of their impact on
customers' abilities to make their mortgage payments, pay their heating bills or profitably operate their
businesses were neatly captured recently by one of our steiff. Looking ahead to our major state political


                                                                                             Session 1
elections in 1994, he said that the only uncertainty is whether MWRA rates will be the largest issue in the
election or the only issue in the election. A recent study suggests that over 100,000 households in our service
area have limited incomes such that payment of water/sewer charges would already force direct competition
with their purchases of other basic life necessities.3 The vehemence of our exponentially increasing rates in
Eastern Massachusetts ought to give real pause to all of us who care about completing the infrastructure and
environmental improvement objectives we would like to see in a perfect world.

                So in a few months on  the job what have I done and what have I learned in trying to
address these issues?

                I first should say how delighted I am today to meet Professor David Aschauer of Bates
College for the first time.4  It is no understatement that I have put his name in lights during a flurry of
meetings with businessmen, elected officials and civic groups like the Chamber of Commerce that I conduct
as a spokesperson for the agency.  Let me tell  you about the overall message we have tried to craft and how
Dr. Aschauer's thesis has fit into it.

                My speech to every group states that our agency's  basic mission has three goals.  First, to
deliver the environmental benefits that are our court-ordered basic  reason for being. Second, to contribute
to economic development.  And third, to do so only on the basis of affordable water/sewer rates.

                On the first point, the key is that our environmental mandate, long conceived principally as
the ending of sewage pollution in Boston Harbor, is really fundamentally to assure the very cornerstone of
public health for the citizens of our service area. Quality drinking water and effective sewage disposal are
the basic environmental services of all communities, recognizing what is essential to preserve public health
and welfare. A century ago, new waterworks systems throughout the cities and towns of this country began a
revolution in our standards of health and our standards of living, basically ending epidemics  in our urban
area and extending life expectancies everywhere. Then clean water worked a miracle.  Perhaps the program
was too successful.  Now, clean water at nominal cost is taken for granted. The services of delivering and
disposing of water are even harder for the public to appreciate because our water/sewer public works are
usually invisible, far away in the watersheds or buried in the streets. How much easier it is to persuade
people that you are spending money on  something important when you are inconveniencing  them everyday
with your project by building something they will see when they use, like a highway, a transit project or  an
airport! It takes Hurricane Hugo or Hurricane Andrew, and then only in a few communities, to remind us
what our world would be like without clean water.

                So I never miss an opportunity in a public speech to try to sharpen and simplify the old-
fashioned environmentalist  focus of our  work.  I always stress that our job has to do with the water you use
in your home—the shower,  the toilet, the kitchen faucet, the clothes washer and the garbage disposal. I talk
about the river of sewage—passing through our treatment plants and into the harbor just hours after it leaves
your house—flush by flush,  shower by shower, to make up a volume into Boston Harbor that exceeds the
natural flows of the Charles, Mystic and Neponset Rivers combined. We show slides of water main breaks in
hundred-year-old 48-inch pipes and we show sewage discharge plumes at the harbor's edge.   We invite
people to see our facilities  in each of their cities and towns.  Rain may fill the reservoirs and gravity may
help to move the water, but nothing else in our system works without attention and maintenance, even if the
promise of our projects is reduced to the basic assurance that the same clean  water will reliably flow in and
out of the same plumbing in your house, and be discharged back to nature with  reasonable respect for
environmental standards.

                                                                                             Session 1

                Then we shift the talk to economic development.  Here is the line, with Dr. Aschauer's
work at its center, that I have probably used a hundred times:

                Today, on our Deer Island project alone we now have $1.6 billion of contracts in construction
                and 1600 craftworkers on the job site weryday.  Their paychecks are critical to their families
                and to helping to pull all of us out of this terrible economic situation.  But that's not the most
                important news about our project's role in economic development.  Think not just of "pump-
                priming, " as only the first order of economic benefit.  Even more significant for economic
                development is that this kind of investment in our public infrastructure, our economists tell us,
                is the best and most efficient investment we can make toward our critical long-term social goal
                of improving the productivity of private investment.  This will help restore and perpetuate our
                national economic vitality.

                I illustrate the point by speaking about Genzyme Corporation, a bio-tech firm which
recently choose Boston as the location not just for its research headquarters, but also for its first
manufacturing plant for miracle drugs.  Genzyme is nothing but a new kind of brewery, a vat, clean water,
and fancy enzymes instead of hops.  Could Genzyme have brought this seminal manufacturing activity to
Boston without the assumption that quality water supply was as good as guaranteed?  Could we ever afford
to let it be otherwise?  And  what  does that mean for the investment necessity of replacing century-old 48-
inch water mains?

                We  try, hi effect, to get the  environmental story and the economic development story to
merge.  Our forthcoming annual report will feature  a fishing charterer who reports that our efforts to date
have already brought healthier fish to a visibly cleaner Boston Harbor—and helped his business.  We will also
have a bagel maker who is about to bask hi our notoriety. He wrote to us that our pure water supply is the
key to the quality of his superior bagels.

                Now we come to the third interdependent goal of our program:  affordable rates.  What
would happen if the political result of ratepayer resistance to our growing rates were  a collapse in  the
political consensus for our work?  We benefit, it is true, from the fact that some of our work, including the
expensive construction  of the new Deer Island Sewage Treatment Plant, follows legal mandates enforced by a
federal district court judge.  It is one thing, however, for the judge to  exercise judicial power  to assist hi
siting and expediting unpopular facilities, which the judge in Boston has shown the will and the courage to
do. It is quite another, I think, to imagine wholly adequate judicial solutions if our program should
shipwreck on the reef of ratepayer revolt.  This is a question I do not wish to test.

                What  is an  affordable rate for water/sewer services?  The greater Boston area is, even in
today's economy, a relatively wealthy part of the country. But real people, not John Median  or Jane
Average, actually pay water/sewer bills. EPA once  proposed that 1.75% of household income might be the
proper guideline at which water/sewer expenditures would be considered burdensome.  We believe today
that nearly one-third of the households in the MWRA service area  spend  at least 2%, not 1.75%, on then-
water and sewer bills.  Our projections are that by 1995 nearly one-half of the households in our service
communities will be at about that level or above and by 1997 nearly two-thirds of these households will reach
that level.

                Delinquencies in customers'  payment of water/sewer bills are increasing.  We also have
documented cases, for  example, of commercial laundries and bakeries in our service area that have closed
their doors, blaming  their water/sewer bills.   I get letters from real people—people whose budgets have no
leeway—who have been forced to  sell their homes and no one can quarrel that rising rates have  directly
contributed to their economic surrender.  We at MWILA can listen to stories about ourselves on the talk
shows every week: one favorite theme is that no one should buy a  house  in the MWRA service area given
the prospect of our forthcoming rate increases.  The best news of the last six months released from MWRA
was that we had "cut the 1992 rate increase."  But it wasn't much solace when you read the small print. All

                                                                                            Session 1
 we had really done was cut a projected 36% annual increase in our wholesale charges to only 19%.  Rallies
 at the State House for the abolition of our agency are a recurrent political activity in Boston.

                My typical public speech then ends with a warning that the environmental and economic
 benefits—let's call them necessities—of our program may never be met.  Our program might never in fact be
 completed and our infrastructure progress could shift again into the reverse  gear of deterioration and
 neglect.  These are real threats unless we can avoid crippling ratepayer burdens by returning to the federal
 government a much larger funding role for our project. You can imagine some of the sub-texts:  our
 environmental agenda is a national agenda; our  economic purposes are in pursuit of our national prosperity;
 our most successful infrastructure modernization programs—highways and airports—draw upon dedicated
 national revenue sources in correct recognition that our infrastructure assets are  national assets.  I close with
 a call to action; we really have no choice, even if it is an uphill fight, but to unite our local constituencies
 with each other and those around the country to fight for substantial new federal funding for our most basic
 environmental programs.

                Now let's refocus on the theme of economic development and turn to two specific issues
 concerning Dr. Aschauer's thesis that I believe are embedded in my case to  promote MWRA's own
 infrastructure investment program.  The most important part of my presentation is to impress upon the
 audience the necessity for renewed federal funding in really significant amounts.  This argument obviously
 implies one major qualification or concern about Dr.  Aschauer's thesis. I believe that in Boston  unless we
 obtain prophylaxis against rate shock, either  by means of higher federal funding or by some other means, the
 economic development and productivity benefits of the infrastructure investments may be more than offset by
 the economic drag of prohibitively high water/sewer rates.  I have learned that Dale Jorgenson of Harvard
 reaches this conclusion or raises similar questions about Aschauer's thesis, undoubtedly with much greater
 sophistication and economic precision. I do  not have an economist's answer, but I do try to turn the issue
 into another way of emphasizing the note that fairness plays in a federal funding role. No one
 locality—Boston or any other—should bear distinctly local negative and distortional economic impacts from
 complying with national agendas for investment in environmental protection assets.

                Another point also strikes me as provocative and needing more thought as applied to our
 situation. Proposed refinements to Dr. Aschauer's thesis  include examination of the differences between the
 productivity gains from various specific types of infrastructure investment. This has taken several forms, but
 the one that particularly interested me was that the largest gain from any form of infrastructure investment
 might be found in the rehabilitation and maintenance of assets already in place.  This had great appeal
 because of one of our special challenges.  MWRA must not let the mandates for new facilities to meet
 increasingly stringent new regulatory requirements—specifically secondary treatment and CSO remediation for
 wastewater and filtration of already high quality surface water supplies for drinking water—financially smother
 our ability to maintain and modernize the antiquated  pipes, pumps and valves which are the fundamental
 components of  the public health utility service we provide. The problem is,  of course, that that line of
 thinking could lead to a very different prioritization for expending our limited affordable capital resources
 than the prioritization that now is mostly driven by "action-forcing" regulation and enforcement by EPA and
 the Department of Justice.

                All this leads to the conclusion that for those of us in operating agencies who are trying to
 bring  about the renewal and extension of our water resource infrastructure—both on the pure water and the
 wastewater side—the economists have as yet only provided intriguing but inconclusive  morsels of  real policy
guidance or real support in the arena of public opinion. The two areas I have just touched on are clearly
 topics on which our agency is very eager to hear more from the community  of economists.

                First, what do economists think about the likely economic impact of steep rate increases and
our high projected rates? Should we consider the matter  not as a question,  as we principally have to date, of
"affordability?"  Should we shift the discussion to the sustainability of economic development in our service
area in the face of the water/sewer rate levels projected in our community?  How do  we use these

                                                                                            Session 1

 arguments to enhance our prospects for greater federal funding or other more broadly based vehicles for
 capital investment?

                Second, how can economists weigh into the question of prioritizing infrastructure investment
 at a time—even if that time might soon be rosier than it has recently been—of scarce resources and
 compelling competing demands?  Among environmental policy-makers one hears increasingly about the need
 to get more "science" into the implicit or explicit cost-benefit judgments embedded  in every exercise of
 legislative or regulatory jurisdiction. I strongly hope: that economists as well as scientists could sit at the
 table where national priorities are set for environmental programming so as to give full account to the
 secondary economic implications of these policy choices. Boston rate impact issues provide a compelling
 case study.

                I took my new job seven months ago because I am utterly convinced of the importance of
 water and sewer services and the need to assure their adequacy in our community for our own and coming
 generations. The small dramas we play out in our jigency—keeping our systems going, planning for the
 future, executing some  important capital projects, relating all of this to the service needs of our
 customers—are tangible parts of the larger environmental movement that, to my way of thinking,  is the most
 significant social and political development of our time.

                But I have had a very sobering thought recently,  sparked I am sure by the policy and
 program discussions in  the presidential campaign.  Is there anyone left in America  who is not convinced that
 our health care sector is a national disaster?  Too much focus  on  high-tech interventions at the very margin
 of health benefits; systemic neglect of preventive health and community health; inauspicious returns in overall
 measures of health protection as judged against simJar countries; costs rising so fast and so high  as to be a
 major drag on productivity.   From time to time those of us privileged to work today in the environmental
 sector, as contrasted to the health care sector, mighi: do well to take a sobering look in the mirror.  Are we
 so certain that fifteen years from now we will not have followed the errors of the health care sector and
 replicated its seeming deficiencies?

                MWRA, I hope, will continue to maintain, enlarge, and improve the water and sewer
 systems of greater Boston. We shall, I hope, meet the mandates of new regulation. We will also, under no
 circumstances, willingly return to an era of under-investment and  deterioration of the priceless infrastructure
stock inherited from our visionary predecessors. As an aside, thinking of infrastructure investment, can you
imagine that the  entire  Quabbin reservoir system known to many  of you as one of the world's great political
 and engineering achievements in water supply, was completed  in 1939 at a cost of $53 million? That is about
 $775 million in 1992 dollars if inflated by reference co the ENR—a bargain by anybody's theory of return on
 investment and impact  on economic development.  So in our hearts we know Dr. Aschauer must be right.
But for those of you in this audience who are our regulators at EPA and are also advocates as
environmentalists for our program objectives, I shoiJd point out the cautious language of our bond market
disclosure which accompanies each invitation to buy our bonds. It warns that our concern about  rates leads
 us to believe that we must find new sources of capital or new sources of revenue or we may be forced to
 reduce the scale  or  slow the  pace  of our projects.

                To the economists in the audience, we warmly invite your thoughts, insights and suggestions
 about how we best can execute the somewhat perilous fiscal and political mission on which we are engaged.
 We certainly are delighted to have your interest in our projects.


 1.              There are many estimates of the national investment requirements for water and sewer
                systems. The recent EPA needs survey of capital requirements for sewer systems as
                submitted to Congress stands at $110 billion over the next twenty  years. The ten states
                leading the  needs list are New York, California,  Florida, Massachusetts, Texas, New Jersey,
                Ohio,  Michigan, Illinois and North Carolina.


                                                                            Session 1
"The Cost of Clean," a pamphlet recently published by the Association of Metropolitan
Sewage Agencies (AMSA), makes a national projection which shows Annual Household
User Fees at $150 in 1990, $275 in 1995, $505 in 2000, $925 in 2005 and $1095 in 2010.
AMSA states: "Annual household user fees are now doubling every six years. They are
projected to rise at an even greater rate in the future due to increased local funding of
capital projects, increased operation and maintenance costs associated with higher level of
treatment and newly mandated environmental programs.  The issue of increasing user fees
heightens political pressures as rate increases impact the users, especially those on fixed

National Consumer  Law Center, Inc. The Impact of Rising Water and Sewer Rates on the
Poor:  The Case of  Eastern Massachusetts.  Boston.  1991.

Dr. Aschauer's contribution is highlighted in an excellent short and non-technical summary
of infrastructure investment issues including an extensive bibliography: Cuciti, Peggy L.
"Infrastructure and the Economy:  Serious Debate in the Profession, "Municipal Finance
Journal.  Volume 12, pp. 73-81. November  4.

                    Luncheon Address  by Keynote Speaker
                                    Environmental Issues

                                       Anne Meagher Northup
                                        State Representative
                                     Kentucky General Assembly
                It is nice to be in Washington today and among friends.  While the statement, "Who am I
 and why am I here?" took on new meaning at the vice presidential debate last week, it does seem to be an
 appropriate beginning to any discussion of complicated issues. Since I am elected to office, I suppose some
 would dub me a politician—something not easy to admit  these days, especially in this town.  Because of my
 educational background, I consider myself somewhat of an economist. As a member of the Kentucky
 General Assembly, I come with a state perspective.  As a member of the EPA Environmental Financial
 Advisory Board, I have developed national and international perspectives. It has been my
 experience—political and economical, local and national—that public policy suffers from a real disconnect in
 communication and understanding. It is with these diverse perspectives that I speak today on the
 reauthorization of the Clean Water Act.

                The assumption that I am facing a friendly audience today is significant because in the past
 two years that has not always been the case. It has often been my unenviable task of following state
 government officials who make a  habit of castigating the  federal government for issuing mandates without
 providing the funds  necessary for  the enormous capital expenditures needed to implement them.  I don't
 suppose EPA regulators would ever be the most  popular folks around, while at the same time, I  don't believe
 that state and local government officials understand the importance of the federal government establishing
 and enforcing national standards.   This is especially true  because of the countless pollutants being dumped
 into the air, ground, and water. These local officials fail  to comprehend the public health implications of
 these environmental regulations.  They do not seem  to understand that, while it is a good idea to protect our
 rivers and streams for the sake of natural diversity, they more importantly also save lives.

                So, even if the federal government cannot provide 100%  grants to cities and states to
 implement the necessarily rigorous standards envisioned  in the Clean Water Act, it is  vitally important for
 these standards to exist. When it can be established that a specific agent is harmful to life, that substance
 must be regulated in whatever fashion is most appropriate.

                Nationally, the environmental movement is past the era of justifying its existence and its
 mandates and into the era of developing funding mechanisms to correct and prevent pollution from
 occurring.  In truth, the cost of designing, building, and maintaining facilities to meet our needs is becoming
 staggering. Ten years ago when we thought  of an EPA mandate, we thought of air pollution or waste water.
Today, regulations extend to drinking water,  hazardous waste, clean air, and cleanup of previously polluted
sites, to name a few. The costs of these efforts are becoming prohibitive in view of the countless other
pressing needs confronting this nation.

                For years we have lived in a country where there seemed to be no limits. Whenever there
has been a major need, the federal government picked up the bill. Witness:  when health care for the needy
became a problem—Congress enacted Medicaid; when health care for the aged was needed, Medicare; and
when our nation needed a new national transportation system—Congress funded the interstate highway
system.  And  when we first realized the necessity for cleaning up our waterways, we saw the  advent of EPA



grants.  For this reason, the mentality at every level of government was to look up to the next larger  entity
and ask for a handout. This created a mind-set among local officials that the federal government would foot
the bill for all environmental programs.  This has also created an unfortunate attitude in the public and
private sectors that the money to pay for these  programs would come out of someone else's pocket.

                Today, we recognize that the  federal government is "out of money." Unfortunately, it is
only of late that we have begun to recognize that  there have always been limits to its resources and we have
reached them.  At the same time, most of our states are  constitutionally unable to incur a general obligation
debt and are suffering the same fiscal pressures as the federal government.  Furthermore, the states that
seem to have the greatest infrastructure  needs also seem to have the  largest human needs. If you look at the
states that have the most acute drinking  water,  waste water, and solid waste problems, they tend to be the
same states whose social service support systems and Medicaid are now in shambles, facing bankruptcy.  Do
you allocate scarce resources on obvious human needs such as health care, housing, education, or do we
build sewage treatment plants?  The political conflict here is, do you  spend money on people or  projects?

                However, the limitation of federal and state resources  has created unique opportunities for
creative thinking and innovative solutions.  Instead of looking to Washington, state and local governments
have, by necessity,  been forced to come up with then- own answers and  money. I believe it has created a new
feeling of self sufficiency where individual initiatives and leadership are  making a difference.  Those closest
to the problem, given the proper tools, are more likely to address them quicker and  cheaper than if EPA
dictated solutions from Washington.  In the area of environmental protection, this is  positive change.  While
environmental policy may be national, and  even global, the solutions that work best and have the deepest
impact are  inevitably and necessarily local.

                The Clean Water Act and the  State Revolving Funds that they created serve as  the best
example of environmental success in this country today.  That success can be measured in several different
ways. First, it has  reflected what many think is an appropriate and balanced federal  role. It has allowed the
EPA to set sound,  consistent wastewater standards and establish an enforcement  mechanism. More
importantly, is has provided the seed  money for the State Revolving Fund. These funds provide each state
with an ongoing source of funds to  build, expand and improve wastewater facilities.  No matter what other
competing needs and political expediencies exist, this trust fund will continue for wastewater needs.

                The significance of this  program canE.ot be minimized  or overlooked.  By creating a
partnership between federal, state, and local governments and also a  shared responsibility for funding, the
taxpayer has been well served. Compared  with glacial speed with which the EPA has implemented the
Superfund clean-up portions  of RCRA,  today the State Revolving Fund is the "Desert Storm" of the
environmental movement.

                Second, the states  have  considerable flexibility in establishing their State Revolving Fund so
that they can best meet the unique  needs that exist in their communities.  These funds are administered close
to home and by those who ultimately use and benefit from them. Keeping their administration out of
Washington is decidedly more efficient and ensures the money can not  be reabsorbed by Congress if the
political winds change at that level.

                But the most important result  of State Revolving Funds is the change they have had on
small communities. While these communities may feel threatened by enforcement of the Clean  Water Act,
they have been enticed by the low interest loans.  These loans have provided the real impetus for small
communities to clean up. When I was first elected five years ago, I was amazed by the number  of small
communities in Kentucky that bragged about being debt free. Of course, they had no infrastructure  and
therefore, no opportunity for economic development whatsoever.

                Today, that  mentality is changing.  As local officials put together a  project using SRF funds,
they begin to do capital planning and depend on existing community  leadership—public and private.  The


 increasing demand for SRF funds reflects the changing mentality of communities, learning to depend on
 themselves and search for resources close to home. This is also important because it introduces concepts
 such as planning into the vocabulary of local government officials.  In the past, the "planning" word has been
 defiled almost as much as is the "tax" word.  In the Kentucky General Assembly, I have witnessed rural
 legislators rushing to their desks to vote "No" on a particular bill simply because it had the word "planning" in
 the title.  Now, local officials and others have begun to think about what they want their community to be 5,
 10, 20 years down the road. Thinking about a sewage treatment plant's capacity leads to discussions  about
 economic development, roads versus mass transit, educational needs and how they are all related.  This, in
 and of itself, is dramatic.

                In Kentucky, we have  many examples of success as a result of our State Revolving Funds.
 This year, for the first time  in many years, the beach at Old Fort Boonesboro, near Lexington, Kentucky, was
 open all summer.  This beach is on the Kentucky River where wastewater from many systems were in
 violation so often that the river was unusable for recreation.  Every one of those systems is now in

                Another success story is the City of Jenkins in far eastern Kentucky who was given an EPA
 grant for 75% of the cost of their wastewater facility.  However, because of its  poor financial conditions, the
 city was unable to get a loan for even the 25% balance.  Eventually, the city gave up the grant entirely in
 order to use State Revolving Funds. The entire project was financed through this  program,  the city built the
 faculty and is making its loan repayments, and,  thus, for the first time, is establishing credit.

                And finally, the City of Elizabethtown received an EPA grant  in 1981, but outgrew this
 facility by 1985, due to the economic development as a result of its close proximity to an interstate and Ft.
 Knox.  As a result, the state had to stop issuing the necessary environmental  protection permits and
 industrial expansion had almost completely halted. Because median income was still low, Elizabethtown
 couldn't borrow the money through conventional channels.  By securing a $9.2  million loan at 2.2% interest,
 Elizabethtown was able to build a new facility that it could afford.  Its businesses are  now expanding and the
 community is actively seeking additional development.

                While the SRFs have had a significant impact in Kentucky, our needs still overwhelm our
 financial resources. In the area of waste water, our state's short-term needs are $50 million. The  long-term
 cost needs of building adequate sewage treatment plants are $390  million over  the next  ten years.  If you
 include the unsewered areas of Kentucky, the costs soar to near $1.5 billion, which is far beyond the  means
 of the  Commonwealth.  The full reauthorization of the Clean Water Act through 1999 provides the only hope
 for Kentucky realizing its clean water goals.

                If Kentucky, and indeed the nation, are to meet the environmental challenges of the future,
we will have to leverage every available dollar from every entity into this area.  This means that governments
with limited resources will have to ensure that their programs attract other investment—especially private

                Recognizing the need  for sound financial advice, the EPA established the Environmental
Financial Advisory Board in 1989 to begin formulating strategies to pay for a clean environment.  Rest
reassured that there are few politicians on this board.  Besides myself, there is  the mayor of Indianapolis, a
member of the Senate and a member of Congress. Rather, the board is made up  of real pros from the
public  and private sector with considerable expertise in the area of finance of public purpose projects. This
board has already produced  six advisories detailing changes in public policy that can substantially increase the
amount of money available to fund environmental facilities. It would be a shame if in the course of the
reauthorization of the Clean Water Act, Congress and its staff failed to consider the proposals made by some
of the best minds in the country today regarding financing these projects.  Now is the time to provide cities
and states with the tools to stretch the finite amount of money available to solve the seemingly infinite
environmental problems confronting them.


                I would like to recommend several amendments in federal law that are included in the
EFAB advisories. These changes should be considered in the context of the reauthorization of the Clean
Water Act.

                First, redefine a publicly owned waste water treatment facility as one allowing less than
100% public ownership if it serves a public purpose. By making this change, the $100 billion already invested
in wastewater facilities could be leveraged to attract significant amounts of private investment to pay for
capital improvements. This is one way to protect the progress and investments we have made in the past
twenty years. Some of these facilities are at an age where they need substantial upgrading and expansion.

                Second, reclassify all state and local environmental bonds as tax-exempt government bonds,
if the bonds are to be used exclusively to finance the provision of public-purpose environmental services.
Changes that were made in the  federal tax code ir 1986 should be  reversed to encourage investment in
environmental facilities.  This would save  states and local governments billions of dollars in interest costs,
increase the volume of environmental bonds issued, and yield a net gain by the year 2000 because of the
private sector productivity and profits that would result from increased investment.

                Third, State Revolving Funds should be allowed to support a public-private partnership for
wastewater services.  After all, these services are public-purpose and offer more communities the opportunity
to stay in compliance and support economic development.

                Fourth, change the time limit of the SRF loans from 20 years to 30 years. As originally
conceived, the fund was  to cease to exist by 1994.  Twenty years seemed reasonable in order  to promote a
turnover in funds.  With the reauthorization, a 30-year term will not overly  restrict the funds, provide more
affordable loans to poorer communities and allow  for economic development in subsequent years to help pay
for the facility.

                Fifth, eliminate grants at the federal level.  This sort of pork barreling is a terrific
disincentive to small, poor communities to tackle their own problems. Furthermore, since it  comes out of
the state's allocation, it often deprives  communities with higher priorities  in the same state from receiving
expected funds.  Everything about federal grants runs counter to the self-sufficiency principles of this
program.  If Congress must make grants,  don't allow them to come out of the  state's allocation—require them
to be an independent appropriation.

                On behalf of the Commonwealth  of Kentucky, I have several other recommendations. First,
review the allotment formula for each  state.  While; the forma'a is  supposed to be based on population and
needs, on either one (or a combination of both) of these criteria, Kentucky should be getting more dollars.

                Second, allow the use of SRF funils for collector sewers, if sewers are necessary for the
community.  One of the biggest problems we face  in Kentucky is that of the unsewered portions of the state.
The ground is not able to accommodate septic tanlcs, but the community  can only afford a sewer system if
the waste water system and the  collector system are financed through the State Revolving Funds.

                And finally, allow more discretion in the application of the Davis-Bacon requirements.
Many small communities in Kentucky have no union shops. The federally mandated wage rates are so out of
sync with local wage rates that the cost of the project is increased by as much as 15%.

                In closing, I would  like us to consider the major theme of the presidential debate. How can
we create jobs—good jobs  in this country? As the military industrial complex is shrinking, we have to  look
for new, growing industries.  By encouraging private investment and participation in our environmental
industries, we not only get closer to reaching our environmental objectives, but we also create  good jobs in
exportable industries using new  technologies.


                As you can probably tell, I am not one of those politicians that believes that protecting the
environment and creating jobs through economic development are somehow conflicting propositions.
Probably the biggest gap or difference I perceive in discussing this and other environmental problems is
between economists and other government officials in Washington and the people I know and work with in
Kentucky who are  responsible for implementing these programs.  The mayors, county judges, and community
leaders have not been involved in the development of our national strategy to clean up the environment. On
a philosophical level, they understand the public health considerations, as I previously mentioned, but do not
grasp the connection between providing clean drinking water, sound waste management, and attempting to
curb air pollution and the ability of their community to provide a sound, bright future for its citizens.
Because of the enormous cost of implementing all of EPA's goals to protect the environment, I believe it
would behoove all  of us to concentrate more of our efforts toward environmental financial education.  I
believe one  way of doing this is for EPA to require more local financial participation in all of their programs
similar to that which exists in State Revolving Fund programs for waste water. This would mean the local
business community would become involved in planning the solutions to their area's environmental problems.
In that way, they would see the costs associated with  not addressing environmental concerns on the  front end
of development projects. Furthermore, because some of the money would be coming out of their pockets,
they would seek the most cost-effective solutions.  In the course of  the reauthorization of the Clean Water
Act, I believe this issue should serve  as the focus of the debate.  How do we encourage the best partnership
of resources: federal, state, local, and private to pay  for  environmental facilities.  I would like, therefore, to
stress this point: while the federal role may be to appropriately establish sound consistent environmental
standards, it should not establish overly strict limits for State Revolving Funds, and enact changes in tax laws
that have the effect of limiting the funds for these facilities.

                Today, business has every incentive to become a partner with community leaders to comply
with established mandates.  Without  question, laws such  as the Clean Water Act are the essence of our
federal government system.  Without it, we would not and could not function as  a nation.

                So, I would challenge all of you in this room to view the process of reauthorizing the Clean
Water Act as an opportunity to make a strong program even more  effective, an innovative program even
bolder, a vitally important program an even more crucial element hi this nation's efforts to be more
competitive  globally,  while at the same time, preserving and enhancing the earth's environment.  This is a
monumental challenge—yet one that is achievable.

                It's been a pleasure  addressing a group  that understands the consequences of inaction and
has been involved in developing programs and legislation that improves the lives of the citizens of this great

                                                         Session 2
                Monday, October 19, 1992
  Session 2:  Balancing Water Demand in Agricultural and
                  Other Economic Sectors

                    SESSION SUMMARY



Kenneth Cook—Paper Unavailable

Kenneth D. Frederick— The Future of Irrigated Agriculture

John K. Hosemann—Economic Issues for Farmers in the Rewrite of The
Clean Water Act

Katherine Reichelderfer—Paper Unavailable

                                                                                             Session 2
                            The Future  of Irrigated Agriculture
                                        Kenneth D. Frederick1
                        Senior Fellow and Director, Renewable Resources Division
                                       Resources for the Future

                Irrigation has been an important contributor to the past, growth of agriculture in the United
States.  Starting from less than 1% of the land in farms in 1900, by 1982 irrigation accounted for one of every
eight acres under cultivation and nearly three of every ten dollars of the value of the agricultural output.2

                Total factor productivity (the ratio of all outputs to all inputs) of U.S. agriculture grew at an
annual rate of 1.2% from 1949 to 1974, a 35% increase over the twenty-five years.3 Although irrigation's
contribution to overall agricultural growth cannot be quantified with any precision, there is evidence that it
was substantial.  Irrigated acreage more than doubled between 1950 and 1977 to surpass 50 million acres.
Not only has irrigated acreage grown significantly while total harvested acreage remained virtually
unchanged, technological change within the arid and semi-arid areas has been higher on irrigated farms.4

                Higher yields and a greater concentration of higher-value crops under irrigation account  for
the fact that the average  value of the output from an irrigated acre is nearly 2.4 times the average for dryland
farming. Irrigated yields exceed those for dryland farming by an average of 54% for corn for grain, 97%  for
wheat, 33% for soybeans, and  67% for cotton (see Table 1).  Ah1 the rice, 70% of the orchards, more than
half of the  vegetables, and about one-third of the cotton are irrigated.3  While much smaller percentages of
grain acreages are irrigated (e.g., 13% of the harvested corn and sorghum  and 6% of the wheat), the
combination of unproved yields on irrigated farms and the increase in the  relative acreage devoted to
irrigation accounted for 28% of the national increase in corn production, 20% for sorghum, and 12% for
wheat from 1950 to 1977.*

                Irrigation also expands the land base on which productive agriculture is possible.  Perhaps
10 to 13 million of the nation's most productive lands  in the arid West would be producing little, if anything,
of value in  the absence of irrigation. Initially, irrigation was almost exclusively concentrated in the arid and
semi-arid areas of the seventeen western states  where controlled water inputs are often essential to high-yield
agriculture. These states still account for about 85% of the nation's irrigated acreage and 75% of the value
of the irrigated output. Indeed, more than half of the value of the agricultural output in the West is
produced on irrigated lands. In California, the leading agricultural state, irrigation accounts for 82% of the
total value.7

                Although irrigation is not as essential to successful fanning in humid regions, supplemental
irrigation increases yields and reduces risks associated with the weather, especially on sandy soils which are
relatively poor at retaining water within the root zone of a plant. Since 1950, irrigation in the thirty-one
eastern states has grown  at more than three times the rate in the West. Yet, with the exception of Florida,
Arkansas, and Louisiana  (where about half of the combined value of the agricultural output is now irrigated),
dryland production continues to account for more than 90% of the value of the output.

                                                                                              Session 2
 1.0             SIGNS OF STRESS

 1.1             Declining Rates of Growth

                The nation's total irrigated acreage actually declined in the last decade as the sector has
 come under considerable stress.  As of the mid-1980s, Irrigation was about 10% below the peak of just over
 50 million acres reached in the late 1970s. The general malaise that has gripped the agricultural sector in
 recent years contributed to the decline.  But longer-term factors are also involved.  Most importantly,
 western water supplies are becoming increasingly scarce and costly.

                Past growth of western irrigation was driven in large part by the availability of low-cost
 water.  The earliest developments involved diverting surface waters to relatively level riparian fields that
 could be irrigated with gravity flows.  Water costs rose as investments in reservoirs, pumps, and canals were
 required to increase assured supplies and to move water to more distant lands.  But federal subsidies often
 insulated farmers from these cost increases.  Bureau of Reclamation projects now provide full or
 supplemental irrigation water to about eleven million acres with subsidies that for  some projects were
 estimated in excess of $1,500 per acre and as high as 97%  of the full project costs.8 Where low-cost or
 subsidized surface water was not available, groundwater was likely to be tapped for irrigation.  Low-cost
 energy and technological breakthroughs such as improved high-speed engines and  turbine centrifugal pumps
 in the 1930s and center-pivot sprinklers in the 1950s encouraged the growth of groundwater use.

                Water scarcity is not a new phenomenon that has just started to impact the growth of
 irrigation.  To the contrary, water has constrained the  rate and location of western irrigation for at  least the
 last three decades.  Indeed, the recent decline in the total acreage under irrigation can be viewed as a
 continuation of a longer-term trend which can be explained, at least in part, by changes in the availability of
 water supplies within the West's best agricultural areas.

                Both the annual rate and the absolute level of growth of irrigated acreage in the West have
 declined steadily since 1950 according to agricultural census data.  For Instance, the growth of irrigated
 acreage averaged 4.5% or nearly a million acres per year from 1945 to 1950. In contrast, average annual
 growth was only 1.1% or 400,000 acres  from 1969 to 1974.9 Irrigated acreage declined from 1978 to 1982.
 The major regional shifts underlying the overall decline in  the growth of western irrigation are  further
 indication of the stresses within  some of the better agricultural areas. Nearly four of every five of the net
 additions to western irrigated acreage between 1945 and  1954 were in a southern belt which includes all of
 California and Arizona and parts of Texas, Oklahoma, and New Mexico.  In the subsequent two decades, the
 contribution of this southern region declined to 31 and then to 1% of the net change in western irrigation.
 In the southern High Plains of Texas, which alone accounted for one-third of total increase in the decade
 immediately following World War II, irrigated acreage had started to decline as early as the mid-1960s. By
 this time the center of irrigation growth had moved to the  northern plains.  More  than 90% of the  net
 additions to western irrigation from 1964 to 1974 were in Kansas, Nebraska, and eastern Colorado.10 Since
 1978, Nebraska and North and South Dakota, where the growing seasons are considerably shorter,  have been
 are the  only western states to experience a net increase in  irrigated acreage."

 1.2             Competition for Western Surface Water

                The increasing competition  for limited surface water and the high costs of developing new
 supplies underlie the  declining growth described above. Data on water supply and use conditions suggest the
 nature of the constraints confronting potential new irrigators as of 1975.  With the exception of a few areas
with relatively poor growing conditions, there was  very little, if any, slack between  average year stream flows
and total water use (defined as the sum of instream needs  and offstream consumption) in much of the West.
Moreover, total water use exceeded average stream flow in 24 of the 53 western water resource regions.
These 24 water-scarce regions accounted for much of the better growing areas and about two-thirds of the
West's irrigated acreage in 1975.12

                                                                                             Session 2

                While irrigators are finding it increasingly difficult to establish additional surface water
rights, economic factors are diverting some of the supplies initially used in agriculture to other uses. User
rights to western surface waters were granted free to those who first diverted the water for a beneficial
purpose.  The earliest users acquired the most senior rights and could continue to withdraw their full share
even in times of shortage.  As the largest and often the earliest users, irrigators have senior rights to much
of the West's water for as long as they continue to use it or until they voluntarily transfer their rights.

                Although the irrigator pays nothing for the water itself and probably only a modest fee for
transporting it to the farm, the opportunity costs of using water for irrigation rise when farmers have
opportunities to sell water for other uses.  Since irrigation is a relatively low-value use, water is being
attracted away from agriculture to municipal, industrial, mining, and other uses with growing frequency.

                Instream uses were  generally ignored by western water law. Water rights were established
by diverting stream flows, not by enjoying the beauty of a free-flowing stream or the fish it supports.
Recently, however, instream flow values have attracted considerable attention from state legislators, courts,
and environmentalists.  Minimum stream flow legislation to promote uses such as  fish and wildlife
enhancement, hydropower production, recreation, pollution control, and scenic amenities has been  adopted
or proposed in several states.  The Public Trust Doctrine has been employed in some court decisions to
question the legality of water withdrawals  that threaten to destroy the ecology of aquatic environments, the
preservation of which is viewed as being in the public interest.13 As society places higher values on instream
water uses and tries to compensate for their past neglect, it will be increasingly difficult to maintain former
levels of agricultural water use.

                The state-granted water rights held by irrigators are also threatened by the failure to
quantify Indian and federally reserved water rights.  These potential claims are based on vast  Indian and
federal landholdings in the West and federal court decisions supporting the view that these lands have
accompanying water rights sufficient  to accomplish the purposes for which the lands were reserved.
Moreover, since these rights date back to the time when the lands were set aside,  they have priority over
most of the water  rights granted under state law.  Providing for Indian and federally reserved claims to
western water could well come at the expense of some of recent agricultural users.

U              Groundwater Mining

                Since the mid-1950s, the expansion of western irrigation has been based largely on
groundwater. From negligible levels hi the early 1930s, groundwater withdrawals for irrigation rose to 31
maf in 1955 and 58 maf in 1980, when they represented 38% of irrigation withdrawals in the West.14

                While groundwater stocks are vast and far exceed surface water supplies,  economic
considerations constrain the supplies of potential use to irrigators.  Increasing pumping lifts and rising energy
costs worsened the economics of groundwater use for many irrigators over the past decade.

                Pumping exceeded aquifer recharge in 1975 by more than 22 million acre-feet (maf),
equivalent to 40%  of the annual groundwater withiirawals for irrigation. In the Texas and Oklahoma High
Plains alone, mining from the Ogallala aquifer was about 14 maf a year, equivalent to the  average  annual
flow of the Colorado River.15  As of  1983, groundwater supplies underlying more than 14 million acres within
the eleven leading  groundwater irrigation states wexe falling by at least half a foot annually. '*

                Mining affects water costs both by increasing the lifts and by decreasing the saturated
thickness and, therefore,  the yield of a well. The effect of increased lifts on  water costs is likely to be small,
probably less than  1 to 2% a year, until investments in larger wells and pumps are required to maintain flow
levels.  At that point, the impacts on costs become much more significant  and irrigators may find it more
profitable to simply use less water.  Investments in water-conserving technologies may enable irrigators to
reduce water use without adverse impacts on crop production. A more likely strategy during periods of low

                                                                                              Session 2
 crop prices and tight credit may be to cut back on the acreage irrigated and the rate of water applied per
 acre.  Under this alternative, the costs are incurred in the form of reduced production.

                Rising energy costs produced the most dramatic cost increases for some groundwater
 irrigators during the 1970s. Energy price shocks were particularly great in the High Plains where the
 availability of almost free natural gas to power irrigation pumps had been a major factor in the rapid
 expansion of irrigation.  Many of these irrigators faced very sizeable increases in energy costs as the nation
 adjusted to the OPEC embargo.  The resulting sharp rise in water costs forced a major transformation on a
 region that had been characterized by relatively inefficient and wasteful irrigation practices. For some
 farmers this meant returning to dryland farming. For most farmers, however, more water-conserving crops,
 seed varieties, cultivation techniques,  and irrigation practices enabled them to adapt to higher water costs.

                Initially the states placed no controls on groundwater  use and  landowners were granted
 absolute ownership of the underlying water.  Most western states, however, switched to the appropriation
 doctrine and began imposing controls on groundwater use as mining conflicts between the  rights of surface
 and groundwater users and a number of other problems arose.  Even though new pumping permits are
 supposed to be granted only where additional pumping will  not adversely  affect existing users, the laws have
 seldom been applied to prevent depletion of an aquifer.  Arizona's Groundwater Management Act of 1980
 moves the furthest in mandating an eventual balance between pumping and recharge and in restricting
 irrigation within designated groundwater management areas.

 1.4             Environmental Problems

                High and generally rising salinity levels in several western river basins pose the principal
 environmental threat to  irrigation.  High salt levels in the soil or water impede plant growth, and can
 eventually render land worthless for agriculture. All irrigation water carries salts,  and concentrations
 increase  as water evaporates, is transpired by plants, or passes over saline soils. High salt  concentrations
 currently threaten agricultural productivity in the Lower Colorado, the Rio Grande, the San Joaquin, and
 several other river basins.

                The nature of the salinity problems differ among basins.  In the Colorado, high-quality
 headwaters (containing less than 50 parts per million of inorganic salts) pick up salts from  irrigation return
 flows as well as from natural sources. By the time the water reaches Mexico or the Imperial Irrigation
 District in Southern  California, salt concentrations have increased about 11 to 15 fold, reaching levels that
 are detrimental to irrigation as well as municipal and industrial water uses.17

                In California, repeated irrigations on naturally saline soils with poor drainage are producing
 waterlogging on the  west bank of the San Joaquin Valley. As the water tables  rise, oxygen is unable to get
 to the  roots and capillary action produces very high salt concentrations near the surface. About 300,000
 acres are already adversely affected, and with present management techniques the problem area is expected
 to double within a few decades.18  Saline water can be removed from individual farms with subsurface drains
 if there is someplace to put the drainage.  The  valley is still seeking an economically and environmentally
 acceptable way of disposing of the huge quantities of drainage water generated.

                Policies designed to  curb environmental insults inflicted by the agricultural sector also
 threaten current irrigation practices in some areas.  The closing of the canal carrying irrigation drainage from
 the Westlands Water District (the San Joaquin Valley's largest irrigation district) to Kesterson Reservoir 82
 miles to the north illustrates this type of threat.  Selenium, which is essential to some animals at very low
 levels but becomes toxic  at higher concentrations, is one of the naturally occurring trace elements in the
 drainage  delivered to Kesterson.  The mineral first entered the vegetation and small animal life of the
reservoir and increased to lethal concentrations as it moved up the food chain.  When it became clear that
the drainage was converting Kesterson into a deathtrap for many of its birds, the Secretary of Interior
arranged to close the canal as of June 1986 to avoid further violations of the Migratory Bird Treaty Act. The

                                                                                              Session 2

 Westlands is still seeking affordable and environmentally acceptable solutions to their drainage problems.
 Removing some of the lands from irrigation may need to. be part of any eventual solution.

                Current concerns about keeping agricultural chemicals out of water supplies may lead to
 restrictions on pesticide use that would affect irrigators as well as other farmers. California's Safe Drinking
 Water and Toxic Enforcement Act of 1986, better known as Proposition 65, is a case in point.  The  use of
 some pesticides will be banned under the act. Depending on how the legislation is interpreted and
 implemented, Proposition 65 could have major impacts on the state's agriculture.  Similar legislation is being
 debated in other  states, and the U.S. Environmental Protection Agency is considering bans on leachable
 pesticides in  areas where groundwater supplies are threatened.  Although little is known about the likely
 impacts of such policies on farmers, the uncertainties are apt to discourage some investment.


                To summarize the previous discussion, irrigation, especially in the seventeen western  states,
 played an important role in the growth of U.S. agriculture during this century.  However, the rapid growth of
 irrigation was based on easy access to inexpensive water,  and those conditions no longer exist.  Moreover,
 existing irrigators will be under increasing pressures to reduce current water use levels  in order to meet the
 rapidly growing demands of municipal and industrial users, to restore some of the values lost through  past
 neglect of instream flows, to bring groundwater use in  line with recharge, and to mitigate environmental
 threats from  current irrigation practices. Yet, as  is discussed below, there are reasons to believe that  (if
justified by agricultural price levels) irrigators can adapt to these pressures in ways that will ensure continued
 growth in the total value of irrigated production.  Future  growth in the western states will depend on
 increasing the returns to water rather than, as in the past, increasing water use. Fortunately, there are
 opportunities for  raising  the returns to water in irrigation by improving the efficiency with which the water is
 delivered to the plants or by increasing the value  of the output produced with a given amount of water.

                Surface  water irrigation efficiencies depend on both the conveyance losses incurred
 delivering water from its source to the farmgate and I he  on-farm  losses in getting water from the farmgate to
 the root zone of the crops. From the perspective of the system or region as a whole, the significant losses
 are those which cannot be recovered through return flows or groundwater recharge for later use. From the
 individual farmer's perspective, efficiency is measured as  the ratio of water received at the farm to the water
 utilized by the plants.  Higher water costs give irrigators  increased incentive to improve on-farm efficiency
 even if the on-farm water losses are recovered by others  in return flows.

                Irrigation systems differ widely in their relative uses of water and other inputs such as
capital, labor, and management skills.  The most efficient systems in terms of water use generally require
more of these other inputs.  In the late 1970s, a government task force established to assess  the potential for
 improving irrigation water use efficiency estimated that an investment of $14.6 billion in conveyance and
on-farm systems was required to achieve state-of-the-art  improvements in the irrigation systems of the 17
western states. These investments, however, would only provide an additional 3.3 million acre-feet of water
for new uses.  The Task  Force recommended a $5 billion increase in expenditures on water  conservation
measures spread over three decades.  They estimated that these  measures would reduce gross annual
diversions by 15 to 20 million acre-feet and make 2 to  5 million acre-feet available for new uses."

               At current water values, only the most attractive of these investments  are likely to be
economically justified.  The implied average costs of adding an acre-foot to annual water supplies through
the recommended conservation measures is somewhere between $1,000 and $2,500. While these costs are
 not out of line with prices being paid for water rights in some areas of the West, they are well above  the
values of water for  most agricultural uses. About 90% of the consumptive use  of western irrigation water is
 applied to crops for which the marginal value of water is less than $100 an acre-foot; nearly half is for crops
with marginal water values of $30 an acre-foot or less..20 Thus, the present value of a permanent increase in
 net water  supplies is less than $1,000 per acre-foot for all but the higher value crops.

                                                                                              Session 2
                Farmers are often able to conserve water at significantly lower costs.  For reasons provided
 above, however, farm-level water savings may overstate regional savings because they do not allow for return
 flows. Nevertheless, farmers' perspectives are important since they guide on-farm investments.  More than
 60% of the West's irrigated lands use gravity to distribute water by flooding fields planted to close-grown
 crops or through furrows for row crops. With gravity systems, only about half or, where the soil is sandy and
 the field uneven, considerably less of the water delivered to the farm may reach the plant. Farm-level
 efficiency for these systems can be improved perhaps 20 to 30% through investments in tail-water recycling
 (to capture water at the bottom of the field for reuse) and laser-leveling (to eliminate runoff).  Under
 conditions characteristic of many areas, it might cost from $10 to $50 an acre-foot to conserve water through
 these investments.

                Sprinkler irrigation systems, which are used on about 36% of the West's irrigated lands, can
 produce water-use efficiency levels of about 80% even on sandy, hilly terrain.  Sprinklers, however, tend to
 be considerably more expensive then gravity systems. Center-pivot systems, for instance,  cost in excess of
 $300 an  acre installed and about $15 in energy for each acre-foot applied.  On the other hand, center-pivots
 require very little  labor to operate.  Drip or trickle irrigation systems deliver virtually all of the water to the
 root zone of the plants.  Installation costs, however, are about three tunes those for a center-pivot system
 and  would be considerably higher with the closer spacing required for row crops.  Moreover, the pipes used
 to deliver the water to the plants are difficult  to farm around. Consequently,  fixed drip systems are not
 suitable  for close-grown and most row crops which together account for over  90% of the irrigated acreage.
 Mobile trickle systems which attach  trail lines with emitters to center pivots or other mobile sprinkler
 systems have been introduced into the High Plains as a means of reducing both evaporation losses and
 energy use.21

                Not all of the opportunities for conserving or increasing the returns to water require  large
 investments in new irrigation systems. Improved irrigation scheduling, which  applies water  only when it will
 be used  most  effectively by the plant, may actually produce higher yields with  less water.  Irrigation
 scheduling services utilizing models and computers to analyze data on crop responsiveness to water, daily
 weather  records, soil moisture levels, infiltration and evaporation rates, and other factors are now available  in
 many areas to assist farmers in making irrigation decisions. As water costs rise it may become profitable to
 irrigate less even if lower yields are  a likely result.  For instance, water use can be reduced by about
 one-third with only modest declines  in yields by simply irrigating alternate furrows.

                A common response to rising water prices is to switch to less water-using crops.  In
 particular, some growers have replaced corn with sorghum or wheat as water  became more costly.

                Agricultural researchers are developing seeds, chemicals, and management practices that
 will help farmers adapt to higher water costs.  Chemicals that reduce the amount of water a plant transpires,
 seed varieties  providing high yields with lower water inputs, and agronomic and irrigation management
 techniques that improve yields per unit of water are being developed on experiment stations and La some
 cases are being adopted by irrigators.  Since it has only been within the past decade that  researchers  have
 paid much attention to developing technologies particularly suited for conditions of water scarcity, a more
 concerted, long-term research effort is likely to produce major breakthroughs in the future.

                In spite of the growing opportunities for increasing returns to irrigation water, farmers
 attracted by offers of high prices are selling water to municipal and industrial users. The much higher water
values that are often characteristic of non-agricultural uses have led to predictions that such transfers would
lead to the demise of irrigation in large areas. Such forecasts seem unwarranted, however.  Water transfers
 occur gradually and are not likely to affect more than a small percentage of agricultural water  rights  for the
foreseeable future. Because  of the current dominance of irrigation in western water use, large percentage
increases in non-agricultural water uses can be met with relatively small percentage reductions in irrigation
use.  For instance, nearly 90% of the consumptive use of western water is for irrigation.  Thus, a 10%
reduction in irrigation use would almost be sufficient to double the water available for municipal and
industrial uses.


                                                                                             Session 2

                The water rights of irrigators could suffer from efforts to satisfy die increasing values and
legal status being attributed to instream uses or when Indian and federally reserved water claims are settled.
From a national perspective, however, the impacts on irrigation are likely to be small.  The higher values
placed on instream uses in recent years have made it more difficult to increase diversions from many western
streams for consumptive uses.  But since instream uses are non-consumptive in nature and since some of the
higher instream values (including those likely to be associated with federally reserved rights) occur hi the
upper reaches of a river, downstream diversions can be consistent with meeting these instream uses.  Since
irrigation is apt to be the dominant  use for Indian water for the foreseeable future, abrogating the rights of
existing users to settle Indian claims would have little net impact on agricultural water use.

                The strong complementarity between irrigation practices that conserve water and those that
reduce the environmental  problems associated with irrigation is another encouraging factor for the future  of
irrigated agriculture.  Limiting the rate and quantity of water applied to levels that can be fully absorbed
within the root zone eliminates the erosion, sedimentation, and water-quality degradation associated with
irrigation. Unfortunately,  eliminating runoff will lead to the accumulation of salts within the  root zone.  To
prevent these salts from damaging productivity, additional water must be applied occasionally to leach excess
salts from the soil.  Even though some of these salts are likely to show up in neighboring streams or
underlying aquifers, improved water management practices can go a long way towaird reducing the
environmental costs of irrigation while conserving scarce water supplies.

3.0             SOME FINAL THOUGHTS

                Economic factors, especially crop and  energy price levels, will be important to the future
growth of irrigated agriculture.  All  farmers have been  affected by the low crop prices of recent years. But
since their yields and production costs are generally lu'gher, irrigators' profits tend to be more sensitive than
those of other farmers to agricultural prices.  High crop price levels encourage yield-increasing investments,
of which irrigation is an important option.  On the other hand, high energy prices are likely to affect
irrigators more adversely than other farmers. Irrigators pumping from considerable depths and distributing
water under pressure through sprinkler systems are particularly vulnerable to energy price levels.

                In the humid eastern states, irrigation  growth will continue to be driven in large part by the
demand for agricultural crops. Drought, which increases the relative attractiveness of irrigation, can also be
an important inducement for irrigating.  Eastern irrigation is likely to continue growing faster than the
overall agricultural sector.  Yet, outside of Florida, /o-kansas,  and Louisiana, irrigated production will remain
a relatively minor part of the total on all except the liigh-value specialty crops.

                In the West, the impacts of increasing water scarcity on regional development are
inescapable.  Rising real crop price  levels can offset higher water costs and encourage additional groundwater
pumping.  But the lure of additional profits from irrigation would not alter the tread for more of the region's
water to flow to municipal and industrial uses for which water values are much higher than in irrigation.  Nor
would it do much to increase the flow of public funds for irrigation projects which are criticized for their
adverse impacts on the environment and instream water uses as well as for their questionable economics.
Higher crop prices would, however, make irrigators more inclined and better able to respond to rising water
costs with investments designed to increase the returns to water.

                No set of policies will alter the underlying fact that water is becoming an increasingly scarce
and valuable resource in the West.  Historically, both the federal and state governments sought to attract
settlers to the  West by assuring them access to low-cost water. State laws provided the security of
permanent water rights, and federal projects and subsidies helped ensure reliable flows of affordable water to
agricultural lands.  Currently, the persistence of soms of these laws and policies provide the wrong incentives
and make it  more  difficult to transfer water to new uses in response  to changing conditions.  In many states,
for instance, water rights are encumbered by restrictions on use and  procedures which make transfers costly,
tune-consuming, and uncertain.  Restrictions on the use of federally supplied water curtail both the
opportunities for transferring water  from Bureau of Reclamation projects to other areas and uses and the


                                                                                             Session 2
 incentives to conserve this water. Such laws and policies isolate some inigators from the increasing scarcity
 of water and encourage them to continue irrigation practices appropriate for a period when water was a free
 resource. Unfortunately, when an illusion of plenty is artificially created in some areas, water is made
 increasingly scarce in others.

                The laws, institutions, and attitudes that allocate and manage western water  are changing.
 Water marketing is becoming increasingly common throughout the western states as is evidenced by the
 emergence in January 1987 of a monthly newsletter to report on new developments, transactions, and
 trends.22 Several states  have passed laws in recent years declaring water marketing to be a beneficial use
 and, therefore, not cause for loss of a water right.  In July 1986 the Western Governors' Association adopted
 a resolution endorsing improved water use efficiency as a primary goal and promotion of voluntary water
 transfers as a primary means of achieving it. Even the Bureau of Reclamation has come to recognize a need
 to change their mission  from "one based on  federally supported construction to one based on effective and
 environmentally sensitive resource management".23 As the incentives are altered to more nearly reflect
 underlying resource availability, the growth and prosperity of irrigated agriculture is likely to  closely reflect
 that of the overall agricultural sector.

                The foregoing discussion implicitly assumes the nation's climate will remain  essentially
 unchanged. In view of the widely held consensus among climatologists that  increasing concentrations of
 carbon dioxide and other radiatively active trace gases in the atmosphere will lead to a global warming and
 substantial, but unknown, changes in precipitation patterns, this assumption  becomes increasingly
 questionable as we move into the next century.  Global climatic modeling is not sufficiently advanced to
 predict what these changes might mean  for the  agriculture of specific regions.  Regional water supplies could
 be substantially curtailed even with no reduction in precipitation as evapotranspiration rates rise with average
 temperature  levels.  On the  other hand,  water supplies might rise  as the global hydrological cycle is
 accelerated by the warming. The added uncertainty,  however, provides further justification for both
 institutional changes that will make irrigators as well as other water users more responsive to underlying
 resource conditions and research designed to develop better ways  for adapting to increased water scarcity.

 4.0             REFERENCES

 1.               Funds for this paper  were provided by the National Center for Food and Agricultural Policy
                at Resources for the  Future.

 2.               U.S. Department of Agriculture, Economic Research Service. Agricultural Resources:
                Cropland, Water, and Conservation. Situation and Outlook Report. AR-4. pp. 21-22.
                October 1986.

 3.               Capalbo, S.M. and T.T. Vo. "A Survey of Econometric Evidence on Productivity and the
                Structure of Agriculture," Discussion Paper Series. RR85-03.  National Center for Food and
                Agricultural Policy, Resources  for the Future,  p. 61.  April 1985.

 4.               U.S. Department of Agriculture, Economic Research Service. "Measuring the Effect of
                Irrigation on the Rate of Technological Change," Agricultural Economic Report No. 125.
                p. iv. November 1967.

 5.               Economic Research Service, Agricultural  Resources, p. 21.

6.               Frederick,  K.D. and J.C. Hanson. Water for Western Agriculture. Resources for the
                Future, Washington,  D.C. pp.  24-35. 1982.

7.               Economic Research Service. Agricultural Resources,  p. 22.

                                                                                          Session 2

8.             U.S. Department of Interior. Aqeage Limitation. Interim Report.  Washington, D.C.,
               pp. 38-41. March 1980.

9.             Frederick, K.D. and J.C. Hanson. Water for Western Agriculture,  pp. 15-16.

10.            Ibid., p. 18.

11.            Economic Research Service.  Agricultural Resources,  p. 20.

12.            Calculated from data in U.S. Water Resources Council. The Nation's Water Resources:
               The Second National Water Assessment, vol. 3.  GPO, Washington, D.C.  Tables II-5, II-6,
               andIV-2. 1978.

13.            Scott, L.L.  "The Public Trust Doctrine -- A Tool for Expanding Recreational Rafting
               Rights in Colorado," University of Colorado Law Review. 57/3. pp. 625-637. Spring 1986.

14.            MacKichan, ICA.  Estimated Use of Water in the United States in  1955. Circular 398. U.S.
               Geological Survey, Washington, D.C. 1957, and W.B. Solley, E.B. Chase, and W.B. Mann
               IV.  Estimated Use of Water in iJie United States in  1980.  Geological Survey Circular
               1001. U.S. Geological Survey, Alexandria, VA.  1983.

15.            United States Water Resources Council.  The Nation's Water Resources,  vol. 1, p. 18 and
               vol. 3, App. II and III.

16.            Sloggett, G. and C. Dickason. "Ground-Water Mining in the United States," Agricultural
               Economic Report Number 555.  Economic Research Service, Washington, D.C.  p. 3. 1986.

17.            Young, RA, and G.L. Homer. "Irrigated Agriculture and Mineralized Water," Agriculture
               and the Environment. Resources; for the Future, Washington,  D.C. p. 96.  1986.

18.            San Joaquin Valley Drainage Program.  Status Report No.  1. Sacramento, California, p. 1.
               October 1985.

19.            U.S. Department of Interior, U.S. Department of Agriculture, and  Environmental  Protection
               Agency.  Irrigation Water Use and Management:  Interagencv Task Force Report. GPO,
               Washington, D.C. p. 5-8.  1979.

20.            Gibbons, D.C.  The  Economic V;due of Water.  Resources for the  Future, Washington,
               D.C.  Chapter!. 1986.

21.            Frederick, K.D. and J.C. Hanson. Water for Western Agriculture,  pp. 158-165.

22.            Western Network. Water Market: Update. Santa Fe.

23.            United States Department of the Interior, Bureau of Reclamation.  Assessment '87 . . .
               A New Direction for the Bureau  of Reclamation.  Washington, D.C.  September 1987.

                                                                                           Session 2
      Economic Issues for Farmers in the Rewrite of The Clean Water Act
                                         John K. Hosemann
                                           Chief Economist
                                  American Farm Bureau Federation

                This paper discusses the central economic issues farmers and ranchers will face in the
reauthorization of the Clean Water Act.  Given the wide variation among farm types, farm regions, farm
cultural practices and weather, generalized rules and centralized controls for dealing with nonpoint source
contamination are likely to be very costly and produce limited real environmental gains for the money spent.
The paper discusses the distribution of the cost of solutions of nonpoint source contamination and the
implications of these cost burdens for the family farm competitive structure, U.S. farmer international
competitiveness, farm income and asset values, rural development and the impact on new entrants.

                A lack of site-specific farm-level data on nonpoint source contamination is a major obstacle
to evolving real solutions to serious nonpoint source agricultural problems if and where these do exist. Given
the conflicting farm and nonfarm economic and  environmental interests,  the lack of site-specific farm-level
scientific data on nonpoint source linkages  makes a case for  bold new approaches to marry the incentives of
private ownership and the efficiency of private resource management with the discipline of the  market to
solve nonpoint source problems.

"Taking action without knowledge is like throwing darts with a blindfold."



                Sorting out the economic issues to be dealt  with in the rewrite of the Clean Water Act is an
humbling experience.  The approach in this paper is to focus on some fundamental  economic issues.  Should
the fundamental economic issues get swept aside, there are obviously still many serious issues with which
farmers must struggle.

                Partial review of technical research and earlier economic papers reveals certain point source
pollution issues pertinent to nonpoint source pollution. Technology-based, command-control, "zero-based"
policy and regulatory approaches have not worked effectively or efficiently for point source  pollution
problems. These approaches are not likely to work for nonpoint source problems either.  It is time to
abandon the status-quo and move on to bolder, more creative solutions that put water quality improvement
as the central policy focus rather than federal micro-management of farm inputs and resource uses.

                A new approach based on water quality outcome standards requires some  recognition of the
basic economic relationships that have made U.S. agriculture what it is today, a science-driven  and highly
efficient industry facing the challenges of a competitive world marketplace. If policymakers insist  on  applying
the discredited command-control, technology-based regulatory controls to the farm sector, they should
understand that there will be substantial  economic implications and  the weakening of one of the last  world-
class industries in the United States.

                One reason for including these  Figures 1, 2, and 3 is to  point out that had U.S. farm
technology been frozen at the 1910 level, the U.S. would have to cultivate 1.222 billion acres to produce the
output that U.S. farmers currently produce on 300-400 million acres. Technology and innovation is pro-


                                                                                             Session 2

environment.  It has released vast land and water resources for other activities.  Goklany and Sprague1
discussed this point in detail.

                Another reason for including these productivity perspectives upfront is to remind ourselves
what this policy debate is all about—raising farm costs and lowering these positive trends.

                Long-standing increases in U.S. farm productivity are based on a massive investment in
scientific discovery, trial and error on and off farms, with both private and public research and development.
In addition, over the last 100 years,  billions of dollars of private and public money have gone into technology
transfer that positions U.S. agriculture as the world-class competitor it is today.

                Finally, the central point here is that farmers simply do not have a similar scientific basis on
which to make business judgments and decisions about what they are/are not contributing to nonpoint source
contamination. We simply do not know, in site-specific farm-level terms, the linkages between modern farm
practices and water quality.  This detail data is absolutely essential in order to evolve the policy options—and
ultimately the common law legal remedies—which can improve water quality where serious problems do exist.

                It is  simply not good enough to make sweeping allegations and generalizations about the
possible links between modern U.S. farm practices and water quality without scientific  proof of cause and
effect at the site-specific farm level.

                In simple terms, an individual fanner has the scientific data and know-how to produce 75
bushels per acre wheat on his  land and similar land.  What he/she  now needs is access to the scientific data
and  know-how to produce 75 bushel/acre wheat and a specified quality of runoff and groundwater from that
same acre of wheat.

                Figure 4 depicts the principal challenge which U.S. farmers will face in the decades ahead.
By the year 2000, world population will increase by 1 billion people.  In 50 years, world population is
expected to double from 5.5 to 11.0 billion people. New technology will no doubt play a major role in
meeting this fundamental challenge.  But so will land and water resources in the United States.

                Figure 5 illustrates the 1975-1990 trends in world grain production and utilization. If world
grain consumption increases only by population growth at 1.4% per year, by the year 2000 the world will
need 16% more grain. How will this  be done?

                Figure 6 illustrates the 1975-1.990 trends in world grain acreage and world grain yields.
World grain acreage increased between 1975-1982 and declined steadily thereafter.   In fact, the longer-term
trend shows a steady  decline in world grain acreage.  World grain yields,  on the other  hand, with a few
exceptions have trended steadily upward over the 1975-1990 period. Yield increases have offset the decline
in the grain production area.

                To meet the world population—and hopefully income—increases in the years ahead some
combination of yields and acreages will need to increase. Environmental pressures worldwide will surely
continue to  put downward pressure on increasing acreages  for production.  To close the gap,  yields will have
to increase even more so, but  there are no dramatic breakthroughs on the horizon and there  are numerous
obstacles  in areas, like biotechnology, which hold potential  for farm productivity and environmental gains.

                                FIGURE 1
                     OUTPUT and PRODUCTIVITY
                            RISE STEADILY;
                              INPUTS FALL
                              Session 2
                  INDEX (1910=100)
                                      HYBRID SEED CORN, FERTILIZER,

                                         MACHINERY COME INTO PLAY
               300 -
               250 -
                 1910  1920  1930  1940  1950  1960  1970  1980
                        U.S. AGRICULTURAL PRODUCTIVITY
                                 75 YEARS OF GROWTH
         INDEX (1977=100)
         120  -
         100  -
              1915   1925   1935
1945   1955
1965   1975   1985
                 Source: Agricultural Chartroom, National Council of Farmer Cooperatives

                         'IGCRl 3
                     PEOPLE FED BY
                ONE U.S. FARM WORKER
                        1870 TO 1988
                                 Session 2
            People-supplied farm
              products ty one
               farm worker
         20 H
          1870    1890
 1910   1930
rieuu 4
                                 1950    1970

10,000 -

 8,000 -

 6,000 -••

 4,000 -

 2,000 -
      1900 ' 1920 ' 1940  1960   1980  2000  2020  2040
  >:  Agricultural Chartroom.Nat'l Council of Farmer Cooperatives



. x 	

1700-r-   Million
     I Metric Tons
1200 —
                                                                              Session 2
                  World Grain Production
                 World Grain Ut  zation
75   76   77   78   79   80   81
     Filename: Grphl
                                     82   83   84   85    86   87   88   89   90

                                      Year          Source: USDA.FAS. FG-10-89
                                       riGUU 6
                                                          Metric  Tons
                                                          Per  Hectare
                                                     World  Grain Yields
                                       World  Grain Acreage  %
       75  76   77  78   79  80   81   82   83  84   85  86   87  88   89  90

              Filename: Trend             Year         Source: USDA. FAS FG-10-89

                                                                                            Session 2
                Ruttan2 assesses the situation and prospects as follows:
                "Now in the closing years of the 20th century we are completing one of the most remarkable
transitions in the history of agriculture. Prior to this century almost all of the increase in food production
was obtained by bringing new land into production . . ." Yet in the next century, almost all increases in
world food production must come from higher yields—from increased output per hectare.  This shift from
expanding crop area to increasing land yields has been underway in most of the developed world since  the
turn of the last century . . .

                As we look toward the future, however, we know that the demand increases will be large.
The demands related to population growth and improved incomes in the developing economies will be
exceedingly high. During the next several decades, jjrowth in food and feed demand rising  from growth in
population and income will run upwards of 4.0% per year in many developing countries.  Many will
experience more than a doubling of food demand before the end of the second decade of the next century.  . .

                Several developments suggest that gains in agricultural production required over the next
quarter century will be achieved with much greater liifficulty than in the immediate past.  Difficulty is
currently being experienced in raising yield ceilings lor the cereal crops which have experienced rapid yield
gains in the recent past.  The incremental response to increases in fertilizer use has declined.  Expansion of
irrigated  area has become more costly. Maintenance research, the research required to prevent yields  from
declining, is rising as a  share of total research effort.

                Further, the institutional capacity to respond effectively to these developments is limited,
even in the countries with the most effective national research and extension systems.  Indeed, during the
1980s,  many countries have had difficulties maintainimg their agricultural research capacity at levels achieved
in the 1970s.  . .

                ... Almost all increases in agricultural production over the next several  decades must
continue to come from more intensive use of land currently in  use. Improved crop and animal productivity
will come from better plant and animal breeding, more effective animal nutrition, and more efficient  use of
technical inputs including chemical fertilizers and pest control chemicals.

                Even so, the productivity gains from conventional sources are likely to come in smaller
increments that in the past  . . ."

                Policymakers rewriting the Clean Water Act will need to make sure that they recognize the
economic pressure on U.S.  farmers from these underlying trends. The world food  balance is too  precarious
to adopt  policies which will adversely impact  U.S. yield and acreage opportunities in the years ahead.


                The first major economic issue that all farmers now worry about is the right to own
property  and to use it efficiently.

                The confusion about federal wetland delineations among at least four federal agencies, the
passage and now implementation of the Coastal Zone Management Act (CZMA) amendments, endangered
species, FIFRA, and Senate Bill 1081 to rewrite the Clean Water Act all have command-control regulations
for farm  activities and have added to  the risk and uncertainty in the U.S. fanning business.

                Farmers respond to incentives.  The incentives to own and manage private resources is
probably the  most powerful economic incentive from the farmer's perspective. The idea of owning and
improving the farm resource base motivates farmers to take the risks that lead to long-term farm  productivity
gains.  The incentive to pass on a productive  farm unit to heirs or to sell the unit based on its productive
value is a powerful motivation for farmers.


                                                                                             Session 2
                Ownership of property is the right above all others that enabled the common man to ascend
 from serfdom.  It is the most basic of human rights which are essential to freedom and progress.  Property
 ownership and its use is essential as a stimulant to productive effort.  Unless people can feel secure in their
 ability to retain the fruits of their labor, there is little incentive to save and expand the fund of capital—the
 tools and equipment for production and higher living standards.  Fanners are feeling less and  less secure in
 their rights to property and, as a result, their incentives are diminished.

                Markets cannot exist without property ownership.  Private property produces  an efficient use
 and allocation of scarce resources. Any infringement on property rights reduces the efficiency of our
 economic system, raises output costs, and lowers living standards.

                The right to own and  use property causes individual farmers to better cope with variations
 in annual income in order to accumulate wealth by building a productive asset base over time.  Ownership
 and control motivate farmers to create wealth through innovation.

                The systematic erosion of the right to own and use property is now causing farmers to
 seriously wonder if they will only  be left with the ownership responsibilities of paying taxes,  mortgages and
 insurance, but without the right to use  the resources efficiently. Do policymakers wish to trade off farm
 productivity gains for uncertain surface and groundwater improvement?  Rewriting the Clean Water Act will
 strike at the heart  of the economic incentive structure on which U.S.  agriculture depends.

                Command-control policy approaches where government specifies  "the correct" technology, if
 applied to nonpoint source problems in agriculture, will have serious  negative farm productivity implications
 for the longer term.  Negative motivation stifles innovation, raises  costs, and reduces productivity.

                If anything has been learned from recent developments around the world, it should be that
 central command-control approaches do not work. Now is  the time to invigorate,  not denigrate, the
 institution of private ownership and control and use it to everybody's benefit in solving water quality
 problems.  This is  at the heart of the economic incentive structure  of U.S. agriculture.  Solving nonpoint
 source pollution problems must work in harmony with private property values and the  incentives of

                Current wetland regulations are the antithesis of using the incentives of property ownership.
 Farmers have been penalized for  good faith  efforts to construct and conserve bona fide wetlands. Others
 have been left with no use of their property, substantial fines, hours of red tape, confusion, and lost
 productivity.  The new Clean Water law must reject these precedents.


                A second economic issue in the Clean Water Act  rewrite is the fact that we simply cannot
 prove the  cause/effect linkage between specific farm level activity and water  quality.   Broad generalizations,
 allegations, and nonscientific monitoring (Clean Water Act, Section 305B State Reports to EPA) are not
 sufficient to make policy recommendations for widespread changes in farm practices.  We must do better.

                It is not good enough  to say that answering the scientific cause/effect relationships is "too
costly" or "impossible."  It will be even more costly to not discover  the scientific relationships between
activities and practices on individual farms and water quality.  This  point is made frequently in the literature
by economists who have avoided the trap of aggregation and focused on the  micro implications of farm level
water quality policy issues.

                                                                                             Session 2
                In the textbook, Environmental and Natural Resource Economics,3 Tietenberg argues as

                One way to tailor the policy is to focus, at least initially, on those pollutants causing the
                most damage.  Unfortunately, there is very little hard information available on the damages
                caused by nonpoint pollution.  This makes it difficult not only to set priorities for controlling
                various categories of nonpoint pollution, but also to secure the efficient balance between
                controlling point and nonpoint sources.

                How should policy makers react to this uncertainty? Watson and Ridker [1982] set out to
                answer this question by quantifying the costs associated with various policy approaches.
                They specifically considered the cost of being wrong in the sense of making one policy
                choice (a strict focus on point sources) when another choice (a balanced program of
                controlling point and nonpoint sources) was appropriate.

                Their results indicate that the cost of Iteing wrong is so high that the government would
                benefit from investing time (by delaying implementation of the most stringent point source
                controls) and resources  (by conducting research on the intensity of nonpoint pollution
                damages and costs) before making a specific policy choice that could prove to have been a
                serious mistake.  Sometimes procrastination can be efficient! [Emphasis added by author.]

                In a paper, "The Impacts of Nonpoint Source Pollution Regulations on Mississippi
Agriculture"4, Hurt and Reinschmidt give the farm-level application  of Tietenberg"s argument:

                Ultimately, the question of what constitutes acceptable levels of erosion control and water
                quality will be  the overriding issue facing agriculture and society. Resolution of this issue
                will require substantial increases in bath technical and economic research.  Technical
                research is needed to provide more and better information about the physical parameters of
                the  water quality-agricultural production relationship.  Economic research is needed to
                provide more and better information about benefits-costs and 'their distribution among the
                various segments of society and over time.  The penchant of agricultural economists is to
                address the aggregative,  longer-term, broad, general policy type issues regardless of the
                quality of technical information available  . . .

                Many specific tasks and  questions must be identified prior to designing and conducting the
                research.  One of the first tasks is to specify in detail the practices  and activities included in
                each crop production/erosion-pollution control system.  For example, the following items
                must be specified:  [Emphasis  added by author.]

                        •      Each tillage practice end its timing;
                        •       Each pesticide application and its  timing;
                        •      Each fertilizer application and its timing;
                        •       Harvesting procedures and residue management; and
                        •       Other erosion-pollution-production practices affecting the variables of

                Ideally, a set of systems  would be specified spanning the range of alternatives available . . .

                Once a practical set of alternative systems has been identified the research must  be designed
                to address certain questions about each system in the  set.  Some of these questions are:

                        1.      What are the expected yields and  costs  per acre and. their variability and
                               distribution over time'1

                                                                                             Session 2
                        2.       What is the expected erosion, what is its distribution within a year and over
                                years, and what is its relationship to water quality?

                        3.       What is the expected sediment, nutrient, pesticide, and toxic chemical
                                content of runoff and its distribution spatially and temporally?

                        4.       How would the answers to the preceding questions differ for alternative
                                soil-slope-rainfall situations?

                        5.       What are the relationships among the variables identified (interaction)?

                Ribaudo in his article "Agriculture and Water Quality"3 further clarifies the issues:

                The contribution of cropland or other nonpoint sources to pollution varies from one
                location and time to another.  Identifying which land  and land use is subject to substantial
                loss of sediment, nutrients, and pesticides is difficult  without expensive monitoring
                systems. The  variability of climate, soil traits (erodibility, hydrological features, ability to
                bond with chemicals, productivity for crop production), a watershed's ability to absorb
                pollution, and other factors make it difficult to evaluate how much a single  field or farm
                affects water quality downstream....

                All factors affecting water quality and resulting economic damage must be considered
                before implementing water-pollution control efforts. For example, the Corn Belt generates
                substantial erosion and sediment because it uses land extensively for farm crops.  However,
                regions with dense populations, high incomes, and concentrated industry such as the
                Northeast and the Lake States will feel the  effects of water pollution more than a region
                like the Corn Belt that may have greater erosion problems but fewer people  to feel its
                effects.  But, off-site damage associated with water pollution cannot be measured directly
                and the links between farming and affected water uses are not well defined.  Many
                assumptions are made to estimate off-site damage, and both methods and data for
                estimating damage need to be improved . . .
                [Emphasis added by author.]

                Ground water contamination occurs only in certain places, making it difficult to draw a
                broad perspective on pollution issues.  Sites cannot be compared because data for individual
                wells are inconsistent. Evaluating the full extent of ground water pollution is made even
                more  difficult by variations in well depths, sampling periods, chemicals tested for, land uses
                above contaminated sites, soils, and biologic, hydrologic, and geologic characteristics . . .

                The facts of the  matter are that the variability among practices on farms, among different
farm units, among different farm  regions is so great that applying the "one-size-fits-all," command-control
regulatory approach to nonpoint source problems will erode farm productivity gains and ultimately reduce
U.S. agriculture to a second-rate  international competitor. The rest of the agricultural world  will not remain
idle while the U.S. plays trial and error with water quality policy for fanners.

                Appendix A contains the maps and well testing data for two Ohio counties.   These maps
and data clearly illustrate how command-control,  centralized rules for water quality will not work even within
a township, much less within  a county or within a state, region or the nation.  Flexibility and positive
incentives should be the key words in the Clean Water Act rewrite.

                All agricultural systems  must be  site-specific and flexible enough to allow changes in
management practices when Mother Nature throws a curve.  This year's crop season has been an excellent
example of widely variable weather events with which the farmer must cope. If a farmer plans to "no-till" a
field but excess rain causes harvest machinery to leave  ruts, the farmer  needs  to be able to smooth out the


                                                                                            Session 2

ruts with tillage without being charged for violating a conservation compliance plan.  This kind of
environmental enforcement has lost credibility with farmers. The environment is not improved, but the
farmer's costs are increased.


                The regulatory pressures of wetlands, cle.in water, endangered species, coastal zone
management, and the anti-technology media hysteria that currently drives the policy  debate are already
imposing costs on farmers in terms of the human intellectual capital that is now diverted to unproductive
regulatory activity.

                More and more time and resources are being diverted from finding better ways to produce
the bushel, bale, pound, and hundredweight to regulatory compliance. This is a cost not captured by most
analysts. It is not captured in conventional data series. A day spent discussing whether a parcel of land is/is
not a wetland is  a day lost from thinking, planning, anticipating, studying the farm enterprise.  A day spent
worrying about future legal liabilities because current farm practices may not satisfy  future federal regulators
is a day lost for improving the farm business.

                Command-control regulatory mandates for farmers are at odds with the basic nature of the
business—production, enthusiasm, and excitement for whal. lies ahead. Command-control is negative,
unproductive, and backward looking.  More and more farmers of all ages,  particularly younger operators, are
being turned off or away by the obstacles they now have in land and water regulations.  An industry cannot
grow when its intellectual capital and entrepreneurs are discouraged by a clouded and risky regulatory future.


                Constraints on farm  resource ownership and uses will sooner or later translate into a lower
income  stream as land uses are restricted.  With income potential reduced, asset values will surely decline.
This economic issue poses substantial considerations for fcirm financial institutions, rural schools, and other
institutions dependent on the tax base.  Rural development will be penalized in the process of more federal
water quality micro-management.

                It  is not true that farmers can find economic Utopia through restrictions in asset uses with
the prospect for  longer-term, higher commodity prices. T!tiis is not the way the world works.  These lessons
were learned through the production and marketing programs in the  1950s and 1960s and relearned in the
early 1980s, as U.S. market shares declined, stockpiles accumulated, and government costs increased.

                In the very short run, the idea of causing farm resources to be used less in order  to drive up
prices may hold. But longer term, a new equilibrium will be found unless all players in the world
marketplace are  forced to  obey the same U.S. nonpoint source land and water rules. This is not a likely

                Reichelderfer  recognized the basic economic tradeoffs in  her paper "Water Quality
Legislation Affecting Agriculture."6 She stated:

                As the prevalence of stricter environmental legislation increases, tradeoffs among the
                following  sector-wide consequences will need to be considered:

                       •       Higher commodity and consumer prices;

                       •       Lower direct government expenditure for commodity  price support;

                       •       Changes in farm income distribution, including:

                                                                                            Session 2
                                       Higher feed costs and lower income for livestock producers,

                                       Higher aggregate income from crop production,

                                       Reduced income for producers directly affected by restrictions;

                        •      Reduced demand for the services of upstream agricultural services (farm
                               input industries);

                        •      Less business for downstream agricultural industries (e.g., food processing);

                        •      Improved environmental quality, including safer drinking water for farm
                               households and livestock.

                Policymakers who fail to learn the lessons of resource use restrictions via regulatory controls
or outright limits on farm production have not accepted the realities of the globalization of agriculture.  Nor
have they learned the economic lesson that living standards  for all citizens cannot be improved by
redistributing a smaller farm production pie. The pie  must  be made larger through the incentives  of the
marketplace and  the spur of competition that allows free individuals to evolve creative low-cost solutions to
water quality problems and at the same time fully participate in the increasing world demand for food, feed,
and fiber.


                Extending the technology-based, command-control policy and regulatory regimes  to
nonpoint source problems raises the  fundamental economic issue of zero pollution.  Zero pollution is simply
an uneconomical and impractical policy goal.

                In a forthcoming paper "The 1991 Clean Water Act: Reauthorize,  Reform, or Repeal?"7
Meiners and Yandle write:

                Scientific evidence about the consequences of pollution tells  us that we can stop short of
                zero discharge for many pollutants, but that we should strive for zero for certain  toxic
                materials. The old fixation on zero pollution is a barrier to effective, lower cost  control. If
                ambient quality standards are set for  receiving waters, or the amount of pollutants that may
                be discharged are established, decision makers can solve the resulting problem. They know
                where they are headed; they must then find the most effective way of getting there.
                [Emphasis added by author.]

                The overall environmental debate and the water quality debate seems to have matured
beyond the naive notion that zero pollution is a workable policy goal. The debate seems  to be refocusing not
on the "either/or" questions, but rather the "how" question.

                "How" do producers solve real environmental problems where these do exist at the lowest
possible cost? With this question now being asked by  mainstream policymakers, the debate has shifted away
from the policy goal of zero pollution.  This long-standing policy goal implied that producer and consumer
costs do not matter. A shift from the goal of zero pollution to a goal of water quality improvement will be
welcomed by farmers.

               We now know that in the  case of surface waters, streams can assimilate certain levels of
pollution naturally.  This should mean that scarce resources can now be allocated where these would yield
the largest water quality improvements (and environmental gains).

                                                                                            Session 2

                In summary, abandoning the zero discharge and policy goal, except for proven toxic
substances, should go a long way toward evolving real solutions to real nonpoint source water quality
problems.  Establishing realistic standards for water quality improvement is a substantially different objective
than chasing the goal of zero pollution with ever-broadening command-control regulations and government-
mandated technology.

                Once realistic standards are set for runoff-water from farm operations all participants will
have a clearer idea of where they are headed. Ideas for "how to get there" will soon emerge if other
economic fundamentals like respect for private ownership are not violated and incentives are in place to find
low-cost remedies.

                Shifting away from the unrealistic goal of "zero discharge" and on to performance standards
will mean a shift by regulators away from trying to micro-manage inputs to  monitoring output.  Competition
forces cost minimization. Competition rewards genius, creativity, and entrepreneurship of those who
innovate to meet the specified water quality standards. It punishes those with higher costs.

                Farmers will respond as they always have to competitive forces provided the incentives are
in place.  In rewriting the Clean Water Act, policymaksrs would see substantial environmental gains to real
problems i/they make it clear that  the policy is aimed at output results not input controls and that
competition will be the driving force.


                The Coastal Zone Management Act  amendments made very detailed management
recommendations for farmers for grazing, erosion, nutrients and pesticides, irrigation, and confined animal
facilities.  These measures and practices are well on their way to becoming  the "farming law" in the states
impacted by the CZMA.  Policymakers are likely to extend these rules to the rest of the nation via the Clean
Water Act reauthorization. At least two points need to be made.

                First, it is not enough to look at the "macro" impacts of the proposed changes in farming
practices in CZMA states. Totaling up the aggregate costs of Best Management Practices (BMPs) will in all
likelihood mislead policymakers to  believe that CZMA will not "cost very much."

                The real cost of the CZMA regulations  of land and water used in farming will be the cost
imposed at the farm  (firm) level of decisionmaking.  For example, what will the new regulations do to the
crop-livestock mix on a particular farm, the  tuning of field operations, production practices, size and
structure of the farm unit?  And to what alternative uses might the capital cost of the new regulations been
used to make the farm more competitive?  Perhaps more significantly from the standpoint of many
producers, the potential risk  and liability of "being wrong" has proven to be a high cost in trying to comply
with wetland regulations.

                Secondly, the environmental effectiveness of the proposed regulatory measures have not
been proven.  Before imposing the  proposed regulatory costs on the CZMA farming region (or  the nation's
farmers via the Clean Water reauthorization) policymakers should know whether these actions will, in fact,
improve water quality.  For example,  the 100-horsepower tractor pulling the appropriate tillage equipment
has proven far superior for runoff water control than  terracing.

                The lack of understanding of the real costs of more land and  water restrictions on farmers
and the uncertainty about the environmental effectiveness of various regulatory prescriptions should cause
policymakers to look for superior approaches which will: (a) discipline cost and (b)  evolve the best and
lowest cost methods  for  improving  water quality. This would mean a complete shift in regulatory focus from
micro-management of all farm activities that involve land and water to management of output, (i.e., setting
realistic water quality standards, a timetable, and incentives for achieving these new standards).

                                                                                            Session 2

                It has been said before but it is worth noting again that once the links between water quality
and nonpoint source problems have been identified in site-specific terms, the next step should be to
determine what the risks are to both human health and to well-defined environmental values. Simply put,
farmers cannot stay in production if zero remains  the federal policy goal of acceptable risk for humans,
plants, and animals

                As things now stand, the levels of chemicals allowed in the  water are based on standards
which have no scale for comparing relative  risks from  manmade chemicals to risks from "natural" chemicals.
Present methods of risk assessment must be revised based on science and not the politics of the promise of
risk-free living.


                Those who fail to accept the globalization of the U.S. economy and particularly of U.S.
agriculture will insist on extending the command-control technology-based prescription to nonpoint source
contamination problems. Absent scientific  proof of the cause-effect linkages between site-specific farm-level
activities and production practices, such a generalized  approach will penalize those farmers who, for whatever
the reasons, are already at or below common-sense acceptable discharge levels. If this happens, one can
expect the cost of production to rise unnecessarily for  those who are already doing a  "good job."

                The example of mandating concrete bunkers for fertilizer and fuel storage facilities comes to
mind. For those producers (and/or their supply cooperatives) who have superior management plans and
practices and who have never had spills or leakage, this is an unnecessary and added cost. It contributes
nothing to farm-level productivity improvement. A more enlightened approach would be to enact policies
which reward, not punish, better managers. Markets are much more efficient at the reward/penalty process
than regulators.

                Farm structure will definitely change  if command-control, technology mandates are extended
to nonpoint source problems. New entrants—those without  accumulated capital resources—will be forced to
choose between investing in innovative farm production methods or pollution control investments which add
nothing to farm productivity.

                Increased federal pollution control mandates will translate into farm consolidations. Fewer
and larger farm units which are financially equipped to "do what the regulators tell them to do" will soon
emerge.  This process is already underway.  Many fanners are already to this point when they contemplate
the cumulative effect of wetlands and fertilizer and pesticide aspects of their operations. Given the age of
some farmers, present  costs and future liabilities are not worth staying in business.

               Instead of the traditional competitive, family-farm diversified structure, U.S. agriculture will
be headed toward a corporate-state centralized large-scale fanning system of a  public utility variety.

               Prescribing technology for  pollution control will ultimately lead to federal regulators
prescribing crop and livestock practices, and production and marketing controls. The only unregulated farm
activity that will remain will be rates of return.   Regulation of returns will surely follow once the centralized
food production system leads to politically unacceptable food prices or unavailable supplies.

               U.S. agriculture will, by discouraging young creative producers, be left with the exact
opposite outcome—producers who know little about the art forms of food production and a lot about
responding to federal regulators. Such an outcome is not indicative of growth industry status.  Several
analysts have noted the unequal distribution and impact of environmental regulations. These costs will fall
disproportionately large on small- and mid-sized farm  operations.


                                                                              Session 2
Ribaudo8 captures many of these points:

Laws aimed at protecting water quality will affect fanners' pocketbooks.  Farmers in critical
or sensitive watershed areas could be faced with such actions as:

        •       Taxes on nitrogen fertilizer and pesticides.

        •       Mandatory soil conservation management practices, with or without
                government cost sharing.

        •       Bans on certain pesticides known to leach into ground water in significant
                quantities or knovoi carcinogens.

        •       Regulations on land uses, on types of land on which chemicals can be
                applied, and on the  quantity of chemicals used.

        •       Mandatory management practices for applying chemicals (for example,
                requiring injection instead of mixing chemicals with irrigation water).

Any of these  actions could change fanners' operations. They could have to:

        •       Reduce inputs, particularly nutrients and pesticides.

        •       Use structural practices such as grassed  waterways to reduce runoff and
                associated pollutants.

        •       Change linage or other management practices.

        •       Change land use, such as altering the intensity of the crop rotation or
                converting land  from row crops to hay.

Any of these changes could cut incomes if production costs increase, yields decline, or
both. If fertilizers and pesticides are taxed, farmers will face higher production costs.
Constrained fertilizer use will reduce crop yields. If specific pesticides are banned, farmers
will have to shift to either more expensive or less effective chemicals, or cultivate more land.

Curtailing nitrogen use or banning heavily used pesticides could mean yield losses  for most
major crops.  Pesticide  suppliers  could be hurt sharply by widespread bans on some
chemicals.  And, farm income and corporate profit losses could be substantial....

Restrictions on farming could affect local economies and the distribution of cropping
activities.  For example, some regions would face considerably greater yield losses than
others if wide-ranging pesticide, fertilizer, or  sediment restrictions are imposed.  Regions
affected less by environmental controls would acquire a competitive advantage over more
affected regions, and production of crops that are affected by baas would shift to less
affected regions.  Sensitive watersheds targeted  for control would  become less competitive
as production costs rise for affected crops.

Widespread changes in  agricultural production, brought about by legislation to protect water
quality, could affect crop prices.   For example, banning important pesticides such as the
triazine herbicides could significantly reduce corn yields and increase corn prices.  Farmers
would benefit from the  higher prices, but consumer costs for food  would rise from current
levels. However, most steps taken to protect water quality likely will be local, not national,
in scope . . .  [Emphasis added by author.]


                                                                                            Session 2
                Richardson10 explained what would happen to the economic viability of a representative
 1,360 acre dryland Texas cotton farm under alternative conservation compliance regulations. Farms forced to
 comply with the High Residue-Basic System (planting a low residue  crop in combination with a high residue
 crop) were shown to experience substantial reductions in net farm income, net worth, and their probability
 for survival. The approach by Richardson, et al, should give policymakers a clue as to what will happen to
 farm income, agribusiness, and the rural economy through water quality mandates at the farm level. In
 summary, if higher water quality is pursued through policies that change fanning systems—crop mixes and
 cultural practices—there will be reductions in farm income. The economic reason  for this outcome is that
 farmers are already profit maximizers. Farm system changes will increase upfront costs, likely mean higher
 annual operating cost and increase yield  risks.


                A regulation-induced reduction in farm numbers will surely translate into reduced
 opportunity off the farm in rural areas and communities.  Larger farm units are not as likely to do business
 locally. These units will be large enough to buy direct from input suppliers, bypassing the services of local
 farm input suppliers.  Maintaining the competitive family farm structure through a new focus  on water
 quality standards would not have this negative impact.

 10.0            WHERE FROM HERE?

                Extending  the proposals in S. 1081 and the Coastal Zone Management Act amendments to
 the Clean Water Act reauthorization will not be in the economic interest of the  nation or farmers. Water
 quality improvements will be meager for the tax money spent and costs imposed on fanners and the private
 sector  generally.  These provisions violate the fundamental  principles of property ownership and common-
 sense knowledge about the  nature of the farm business. Water quality will not improve in proportion to the
 money spent and there will be extensive restructuring and dislocation among farmers and within rural

                Citizen controls, controls on technology and farm practices, task forces without farmers
 (who have a major stake  in the legislation), controls on conservation reserve program acreages and animal
 waste facilities, controls on  fertilizer sales and use—these  are the basic tenets of S. 1081.

                S. 1081 simply follows along the same command-control path as the Coastal Zone
 Management Act amendments which have already extended the heavy regulatory hand of the  federal
 government. The Coastal Zone Management Act considers livestock production not as an end in itself, but
 rather  as a tool in overall "ecosystem" management.  New production facilities will be expected to be built
 according to new management measures. There is no administrative vehicle for farmer input in the gamut of
 provisions that will negatively impact their lives and businesses. Both the CZMA and S. 1081 ignored the
 economic fundamentals discussed in this  paper.  We hope that Congress will not sweep these aside in the
 Clean Water Act reauthorization.

                Given the significant economic implications for farmers and rural America, farmers are very
 concerned that the Clean Water Act rewrite should have substantial input from  the Senate  and House
Agriculture Committees.  Those bearing the economic brunt of this new law should have something to say
 about its provisions.  There will not be a farm or rural community that  will not be adversely affected by this
 forthcoming legislation.  At a minimum, there should  be extensive field hearings on this legislation.

                Should Congress fail to  recognize the fundamental economic issues raised  in this paper, at a
minimum, lawmakers should consider the following practical issues as it rewrites the Clean Water law.

                Nonpoint source programs should be voluntary and emphasize  the use of cost/benefit
effective best management practices.

                                                                                             Session 2
                Nonpoint source information, incentives, technical assistance, and cost share programs with
landowners are essential to success of a nonpoint source program. Limits on agricultural conservation
payments should be removed.  The concept of "trading" to reduce overall discharges should be considered as
a potential incentive to land owners.

                Water quality programs should be on a watershed basis using a "worst case first" approach.

                Increased scientific research and evaluation is needed to determine the true extent and
sources of pollution.

                States should  retain primacy  for designating uses, determining impaired waters, establishing
standards and criteria, and developing and implementing appropriate response programs and plans. Site-
specific problems require site-specific responses. Development of state plans should rely heavily on local

                State water rights and water  allocation systems should be preserved for existing and future

                The current scope of the Clean Water Act should remain that of clean water  and should not
be expanded to one of biological diversity.

                Any Clean Water Act reauthorization should include reform of Sec. 404 provisions affecting


                The real agenda in the national water quality debate is that the cost of further restrictions
on point sources is very high relative to potential environmental gains and, therefore, it will be "cheaper" to
impose restraints on agricultural activities (nonpoint sources). This naive assessment could produce
substantial unintended economic consequences and little water quality improvement if policymakers fail to
account for the importance of  fundamental economic issues for the typical farm enterprise.

                Further, in a recent Resources for the Future9 assessment of the nation's renewable
resource base, Frederick stated:

                The quality of a water body can be defined in various ways,  including  the effluents it
                receives; its chemical, physical, and biological attributes; and the sodoeconomic benefits and
                costs associated with specific uses.  The National Water Quality Inventory:  1986 (U.S.
                Environmental Protection Agency, 1987) assessment of surface-water quality is based on
                state reports indicating whether state water resources are capable of fulfilling the uses
                designated by the states.  The results of the inventory suggest that nearly 18% of the
                assessed rivers, lakes, and estuaries were capable of only partially supporting  their
                designated uses, and that 7% were too polluted to support any designated uses.  These
                percentages may overstate the national  magnitude  of the water-quality problem because the
                states tend to focus their monitoring resources on the waters most likely to have problems.
                Only 21% of the nation's rivers, 32% of the lakes, and 55% of the estuaries actually were
                assessed for the 1986 inventory. If all the water bodies that were not assessed for the 1986
                inventory had fully supported their designated uses, then 95% of the river miles, 92% of
                the lake acres, and 86% of the estuary areas would have supported their designated uses
                (Fedkiw, 1989). Although this conditional calculation probably understates the extent of the
                nation's surface-water quality problems, it does help establish a range that suggests from 74
                to 92% of all  surface waters  fully supported their designated uses.  [Emphasis added by

                                                                                          Session 2
               If Frederick's analysis is correct, now is hardly a time for policymakers to panic by adopting
massive federal command-control policies and programs to further improve a relatively small percentage of
the nation's surface water. Surely more cost-efficient and environmentally effective policies can be found
which build on the long-standing conservation ethic of farmers, property ownership and control, market-
based incentives, competition, and scientific research.

12.0           REFERENCES

1.             Goklany, I.M. and M.W. Sprague. "Sustaining Development and Biodiversity: Productivity,
               Efficiency, and Conservation," Cato Institute Policy Analysis No. 175.  August 6, 1992.

2.             Ruttan, V.W. "Sustainable Growth in Agricultural Production: Into the 21st Century,"
               Choices. 3rd Quarter. 1992.

3.             Tietenberg, T. Environmental and Natural Resource Economics.  Second Edition, Harper
               Collins.  1988.

4.             Hurt, V.G. and L.L. Reinschmiedt. "The Impacts of Nonpoint Source Pollution Regulations
               on Mississippi Agriculture," Southern Journal of Agricultural Economics. December 1979.

5.             Ribaudo, M.O.  "Agriculture and Water Quality," USDA Agriculture Information Bulletin
               #548.  August 1988.

6.             Reichelderfer, K.H. "Water Quality Legislation Affecting Agriculture," USDA Agricultural
               Outlook '89 Conference. November 30, 1988.

7.             Meiners, R.E. and Yandle, B. "The 1991 Clean Water Act: Reauthorize, Reform, or
               Repeal?" forthcoming paper.

8.             Ribaudo, M.O.  Agriculture and Water Quality. August 1988.

9.             Frederick, K.D. and R.A. Sedjo, editors.  America's Renewable Resources.  Historical
               Trends and Current Challenges.  Resources for the Future. 1991.

10.             Richardson, J.W. et al.  "The Economic Impacts of Conservation Provisions in the 1985
               Food Security Act on  a Representative Dawson County, Texas Farm," AFPC Policy
               Research Report 89-1. College Station, Texas.

                                                                            Session 2
                             Appendlix A

•       Auglaize County "A Summary of Nitrate Concentrations...'

•       Auglaize County dot map

•       Tuscarawas County "A Summary of Nitrate Concentration.

•       Tuscarawas County circle map

                                                                                Session 2
               WATER QUALITY LABORATORY. HbiucmtKu cuLLfcuc,
                                                             . UMKJ 44»g j

           A   Summary  of
   Nitrate  Concentrations
         in   Private  Wells
The concentrations of nitrate + nitrite-nitrogen, given in milligrams per liter (mg/L), were measured in 16,166 private wells from 76 Ohio
counties. The following bar graphs indicate how Auglaize County compares with the other counties in terms of average concentration.
number of wells tested, and Che number of wells registered. The pie charts indicate the proportions of wells falling within four nitrate
concentration ranges for Auglaize County and for all wells tested.	
 Average nitrate concentrations by county
                          AUGLAIZE COUNTY
                            0.02 mg/L avg.
             .2   .6   1.0  1.4  1.8  2.2  2.6  3.0  3.4
               Average nitrate-nitrogen concentration, mg/L
 Number of wells tested by  county
       30 "•       	AUGLAIZE COUNTY
                                112 wells tested
                  150   250  350   450
                  Number of welis tested per county
550   650  750
 Number of wells registered by  county
                                AUGLAIZE COUNTY
                                1994 wells registered
         0    1    3   5   7   9   11   D   15   17
          Thousands of well log* on Tile with the Ohio Department
                  of Natural Resources per county
               Nitrate  concentrations in
               Auglaize County
               (average 0.02 mg/L)
                                                                               <0.3 mg/L
                                                                112 wells tested
                                                    Nitrate concentrations in
                                                    all wells  tested
                                                    (average  1.32 mg/L)
                                                   0.3<3.0 mg/L
                                                                               <0.3 mg/L
                                                              16,166 wells tested
               Source:  Nitrate and Pesticides in
                        Private Wells  of Ohio:
                        A State Atl»s

                                                             Session 2
                           AUGLAIZE COUNTY
       • 0.0 • 0.3 mg/L   O 0.3 - 3.0 mg/L
3.0-10.0 mg/L
more than 10.0 mg/L
                                                Source: Witrate and Pesticides ir
                                                       Private Wells of Ohio:
                                                       A State Atlas

                                                                            Session 2
                                          'Him OHIO 4468T

            A  Summary  of
     Nitrate   Concentrations
           in   Private  Wells
  The concentrations of nitrate + nitrite-nitrogen, given in milligrams per liter (mg/L), were measured in 16,166 private wells from 76 Ohio
  counties. The following bar graphs indicate how Tuscarawas County compares with the other counties in terms of average concentration,
  number of wells tested, and the number of wells registered. The pie charts indicate the proportions of wells falling within four nitrate
  concentration ranges for Tuscarawas County and for all welb tested.	
   Average nitrate  concentrations by county
         10 4
                            TUSCARAWAS COUNTY
                                1.95 mg/Lavg.
                                      Nitrate concentrations in
                                      Tuscarawas County
                                      (average  1.95 mg/L)
               .2   .6   1.0  1.4  1.8  2.2  2.6   3.0  3.4
                 Average nitrate-nitrogen concentration, mg/L
   Number of wells tested  by county
                               TUSCARAWAS COUNTY
                                   400 wells tested
                                     0.3-<3.0 mg/L
                                                           10 or more mg/L
                                                                 <0.3 mg/L
                                                                   400 wells tested
                50   150  250  350  450   550   650  750
                    Number of wells tested per county
   Number  of wells registered  by county

   Number  20-
  5961 wells registered
            0    1    357911131517
            Thousands of well logs on file with the Ohio Department
                    of Natural Resources per county
                                                      Nitrate concentrations in
                                                      all  wells tested
                                                      (average 1.32  mg/L)
                                        3.0-<10 mg/L
                                     0.3-<3.0 mg/L
                                             10 or more mg/L
                                                                 <0.3 mg/L
                                                                 16,166 wells  tested
                                       Source:  Witrate and Pesticides In
                                                Private Wells  of Ohio:
                                                A State Atlas

                  TUSCARAWAS COUNTY
                                                             Session 2
• 0.0-0.3mg/L   o 0.3-3.0mg/L   0 3.0-10.0 mg/L
more than 10.0 mg/L
                                                  Source:  Nitrate and Pesticides in
                                                        Private Wells of Ohio:
                                                        A State Atlas

                                                                                      Evening Address
                                      Evening Address
                                             Fred Krupp
                                          Executive Director
                                     Environmental Defense Fund
                I'm really glad to be here to talk about clean water and the American economy. And it's a
 special pleasure to talk to you, professionals in the area, who have a role to play in the amendment of the
 reauthorization of the Clean Water Act.  It reminds me of what Humphrey Bogart told Claude Raines:  "I
 came to Casablanca for the waters."  I hope that I can add to this program by outlining what I think are
 EDFs ideas and my ideas about how we can harness market forces to save America's vast and abundant
 supply of water resources.

                I think any discussion needs to start, and undoubtedly you've already started today, by
 noting the many successes we've had throughout the 20 years under the Clean Water Act.  Especially with
 the worst sources of pollution—municipal sewage treatment, industrial facilities—these are much improved.
 The Cuyahoga River doesn't catch fire any more. But it's more than that. Raw sewage is no longer
 discharged into the  rivers on a daily basis, only when it rains.

                But NOAA also reported in a study released last year that toxic substances are declining in
 coastal organisms—stable or declining.  So what we've gotten from the unprecedented amount of
 environmental regulation in the past few decades is solid progress on our most serious water contamination
 problems.  And for the role that you have played in  that, I congratulate you, because undoubtedly much of
 the success is due to the  people right here.

                But the  hard part is that, in the last few decades, we  have been confronting a handful of
 water pollution sources, the factories and the sewage treatment plants. And now we have to confront a
 myriad of sources, runoffs from fields, from lawns, from cars,  and from highways. And it is because of those
 nonpoint sources that the Great Lakes are still imperiled by toxic contamination.  It's because of those
 nonpoint sources that we still have a tremendous pollution problem that affects  our waterways.

                Last year, the Nature Conservancy reported that one-third of the common fish, two-thirds of
 its crayfish, and nearly three-fourths of its mussels are rare or imperiled.  Michael Huglow from NOAA, the
 director of hydrology, predicts severe water shortages in the nineties.

                I think we have  to develop and enforce strict regulations to reduce  pollution from point
 sources.  I don't mean to imply that that job is over.  But  I think we also have come to the point where we
 need to recognize that nonpoint pollution is the chief culprit which has been invading the  regulatory structure
 that we have out there.

               As EPA estimated in 1989, of 17,000 polluted water bodies, rivers, and lakes, only 600 of
 them are polluted exclusively due  to point sources; the others are a combination.  And according to some
 estimates, perhaps as much as 60-70% of remaining  pollution comes from nonpoint sources pollution
 entering  our waters.

               We have to admit that,  for this sort of pollution, the Clean Water Act has been a failure.
So that's the challenge before us.  If municipal sewage treatment and industrial  facilities were the challenges
of the seventies and the eighties,  nonpoint source pollution is the challenge of the nineties.

                                                                                      Evening Address

                Bill Reilly said it best when he said clearly the problem is enormous. It's because this type
of pollution is so hard to pinpoint, and because almost everyone contributes  to the problem, it largely defies
traditional command and control regulatory approaches.

                Nonpoint source pollution is the sort of pollution that I believe requires a radically different
approach. And I think we need to make way for the different approach in the amendments that are written
for the Clean Water Act or through other  means that make it easier for EPA to include incentives and other
structures into experimenting with new methods into the Clean Water Act. And perhaps the conference can
serve a role and recognize the importance  in showing a new direction for nonpoint sources.

                Now let me say once again, because I don't want to be misunderstood, that we need to
continue plugging away command and control measures where appropriate.  But for a different  tool to
supplement  command and control measures that has great potential, I'd use  the words "market incentives" to
describe what I mean for that set of different tools.

                What we need are policies that set goals, but leave the technical solutions up to business,
governments, and consumers.  The best example of this,  of course, is the 1990 amendments to the Clean Air
Act, tradeable pollution permits with regard to sulfur dioxide, to reduce sulfur dioxide emissions in this
nation by 50% from electric power plants.

                The reason that nonpoint sources ;ire harder to control is that they come  from so many
sources.  It's axiomatic, isn't it? And that's what m.ikes the existing command and control dictate system in
the potential.  It's so hard to micromanage so many  diverse sources. We just can't permit and regulate every
parking lot and every farm yard.   Instead, we have lo look for a diverse array of opportunities and a variety
of solutions.

                Before I describe some of the ideas that have begun to be generated in this area,  I think I
should stress that there is more that needs to be done under  existing authorities.  I don't want to gloss  over
that.  EPA reports that almost 90% of all sewage treatment plants and an even higher percentage of
industrial facilities still meet federal and state water  pollution control requirements.

                But those requirements don't  necessarily go  far enough.  Discharges and traditional
pollutants, especially oxygen demanding waste from sewage treatment plants, do continue to impair our
nation's waters, killing fish and aquatic animals.  In many cases, these organisms, the mussels, fish, and other
shellfish, are declining because we haven't  controlled point sources thoroughly enough.

                Combined sewer overflows are a very special problem, and as you know, they continue to
spew billions of gallons of untreated wastewater into our nation's most valuable coastal waters, routinely
causing closing of shellfish beds and endangering the safety of these waters.

                Also, in many cities we're still allowing factories to dump too much industrial waste into our
sewer systems that weren't designed to accept them. This continues to foul  the treatment  plants and
contaminate the sludge which further causes a  problem when it keeps the sludge from being used as a  useful

                All this is a far cry from what the nation had in  mind when it passed the  Clean Water Act
in 1972, calling for the elimination of discharge of pollutants  into navigable waters by 1985 and  the
prohibition of discharge of toxic pollutants and toxic amounts.

                So the fact that these sources  are meeting the EPA standards is cold comfort to Americans
that can't eat the fish that they catch or drink the water set before them, or swim where their parents and
grandparents swam.  The public wants to know why  the standards are being met and they still cannot eat the
oysters.  And I think it's a good question and points, up the need to do more in both point and  nonpoint


                                                                                       Evening Address

                Toxic substances are also a special category and it may be necessary to ban the discharge of
 highly dangerous and persistent toxic chemicals which have so contaminated our ecosystem. So I will just
 reiterate that there is much more we can do by enforcing existing clean water regulations, and we should be
 doing everything we can to do just that.

                I don't think it's enough just to educate people out of the behavior which causes nonpoint
 pollution.  I know Bill Reilly has said that education is the key, but we can't expect all fanners  to use less
 fertilizers and pesticides, or all backyard mechanics to dispose of their oil properly, or all timber companies
 to change their harvesting measures simply by telling them that their current practices are wrong.

                That's why economic and market incentives are so important, and why this conference is so
 important. We need to use educational messages to build a stronger environmental ethic.  But we need to
 undergird those educational messages in that new ethic, with incentives and price signals that make it in
 people's economic interest to do the right thing.

                What are some of these market-based solutions to water pollution?  I want to mention
 pollution charges and market barriers, and then go on to discuss tradeable allowances, which I  think offer
 somewhat more promise.

                Pollution charges do have strong appeal because they provide incentives to businesses and
 consumers to reduce emissions. They can help internalize the cost of pollution and thereby force businesses
 and consumers to factor costs into their decisions. The excise tax on chlorofluorocarbons enacted by
 Congress three years ago, the gas guzzler tax, and the container deposit laws in so many states are all
 examples of pollution charges.

                But one can imagine such an approach being used in the water pollution area.  Why
 shouldn't there be, for instance, a tax on motor oil, to encourage each consumer to return and dispose of
 used oil properly instead of just pouring it into storm sewers?  And perhaps a charge on fertilizers,
 pesticides, or other agricultural chemicals could also encourage the more efficient use of these  products.

                But I think that before we conclude that market incentives are synonymous with pollution
 charges, which they are not, we need to remember that there are problems with pollution charges and  there
 are other market incentives for us to work with. The problems with pollution charges basically involve if you
 set the charge too low, the system explodes. You create the fiction among citizens that you have addressed
 the problem, but the charges are too low to actually affect behavior, so you are not reducing pollution
 enough.  This has been a problem with many of the pollution charges that we have imposed to date.

                You also have the problem that you are all sitting there thinking, perhaps,  of the resistance
 of the American public to charges, because charges seem like taxes.  Some would argue they are taxes, and
 clearly the reaction in this campaign and in other years to things like gasoline taxes points to the political
 problem there.  Nevertheless, there is a role for pollution charges. My role here today is just to suggest that
 role is somewhat limited.

                The second  sort of market mechanisms that have a quick ability in the area of water
 pollution is removing perverse incentives or market barriers.  There are lots of government policies which
 are incenting people to do the wrong thing, and we should get rid of as many of those as we have the
 political will and the courage to do (for example, the U.S. Forest Service sale of publicly owned timber below
 cost, which is wasting tax dollars, depleting our natural riches of overgrowth forest, and damaging our
 watersheds ah* the while).

                Another example  is the commodity price system and the income support programs that
penalize fanners for leaving land fallow, that also penalize fanners for rotating crops.  A farmer who accepts
price supports cannot rotate to another crop unless he already has a base for  that crop.  Allowing a field to
lie fallow lowers the five-year average used to compute payments. Thus, these farm programs, which


                                                                                      Evening Address

incidentally enroll some two-thirds of America's crop land, actively discourage practices that would reduce
the need for pesticides and fertilizers.

                Now, moving off pollution charges and the removal of these perverse incentives; I think they
both have a role. They should be part of the market approach that we undertake. But the most underrated
set of market-based solutions involves tradeable allowances. And it is the one that we  should aggressively
pursue, both for point sources and nonpoint sources in the water pollution area.

                Under such a system, we  could identify impaired water bodies and problem pollutants, and
establish an overall reduced need to meet  water quality standards, and allocate allowance levels among the
point and nonpoint sources in these waters.  Instead of mandating specific controls or numerical limits on
each source, a trading system would allow them to buy and sell the  allowances, leaving to the market the
most cost-effective and innovative means to achieve or even exceed  water quality goals.

                The advantages of trading are numerous.  Setting a cap or target level and allowing trades
directly would address the volume of pollution, but they leave the technical solutions to each discharger to
devise solutions that are most cost effective and unique to  each situation. It brings the pollution control and
entrepreneurial dynamism absent from the conventional command and control system.

                The cost of compliance in an allowance trading system can gradually decline as
entrepreneurs develop technological improvements that lower costs.  For the first time with a program of
tradeable allowances, the entrepreneur gets value fiom overcontroUing.  And because there is value in
overcontrolling, there is impetus to develop new methods of control.

                An example  I heard the other day from one of my colleagues on the president's commission,
Dick Clark of Pacific Gas and Electric, is that when  Congress was considering passing the conventional
system to deal with sulfur dioxide, 112 plants were :>traightjacketed to do the same thing, with the same type
of scrub runner on each plant.  There was no incentive for anyone to come up with any different technology.

                Instead, Congress passed  a  law that said we have to reduce sulfur dioxide by half, but you
decide how to do it.  If you overcontrol, if you overreduce  your sulfur dioxide, you can sell that overcontrol
to somebody else. Suddenly,  entrepreneurs within Dick Clark's company, the largest utility in America,
Pacific Gas and Electric, and inventors outside the company are rushing to him to say, we have a new way to
reduce sulfur.

                That's the sort of creative outburst that we have to unleash in the area of water pollution,
specifically in nonpoint sources.  That system, I might say,  has received  sort of the ultimate recognition in
that the Chicago Board of Trade is actually going to start trading these  pollution  allowances next year.

                I think, though, there are some rezd world examples of this sort of thinking starting to take
hold in the water arena: EPA has cited the success  of the Dylan bubble to reduce phosphorus discharges
from point and nonpoint sources in Lake Dylan, Colorado. In this  case, local governments bid this interest.
The Denver Water Board and EPA came  together to stop further degradation of Lake Dylan while allowing
continued development of the watershed, to take advantage of the projected cost  effectiveness of nonpoint
source control as relative to point source measures.

                The Colorado Water Quality Commission and EPA allowed point sources to  cut back on
their phosphorus  reductions by one pound for ever)' two pounds they removed from the watershed through
investments in nonpoint controls. In one case, a to'jvn on the  shore of Lake Dylan redesigned its storm water
collection to reduce phosphorus  discharges and thus can earn credit for its sewage treatment systems.

                In that case, it was more  efficient I o reduce nonpoint discharges of phosphorus than it  was
to make expensive changes to the sewage treatment  plant.   Now the nonpoint trading has not occurred in the
Lake Dylan case because of the decline  in the area's growth and also because of  lower than expected control


                                                                                      Evening Address
 costs for the point sources; however, the new trading program did help catalyze the achievement of a
 regional water quality goal, and a workable trading system is in place should it be needed in the future.

                EDF has developed a similar program in a far larger and more complex area of North
 Carolina's Tarp  Pamlico River basin.  This is an area that drams 12,000 square miles of land, including parts
 of 17 counties, and supports a population of 500,000 people.  The river has experienced a serious nutrient
 problem in recent years, with agriculture being the major source.  There has been a phenomenal increase in
 hog farming operations and in the number acres of soy beans, wheat, and corn that have been planted in the
 recent past.

                Now what happened here, unlike the Lake Dylan situation, is that the need was to reduce
 nutrients now, as opposed to prepare for future growth.  Like the Lake  Dylan situation, the burden was
 going to be  imposed on the municipal sewage treatment plants, and they would have had enormous costs to
 reduce the discharges.

                The State of North Carolina, having determined that the river had too many nutrients going
 into it, had notified the local governments  to reduce discharges from the sewage treatment plants. Now the
 local governments were, understandably at that point, complaining, why should they have to bear the
 responsibilities and costs, which farmers, the major sources of nutrient pollution, did not have to bear at all?

                We shared that concern.  It was inequitable and we're also dissatisfied with the limited
 scope of the state's nutrient reduction plan.  And so we worked with local governments and state officials to
 design a new basin-wide plan that includes a trading program.  Let me briefly outline the features of that

                First, the discharges in the basin are funding the development of a model to help us
 understand the nutrient dynamics of the basin, including the relative impacts of different nutrients, different
 source categories, different loading points, and to help establish a long-term nutrient limit for Tarp Pamlico.
 EPA, I should mention, is also helping to fund the development of a land management model under the

                Second, pending completion of the model and establishment of a long-term nutrient goal,
 the point source discharges would have to  achieve the same overall reductions required by the state  through
 a series of step-down annual nutrient  reductions.

                Third, instead of in-plant  improvement, the dischargers  can achieve the required reductions
 by payments to the state's agricultural cost share program to pay for installation of agricultural BMPs to
 accomplish the same reduction goal.

                Fourth, the dischargers have conducted engineering evaluations at existing treatment plants
 to identify cost-effective improvements to reduce nutrient discharges.  The results so far are  that local
 governments in the Tarp Pamlico basin have found an improvement  and produced reductions of 10% below
 their 1991 allocations.  By 1994, these facilities will be at least 35% below 1989 levels.

                Funds are also now available for targeting the most serious nonpoint sources, and the
 development of a more  effective targeting  and tracking system is  underway.  However, there are difficulties
with such a system. We're still uncertain about the relative effectiveness of nonpoint source control,
especially the actual reductions achieved, and how permanent those reductions will be.

                So the mechanism in the Tarp Pamlico basin to  distribute funds also seems somewhat weak
in that the money from the trade, instead of going to a specific down-point program, goes to a fund
administered by  the state.  I think that runs the risk of being influenced by political pressures, instead of
documented needs.  And it also puts government in a position well beyond monitoring and enforcing, which

                                                                                       Evening Address

 may not be at all ideal if what we are talking about is netting up a system that creates an entrepreneurial

                Our involvement in Tarp Pamlico, however, has taken us into the finer points of tradeable
 allowances to reduce point and nonpoint source water pollution.  And I think it suggests several general
 lessons that we should think about and try to incorporate into market mechanisms when we reauthorize the
 Clean Water Act.

                First, we need more information from each basin impaired by pollution, including the
 contribution by nonpoint sources, as well as point sources, the goals for reductions by each source, and
 monitoring to determine compliance.  It's very important to have a basin-wide approach, with enforceable
 basin-wide loading limits.

                Second, the authority over nonpoint  source controls should rest as close to the local level as
 possible and be based on natural watersheds, with point sources left for the state and federal officials to

                Third, ultimate authority for implementation should rest with state and federal government,
 with the federal government if the state does not accept the authority, with interstate commissions for basins
 that cross state lines.

                Fourth, local governments should be able to choose from a range of mechanisms, trading,
 BMPs, effluent fees and others.  I don't want to oversell allowances as the only answer. I think flexibility to
 choose the most workable mechanisms should, however, be the core feature.

                Fifth, and most important, the program established by the Clean Water Act should avoid
specifying technical solutions for dischargers to meet  the goals.  States could approve  plans for each basin,
with oversight by EPA.

                The crucial feature of this program to reduce water pollution from nonpoint sources has to
be to develop enforceable goals while maximizing flexibility in fostering diversity. We should let market
forces decide what works best.  It may be wetlands restoration or some other tool that we can't envision now.
The key thing is, the Clean Water Act should be spurring that flexibility  and allowing the best intelligence to
 come to the fore.

                In conclusion, let me say that it is early on in our thinking.  I don't have all the answers, as
you can see.  We've  really just begun to think about this. But I  think we know enough to be excited by the
potential of market mechanisms and to be cautiously optimistic that this is a way that we can solve our
 remaining serious water pollution problems.

                We're on to something here. EOF is working hard to  develop more specific strategies, and
we need your help to develop strategies along these lines. Bill Reilly has said, nonpoint pollution challenges
us to  seek creative solutions.  One thing I know for sure is that we're beyond the point in the next Clean
Water Act of settling for more studies.

                We've had enough good experiences with the few programs that have taken place, that we
 should try to  establish a framework in the Clean Water Act now to facilitate trading and other  mechanisms.
We must stop the slide of water quality in America.  And the potential for market-based solutions is real
 enough that we must be aggressive in developing these solutions.

                                                          Session 3
                 Tuesday, October 20, 1992
             Session 3: Recreation and Tourism

                     SESSION SUMMARY

MODERATOR:  David G. Davis


Charles F. Gauvin—Paper Unavailable

Mary Jo Kealy—Clean Water and Recreational Use Support:  Has the
Clean Water Act Made a Difference ?

W. Douglass Shaw—Recreation and Tourism Benefits from Water Quality
Improvements: An Economist's Perspective

R. Lawrence Swanson— The Costs of Marine Debris Wash-Ups On New
York and New Jersey Beaches

                                                                                          Session 3
                      Clean Water and Recreational  Use Support:
                    Has The Clean Water Act Made a Difference?

                                           Mary Jo Kealy
                                         Senior Economist
                               Office of Policy, Planning, and Evaluation
                                U.S. Environmental Protection Agency

                                           Tim Bondelid
                                     Research Trizmgle Institute

                                            Brett Snyder
                            Chief, Economic Analysis and Research Branch
                                U.S. Environmental Protection Agency
               The Nation's lakes, rivers, and ocean waters are frequented by Americans at leisure.
Surveyed citizens over 12 report annual participation rules of 76% in swimming, 59% in fishing, and 27% in
motorboating, for example.  Others simply enjoy viewing aesthetically pleasing watersites. The language of
the Clean Water Act (CWA) reflects the importance that Americans place on water-based recreation by
expressing goals in terms of recreation use support. We attempt to demonstrate that the CWA has been
good for recreation, but that there is still room for improvement.  Values for three pollutants, biochemical
oxygen demand, total suspended solids, and fecal coliform, are used  as indicators of use support both with
and without the CWA.  For the 630,000 river and streami miles (Reach File 1) included in our model,
simulations suggest that further reductions in discharges by point sources would do relatively little to improve
the quality of these three pollutants.  However, reductions in nonpoint sources could produce improvements
that surpass past water quality achievements.


               The Nation's lakes, rivers, and ocean waters are frequented by Americans at leisure.
Surveyed citizens over 12 report annual participation rates of 76% in swimming, 59% in fishing, and 27% in
motorboating, for example1. Others simply enjoy viewing aesthetically pleasing watersites. The language of
the Clean Water Act (CWA) reflects the importance that Americans place on water-based recreation by
expressing goals in terms of recreation use support. We attempt to demonstrate that the CWA has  been
good for recreation, but that there is still room for improvement.  Values for three pollutants, biochemical
oxygen demand, total suspended solids, and fecal coliform, are used  as indicators of use support both with
and without the CWA.  For the 630,000 river miles in our model (i.e., Reach file 1), simulations suggest that
further reductions in discharges by point sources would do relatively little to improve the quality of these
three pollutants.  However, reductions in nonpoint sources could produce improvements that surpass past
water quality achievements.

               By  limiting this preliminary analysis to just three pollutants,  we cannot draw any conclusions
about beneficial use support attainment. However, this analysis is illustrative of and provides a framework
for a more complete assessment. To more fully characterize beneficial use support within the present
modeling framework, it remains to control for both toxicants and nutrients. Also, it remains to extend the
framework to include more rivers and streams as well as to bring lakes, and estuaries into the analysis.
'President's Commission on Americans Outdoors


                                                                                            Session 3

                The objectives of this study are to develop and apply a methodology for assessing the effects
that the Act has had on surface water quality over the past 20 years and to evaluate alternative national
policies for improving water quality.  Surface waters are complex hydrologic/chemical/biological systems in
which the effects of pollution are often poorly understood. We developed a model, the Clean Water Act
Effects Model (CWAEM), to relate changes in discharges to changes in water quality and beneficial use
attainment of the Nation's rivers and streams. The beneficial uses include recreation activities such as
boating, fishing, and swimming.  Although our current emphasis is on recreational beneficial uses, other
beneficial uses  (e.g., drinking water, non-use values, commercial fishing, industrial uses) may also be
enhanced by the water quality improvements associated with the different policy scenarios.

                Before the CWA, there were literally thousands  of uncontrolled point sources, particularly in
urban areas.  Also, many municipalities had primary waste treatment only, and much of the "secondary1
treatment was less than adequate in many others.   With the aid of the Construction Grants program, a
direct outgrowth of the CWA, municipal treatment plants upgraded substantially.  "As of October 1990, most
major point sources were meeting their permit limits: 15% of major  municipal plants and 13% of directly
discharging industrial facilities were in significant noncompliance  with applicable permit conditions" (U.S.
EPA, 1992:xix). Finally, the CWA has had a significant effect on control of toxicants, principally from
industry.  "EPA estimates that toxic pollutant loadings to POTWs have decreased by up to 75% through
pretreatment" (U.S. EPA,  1992:142). The rates of noncompliance with pretreatment requirements (i.e.,
approximately 14 to 17% of significant industrial users) are similar with those for the major industries in the
NPDES program.  However,  these statistics do not reflect the failure of 39% of POTWs to fully implement
their approved  pretreatment programs (U.S. EPA,  1992:142).  Although the current scope of this study does
not include evaluation of toxic pollution reduction, work is continuing to develop methods for the evaluation
of toxicants in the current analysis framework.

                Programs to reduce nonpoint sources of pollution have lagged behind point source controls
(U.S Comptroller, 1977 and U.S. Council on Environmental, 1979).  These nonpoint sources include runoff
from agriculture, construction, and urban areas and from  areas such as  forests. The 1990 National Water
Quality Inventory Report to Congress ranks agricultural runoff as the leading source of use impairment in
rivers and streams.  Other major sources of impaired rivers,  streams, lakes, and estuaries include:
hydrologic/habitat modification, municipal discharges, storm sewers/runoff, resource extraction, and land

                Beneficial use determination remains an inexact science-one  subject  to considerable debate.
Relevant use information is available in State 305(b) reports, which summarize beneficial use support by
State, and in national water quality monitoring databases  such as the USGS NASQUAN network and
STORET.  Use of the  305(b) reports is limited because of the inconsistency in assessment methodologies
used by the States and limitations on the  extent of monitoring done by the States. The Environmental
Monitoring and Assessment Project (EMAP), currently being developed by EPA, will provide a statistical
evaluation of the overall quality of the Nation's waters; however,  results will not be available for several

                The approach used in this study is to develop a national water quality model that can
simulate existing conditions and, for example, the following alternative scenarios:

                •       No CWA - Conditions had the CWA never been passed and no other  legislation
                       been enacted in its place;

                •       Zero discharge - Conditions had the original CWA goal of eliminating ALL
                       dischargers been reached; and,

                •       Reduce non-point source loadings by half - Conditions if these reduced loadings
                       occur over and above current conditions with the CWA.

                                                                                           Session 3

Refinements to the model will permit a much richer set of policy simulations.

               Two studies undertaken in the early 1980s are relevant to the current work. The first effort,
led by Resources for the Future (RFF), built a national surface water network with point source and NFS
loadings assigned to 1,051  nodes. This work used a variety of data sources for loadings, flows, and modeling
parameters. The RFF model has been used to evaluate point source controls in combination with
agricultural sediment control.    The second study of direct relevance is the COGENT model, undertaken
by the EPA Construction Grants Program. COGENT used the NEEDS survey databases and the USEPA
River Reach File 1 (RF1), a much more detailed river network than that used by RFF.  The objective was to
model the water quality changes resulting from treatment plant construction.  COGENT modeled effects in
terms of improvement in dissolved oxygen (DO) concentrations.  Detailed sensitivity analyses showed that
the model was very sensitive at low flows and shallow slopes, which are the conditions under which waste
treatment has the most effect.  Because the model results could vary widely with very small changes in input
parameters, more detailed calibration efforts were  needed.  Based on results of these earlier studies, we
developed a modeling effort that uses a more detailed network than the RFF model and, in response to
model sensitivity issues, applies simpler model kinetics than COGENT.


               The conceptual framework for the analysis is shown in Figure 1. The boxes with solid lines
represent attributes of the framework that are include in the present analysis; whereas, the boxes with dotted
lines identify anticipated extensions.  Beginning in the upper left hand corner and moving clockwise, the
CWA limits discharges from point sources and nonpoint sources into the nation's rivers and streams.
Ambient water quality improves and, therefore, supports additional beneficial recreational uses such as
fishing and swimming. These beneficial uses provide benefits  in terms of improved health and economic
well-being of humans. They also relate to the improved health of the ecosystem. These changes in ambient
water quality, beneficial use support and economic and health benefits all provide a basis for assessing the
effectiveness of policies for controlling discharges.  The results of this preliminary and incomplete assessment
cannot be used  to inform the choice of policies  for controlling discharges.  However, the model design can
accommodate the necessary refinements, which if carried out,  could be used to evaluate and compare policy

               A guiding principle in developing  the CWAEM is to start  with relatively simple model
kinetics and parameters so that model behavior can be evaluated effectively.  After these simple relationships
are fully understood, the model can be expanded to more complex kinetics and parameters.

               Using the framework in Figure 1, CWA effects can be evaluated with two state variables:

               •       With and without the CWA implemented
               •       1990 and early 1970s.

               Various scenarios are possible using these two state variables, including:

               •       1990 with CWA implemented
               •       1990 without CWA implemented
               •       1990 with zero discharge:
               •       1990 with NPS loads reduced by half
               •       Early 1970s without CWA implemented
               •       Early 1970s with the CWA implemented

Below, we use current conditions (i.e., 1990 with CWA implemented) as the baseline and compare the  other
model simulations to it.  The model outputs are expressed in  terms of the  number of river  and stream  miles
supporting particular beneficial uses.  The parameters that determine beneficial  uses in our model are

                                                                                              Session 3
 described next.  Tten, we conclude this section with a discussion of the limitations and strengths of our
Selection of Model Parameters
                Methods and criteria for beneficial use determination vary, sometimes widely, by State. A
 uniform method for relating beneficial use to water quality is needed to follow through the conceptual
 framework shown in Figure 1.
1 . Conceptual Framework for the CWAEM

Point Sources
Non-point Sources
/ As
\ C
N. Imp
sess Ns
>acls ./

Surface Water
Farm Run-off
Effluent Wastes
1 Affect
Other Aquatic
; Life Criteria


Beneficial Uses
Industrial Uses
Commercial Fishing
Non-use Values

Beneficial Uses

1 Determine


                                               Figure 1
                RFF has developed a "water quality ladder" that relates a selected set of water quality
parameters to beneficial uses (Vaughan, 1986). The water quality parameters are DO, BOD, turbidity, pH,
and FC.  In addition to these parameters, toxicants, temperature, and salinity are important influences on
recreational beneficial uses. However, this preliminary analysis uses only a subset of these water quality

                                                                                           Session 3
parameters.   A modification of the ladder L> feasible using BOD and FC concentrations directly and using
TSS as a surrogate for turbidity.2

               Table 1 shows the modified water quality ladder used in the CWAEM. The model
assumes that, if any one parameter exceeds Ltie maximum value in the table, then the water does not meet
that beneficial use. For example, to  be classified as drinking water, the concentrations for BODS, TSS, and
FC cannot exceed 0.5, 5, and 2,000, respectively.

                                              Table 1

                               Maximum Value for Use Category
Beneficial Use
Game Fishing
Rough Fishing
BOD, (mg/L)
Turbidity (JTU)
FC (#/100 mL)
               BOD, TSS, and FC standards are necessary, but not sufficient for indicating recreational
beneficial use support.  Nonetheless, they have been selected as the model parameters for the CWAEM for
the following reasons:

               1.      Point source estimates for 1990 and early 1970s are most reliable for BOD, TSS

               2.      Non-point source loadings of BOD, TSS, and FC are available by county.

               3.      Removal efficiencies, for BOD, TSS, and FC using, conventional primary, secondary,
                       and tertiary treatment technologies are well known and readily defensible. Instream
                       water quality modeling of BOD, TSS, and FC can be performed using simple but
                       highly defensible first-order decay and settling kinetics;

               4.      A modified water quality ladder can be used for BOD, TSS, and FC to  provide a
                       partial assessment of recreational beneficial use attainment; and,

               5.      The model using BOD and TSS is amenable to a retrospective analysis  because
                       waste treatments have consistent and well-documented effects on BOD  and TSS
2We apply a one to one correspondence between Turbidity measured in Jackson Turbidity Units (JTUs) and
TSS measured in milligrams per liter (mg/1). The original development of the JTU scale was based on a
one to one correspondence between turbidity and concentration in mg/1 of a stock of a silica solution.
Therefore our use of the one to one correspondence between JTUs and TSS goes back to the original
development of the JTU scale (Stern and Stickle,  1978).

3The inclusion of the category "drinking"  is  for consistency with the RFF water quality ladder, only. It is not
blended to imply that the  surface water  quality meets the water quality standards under the Safe Drinking
Water Act.

                                                                                             Session 3

                        discharge concentrations. For instance, taking 1990 discharges to non-CWA levels
                        can be done by changing the existing concentrations to typical primary treatment
                        values. For prospective  analyses the model can accommodate a much wider range
                        of pollutants.

                Several parameters were considered, but not chosen, for inclusion In the model.  As
discussed in the introduction, DO modeling on this scale has severe problems with model sensitivity.  DO
deficits are directly related to use support and are a primary part of most instream water quality models.
However, DO was not included in the CWAEM because  of the difficulties inherent in national DO modeling.
Reaeration coefficients are a primary determinant in how much DO deficit results from BOD decay, and
reaeration coefficients are very site-specific.  Extensive site-specific data collection efforts are usually
required to properly calibrate a DO deficit model. Other components to consider in modeling DO include
benthic demands and algae growth.  Although DO modeling has great potential value, its complexity is not
justified at this stage of model development. pH also presents serious modeling difficulties because of the
complex  interactions that affect pH, including buffering effects and atmospheric deposition.

                Toxicants were not included in the model because methods for estimating the changes in
toxicant releases, especially as they relate to the CWA, are not fully developed. Research has begun for
future inclusion of toxicants in the CWAEM.

                Nutrients are a major cause of use impairment primarily because they promote algae
growth.  Their inclusion would require the modeling of changes in nutrient loadings  due to the CWA,
estimation of changes in algae growth, and estimation of effects on use impairment.  This type of modeling is
quite complex on a local level,  let alone on a national level.  In addition, issues such as nutrients from
atmospheric deposition and phosphorous discharges resulting from phosphate bans must be resolved before
nutrients can be included in the CWAEM.  Nonetheless, we are investigating databases and analysis methods
for inclusion in the model.  For example, USGS is developing concentration regressions  as a function of
loadings  in order to explain how loadings may affect water quality.4

22             Study Limitations and Strengths

                This study should be viewed as illustrative, only.  In interpreting and using the results of this
study, the following limitations  apply:

                1.       Until  the model calibration process is completed, the model is not valid for
                        estimating the number of miles supporting beneficial  uses.  The  model does support
                        relative analyses and therefore can explain relative differences in the number of
                        miles  that support beneficial uses corresponding to the different policy scenarios.

                2.       The current analyses use the conventional  pollutants,  biological oxygen demand
                        (BOD),  total suspended solids (TSS), and  fecal coliform (FC), as indicators of
                        support rather than absolute determinations. The effects of dissolved oxygen,
                        nutrients and toxicants, for example, are not  included. This means that the model
                        using  these three parameters only overstates  beneficial use attainment when DO,
                        nutrients, or toxicants are limiting factors.
4Personal conversation with Dr. Richard Smith, USGS, December 1, 1992.


                                                                                            Session 3

                3.       The analysis framework, Reach File Version 1 (RF1), includes over 630,000 miles of
                        the larger rivers and streams in the continental United States.3 The model results
                        cannot be extrapolated to the remaining river and stream miles, lakes, estuaries, or
                        ocean waters.  Although RF1 does not represent a scientifically or statistically based
                        subset of the nation's rivers, it does contain most of the larger rivers and streams
                        and 85% of the point source dischargers in the combined NEEDS/PCS database
                        used in the present study. Further, it is the most detailed national-level
                        hydrographic network kaown that also contains the critical linkages to point sources,
                        counties, flow estimates, and storet water quality data.

                4.       Currently, the model is  based upon national parameters rather than site-specific or
                        region-specific parameters.  This limits the applicability of the model  to national

                5.       Point source discharges from minor industrial sources and other minor untreated
                        discharges are not included. The point sources used Include most municipal
                        discharges plus the major industrial point sources. However, by definition, minor
                        industrial sources contribute relatively minor discharges into receiving waters.

                6.       Other sinks and sources such as sediment re-release, atmospheric deposition, and
                        influences of wetlands and groundwater on surface water quality are not integrated
                        in the present model.

With the above limitations in mind, this study has the following strengths,:

                1.       The CWAEM uses the most complete and detailed data sources available on a
                        national level. The data are described below.  Although this preliminary analysis
                        uses national parameter!;,  it  is important to note that the underlying data can
                        support the  developmenl of regional  versions of the  CWAEM.

                2.       Extensive testing of the  model using  a wide range of calibration values has shown
                        that, although the absolute numerical estimates vary, the relative differences
                        between scenarios remain fairly consistent across parameter values. With further
                        calibration and validation, the model should eventually support valid estimation of
                        absolute numerical values corresponding to current baseline conditions and the
                        alternative policy scenarios.

                3.       The model can be used lo identify the geographic locations of water quality
                        improvements due to the CWA, for example. Additional analyses concerning
                        economic and health effects are therefore possible.  This capability of the model
                        can be improved further using regional, rather than  national parameters.

                4.       The model employs consistent criteria to relate changes in discharges to the CWA
                        goals of beneficial use attainment and is therefore, policy relevant.
5RF1 was completed and installed at USEPA in 1982.  It is based on the 1:2,000,000 scale NOAA
aeronautical chart hydrographic layer.  RF1 contains approximately 68,000 reach segments with
approximately 630,000 miles of rivers and streams covering the continental U.S. (Alaska and Hawaii are
excluded from RF1). In comparison, the total len;5th of rivers based on compilation of state 305(b) reports
estimates 1,221,540 miles and the 1:100,000 scale USGS Digital Line Graph database estimates 3,591,840
miles in the continental  U.S.


                                                                                            Session 3

                S.       The model will accommodate the inclusion of additional water quality parameters,
                        particularly toxicants and nutrients.

                Given the objectives of our analyses, we believe that the strengths of our approach outweigh
 the deficiencies. Next, we describe the model, including our data sources, sensitivity analyses, and scenario

 3.0             MODEL DESCRIPTION

                Currently, the CWAEM runs on EPA's IBM mainframe computer at Research Triangle
 Park.6 The results are saved as data files, which are available for further evaluation.  Each scenario requires
 a separate run of the CWAEM.

 3.1             Input Data

                A major part of the CWAEM development effort has been expended in developing a valid
 methodology for assessing the  effectiveness  of the CWA and in assembling the necessary input data files.
 These input files are summarized in Figure  2.  To date, the CWA has affected pollution release primarily
 through point source  controls, most notably wastewater treatment.  Modeling of waste treatment effects can
 be a key component of estimating CWA effects, and point source discharge data are key to the model
 development.  We reviewed existing discharge data availability, with the following conclusions:7

                1.       For 1990, good data exist for conventional and many toxic pollutants for point
                        sources.  The NEEDS88 database is  the best source for municipal discharges of
                        conventional pollutants. The Permit Compliance System (PCS) is a good data
                        source for major point source discharges.  The NPS data contain separate urban
                        and rural loadings estimates for each county.

                2.       For the early 1970s, discharge data are very limited. Data on conventional
                        measures, especially BOD and TSS, are available  in generalized forms. Toxics data
                        are almost nonexistent. The National Residuals Discharge Inventory (NRDI) is the
                        best overall source found to date, especially for BOD and TSS. The NEEDS88
                        database contains  the 1972 population, which can  be used for developing municipal
                        loadings estimates. Industrial loadings estimates will require somewhat more
                        "creative" methods.

                3.       EPA-Cincinnati has developed a wastewater "treatabiliry" database that  covers a
                        wide  range of parameters and treatment types. This database is defensible and can
                        be incorporated as needed, especially for toxicants.

               The model also includes data on discharges due  to the  macroeconomic output effects of the
 CWA. Generally speaking, to  the extent that the CWA has increased industry costs and dampened output,
 the corresponding effluent discharges are expected to have declined. However, a study conducted in parallel
 to this work (U.S. EPA, 1992)  estimates that the changes in economic output due to CWA costs are
 generally less than 1%.  We assume that the level of discharges are related directly to the level of output and
 incorporate these changes in evaluating the  "no CWA" scenario.
"We are investigating transforming the model to a personal computer platform.

7We have not conducted an independent assessment of data quality and we are relying upon the quality
assurance practices of the data sources.  However, USGS is conducting quality assurance on these data and
we may run the model using their data when they become available.


                                                                                           Session 3
                CWA wastewater treatment requirements are met primarily with end-of-line treatment with
some local pretreatment for toxicants as needed.  Once an industrial plant is required to treat wastes, water
consumption is usually reduced 30 to 40% through rscycling and more efficient water use. This water
reduction has little effect on cost and is fairly easily accomplished.

                The NPS loadings estimation techniques developed by RFF were determined to be the best
approach for the CWAEM. These methodologies develop estimates by county, which can be integrated with
RF1. The estimates were updated to 1990 conditions and also developed  for 1972 to evaluate pre-CWA

3.2             Water Quality Model

                Water quality estimates are developed by combining data from the files shown hi Figure 2
into a reach routing dataset in SAS. Instream estimates of BOD5, TSS, and FC concentrations are generated
using the loading estimates, mixing with mean flows, and then applying first-order decay using the
corresponding mean flow velocities (Fan- et al., 1971: Weber, 1972; Bowie, et al., 1985).  The river flow and
velocity estimates are specific  to each region in the network and were developed using data from 9,127
gaging stations (Grayman, 1982). The decay kinetics for TSS incorporate  a velocity-dependent term to
reflect settling.  These concentrations are then compared to the modified  water quality ladder to determine
beneficial use category (fishing, swimming, etc).
Figure 2. Sources of Data

Point Source
NEEDS 1988 = 14,438
1990 PCS = 4,256 facilities
IFD connects point sources to RFI = 13,625

Nonpoint Source
DATA for 3,1 1 4 counties with separate files for:
«1990 urban loading estimates
• 1990 rural loading estimates

GAGE File Instream Flow and velocity estimates

Nonpoint Source

630,000 miles of
rivers and streams

               The NPS loads for each reach are divided, with half of the load put in at the top of the
reach and half put in at the middle; this distributes the NPS loads along the reach.  A uniform sediment
delivery ratio (SDR) is applied to the NPS loads before putting those loads into the river. The SDR reflects

                                                                                             Session 3

the behavior of NFS loadings in that much of the load first goes into smaller tributaries or across other land
so that the net load on the river is significantly attenuated. The SDR has a major effect on the net NFS
loads, with SDR  values of 0.10 or less being common; an SDR of 0.10 translates to only 10% of the NFS
load being put into the river model.  The CWAEM has been tested and refined using SDR values between
0.10 and 0.01.

                The point sources are injected at the river mile as assigned in the Industrial Facilities
Discharge (IFD) file. The reaches in RF1 are divided as needed to incorporate the point source and NFS
loads. Each of these sections is given a beneficial use classification based on the worst water quality
conditions in that section.  The entire section of reach is assigned that use classification.  A total of  125,357
reach segments are modeled. Total miles for each use category are then tabulated based on the length of
that section. Beneficial use frequency statistics are generated showing total miles supporting each beneficial

33             Model Sensitivity

                Sensitivity of the model to load and  flow estimates is analyzed. The sensitivity analysis is
performed by changing all input parameters by 10% and comparing these results. If the results within the
10% "window" are radically divergent, then the model may be "hypersensitive" to one or more input
parameters.  In this case,  further analyses can determine which parameter(s) are causing the sensitivity, and
efforts can be directed to  evaluating and perhaps improving the model reliability.

                The following model inputs are varied 10% with each run:

                1.      Reach file flows
                2.      Reach file velocities
                3.      Point source loads
                4.      Nonpoint source loads
                5.      Use criteria limits
                6.      Decay coefficients
                7.      Treatment efficiency assumptions
                8.      Industrial sector  production coefficients.

                For the "increased use" run, the coefficients are varied in the direction that will increase use
support computations.  Similarly, the "decreased use" coefficients are varied in the direction that will decrease
use support computations. All of the model inputs are directed monotonically one way or another in relation
to beneficial use support determination.

3.4             Scenario  Development

               This section gives a brief overview of the analysis steps for each of the scenarios.

                Scenario  1 - 1990 with CWA Implemented

               •       Municipal point source loads are generated using NEEDS88, adjusting flow using
                       1990 population as available, and overriding with 1990 Permit Compliance  System
                       (PCS) data  as available.

               •       Industrial point source loads are generated using Industrial Facilities Discharge
                       (IFD) and PCS.  IFD is used to get reach and NPDES numbers, and PCS provides

                                                                                           Session 3

                •       Nonpoint source loads by reach are generated using the  county estimates and
                       apportioned using the State/county FTPS codes in RF1. The apportioning
                       uniformly distributes loads based on total lengths of reaches by county.

                •       Reach mean flows and velocities obtained from the GAGE file are merged with

                •       The water quality model is run as described in Section 3.2.

                •       Sensitivity analyses are performed including sensitivity to load and flow estimates as
                       described later in this report.

                Scenario 2 - 1990 without CWA Implementation

                The municipal and industrial concentrations can be adjusted to reflect primary treatment
only.  The analyses for Scenario 1 can then be run and the two scenarios compared.

                Scenario 3 - 1990 with Zero  Discharge

                The analysis steps for Scenario 1 are followed, but all point source loads are set to zero.
The only loads going into the model are from NFS.

                Scenario 4 - 1990 with NFS Loadings Reduced by Half

                Again, the analysis steps for  scenario  1 are followed, but NPS loadings are reduced by half.

                Additional Scenario - Early  1970s Without CWA Implementation (not analyzed for this

                The following steps could be followed to simulate conditions in the early 1970s without
CWA implementation:

                •       Adjust municipal flow using the NEEDS88  1972 population, adjust concentrations
                       to primary treatment only. Totals can be compared and cross-checked to estimates
                       in the NRDI.

                •       Adjust industrial loadings by backing out a primary only treatment level and
                       adjusting flows to match output totals for 1970 using factors that compare 1990 to
                       1970s production levels to adjust flows. Totals can be compared to NRDI values to
                       check overall validity of techniques.

4.0              RESULTS

                We report the results from four scenarios.  Many other scenarios  and tests have been run to
verify the proper functioning of the model and to evaluate the key input parameters affecting the results.
These tests have shown that a wide range of input parameter assumptions all lead to  'the same basic
conclusions. The results presented here show only changes that lead to categorical variations in use support.
Changes that improve the waters  but are not  enough to effect an increase  in a use category are not

                Sensitivity analyses show that the model is not "hypersensitive" to any particular input
parameter.  Applying the 10% sensitivity factor showed less than 10% change in beneficial use totals.  There
are, however, two primary input parameters that have  "valid" ranges in an  order of magnitude—the SDR and
the  decay coefficients.


                                                                                            Session 3

                Our current state of knowledge supports a range of values for the SDR and the decay
 coefficients and it is difficult to assign them single values. The model results using ranges of SDR from
 SDR = 0.10 to SDR=0.01 show "reasonable" but widely varying results.  This is an order of magnitude range,
 and further work is needed to determine either a single "best" value or to determine regional values.

                The decay coefficients also have a valid order-of-magnitude range.  Decay coefficients
 between 2 and 0.2 per day have been evaluated. An enhancement to the model is being considered that
 would vary the decay coefficients based on concentration.

                "Reasonable" results were determined by comparing the model's results with selected
 STORET water quality monitoring data as well as best professional judgment.  The State  305(b) reports
 provide some information concerning use support, however these reports are highly variable in values
 reported and methods used.  Selected State values were used where we had in-depth knowledge of the
 methods and criteria used.  The ranges for SDR and decay coefficients were determined from experience
 with water quality models and review of typical values used in the literature.

                The results presented in Table 2 use the current best estimates for valid SDR and decay
 coefficients.  Values of SDR=0.05 and decay coefficients of 2/day are used. Following these results is an
 analysis incorporating ranges for SDR and decay.

                In interpreting the results of the model simulations it is important to keep in mind that they
 are intended  to be illustrative, only.  A comparison of the first two scenarios in Table 2 shows a very small
 percentage difference due to the CWA. However, the gains in river miles that support additional beneficial
 uses are substantial, especially considering that the miles of rivers and streams that have been cleaned up
 tend to be hi densely populated areas. Table 3 shows the total miles of increased useability due to the CWA
 alone,  if zero discharge were achieved, and with NPS loads reduced by half.

               A comparison of the  1990 baseline with the CWA and 1990 with zero discharge indicates
 that most of the improvement through point source cleanup has  already taken place  and relatively smaller
 levels in overall improvement can be achieved by approaching zero discharge.

               The far right column in Table 3 shows the dramatic improvements that can be achieved
 through aggressive control of NPS. This analysis in no way implies that a 50% reduction in NPS pollution is
 feasible, but it does illustrate the relatively large effect of such a goal.

 4.1            Steps of Designated Use

               Figure 3 shows miles of improvement attributable to the CWA in terms of how many "steps"
 of improvement took place.  One step, for example, would be improving beneficial use from rough fishing to
 game fishing.  A two-step improvement would be from rough fishing to swimming.  The table shows that
 618,657 of the 632^51 miles (97.8%) did not change their use support status due to the CWA. A total of
 13,894  miles (2.2%) changed use support. The maximum increase possible is five steps, which would
 represent going from no recreation to drinking water.  Note that no miles showed this maximum
 improvement due to the CWA alone.  Note also that these numbers reflect only changes that result in a
 change in use support; water quality improvements that do not change the designated use classification are
 not accounted for in the figure.

               Figure 3 also shows the additional improvements that would occur if zero discharge were
 achieved.  An additional 3,694 of the 632,551 miles (0.6%) would show improvement over current conditions.
 Of the  3,694 miles, 2,626 (71%) would experience  a one-step  improvement with the remaining 29%
improving two or  more steps.  If zero discharge were achieved, a total of 17,588 miles  (13,894  +  3,694)
would show improvement due to the CWA.

                                                                                          Session 3
                                      234        5


                                     | Improvement due to CWA

                                     H Improvement with zero discharge
                                                      Total Miles
                                              Figure 3
                          Miles of Improvement by Number of Beneficial
                                        Use Steps

42             Model Sensitivity

               Table 4 shows ranges of results under vaiying values of SDR and decay coefficients for the
scenarios corresponding to the first two columns of Table 3.  The ranges are 0.05 to 0.01 for SDR, and 2 to
0.2 for decay coefficients. The ranges are particularly broad, as should be expected when varying the two
primary input coefficients by orders of magnitude. The ranges for drinking and swimming are particularly
broad, while the ranges for the other uses are significantly smaller. Sensitivity analyses using a 10% change
in ALL input data showed a similar pattern with broader ranges for drinking and swimming and much
narrower ranges for game fishing, rough fishing, and boating. These analyses indicate that there is
significantly more confidence in the results for fishing and boating than those  for drinking and swimming.
               The analysis in the present paper has, in some ways, retreated from the scope of previous
efforts and, in other ways, has extended the scope beyond those previous studies.  The scope has been
reduced in terms of the parameters modeled and types of waters modeled.  The RFF studies modeled DO
deficits and nutrients while the CWAEM is limited to BOD, TSS, and FC. However, to use the CWAEM for
policy analysis, additional pollutants will be incorporated into the model. The RFF studies included lakes and
estuaries while the CWAEM is limited to flowing rivers and streams.  This reduction in scope is intended to
limit the modeling to relatively simple kinetics that can be modeled reliably on a national scale. By using a
simpler  model, calibration and sensitivity analyses become more manageable and create a strong basis from
which to expand the scope as required.  We are investigating expanding the model to include lakes and

               The CWAEM has expanded the scope of previous studies by attempting to link the water
quality changes  to changes in beneficial use support.  The addition of more water quality parameters should
enable valid assessments of beneficial use attainment under various policy scenarios. The CWAEM also uses
more detailed and updated pollutant loading databases and a more detailed hydrologic network than the
RFF models.

                                                                                                                Session 3

                                                                                       Session 3
                                           Table 3
                Increase in Miles of Beneficial Uses under Three Scenarios
Beneficial Use
Game fishing
Rough fishing
With Zero
With NFS Loads
Reduced by Half
                                           Table 4
              Estimated Range of Increase in Miles of Beneficial Use Under
                      Varying Values for SDR and Decay Coefficients*
Beneficial Use
Game fishing
Rough fishing
1,236 - 14,314
1,790 - 11,828
5,305 - 14,380
4,359 - 11,598
4,453 - 11,504
With Zero Discharge
394 - 4,511
468 - 2,937
1,237 - 2,937
870 - 1,909
825 - 2,151
"SDR value = 0.05 to 0.01; Decay coefficient = 0.2 to 2.

               Several possible improvements to the model have been identified.  The importance of
certain key modeling parameters, in particular SDR and decay coefficients, became apparent in analyzing the
model results. Further efforts to calibrate the model have begun. Water quality monitoring data for several
hundred NASQUAN stations have been obtained from  the U.S. Geological Survey (USGS). These stations
are linked to RF1, so automated calibration techniques  can be developed. This additional calibration may
enable valid estimation of absolute miles of rivers and .streams supporting beneficial uses, and not just
relative changes  for each of the policy scenarios.

               One advantage of using the limited set. of parameters is that calibration and verification is a
reasonable undertaking. Another advantage of the limited nature of the CWAEM is that priorities for
'See footnote 3.

'"See footnote 3.

                                                                                            Session 3

 further refinements are clearly identifiable.  More parameters and/or more complex kinetics can quickly
 create a model that would be extremely difficult to work with on such a large scale.

                Currently, the model uses uniform coefficients from the entire country.  The use of regional
 values should improve the results.  Regional values make sense because of the varying impacts due to factors
 such as rainfall patterns and slope.  The USGS monitoring data may very well enable regional calibration. In
 addition to regional analyses, seasonal analyses can be undertaken.  RF1 contains low flows as well as
 monthly values, so the model can be set up for different months and/or low flow conditions.

                Further improvements can be undertaken by enhancing the way NFS loads are incorporated.
 Currently, the urban and rural loads are combined and then added uniformly to the reaches. The
 development of techniques to add more selectively the urban NPS loads only to the reaches where urban
 areas exist could significantly improve the results and enhance the capabilities for evaluating alternative NPS
 control strategies.

                The limited set  of water quality criteria (BOD, TSS, and FC) that defines beneficial use
 support in our model leads to overestimates of the effects described in the policy scenarios if the omitted
 pollutants are limiting factors. It is not known how much the numbers would change by incorporating
 additional water quality parameters.  There is no way of knowing how many miles currently classified by the
 model with a particular beneficial use would have the same beneficial use with other parameters considered.
 The question is, how much do beneficial use limitations coincide with other water quality parameters. For
 example, if a reach is united to boating, would nutrients and toxicants  also limit the water to boating?

                The model results lead to some preliminary conclusions. First, the CWA has effected a
 relatively small percentage of the surface waters of the United States, but, several thousand river miles have
 achieved improvements in at least one of three pollutants (i.e., biochemical oxygen demand, total suspended
 solids, or fecal coliform).  Furthermore, the effects are potentially significant because the waters unproved
 are primarily in densely populated areas. Second, taking a national perspective, the majority of the
 improvements possible through point source control have already been achieved. Meeting the original CWA
 goal of "zero discharge" will have significantly less effect than the improvements achieved to date. However,
 this in no way implies that targeted controls of point source pollution are without merit.  Finally, further
 significant improvements in water quality will require major reductions in nonpoint source pollution.

               Directions for future research involve refinements to the model, to address issues such as
 the following:

                1.       Expand the list of pollutants to include loadings of toxics, nutrients, and other
                        contaminants of regional or national importance for a more complete picture of
                        beneficial use attainment under various policy scenarios;

               2.       Obtain  an overview of which regions of the country are most adversely affected by
                        which pollutants from which sources;

               3.       Assess the relative effectiveness of alternative policies to control pollution at the
                        regional or watershed level; and,

               4.       Assess the economic costs and benefits of alternative policies to control pollution at
                        the regional or watershed level.

6.0            REFERENCES

Bowie, G.L., W.B. Mills, and D.  B. Porcella, C.L. Campbell, J.R. Pagenkopf, G.L. Rupp, K.M. Johnson,
P.W.H. Chan, and SA. Gherini,  and C. E. Chamberlain. 1985. Rates, Constants, and Kinetics Formulations
in Surface Water Quality Modeling, EPA Report 600/3-85/040, U.S. EPA. Athens, Georgia.


                                                                                        Session 3
Fair, G., J. Geyer, and D. Okun. 1971. Elements of Water Supply and Wastewater Disposal. John Wiley and
Sons. New York.

Grayman, Walter. 1982. "Estimation of Streamflows and the Reach File," Report to U.S. EPA, Office of

President's Commission on Americans Outdoors. 1986. Report and Recommendations to the President of the
United States. U.S. Government Printing Office, Washington, D.C. 20402

Stern, Edward, M. and William B. Stickle. 1978. "Effects of Turbidity and Suspended Material in Aquatic
Environments," Technical Report D-78-21, U.S. Army Engineer Waterways Experiment Station, Vicksburg,

U.S. Comptroller General. 1977. National Water Quality Goals Cannot Be Attained Without More Attention
To Pollution From Diffused Or "non-point" Source!!. Rep.  CED-78-6, Government Printing Office,
Washington, D.C.

U.S. Council on Environmental quality. 1979. Environmental Quality - 1979. Government Printing Office,
Washington, D.C.

U.S. Environmental Protection Agency. 1992. Appendix A: Macroeconomic Effects of the Clean Water Act,
in Draft Technical Support Document for Clean Water Act Benefit-Cost Assessment. U.S. EPA. Office of
Policy Analysis, Economic Analysis and Research Eiranch.

U.S. Environmental Protection Agency. 1992. National Water Quality Inventory 1990 Report to Congress.
EPA 503/9-92/006, Office of Water, Washington, D.C.

Vaughan, William J. 1986. "The RFF Water Quality Ladder,"  in The Use of Contingent Valuation Data For
Benefit/Cost Analysis in Water Pollution Control, by Robert  C. Mitchell arid Richard T. Carson. Report to
the  U.S. Environmental Protection Agency  under Cooperative Agreement No. 810224.

Weber, W. 1972. Phvsicochemical Processes for Wiiter Quality Control.  Wiley-Interscience. New York.

                                                                                          Session 3
                Recreation and Tourism Benefits From Water Quality
                      Improvements:  An Economist's Perspective*

                                         W. Douglass Shaw
                                         Senior Economist
                                      RCG/Hagler, Bailly, Inc.
                                         Robert S. Raucher
                                           Vice President
                                      RCG/Hagler, Bailly, Inc.


               As the level of pollutants is reduced under legislation such as the Clean Water Act (CWA),
benefits to users of water resources will arise.  This paper focuses on the benefits in water-based recreation.
We present the economist's view of such benefits, how they are defined and measured, and some examples of
estimated benefits from water-based recreation. This perspective is probably different from the vantage
point of just about everyone else.  Regional planners and local officials cite increased tourism and the related
expenditures of visitors to the region as "benefits"  because the incoming dollars are  revenue that may
increase jobs and provide funds that may be used  to enhance local services. In contrast, economists focus on
a monetary measure of the enjoyment of recreation by the individual (known as the "consumer surplus") and
think this is the important benefit from recreation. We explain both views below, critique the use of
expenditures as a measure of the benefits from cleaner water, and summarize by providing some examples of
benefits estimated in previous studies and estimated for a reduction in nonpoint source pollution.

1.0            INTRODUCTION

               Water quality in surface and ground water sources is influenced by a host of pollutants and
contaminants, including but not limited to: suspended solids, metals such as arsenic and lead, PCBs, and
pesticides and chemicals from agricultural and  other sources.  As the level of these  pollutants is reduced
under legislation such as the Clean Water Act  (CWA),  benefits to users of these water sources will arise.
This was shown to be the case with implementation of the amendments to the Federal Water Pollution
Control Act of 1972 and 1977.' This paper focuses on the benefits in water-based recreation. Individuals use
lakes, reservoirs, rivers, streams, and coastal waters for recreational fishing, motorized and non-motorized
boating, swimming, sail-boarding (windsurfing), surfing, and use the banks and  public access areas near water
bodies for activities such as walking, picnicking, or just to look at the water. In an early study, the "most
likely" estimate of the national benefits from pollution control was $13.9 billion (1979 dollars, Freeman), with
recreation accounting for well over half of this. While some are skeptical of the results by subcategory,'
there is no doubt  that recreation is an important benefit from water quality improvement.

               This paper presents the economist's view of such benefits, how they are defined and
measured, and some examples of estimated benefits from water-based recreation. This perspective is
probably different from the vantage point of just about  everyone else.  Regional planners and local officials
cite increased tourism and the related expenditures of visitors  to the region as "benefits" because the
incoming dollars are revenue that may increase jobs and provide funds  that may be used to enhance local
services.  In contrast, economists focus on a  monetary measure of the enjoyment of recreation by the
individual (known as the "consumer surplus") and  think this constitutes  one of the important benefits from
'Views within are those of the authors only and do not necessarily represent the views and opinions of
RCG/Hagler, Bailly, Inc.


                                                                                            Session 3
recreation. We explain both views below, critique the use of expenditures as a measure of the benefits from
cleaner water, and summarize by providing some examples of recreation benefits estimated in previous
studies and benefits estimated for a reduction in nonpoint source pollution.


                As a consequence of water quality improvements generated by the Clean Water Act
(CWA), individuals may be attracted to a region to engage in water-based recreation.  Reservoirs, lakes and
streams often attract individuals not only from close by, but from throughout the country, and individuals
already engaged in recreation in the area  may increase the number of outings they take. Many state and
local government officials focus on the likely expenditures of those individuals, or the revenue from tourists.
For example, in one study, it is noted that boating-related expenditures in the U.S. grew from $7.5 billion to
over $12 billion in 1984,2 and it is implied that this growth is "good"  for the  economy.  Another study states
that "it is clear from [the] statistics that boating plays an important economic and social role."3  This same
study goes on to estimate that the total estimated spending of Delaware-registered boaters in 1985 is $116
million, and states that

                "...spending provided much useful information to gauge the impacts that recreational boating
                has on the Delaware economy."3

If one wishes to link water quality changes with expenditures, then what has to be done is to estimate the
additional expenditures that would stem from some water quality improvement. Economists, however, often
do not consider these expenditures to be the important benefits from recreation that depend on water
quality. This is particularly true for national programs, such as pursued in accordance with the federal CWA.

                To begin, economists typically recognize that the relevant impacts of a project depend upon
the accounting stance taken for an analysis.  The impacts are viewed as either benefits or costs,  and the
stance  from which these benefits and costs can be recognized can be national, regional, state, or local.  The
goal from the economist's perspective is to maximize the "net" benefits (total benefits minus total costs) from
a project,  or at least to go ahead with a project only when the benefits exceed the costs.

                A national accounting stance views benefits and costs as they accrue to the entire nation,
while the recognition of benefits and costs from  a region's perspective is obviously much different.  In
addition, benefits and costs are defined as either being 'primary" or "secondary", with the latter being those
impacts that are generated from activities indirectly related to  the project.11  A regional government or
economic  planning office may be quite interested in the expenditures of recreational anglers  or boaters who
visit a river or lake in the region (such as for food,  transportation, lodging,  entertainment), but these
expenditures may be of no interest from a national accounting stance because as tourists move from region
A to region B to recreate, region A loses revenue from the expenditures from this group—that is benefits in
region  B are offset by costs in region A.  Thus, secondary impacts such  as expenditures are rarely considered
at all by economists interested in the net benefits of a  national program to  improve  water  quality. There is
yet another important reason that an individual's expenditures are not used by economists to estimate the
benefits from recreation.

                It is sometimes thought that spending, or expenditures might be used to proxy the costs that
are borne by recreators in conducting their outing,  and that these costs might in  turn be considered a lower
bound  estimate of the benefits that each individual  derives from an  outing.  This logic underlies the travel
cost model (discussed below), in that identification  of costs is a step toward identification of benefits, but is
bSuch secondary impacts are in fact sometimes referred to as "indirect" impacts.


                                                                                           Session 3
flawed. The reason is twofold, and the first reason is simply that costs are not benefits."  The value that an
individual places on recreation has to do with the maximum willingness to pay (WTP) for it, and the actual
cost the individual must pay for recreation may have little to do with this value.

                The second problem with the argument that expenditures are a lower bound estimate of
benefits is that the expenditures an individual makes are his or her choice.  The individual decides how much
food to purchase on an outing, whether to stay overnight and in what hotel, whether to rent a guide or a
boat, etc.  These costs are thus endogenous to the consumer.

2.1             Costs as Proxies for Prices

                Economists are interested in modeling behavior in the face of exogenous costs because
knowledge of these costs helps identify the "demand" for the good.d Prices of goods and services are
exogenous to the consumer, in that the consumer cannot choose what price to pay, except in unusual cases
where  bargaining is practiced.  Costs may be "fixed" in the sense that if the individual decides to participate,
he or she must pay this cost or price. The price of a hotel room is indeed exogenous, but the decision to
stay overnight is  not. Similarly, a boater pays a fixed cost of storing his boat at a marina, but the decision to
store his boat is  his own.  For modeling purposes, as in the travel cost model discussed below, expenditures
are often averaged over an entire sample of recreators, and this  "average" cost is assumed to be exogenous to
the individual recreator. Thus, only in this  use are expenditures an important source of information to the
economist. What then is important to the economist in assessing the magnitude of benefits?

22             Consumer Surplus

                The primary benefits from water quality improvements here are measured by the benefit to
each person who derives enjoyment from recreation. As will be seen below, these benefits can be quite
substantial. In formal terms, this benefit is called the "consumer surplus" from the water-based recreation.
Put simply, consumer surplus (CS) is the net benefit to an individual when the price of a good falls (or the
net loss in CS when the price of the good rises), or when the quality of the good improves (or is the net loss
in CS when the quality of the good decreases). CS is also often deemed the "Net Economic Value" (NEV)
of a resource or  good.

                In the  recreation context, the good is a water resource such as a lake or a stream, and the
quality of this lake may be portrayed using an  environmental characteristic that is measurable and influences
the enjoyment of the resource. Examples are the catch rate for  species of fish, or some index of site quality.
In economic theory, a simple,  though not strictly correct, way of presenting the benefits from a good is by
examining the area under a demand curve bounded by two prices or two quantity levels (see Figure l).e In
Indeed, we noted above that net benefits are benefits minus costs.

dWhen a market exists, a relationship can be identified between the quantity demanded of a good and the
market price (i.e. how many boxes of cereal are purchased per year/month at a price of $2.50 per box).  A
well-defined market does not usually exist for outdoor recreation sites, however, so economists appeal to
exogenous costs to proxy those prices, and the basic subsequent approach to identifying the demand
relationship is the same as when a market exists.

Economists know that what actually needs to be examined is the area under what is called the "Hicksian" or
"Hicks-compensated" demand curve, which is different from an "Ordinary" or "Marshallian" demand curve
due to compensation or income effects.  There is an ongoing discussion about the magnitude of the
discrepancy between the benefits estimated using an ordinary versus the Hicks-compensated demand curve.5'6
To avoid the debate, it may be best to estimate exact consumer surplus measures such as the compensating
and equivalent variation, which is now commonly done in more sophisticated recreation demand studies.7


                                                                                       Session 3
the figure the shift in the demand curve from D0 to D, is an increase in demand, and may be assumed due to
an improvement in environmental quality.  For example, the equilibrium price of a recreation trip is P0, and
suppose that water quality doubles, increasing the number of trips from Q0 to Q,. Then the triangle ABC
shows the graphical approximation of consumer surplus (see footnote e). The next section provides a simple
discussion of how such benefits are estimated.
                                           Figure 1
                         Benefits  From an Increase  in Demand
                                            Figure 1
               Water quality related benefits may be estimated by doing primary research on a set of
individuals that use the resource.  This type of research is expensive but quite common, and the literature is
rich in examples of benefits estimated for recreational fishing and boating.  In cases where primary research
is not possible, benefits that have been previously estimated using primary research conducted for some
resource might be "transferred" to another resource.  The credibility of such a transfer depends not only on
the comparability of the two resources, but also upon the ultimate purpose of the benefits estimation.4  For
example, it may be that the benefits from saltwater fishing estimated for anglers fishing off the Oregon coast

                                                                                            Session 3
 are transferable to saltwater fishing for anglers fishing off the Maine coast. The purpose of the benefits
 study for Maine anglers helps determine what level of "accuracy" in benefits needs to be obtained. A
 common view, however, is that a primary study is the best method of estimating benefits when resources are

 3.1             Primary Methods

                Benefits may stem from use or from nonuse of the water resource, but this paper focuses on
 recreational use/ Benefits from use may be estimated using a travel cost method (TCM), the contingent
 valuation method (CVM), or the hedonic price method (HPM).  The benefits stemming from nonuse can
 thus far  only be estimated using the CVM.  A very short, and largely nontechnical discussion of each method
 follows.  Virtually all methods below require conducting a survey of recreators.

 3.1,1            Travel Cost Method

                The TCM essentially uses the recreator's costs incurred in travel from an individual's home
 to a group of recreation sites to proxy the "price" that this person pays for use of the sites.  Gathering
 information on all of the sites that the individual visits allows analysis of behavior with the possibility of
 substitution and complementarity between sites.  Just as an individual may substitute a hotdog for a
 hamburger when the price of hamburgers increases and complement that hotdog with pickle relish, a
 recreator may substitute Chesapeake Bay for the Delaware Bay when water quality in the latter decreases, or
 complement a fishing trip to Lake  Placid with a hiking trip to the Adirondack mountains when water quality
 in Lake Placid improves. Estimation of demand or behavior for trips to only one recreation site often rules
 out this possibility.

                The relevant prices may include the often thought of "site-entry" fee, but also includes the
 out-of-pocket  cost of getting to and from the sites (gas  and wear and tear on an automobile),  and some cost
 of time to the recreator.  All of these costs are assumed exogenous to the  consumer of recreation services.
 In order  to ensure that this assumption holds, the costs reported by each individual are often averaged over
 the entire sample, or averaged from each origin point.8 With data on these components and on
 environmental attributes that attract the recreator to the site, a relationship between the quantity demanded
 (trips to  the site) and these variables may be formed.  With such a relationship  known, the consumer's
 surplus may be estimated. The data on the individual's behavior (destinations and trips to the recreation
 sites, number  of hours engaged in recreation per day, place or residence, etc.), are usually obtained by
 conducting a mail, telephone, or on-site survey of recreators.  Many of the new  travel cost applications
 estimate  the benefits for an individual and then aggregate benefits for a group of individuals, but older
 applications estimate benefits for populations from a zone or region.9

3.12            Hedonic Price Method

                The hedonic price method often takes the form of a variation on the TCM.10  In such a
model, the quality attributes of a site (such as water quality) are used to explain the variation  in how
recreators value their use of a site.  The idea stems from the fact  that individuals can be observed to pay a
fAn example of nonuse value or benefit is the benefit of a recreation site to an individual from merely
knowing that one's child may use the resource in the future.  Though controversial, these nonuse values have
been shown to be measurable and substantial.

'For example, all those fishing at Lake George and coming from New York City by automobile would face
the same distance to drive and thus the same basic cost of operating a vehicle to get there and back.  In
addition, each individual has an opportunity cost to his or her time spent in travel to and from Lake George,
and while  at Lake George.  Issues connected to valuation of time are complex, but inclusion of some time
cost may substantially influence the estimation of benefits."


                                                                                           Session 3
different price for the same resource because some people travel much further to a recreation site than
others.  People may also be observed to travel much further than the closest recreation site to them to enjoy
an activity. What explains this willingness to travel so much further than a person has to, or so much further
than others visiting the same site? The thought is that people do this because of the environmental
attributes sought after and the desire for a "different' or "better" recreation experience. Formally, the
attributes are used to explain the variation in the WIT for recreation observed across a sample of
individuals.  Data are collected on observed behavior and preferences using some sort of survey technique.

3.13           Contingent Valuation Method

               The CVM is an approach in which hypothetical markets are constructed and presented to
individuals in a survey format, with the responses to questions used to infer prices and values for the goods
and services being evaluated.  For example, individuals may be asked about the recreator's WTP rather than
do without the resource, or the WTP for an environmental improvement to determine the benefits of the
resource when quality is improved.1"  These questions are asked in person, or using a telephone or mail
survey questionnaire. The credibility of CVM results often depends on the credibility of the CVM survey
instrument.  The key issue may be, did the respondent really understand the question and believe in the
scenario being presented when he or she answered the question?

               The CVM technique and the use of surveys has improved over the years, but controversy
still exists about the ability of the method to determine reliable non-use values13 (the "Cambridge
Symposium"1). There appears to be  little controversy over the method's application to obtaining  use values.

32             Secondary Methods;  Benefits Transfer

               The three primary methods described above are often quite expensive and time-consuming
to implement for even a single site or area of interest. For a large number of sites which may be
geographically dispersed, such as would be impacted by  changes in the CWA, these primary research
approaches are generally not feasible because of the costs.  If a research budget does not allow
implementation of one  of these primary methods, then the researcher might.appeal to the method of
"benefits transfer" in order to develop some estimates  of the magnitude of the potential benefits  from a
policy that leads to water quality improvement. Transferring involves taking the estimated benefits for one
area or  at one point in time, and using these benefit; as approximations for the benefits for another area or
at another point in time.  An example is given in section 4.1 below.


               An example of the difference between the  expenditures and the estimated consumers
surplus  for a group of recreators may drive home the  points made above.  Note, however, that we  are
recommending that expenditures not be used at all to  make inferences about the benefits from recreational
benefits associated with national CWA policies.
hQuestions may also be framed to elicit the individu;il's willingness to accept compensation for degradation of
the resource.

'Research from the Cambridge Symposium14 was largely funded by Exxon Corp. with the purpose of doing a
"critical" assessment of CVM. The papers presented at the symposium have not been subjected to peer
review so while controversial and thought-provoking, no conclusions about use and misuse of CVM should be
drawn from  them at this time.


                                                                                            Session 3
Pace Study
                Pace (1992)l5 estimates the change in net economic value (NEV) and the change in
 expenditures for the Middle Clark Fork River and the immediate region in Montana under a scenario to
 reproduce the effects of eliminating the Milltown Dam project.j  Pace essentially conducts a benefits transfer
 and admits to many problems and assumptions made in his study, his results are used merely to demonstrate
 the difference between benefits and expenditures.  The Dam and reservoir play a role in reducing spawning
 and recruitment of trout to the Middle Clark Fork River (MCF) fishery, and thus, elimination of the project
 most likely would enhance the fishery and lead to an increase in recreational fishing.

                Pace15 estimates  the NEV and the change hi expenditures for the river and for the region
 and these numbers are reported in Table 1. Presented there are both a "high" and a "low" estimate and the
 difference between the two depends on assumptions about likely changes in the  trout density without the
 dam, the response of anglers to that change in trout density, the degree to which anglers substitute between
 fishing sites, and the degree to which resident and non-resident anglers fish on specific stretches of the rivers
 examined in the analysis. First, the table shows that the change in expenditures is larger than the NEV and
 thus the two cannot be identical.  Note also that the actual NEV is quite substantial itself.  It may be
 tempting to use the expenditures as an indication of the economic "benefits" from  this scenario, but recall
 that these expenditures reflect costs, not value.

                                              Table  1
                        Changes in Net  Economic Values and Angler's
                   Expenditures with Elimination of the Milltown Project15

Middle Clark Fork
All Region
 (in millions of dollars)

                Second, note that comparing the two rows of Table 1 shows the effect of substitution among
 fishing sites in the event of a water quality improvement.  At first, it seems that the NEV for the region
 (ALL) must always be higher than just for the river. But the "low" estimate for ALL is only $13.7 million,
 while it is $38.8 million just for the river. How can this be?  This surprising result is explained by the role
 substitution plays in forming the high and low estimate.  For the high estimate, weak substitution effects are
 assumed, while strong complementarity is assumed.  For the low assumption, weak substitution is assumed,
 but even weaker complementarity is assumed, so the former effect outweighs the latter.

                Specifically, under the "high" assumption when the Middle Clark Fork improves, the anglers
 only slightly switch to using it more and another river less, while at the same time use of a third river
 increases.  Fishing in the region thus increases.  Under the "low" assumption, when the Middle Clark Fork
 improves, other rivers are not used more, and there is some substitution away from river 2, thus inducing a
 loss in benefits for river 2.  The total benefits generated by increased use of the Middle Clark Fork are not
 enough to make up for the loss in benefits from use of river 2.  Though the change in expenditures also
 shows this trend, it  does not do so nearly to the extent that the change in NEV does. In Pace's study,  all of
jPace13 in turn draws heavily on the study by Duffield et al.'3>1*


                                                                                            Session 3

 these assumptions are just ones the author makes without any other information, but the point that use of
 expenditure data may be quite misleading is clear.

 42             Other Recreation Benefits Studies

                Benefit estimates are indeed large, however, as may be seen in Table 2. The few studies
 listed there show some results from applications of the primary methods above.  Many, many other studies
 have been conducted and it would be impossible to include all of the interesting references to estimated
 recreation benefits in this paper. A fairly recent compilation of many recreation benefits studies may be
 found in Smith and Kaoru.17  In Table 2, note that the WTP per trip or "choice occasion" may be quite small.
 The small numbers may reflect the small incremental water quality improvement, or may be confusing due to
 the technique used to estimate the WTP.  For example, WTP measures in the random utility model (RUM)
 are often misinterpreted. Such WTP measures are estimated in a probabilistic model, and should not be
 interpreted as the actual WTP per trip taken.  The models may have built into them the probability that the
 individual will take the trip (as in Jones and Sling's)18, and thus the WTP needs to be  adjusted by this


 5.1             Overview of the Nonpoint Source Problem

                Nonpoint sources (NPS) of water pollution are those activities (typically land use-related)
 that generate pollutant loadings that reach the nation's waters via runoff.  For example, soil erosion from
 agricultural or silvicultural activities or urban development produces particles (sediment  and associated
 nutrients, metals, and toxic organic chemical compounds) that can be transported by precipitation and runoff
 to a stream or lake.

                NPS pollution often dominates total loadings of selected important pollutants.  For example,
 Gianessi et al." estimate that  99.9%  of the sediment  (TSS) loadings to the nation's waters are due to
 nonpoint sources, and more than 80% of the nutrients (measured as Total Phosphorus and Total Kjeldahl
 Nitrogen) are from NPS. These loadings have  been associated with significant adverse impacts  on water
 quality.  For example, in EPA's Report to Congress,  1990 National Water Quality Inventory,10 summary
 information about data submitted in state 305(b) indicates that siltation and nutrient loadings from
 agricultural activities (including grazing) are the leading causes of water quality impairments in  the nation's
 rivers and lakes.

                Although NPS pollution has long been recognized as the leading contributor of selected
pollutant loadings and has been clearly associated with widespread water quality impairments, these sources
are not directly regulated under the CWA. Control of NPS pollution is primarily 'within the voluntary
purview of individuals and firms engaged in land use  activities that generate NPS loadings (e.g., farmers,
builders, timber companies, etc.), although state and local codes and regulations often govern some NPS-
generating activities (such as new construction). There also are several incentive-based and educational
programs that try to induce greater participation in l^PS control efforts (such as in agricultural  sectors).  In
contrast, however, point source discharges are regulated directly under the CWA through the permit
process—point source wastestreams are closely  monitored and have discharges limited according to permits
based on effluent limitation guidelines promulgated by EPA on the basis of Best Available Technology (or,
where applicable, more stringent water quality criteria).

                Having illustrated this difference,  the policy maker or concerned local government official
may be left wondering what numbers to use in  order to estimate the likely benefits from water  quality
improvement.  Expenditures are often easy to estimate, while CS or NEV measures are not readily available.
One source of information stems from transferring the estimated benefits from one area to another, as

                                                                                      Session 3
leanup of PCB
ontaminated sedi


                                                                                            Session 3

mentioned above.  Such transfers should not, however, be conducted without considerable care.k  The next
section discusses control of nonpoint source pollution and presents some estimates of national benefits which
are estimated using the benefits transfer method.

                When the CWA was last reauthorked, as the Water Quality Act of 1987, NFS pollution was
given a higher profile through the inclusion of section 319, which requires state programs to determine the
extent and impact of NPS pollution on water quality.  As results of these mandated NPS data collection and
reporting efforts have come in, analysis confirms that NPS pollution remains a significant water quality
problem in the U.S.  Therefore, an important issue for the upcoming CWA reauthorization discussions is
whether an expanded federal role is warranted  in ths control of water pollution from nonpoint sources
(NPS). One aspect of this discussion should be, what types and levels of benefits can the nation anticipate if
NPS pollution is more aggressively controlled?  Below, an overview is provided of the estimated potential
recreation (and other) benefits associated with  NPS controls in coastal waters.

52             Estimated Benefits of NPS Controls in Coastal Waters

                Recently, rough estimates of the potential value of recreational (and other) benefits were
derived, via a benefits transfer approach, for the control of NPS pollution to coastal waters. These benefits
are associated with a guidance package developed by EPA, The Management Measures Guidance for
Nonpoint Source Pollution, in accordance with  the Coastal Zone Management Act Reauthorization
Amendments of 1990.

                The existing economics literature pertaining to the economic value of NPS pollution control
programs, such as embodied in the Management Measures, has focused predominantly on topics not directly
applicable to the Guidance (e.g., inland regional NPS control benefits, or the national damages of cropland
soil erosion).  However, these efforts have some applicability to the Guidance, although the Guidance differs
because of its  coastal waters focus, its applicability to more than cropland erosion problems, and the need to
measure program benefits rather than damage  levels. Nevertheless, as shown in Table  3, the consistency of
the results transferred from other studies suggests the benefits  of the Guidance may be appreciable, and that
benefits may well exceed costs.

                Table 3  presents summary results for recreation benefits from control  of NPS pollution in
coastal waters, some nonuse benefits estimates, and the bottom half shows some corroborating evidence.  All
estimates are converted to 1990 dollars.  An aggregate benefits estimation approach has been developed from
Mitchell and Carson's21 research on water quality benefits. The household-based application of their
willingness to pay (WTP) findings to coastal NPS controls yields benefit estimates in the range of $1.5 billion
to $3.1 billion  per year.  The recreation-related porlion of these benefits, as shown in the top line of Table 3,
amounts to $0.8 to $1.5 billion per year.

                Use of data from the US FWS 198522 survey of recreational angling also can be applied to
develop benefits estimates.  A saltwater angling effort-based interpretation of Mitchell-Carson indicates NPS
control benefits of $2.0 billion in the coastal zone (more than half of which is recreation related). A
comparable estimate of $1.3 to $2.7 billion is derived by valuing potential NFS-related improvements in
coastal recreational fisheries.

                In the bottom half of Table 3, note the aggregate damage research study by Clark et al.23
This widely cited study suggests highly significant potential benefits, a significant portion of which (over 37%)
are attributable to recreation.
kA good portion of a March 1992 issue of Water Resources Research is devoted to benefits transfer, and the
Association of Environmental and Resource Economists had a workshop devoted to the topic in the summer
of 1992.  A consensus may be emerging on how to use existing benefits numbers in transfers.


                                                                                                    Session 3
                                                      Table 3

                      Aggregate Benefit Estimates for NFS Controls in Coastal Waters
   Annual Benefits Range*
                                            Coastal NPS Benefit Estimates
  Recreation Benefits:
  $0.8 billion-  $1.5 billion
  $1.1 billion
  $1.3 billion - $2.7 billion
  Nonuse Benefits:
  $0.7 billion - $1.6 billion
  $0.9 billion
NPS controls in coastal waters.
Includes coastal households only.

Benefits apportioned to controls in
coastal waters by angling effort.
Recreational angling benefits only, for
NPS controls in coastal waters.
NFS controls in coastal waters.
Includes coastal households only.

Nonuse benefits a["?ortioned to NPS
controls in coastal waters by angling
Household WTP for Water Quality

Recreational Angling-Based Allocation of National
Benefits (based on US FWS (1989) and Mitchell-
Carson (1991)).

Value of Recreational and Angling in Salt and
Great Lakes Water (based on US FWS (1989) and
Walsh et al. (1988, 1990)).
Household WTP for Water Quality

Recreational Angling-Based Allocation of National
Benefits (based on US FWS (1989) and Mitchell-
Carson (1991)).
                                            Further Corroborative Studies
  Use Benefits:
  $3.5 billion
  $0.3 billion
  $0.9 billion
  $0.8 billion - $1.5 billion
  Nonuse Benefits:
  $0.4 billion - $0.7 billion
Damages from cropland erosion only.
Includes coastal and noncoastal areas.

CRP-related cropland erosion control
benefits, limited to 9.1% of croplands
in broad "coastal" regions, omitting
several benefit categories.

NPS controls in 201 county, seven
state region. Benefits outweigh costs
by factor of 3 or more.

NPS control benefits across 11 western
states.  Benefits outweigh costs by
factor of 3 or more.
NPS coastal benefits across 11 western
Clark et al.24
Water Quality Benefits of CRP26
Tennessee Valley NPS Controls25-27
Federal Land NPS controls26-28
Federal Land NPS controls27-28
*1990 dollars

                                                                                            Session 3

                Ribaudo's24 estimated benefits pertain only to cropland erosion benefits for acreage retired
under the Conservation Reserve Program. While the benefits estimated for coastal regions encompass in-
land waters, the benefits omit two important benefit categories and are limited by the CRP's enrollment
focus on croplands in the nation's interior. Nonetheless, the coastal regions generated estimated benefits
that amount to $0.3 billion annually for only 9.1% of the region's croplands.

                Finally, two studies of regional NFS control scenarios indicate benefits of the same general
order of magnitude as deduced from  the studies described above.  The benefits in the seven-state, 201-county
Tennessee Valley region amount to $920 million annually (on-site plus water quality benefits, 1990 dollars).
Likewise, the preliminary estimate of benefits of controlling NPS pollution on federal lands in the western
states is estimated at $1.2 to $2.2 billion per year (of which between $600 million and $1.15 billion are
attributable to recreation).

                In sum, the aggregate benefit estimates described above are not particularly robust, nor
directly applicable to the Guidance in some cases.  Nonetheless,  the consistency of the benefit estimates
suggests that  Guidance-related NPS control benefits could well be  appreciable—potentially, in excess of $1
billion  annually. These benefits are predominantly  .issociated with enhanced recreation. These benefits also
exceed the estimated costs of the adhering to the Guidance. Studies cited of other NPS control programs
also suggest that benefits appear to exceed costs (or are, at least, commensurate with costs).

6.0             CONCLUSIONS

                This paper has illustrated the difference between using expenditures and actual benefits
measures grounded in economic theory for the purpose of estimating the gams to recreation from water
quality improvement. As water quality improves, e>penditures in the region may rise or fall. An individual
may change his or her behavior in such a way that benefits from the improvement are measurable. Changes
in expenditures might reveal something about the likely changes  forthcoming in local economies if such
estimates are accurate.  For example, it is possible that another gas station might need  to be built in order to
service incoming tourists or recreators to the region.

                This change in expenditure, however, has little or nothing to  do with the benefits from
recreation that  are associated with the project.  Sucla benefits are large, and often can swamp the cost of the
water quality improvement itself. We close our discussion with a few final points.

                1.      Many economic models or Jy provide estimates of benefits from simulations of
                       enhanced catch rates8 or from estimates of WTP rather than forego use of the
                       site,28 and thus the link between actual  water quality improvement and these
                       enhanced catch rates is missing.
                2.      Estimated benefits are often not directly comparable, in that some are estimated
                       per person,  some per "trip1 or "day" of an activity, and some for a larger aggregate
                       unit such as a state or county.

                3.      Some estimates are quite ' preliminary" and are subject to revision or change8
                       (McConnell et al. 1992).

                4.      Some aggregate estimates are extrapolated for the entire affected population,  while
                       others only are aggregated for a group of recreators. Table 2 indicates the group
                       over which the total applies.

                Finally, it is most important to stress that all benefits numbers are estimates.  As such, they
involve some  error. In a primary study, this error stems from the  fact that investigators cannot observe
everything about individuals and recreation sites that there is to be known. This form of randomness is
transmitted to the benefit estimate for an individual or group of individuals. Researchers are quite cognizant
of this29 and are more careful than they might have been in interpreting benefits estimates in the early  years


                                                                                         Session 3
of recreation-demand modeling.  In transferring benefits from one site to another there is, of course, also
some error.  Determining how large such an error is requires knowledge of the similarity of the
characteristics and prices of the recreation site(s) and the individuals in both the original study and the site
for which an estimate is being sought (the policy site).

7.0            REFERENCES

1.             Smith, V.K. "Arbitrary Values, Good Causes, and Premature Verdicts," Journal of
               Environmental Economics and Management. Vol. 22, pp. 71-89.  1992.

2.             Russell, C.S. and WJ. Vaughan. "The National Recreational Fishing Benefits of Water
               Pollution Control," Journal of Environmental Economics and Management.  Vol. 9, pp. 328-
               354. 1982.

3.             Graefe, A.R.  "Recreational Boating," Unpublished paper prepared for the President's
               Commission on Americans Outdoors.  Pennsylvania State University. 1986.

4.             Falk, J.M. et. al.  "The 1985 Delaware Recreational Boating Survey: An Analysis of
               Delaware-Registered Boaters," University of Delaware Sea Grant College Program, Newark
               DE, DE-SG-06-87. 1987.

5.             Deck, L.B.  and L.G. Chestnut.  "Benefits Transfers:  How Good is Good Enough?"
               Presented at the AERE Workshop on Benefits Transfers, Snowbird, Utah, June 3-5.  1992.

6.             Willig, R.D. "Consumers' Surplus Without Apology," American Economic Review.
               Vol. 66, No. 4, pp. 589-97.  1976.

7.             Hanemann, W.M. "Willingness to Pay versus Willingness to Accept: How Much Can They
               Differ," American Economic Review. Vol. 81, pp. 635-647.  1991.

8.             Morey, E.R., W.D. Shaw, and R.D. Rowe.  "A Discrete Choice Model of Recreational
               Participation, Site Choice, and Activity Valuation When Complete Trip Data are
               Unavailable." Journal of Environmental Economics and Management. Vol.  20, pp. 181-201.

9.             McConnell, K.E., et.al.  "The Economic Value of Mid and South Atlantic Sportfishing,"
               Report #CR-811043-01-0.  University of Maryland, U.S. EPA, NMFS, and NOAA.  1992.

10.             Sutherland, R J.  "A Regional Approach to Estimating the Recreation Benefits of Improved
               Water Quality," Journal of Environmental Economics and Management. Vol. 9, pp. 229-
               247. 1982.

11.             Englin, J. and R. Mendelsohn. "A Hedonic Travel Cost Analysis for Evaluation of Multiple
               Components of Site Quality: The Recreation Value of Forest Management," Journal of
               Environmental Economics and Management. Vol. 20, pp. 275-290.  1991.

12.             Shaw, W.D.  "Searching for the Opportunity Cost of an Individual's Time,"  Land
               Economics. Vol. 68, No. 1, pp. 107-15. 1992.

13.             Mitchell, R, and R. Carson.  The Use of Contingent Valuation Data for Benefit/Cost
               Analysis in Water Pollution Control.  Resources  for the Future, Washington, D.C. 1986.

                                                                                         Session 3

 14.            Kahneman, D. and J.L. Knetsch. "Valuing Public Goods: The Purchase of Moral
               Satisfaction," Journal of Environmental Economics and Management.  Vol. 22 pp. 57-70.

 15.            Cambridge Economics, Inc.  "Contingent Valuation: A Critical Assessment."  A- Symposium
               and Collection of Papers, Washington, D.C. April 2-3, 1992.

 16.            Pace, C.E.. "Estimation of Impacts on Angler Pressure, Net Economic Values and
               Expenditures Associated with Elimination of the Milltown Project of the Clark Fork River,"
               Prepared for the Montana Dept. of Fish, Wildlife and Parks. Missoula, MT.  1992.

 17.            Smith, V.K. and Y. Kaoru.  "Signals or Noise:  Explaining the Variation in Recreation
               Benefit Estimates," American Journal, of Agricultural Economics.  Vol. 72, No. 2, pp. 419-
               433.  1990.

 18.            Duffield, J. et. al. "The Net Economic Value of Fishing in Montana."  Prepared for the
               Montana Dept. of Fish, Wildlife, and Parks. Helena, MT. 1987.

 19.            Jones, CA. and Y.D. Sung.  "Valuation of Environmental Quality al Michigan Recreational
               Fishing Sites: Methodological Issues and Policy Applications," EPA Contract # CR-816247-
               01-2.  1991.

 20.            Gianessi, C.P., H.M. Peskin, and CA. Puffer.  A National Data Base of Nonurban Source
               Discharges  and Their Effect on the Nation's Water Quality. A report submitted to the U.S.
               Environmental Protection Agency in partial fulfillment of Cooperative Agreement
               CR811858-01-0.  Resources for the Future. Washington, D.C.

21.            U.S.  Environmental Protection Agency. National Water Quality Inventory:  1990 Report to
               Congress.  Office of Water, Washington, D.C.  1992.

22.            Mitchell, R. and R. Carson.  An Expe:riment in Determining Willingness to Pay for National
               Water Quality Improvements.  Resources for the Future for U.S. Environmental Protection
               Agency. Washington, D.C. 1984.

23.            U.S.  Fish and Wildlife  Service.  "1985 Survey of Fishing, Hunting and Wildlife-Associated
               Recreation," 1985.

24.            Clark, E.H. II, JA. Haverkamp, and W. Chapman. Eroding Soils:  The Off-Farm Impacts.
               The Conservation Foundation. Washington, D.C.  1985.

25.            RCG/Hagler, Bailly, Inc. Controlling Nonpoint Source Loadings from Federal Lands: An
               Analysis in  Support of Clean Water Act Reauthorization. Final  Draft Report to U.S.
               Environmental Protection Agency, Office of Water. Boulder, CO.  1992.

26.            Ribaudo, M.  "Water Quality Benefits from the Conservation Reserve Program," AER-606.
               USDA, Economic Research Service.  1989.

27.            RCG/Hagler, Bailly, Inc. An Economic Analysis of the Benefits and Costs of the Lone.
               Range Plan for the Land and Water 201 Program.  Prepared for the Land and Water 201
               Program.  1989.

 28.            RCG/Hagler, Bailly, Inc. Benefit-Cost Analysis for the Management Measures Guidance
               for Nonpoint Source Controls in Coastal Watershed Areas. Draft Final.  September 11.
               Boulder, CO.  1992.


                                                                                         Session 3
29.             Seller, C, J.R. Stoll, and J. Chavas.  "Validation of Empirical Measures of Welfare Change:
               A Comparison of Nonmarket Techniques," Land Economics.  Vol. 61, No. 2, pp. 159-175.

30.             Bockstael, N.E. and I.E. Strand.  "The Effect of Common Sources of Regression Error on
               Benefit Estimates," Land Economics. Vol. 63, No. 1, pp. 11-20.  1987.

31.             Ziemer, R.F., W.N. Musser, and R.C. Hill. "Recreation Demand Equations: Functional
               Form and Consumer Surplus," American Journal of Ag. Economics,  pp. 136-40. February

                                                                                         Session 3
                       The Costs of Marine Debris  Washups  On
                           New York and New Jersey Beaches
                                       R. Lawrenci; Swansea
                                    Waste Management Institute
                                  Marine Sciences Research Center
                             State University of New York-^Stony Brook

The New York Bight is perhaps one of the most used and abused coastal areas in the world as a
consequence of urbanization and the disposal of the waste of some 20 million people who reside by its shores
and surrounding bays and estuaries. A variety of sources contaminate these coastal waters.  Many of the
stresses of excess population and industrialization as measured by pollutant loadings and ecosystem impacts
can be crudely quantified in terms of use impairments—use impairments that have measurable social and
economic relevance. Beach closures caused by floatable marine debris are a category of impairment that
have caused significant economic losses.  We have examined beach closures and how the public has avoided
beaches at New York and New Jersey ocean beaches following the major floatable washups of 1987 and

Our measures were loss of user days and total expenditures.  The methodologies used are not standard nor
totally quantifiable. However, during years of major wjishups, the losses to local economies for both states
can be measured in billions of dollars. Corrective measures, while expensive, are necessary if area beaches
are to continue to be a significant part of the tourist economies.



               Floatable wastes are waterborne materials and debris that are buoyant.  These include
debris (wood and beach litter such as cans, bottles, styrofoam cups, sheet plastic, balloons, straws, and paper
products); sewage-related wastes (condoms, sanitary napkins, tampon applicators, diaper liners,  grease balls,
tar balls, and fecal material); fishing gear (nets, floats, Ixaps,  and lines); and medically related wastes
(hypodermic needles, syringes, bandages, red bags, enema bottles).

               Debris washups along the beaches of the New York Bight have been occurring for over a
century. Cleanup operations have been costly to government and the tourist industry has suffered as well. In
1931,  it was estimated to cost $10,000 per mile to remove refuse along New York's  ocean beaches.1  In 1976,
when  Long Island's south shore beaches were declared a Federal Disaster Area because of floatable wastes,
the local economy was estimated to have lost $15 - $25 million. Beach cleanup may have cost more than

               Following the 1987 and 1988 floatable  washups in New York and New Jersey, the U.S.
Environmental Protection Agency, Region II, as part of the New York Bight Restoration Plan,  commissioned
the Waste Management Institute to review the causes £ind impacts of the washups.3  This paper reviews some
of the costs associated with those washups in terms of loss of direct expenditures at beaches. Losses
associated with reduced sales of fisheries products are not presented.

                                                                                            Session 3
                Areal Extent—In the period 1980-1988, there were on the order of 100 beach closures
 around the New York Bight (Figure 1) due to floatable wastes. Until 1989, the criteria for closing beaches
 because of floatable wastes were not consistent from beach to beach.  Water quality (as measured by the
 coliform indicator) was generally not a factor in closing beaches during a floatable washup.  Rather,  closures
 depended on subjective criteria such as the look or smell of the material or on expectations of public
 perception—to avoid a possible public outcry. Most closures occurred for hours—rarely more than a day.
 More consistent beach-closure guidelines by  local and state agencies are now in use.4 Today, beach
 operators are more inclined to quickly and quietly clean up floatable debris and go about business.  Negative
 press reporting on debris washups has been costly.

                In New Jersey, beaches over a stretch of some 40 km were closed due to floatables  on
 numerous occasions during May 1987.  In August 1987, roughly 85 km of beaches were closed periodically in
 the same state (Figure 1).  Few beaches in New Jersey were closed because of floatable wastes in 1988. In
 New York in 1976,  sewage-related floatable wastes were responsible for closing some 90 km of beaches.
 There were 2 km of beaches closed in 1987,  but in July 1988, 93 km of beaches were closed due to medically
 related and other floatable wastes (Figure 1).

                Temporal Changes—From the late 1800s through the 1930s, garbage, paper, bottles, metal,
 and animal carcasses were discarded into New York Bight and New York harbor waters (e.g., Dead Horse
 Point in Jamaica Bay). Following the  cessation of refuse dumping in 1934 and the gradual construction of
 sewage treatment plants throughout the region in the 1930s  and 1940s, the floatables problem was probably
 less apparent for some period  of time.  During the 1960s and 1970s, styrofoam cups, disposable plastic
 diapers, plastic tampon applicators, and PET (polyethylene terephthalate) bottles increased the floatables
 load.  Of course, some small quantity of medically related wastes  found with the typical floatables focused
 international  attention on  area beaches in the late 1980s.

                Causes of Washups—The sources  for the majority of the floatable wastes are located along
 the periphery of the Hudson-Raritan Estuary, and many of these  wastes are flushed out into the New York
 Bight during  the spring freshet of the Hudson River.5 The peak floatable waste input from  the freshet is at
 or near the start of the beach season.

                During the summer, rainfall often causes bypassing of sewage treatment plants. Floatable
 wastes are spewed to  the receiving waters from combined sewer overflows (CSOs).  CSOs are a major
 source of floatables to the region's coastal waters.  Until recently, garbage and trash reached marine waters
 through improper solid waste handling in the metropolitan area.  Storm sewers also contribute to the
 problem.  Illegal disposal occurs but is probably a minor source.

                Sea breezes may wash ashore debris accumulated along oceanic fronts and convergences
 and in Langmuir circulation cells. Long Island is particularly vulnerable to washups of floatable wastes
 because of the prevailing southerly summer winds in the area.2-3

                Problems Associated with Washups—Floatable materials on beaches and in coastal waters
 are mainly an aesthetic problem for the public.  There is a perception that contact with floatable material
 poses a major public health threat. There is no evidence to support that supposition.  Public safety  (injury
 from cuts, bruises, and punctures) is a more  significant  threat. The fear of exposure to AIDS made the
 medical wastes found  in the floatable material a major concern in the 1987 and 1988 washups.  These fears
 are unfounded. The chance of acquiring AIDS in this manner is  close to zero.6 Also, the risk of acquiring
 Hepatitis (B and non-A/non-B) from a needle that has washed ashore is extremely low.7

                There are detrimental impacts on  marine birds, turtles, fishes, and other marine animals
from floatable wastes  which may result in death: entanglement in  plastic objects and in fishing line and
ingestion of plastic objects that are mistaken by animals for  prey food may occur.  Some of the impacted
marine  animals have been designated as endangered or threatened species, underscoring the ecological
significance of this impairment.


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                                                 Session 3

                                                                                             Session 3
                Economic and Social Impacts—Estimates of the economic consequences of beach
 impairments from floatables were based on beach use which can be measured in user days (a person going
 to a beach for all or part of a day). There is no single or comprehensive source from which these data can
 be derived.

                The extent to which beach use decreased at New York beaches in 1988 as a result of
 floatable washups was approximated by extrapolating beach attendance at New York State Park beaches
 where attendance data are estimated.  Loss in user days was approximated by assessing the attendance data
 from 1976 (60 million user days), the baseline attendance figure* (105 million), and attendance in peak years
 (150 million).  Using these data, the reduction in beach use was estimated to have ranged between 30 and 90
 million user days in New York State.  Comparable figures for New Jersey were 6.7 to 37 million user days
 (based on an observed decline in beach attendance of 7.9% to 34% at beaches along the New Jersey shore in
 1987-1988). Direct expenditures were estimated by adapting per-trip expenditures from other studies and
 adjusting  them to 1987-1988.

                A beach pollution event has three major economic impacts.  First, there is a reduced level
 of expenditures on local beach activity, which has negative effects in many sectors of the economy. Second,
 there are  impacts on employment.  Third, the people who use the beaches suffer a lower quality of life
 because of diminished recreational opportunities.  The measures of the first two impacts are apparent to the
 noneconomist.  The  third, measured by consumers' surplus, is not considered in this analysis.

                Reductions in direct beach expenditures were multiplied by a factor of 2.5 to estimate loss
 in total expenditures—a result of the beach expenditures not being respent. For New York, the loss in total
 expenditures was estimated to be between $750 million and $1.8 billion for 1988 (using 1987 dollars).  The
 New Jersey loss in total expenditures was estimated to be between $600 million and $3.6 billion. The reasons
 for the difference in the estimates of losses for the two states is not clear. However, it must be kept in mind
 that the character of the ocean beach areas of the two states is considerably different (it is much more
 commercial in New Jersey). Also,  the manner of generating attendance figures is completely different. New
 Jersey, of course, experienced major floatable problems in 1987 so that frequenters of the New Jersey shore
 were reacting in 1988 to a problem  over two summers.

                In an independent  analysis,  R.L. Associates'reported a reduction in user days of 1.9 million
 in 1988 relative to  1987 along the New Jersey coast. They also reported a reduction  of $700 million in
 expenditures in 1988 relative to 1987.

                In a study for the Long Island Tourist and Convention Commission, Fey9 estimated that the
 net loss of expenditures on Long Island in 1988 was $700 million.  In this estimation, the Commission
 considered that the loss in beach-related expenditures of $1.4 billion was partially returned to other parts of
 the economy and that the  Island had been experiencing a 5.6% growth rate in the tourist industry since 1978.
 The actual loss in expenditures in 1988 relative to 1987 was $900 million.

                While it is difficult to be precise, it seems evident based on several different studies that
 losses  in total expenditures in 1988 amounted to several billion dollars in New York and New Jersey.  Losses
 in jobs (full and part-time) could be measured in the tens of thousands.

                In an effort to reduce the impact of floatables,  the U.S. Environmental Protection Agency
 (EPA) in  cooperation with the U.S. Army Corps of Engineers (COE), the U.S. Coast Guard, the states of
 New York and New Jersey, and New York City implemented a short-term floatables action plan. The plan
 supplements the U.S. Army Corps of Engineers' program of skimming New York Harbor for debris that
 might pose a hazard to navigation.   The effort, implemented in 1989 at an additional cost of $1 million,
"Assumes no unusual events that would influence beach attendance, such as poor weather, floatable washups,
gasoline restrictions, etc.


Session 3

Table 1
rnificant Floatables Washups at Ocean Beaches
and New Jersey, 1989 through 1992
•o >*








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                                                                                           Session 3
 consists of reducing the mesh size of the existing nets in order to pick up much of the floating debris.
 Skimming operations and surveillance also occurs much more frequently than earlier.
                Since 1988, there have been relatively few beach closures along the ocean beaches of New
 York and New Jersey (Table 1).  In fact, significant washups have occurred infrequently (Table 2). The
 decreased frequency of these events can be attributed to the fact that meteorological conditions that
 influence the quantity and distribution of floatable material have not favored landfall in either New York or
 New Jersey.10"13  The short-term floatable action plan has also aided in capturing much of the material that
 did escape to marine waters. Also, beach operators have been cleaning the beaches early and more often
 reducing the likelihood of creating a media event. Covering garbage barges and policing marine transfer
 stations also reduced the floatable load in Hudson-Raritan Estuary.

                People have returned to area beaches as is evident from 1988 and 1991 attendance figures
 from Jones Beach State Park on Long Island (Table 2).  The changes in the monthly attendance figures are
 much more  dramatic if they are normalized to reflect that June 1988 and June 1991 had four and five
 weekends respectively and July 1988 and July 1991 had five and four weekends respectively.  A good weekday
 attendance figure at the Park is 50,000 and a good weekend day may have an attendance of between 150,000
 and 180,000.

                                             Table 2

                     Attendance Comparison for Jones Beach State Park
                                          1988 and 1991
1988 Attendance
1991 Attendance
NOTE: At Jones Beach, medical debris began washing ashore in significant quantities on Wednesday, July 6,
1988. The impact on attendance was felt immediately: with nearly identical weather on July 6 & 7,
attendance on the 6th exceeded 50,000 while on the following day attendance was less than half that figure.
Beach attendance was restored to pre-washup patterns by the summer of 1991.

(Joseph Lescinski, Superintendent. Jones Beach State Park, personal communication)

4 weekends in June 1988
5 weekends in June 1991

               Despite the lack of a major floatable event over the last four summers, it is important to
remember that floatable wastes are still washing ashore. The primary source of floatable waste in the New
York/New Jersey metropolitan region, CSOs, still exists.  Until there is a solution to the CSO problem,
floatables will continue to contaminate the harbor and adjacent coastal waters and beaches.

                                                                                          Session 3

               New York City's long-term goal lo contain and treat CSO discharges at a cost in excess of
$1 billion over the next decade is a prudent investment. Other municipalities should do likewise. Capturing
this debris prior to its being dispersed in the marine environment is far more effective and efficient than
slamming waterways and cleaning beaches.  A key element in capturing debris before it gets into the marine
environment is that of reducing the quantity that gets into the CSO systems in die first place.  Continued
education of the public as to how to properly dispose of potential floatable debris is important and is being
actively pursued. Equally important is the need to keep coastal city streets clean and free of potential
floatable debris.  Unfortunately,  street cleaning is often one of the first programs cut in a budget crisis.

4.0            REFERENCES

1.             Parran, T. Jr., R. Moses, TA. McWhinney and W.H. Runcie. Report on the Governor's
               Special Long  Island Sanitary Commission. Nassau County. State of New York, Albany, NY.
               279pp. 1931.

2.             Swanson, R. L., H.M. Stanford, aad J.S. O'Connor.  "June 1976 Pollution of Long Island
               Ocean Beaches." Journal of the Environmental Engineering Division. ASCE.  Proc. Paper
               14238, 194, No.  EE6, 1067-1085. December 1978.

3.             Swanson, R.L., T.M. Bell, J. Kahii, and J. Olha. "Use Impairments and Ecosystem Impacts
               of the New York Bight," Chemistiry and Ecology.  Vol. 5, pp. 99-127.  1971.

4.             Marine Sciences Research Center. Floatables Management Plan.  Coast Institute. Waste
               Management  Institute. SUNY Stony Brook. Stony Brook, New York, 40 pp.  1989.

5.             Swanson, R.L. and R.L. Zimmer. "Meteorological Conditions Leading to the 1987 and 1988
               Washups of Floatable Wastes on New York and New Jersey Beaches and Comparison of
               These Conditions With the Historical Record," Estuarine. Coastal and Shelf Science.
               Vol. 30, pp. 59-78.  1990.

6.             Green, W.  "Manifest Waste: Will the Regulation of 'Medical Waste' Disposal Promote the
               Public Health and Protect the Public Shores?"  Proceedings of the Conference on Floatable
               Wastes in the Ocean:  Social Economic, and Public Health Implications.  SUNY Stony
               Brook. March 21-22, 1989.

7.             Bell, T. W., J.R. Schubel, and R.L. Swanson, eds. "Floatable Wastes and the Region's
               Beaches: Answers to Some Common Questions," Marine Sciences Research  Center. Special
               Report 85. SUNY—Stony Brook, Stony Brook, NY.  114 pp.  1989.

8.             R.L. Associates. "The Economic Impact of Visitors to the New Jersey Shore the Summer of
               1988," Princeton, New Jersey.  1988.

9.             Fey, G. "Impact of Environmental Issues on Tourism," Proceedings of the Conference on
               Floatable Wastes in the Ocean: Social Economic, and Public Health Implications. SUNY
               Stony Brook.  March 21-22, 1989.

10.             Swanson, R.L. and A. Valle-Levinson. "Meteorological Conditions that Kept Long Island
               and New Jersey Beaches Free of IFloatables During the Summer of 1989," J. Environ. Svst.
               Vol. 20, No. 1, pp. 53-59. 1990.

11.             Swanson, R.L. and A. Valle-Levinson. "Assessment  of August 1990 Meteorological
               Conditions as They Relate to Floatables," Unpublished report. Waste Management
               Institute, Marine Sciences Research Center.  SUNY Stony Brook. Stony Brook, NY. 1990.

                                                                                         Session 3
12.             Swanson, R.L. and A. Valle-Levinson. "Assessment of June, July and August 1991
               Meteorological Conditions as They Relate to Floatables," Unpublished report.  Waste
               Management Institute, Marine Sciences Research Center.  SUNY Stony Brook. Stony
               Brook, NY.  1991.

13.             Swanson, R.L. and A. Valle-Levinson.  "Preliminary Assessment of August 1992
               Meteorological Conditions as They Relate to Floatables," Unpublished report.  Waste
               Management Institute, Marine Sciences Research Center.  SUNY Stony Brook. Stony
               Brook, NY.  1992.

                Tuesday,  October 20, 1992
                                                           Session 4
              Session 4:  Commercial Fisheries
                    SESSION SUMMARY
MODERATOR:  Tudor T. Davies
Carlos Fetteroff— Paper Unavailable

Richard E. Marks—Clean Water:  The Seafood Connection

Andrew A. Rosenberg— U. S. Living Marine Resources: Current Status
and Habitat Related Issues

Ivar Strand—The Contribution of Clean Water to Commercial Fisheries

                                                                                             Session 4
                          Clean  Water: The Seafood Connection

                                            Richard Marks
                                 Government Relations Representative
                                    National Fisheries Institute, Inc.

                People depend on the living resources of the oceans for a basic human need—food.  For
 example, 90 million metric tons of fish and shellfish are being harvested annually on a global scale; 60% of
 the world's people receive more than 40% of their annual protein from fish; U.S. consumers pay in excess of
 $26 billion for fish and fish products each year.  Regardless of the numbers, it suffices to say products from
 the sea constitute significant economic benefit, but more important is the benefit as food.  People have a
 need to eat.  Fish harvest, as opposed to production of animals or crops, does not contribute to water or air
 pollution. Therefore, sustaining food from the sea is an important goal, and a. healthy environment is a
 necessity. Chemical contamination and eutrophication threaten the productivity and usability of the
 resources.  Inconsistent standards and risk assessments do nothing to focus our research needs. Unregulated
 point discharge and nonpoint additions are jeopardizing our coastal zones and inland lakes. A healthy,
 productive ocean environment is essential not only for the world's fishing industries, but for society as a
 whole.  Because the oceans are shared among many nations, efforts to protect marine ecosystems require
 concerted international attention.

                Aquatic animals supply the world with 90 million tons of protein annually. In the U.S.,
 more than $26 billion worth of fish and seafood are coiisumed each year.  Clean water is the connection to
 this wholesome and abundant supply of seafood. However, this supply of food is increasingly threatened by
 the contamination of rivers, lakes, and vital coastal are;is.  Polluted water has devastating affects on our
 resources and our industry in three areas:  (1) destruction of habitat and productivity; (2) subsequent loss of
 utilization; and (3) weakened consumer confidence. Additionally, pollution has no geographical boundary. It
 is a global problem which requires a concerted international effort.  More effective water pollution control
 measures are needed to prevent further degradation of our resources, our food supply, and to reaffirm
 consumer confidence.


                In recent years, overfishing has been implicated  as the major cause for most fishery
 population declines.  Ironically, excessive harvest, which is controllable, may be the least of our fishery
 problems. Anthropogenic factors such as destruction of coastal wetlands and pollution may prove to be
 among the most difficult challenges.

                Maintaining healthy aquatic ecosystems entails more than controls and preventing pollution.
A great many of our fishes and invertebrates spawn or utilize coastal areas as nurseries in the early, critical
 stages of life. For example, nearly 87% of the value and 82% by weight of U.S. finfish landings are species
 whose 'life history depends all or in part on near-coastal habitat.2  Landings of estuarine-dependent species
 may run as high as 98% in the south Atlantic region alone.3  To maintain sustainable fisheries we must
 minimize disturbance to productive habitat.4

                Collectively, we have  not been successful.  The U.S. has already lost an estimated 50% of its
 coastal wetlands since the 1700s.2  Specific regions have: suffered  coastal marsh and seagrass meadow losses
 equaling 90% or greater of their original coverage.3

                                                                                             Session 4
                Besides habitat loss/destruction, toxic and pathogen contamination and eutrophication are
 identified as other areas of concern.2-4

                In 1991, the EPA reported that "Water quality impairment remains one of the most
 important environmental problems facing the U.S. In coastal areas, impaired water quality is evidenced in
 prohibitions on harvesting shellfish, beach closures, and biological productivity in coastal habitats (EPA,
 1991)." Indeed, current EPA estimates indicate that for the 75% of estuarine areas assessed, 10% are
 threatened and 35% are impaired.5

                In fact, back as early as the latter part of the 19th century, fishery resource surveys indicated
 that by the time of the Civil War, pollution had an impact on living marine resources.  The escape of
 petroleum products reportedly affected the abundance  and distribution of oysters, other shellfish, and finfish.6
 Additionally, there  is evidence that by the end of the first quarter of the 20th century, shellfish and finfish
 were already affected by the release of petroleum products to the waters of lower New York Harbor.6

 2.0             LOSS OF PRODUCTIVITY

                Oceans cover approximately 71% of the earth's surface. A mere 7% of this total is
 considered coastal water and supports  a large portion of all fishing activity.7  In  1991, nearly 50% of U.S.
 commercial finfish and shellfish landings (by weight and value) were harvested within 3 miles of the
 shoreline.8  Indeed, coastal habitats are among the most productive on the planet.

                The correlation between water quality and productivity  can be striking. For example, tens
 of thousands of Atlantic salmon were annually harvested from the Penobscot River until 80 years ago.  By
 1957, pollution had virtually eliminated the run.  Cleanup was initiated in 1960, and by 1982, 914 fish were
 caught in the river.4

                We can see evidence for a loss of productivity in a coastal species such as striped bass.
 Anadromous species spend an important and large part of their life history in coastal areas which  are most
 heavily impacted by poor water quality. In 1973, harvest levels reached 14.7 million pounds. By 1983, this
 had dropped to 1.7 million pounds.  Currently, a successful management  plan has helped to initiate stock
 improvement, but with a lack of clean water,  it remains questionable how far we can go.

                Offshore fishery stocks of the mid-Atlantic region also depend  on coastal habitat
 productivity. In addition to functioning as a nursery,  coastal habitat provides piscivorous species with a
 forage base  through an abbreviated foodchain involving plankton and menhaden, a primary forager on plant
 detritus and phytoplankton.  These piscivorous species  are then available to commercial and recreational
 anglers (Lewis and  Peters,  1984).

                Recently, poor water quality through excess nutrient input has been implicated in the loss of
 productivity and other serious concerns. Nutrients may stimulate toxic algal blooms which can  kill fish
 outright, lead to hypoxia and eventual death, and shade marine grasses which may ultimately impact the
 recruitment  of coastal-dependent species.4 Several situations have resulted in public health concerns over
 seafood consumption.

                Since 1987, there has been increased incidence of toxic  algal blooms.  In  1987  and 1988, a
red tide, previously thought endemic to Florida, spread to North Carolina releasing a brevetoxin and shutting
down shellfishing, resulting in a loss of $25 million. Also in 1987, in Prince Edward Island, Canada, three
people died  and more than 100 others  got sick from eating mussels contaminated with domoic acid, a
naturally occurring toxin causing amnesic shellfish poisoning.  In fall 1991, pelicans eating anchovies offshore
in California were found to be dying from domoic acid poisoning.  Shellfish and crab fisheries were shut
down from California to  Washington due to high levels of domoic acid.  Recently, the  potentially lethal
paralytic shellfish poison, saxitoxin, was found for the first  time in the guts of dungeness crab from Alaska.9

                                                                                            Session 4

                In 1988, eutrophication was also determined to be initially responsible for the hypoxic
conditions which resulted in the death of large numbers of flatfish in the Raritan River, New Jersey. A
buildup of organic matter generated by the bloom created the hypoxic conditions.2

                In North Carolina during 1991, documented fish mortality due to toxic dinoflagellate blooms
killed in excess of 1.5 billion menhaden, flounder, and blue crabs (Howard Glasgow, NC State Botany Dept.,
personal communication). In the Chesapeake Bay, loss of native sea grasses and subsequent reductions in
juvenile fish and shellfish populations may be tied to eutrification.  Oyster populations have declined 96%
from levels 100 years ago. Speculation also exists for the relationship between brown tide and the crash of
the scallop fishery  hi the Peconic Bay system off Long Island, New York.

                Some experts point to increased nutrient load as the culprit but the cause may be multi-
faceted. We do not really know how biotoxins and chemical toxins are affecting the spawning behavior and
survival of juvenile fishes.  Now, as in the past, scientists are researching the subtle  effects of toxic
contaminants on finfish populations manifested in the decline of growth and reproduction.10

3.0             LOSS OF UTILIZATION

                Chemical contaminants can affect the  health of an organism as well as the quality of seafood
products which may risk human health. Many of our inshore waters are so called "contaminated" yet we
have little grasp of what that truly means. We don't know the source, extent of contamination, or its long-
term effects.4

                Oftentimes, fish are healthy but consumptive value is lost due to contamination.  Examples
exist from the latter part of the 19th century when some finfish could not be used for consumption because
they tasted of coal oUs resulting from the escape of petroleum products.1

                In the 1970s, mercury levels completely shut down the pelagic swordfish fishery.  The FDA
set guidelines for methylmercury at a risk-averse 0.5 ppm. Before  the FDA could adjust their contaminant
standards to a more accurate  1.0 ppm, the industry collapsed.11  Businesses  were lost as consumer demand
approached zero. Landings plummeted from 287 tons in 1970 to 35 tons in 1971. As in other cases like this,
the fish were healthy and abundant, only consumers were: scarce.  We are seeing some of the same concerns
today in tuna and sharks.

                The loss of utilization is particularly worrisome regarding molluscan shellfish which inhabit
coastal waters.  Molluscan shellfish can pass diseases associated with human sewage if not purchased from
respectable dealers working with product harvested in monitored waters.  Unfortunately, fully one-half of the
most productive shellfish growing areas may be closed for harvest 50% of the year  (Kilgen,  1991). In 1980,
the California oyster industry  suffered a loss of $631,000 due to an outbreak of paralytic shellfish poisoning.12
Here again,  shellfish may be abundant in these waters, but the utilization has been  lost to poor water quality.


                The loss of utilization  leads directly to a weakening of consumer confidence. Fritter4 stated
that "It is most probable that  all human foodstuffs are affected in some way with contaminants."  In 1992,  the
FDA reported that the vast majority of seafood in this country is safe, clean, and free of contaminants
(Commissioner David A. Kessler, FDA—addressing NFI Board of Directors, April  1992).

                Unfortunately, and for no apparent reason, seafood has become the major target. A myriad
of advisories has shaken the confidence of the consumer.  In the recent past, PCB  levels resulted in warnings
on the consumption of striped bass in New York due to contamination by metals and pesticides.  Warnings
were issued to young children and pregnant or nursing mothers. Bluefish consumption was reduced to one-
half pound fillet per week with the blood line removed. Sportfish advisories have and do exist in the Great

                                                                                            Session 4
 Lakes.  Washington state has reported tumors on the livers of flatfish foraging on contaminated soils.2  In
 1991, the state of Minnesota issued mercury warnings for shark consumption.

                Advisories create  a serious economic problem.  While consumers can still consume the
 product, the cost/benefit equation  is ruined for the industry.  The impact has a ripple effect through the
 industry, starting with the retailer and ending with the fisherman.

                The troublesome die-offs of dolphins and humpback whales off the Atlantic coast in the late
 1980's, beach closures, and rumors of hospital waste severely impacted  the seafood industry. The correlation
 between the die-offs and water quality was questionable. However, numerous companies suffered in the

                These incidents provide grist for the hysteria mill.  Special interest groups are using the
 water quality issue to stir public fright.  We hear cries that "fish are the sponges of their environment", and
 ridiculous claims such as "salmonella originating from salmon." The majority of these claims stem from the
 water quality issue, and negatively impact the industry regardless of their accuracy.

                Should concerns about seafood contamination be raised? In Japan, people eat many tunes
 more fish than we do here in the U.S. Yet, they do not suffer from increased chronic illnesses. In fact, they
 live longer.

                Another important point to consider is, compared to the production of other  proteins,
 seafood production results in less impact to the environment.  A lack of pesticides, fertilizers,  runoff, and
 greenhouse gases makes seafood production that much  more desirable. It would be difficult to replace the
 annually harvested 90 million metric tons of seafood with land-based protein production.  The environmental
 impact would not be sustainable.

 5.0             A GLOBAL  ISSUE

                Living marine resources are shared among the nations of the world. All nations should be
 encouraged to develop and maintain standardized, sustainable practices.  For example, in 1988 the National
 Academy of Sciences predicted a potential 2-9° F increase in global temperature as  a result of  global
 emissions. This may impact food chains of the world's oceans via oceanographic changes (NAS, 1988).
 Although speculative, it supports the need for international agreements. The U.S. must assume the
 leadership role in these areas.

                Advisories also impact international commerce and the 30 to 40% of our total harvest which
 is exported.  PCB warnings for Great Lakes salmon were heard in Switzerland, a major importer of U.S.
 salmon products. The scare resulted hi the Swiss refusal of any U.S. salmon, including wholesome West
 Coast-harvested  species.

 6.0             AREAS OF CONCERN

                The reauthorization of the Clean Water Act provides  Congress with an the opportunity to
 do something about the problems facing the U.S. and our food supply from contaminated water.  There have
 been some improvements, particularly in the area of point source controls, but as I have shown, substantial
 problems still exist. Efforts must be made in the following areas if we  are to maintain a safe,  healthy supply
 of seafood.

                Wetlands—Section 404 of the CWA is perhaps the most contentious.  How can we
satisfactorily care for our resources when the current Administration is admittedly fuzzy about what
constitutes a wetland?  Continuing  to vacillate will not save our most productive areas.14 The  key to the
development of sound wetland legislation is not to reinvent the definition but rather to  utilize  the existing
body of knowledge to encompass wetland protection and economic growth. Developing region-sensitive


                                                                                            Session 4

classification, streamlining the regulatory process, and addressing private ownership are important
components. According to Copeland,15 Section 404 issues cannot be permitted to overshadow other sections
of the act.

                Point Source—Positive steps have been taken under Section 403(c) to control discharge from
point sources. The National Pollutant Discharge Elimination System (NPDES) requirement that all point
discharges must  not "unreasonably degrade the marine environment" must be maintained and strengthened.

                The pretreatment of toxic material released through industrial discharge to municipal sewers
remains a serious enforcement problem. The EPA estimates that double the volume of toxic wastewater is
released to treatment plants than is directly discharged to surface water.16  Ironically, the Water Quality Act
of 1987 dramatically changed  how the nation will finance construction and improvements of state wastewater
treatment plants to conform with requirements of the act. The amendments of 1987 replaced federal funding
with a State Revolving Fund (SRF) by which states will generate then- own loan programs via federal seed
monies. According to a recent GAO report (Hembra^ 1992), SRFs are not sufficient to handle the problem
of keeping treatment plants at an efficient level. Sines 1972, Congress has provided $57 billion in wastewater
construction assistance to achieve requirements for secondary treatment of municipal sewage. The EPA and
the states estimate needs totalling an additional $83 billion.16

                Unregulated  combined sewer overflows  (CSOs) are cause for serious concern.  During
periods of high precipitation, wastewater treatment plants that cannot  handle  the increased volume discharge
effluent directly to surface water. Under the CWA, CSOs are defined  as point sources yet they require less
permitting restrictions compared to other point sources.16

                Nonpoint Source—The EPA suggests! that nonpoint pollution is responsible for 60%  of water
quality problems and that failure to curtail that will prevent  the nation from reaching its water quality
objectives.15  Section 319 of the CWA is critical to improving water  quality. Eutrification is a direct result  of
nonpoint input.  The Chesapeake Bay receives 38% of its nitrogen and 53% of its phosphorous via landbased
nonpoint sources.  Atmospheric deposition accounts for 30% of the nutrient input to the Bay.2

                Copeland16 reports that budget constraints have frustrated the  implementation of new
programs and impeded state response.  The FY 1992 funding for grants under Section 319 allocated 50% less
monies to states  for nonpoint  programs than in FY 1991.

                Contaminants—Toxins may affect marine organisms in ways science has yet to  determine.
Efforts have already started to shift toward less conventional pollutants and pathways, to persistent toxic
substances and atmospheric deposition.10  It is critical to  push for zero-tolerance or "virtual elimination" of
these substances. At this point, we are not sure what the potential  impacts are of these substances on our
environment or food supply.

                Accordingly,  we need to develop valid indicators or direct detection of contaminants in our
food supply and  to help develop microbial standards 
                                                                                          Session 4
existence. We need to maintain an organized, long-term process that will protect our marine resources.
Without viable habitat, there are no fish. Without fish, there is no seafood business.

8.0             REFERENCES

1.              Congressional Quarterly Researcher.  Vol. 3, No. 32, pp. 737-760.  August 28, 1992.

2.              U.S. Environmental Protection Agency. Marine and Estuarine Protection.  Office of Water.
                503/9-89-002, 42 p. February 1989.

3.              Chambers, J.R.  "U.S. Coastal Habitat Degradation and Fishery Declines," Presentation at
                the Opening Session of the 57th North American Wildlife and Natural Resources
                Conference, Charlotte, North Carolina. March 27-April 1, 1992.

4.              Fritter, R.  Wildlife For Man.  William Collins Sons and Company, Ltd., London.
                pp. 100-140.  1986.

5.              U.S. Environmental Protection Agency. Coastal Nonpoint Control Program.  Office of
                Water.  43 p. 1991.

6.              Pearce, J.B. and L. Despres-Patanjo.  "A Review of Monitoring Strategies and Assessments
                of Estuarine Pollution." Aquatic Toxicology. Vol. 11, pp. 323-343.  1988.

7.              McConnaughey,  B.H.  Introduction to Marine Biology. The C.V. Mosby Co., MO. p.447.

8.              U.S. Department of Commerce/National Marine Fisheries Service. Fisheries of the United
                States 1991.  Current Fishery Statistics No.  9100. 113 p.  1992.

9.              Culotta, E.  "Red Menace in the World's Oceans," Science.  Vol. 257. pp. 1476-1477.  1992.

10.             Drynan, W.R. "Pollutant Inputs to the Great Lakes," Marine Pollution Papers:  Oceans
                1982. International Joint Commission on the Great Lakes, pp. 1168-1172.  1982.

11.             Officer, C.B. and J.H. Ryther.  "Swordfish and Mercury: A Case History."  Oceanus.  Vol.24,
                pp. 34-42.  1981.

12.             Leonard, D.L. and EA. Slaughter.  The Quality of Shellfish Growing Waters on the West
                Coast of the  United States. U.S. Department of Commerce. 51 p. 1990.

13.             National Academy of Sciences. Report on  Global Environmental Change.  National
                Academy Press.  10 p.  1988.

14.             Lemonick, M.D.  "War Over the Wetlands," Time,  p.  53. August  26, 1991.

15.             Copeland, C. Water Quality: Implementing the Clean Water Act. Environment and
                Natural Resource Policy Division. Congressional Research Service. 14 p.  1992.

16.             Copeland, C. Clean Water Act Reauthorization.  Environment and Natural Resource Policy
                Division. Congressional Research Service.  16 p.  1992.

17.             Hembra, R.L. GAP Study on Water Pollution. Subcommittee on Investigations and
                Oversight. Committee  on Public Works and Transportation. U.S. House of Representatives.
                GAO/T-RCED-92-84.  10 p.  1992.


                                                                                         Session 4
18.             Strand, I.E., N.E. Bockstael, and E.K. Lavan. Food From the Sea and Environmental
               Policy. Report to the World Oceans Fund, Arlington, VA.  40 p. 1991.

19.             Pearce, J.B.  "Collective Effects of Development on the Marine Environment."
               Oceanologica Acta. Vol. SPN11. pp. 287-298.  1991.

                                                                                            Session 4
                               U.S. Living Marine Resources:
                        Current Status and Habitat Related Issues
                                        Andrew A. Rosenberg
                                           Senior Scientist
                                   National Marine Fisheries Service
                The long-term potential yield of the living marine resources of the United States is 9.5
million metric tons worth nearly $7 billion in first-sale value.  Recent annual yields have amounted to about
69% of this potential (6.6 million MT) worth around $5 billion. Of 200 fish or shellfish stocks in federal
waters, 57 are over utilized; that is, there is more fishing effort operating than is needed to harvest the
potential yield. In some of these fisheries, the stocks are depleted and yielding well below their potential,
while others are economically inefficient or at high risk of depletion.  Of the remaining stocks, 55 are fully
utilized and 28 are under utilized. The status of 60 stocks can not be determined.

                In nearshore state waters, of 36 stocks whose fisheries have been evaluated, 10 are over
utilized, six are fully utilized, and 20 are of unknown status.  Recent yields from nearshore resources are over
200,000 MT. The commercial part of this yield is worth over $375 million, and the recreational value is likely
to be far higher.

                Most of the nearshore resources and several important stocks in federal waters are impacted
by water quality or habitat changes.  In some cases, this may reduce the long-term potential yield from the
fishery and adversely affect the important recreational value of the resource. In other cases, poor habitat for
the resource base increases industry costs, reduces marketability, or can destabilize the fishery.  Management
of our living marine resources  is improving in recent years, to take advantage of their potential economic
value to the nation.  This could be undermined by adverse impacts on fish and shellfish habitats  through
water quality or  other pollution-related problems, particularly in nearshore regions.

1.0             INTRODUCTION

                The National  Marine Fisheries Service  (NMFS),  part of the National Oceanic and
Atmospheric Administration in the U.S. Department of  Commerce, published the first annual report on the
living marine resources of the United States in 1991. The second annual report will appear before the end of
1992. These reports, entitled Our Living Oceans, describe the marine resources of the nation and
categorizes them according to their current state of utilization.

                In this paper,  I summarize the information in Our Living Oceans concerning the status of
U.S. living marine resources.  This information is then considered hi the light of environmental effects on
fisheries in a general sense.  The impact of habitat and water quality on fish productivity.

2.0             CURRENT STATUS

                There are 236 stocks of fish and shellfish described hi the 1992 edition of Our Living
Oceans.  Using the available scientific information and the best judgement of NMFS scientists the report lists
the long-term potential yield, recent average yield,  and status of utilization for each stock.

                The long-term potential yield is the amount of fish or shellfish, in weight, that can be
harvested sustainably from the resource under good management. If fishing mortality (i.e., the harvest rate)


                                                                                              Session 4

was carefully controlled and adjusted to the productivity of the resource, then the long-term potential yield
would be, on average, the most that could be taken from the stock without depleting it.

                The long-term potential yield from U .S. living marine resources is estimated to be about 9.5
million metric tons.  More than 40% of this potential is in the waters of Alaska (Figure la), while the other
regions of the country (Coastal Pacific, Oceanic Pacific, the Southeast and the Northeast) each contribute
between 10 and 20% of the total.  Bottom  dwelling fish make up 48% and pelagic species of fish and give
43% of the total long-term potential yield.  The majority of the potential yield in weight results from three
fisheries; Alaska groundfish such as walleye pollock, Pacific tunas, and Atlantic and Gulf Coast menhaden
and butterfish.  However, in value of the resources, noi: including recreational value, shellfish such as shrimp,
scallops, and lobsters dominate. Regionally, the southeast, with its large shrimp fisheries, has the most
valuable  commercial resources (Figure Ib), closely followed the oceanic Pacific where valuable tuna stocks
dominate the commercial landings.

                The recent average yield is what is actually being harvested from  each stock currently.  If it
is much more than the long-term potential, such high catches are unlikely to  be sustainable and the stock will
be depleted. If recent yields are much lower than the long-term potential, the stock is not now being heavily
exploited or it is already depleted to a low level and needs to rebuild before higher sustainable yields will be
available. The  1992 edition of Our Living Oceans also gives the current stock level, relative to the level that
would support the long-term potential yield, to clarify stock status.

                The status of utilization is, in the best judgement of NMFS scientists an indicator of level of
use of the fishery resource.  Stocks are classified as under utilized, fully utilized, over utilized,  or unknown.
Details are  given in Our Living Oceans.  Briefly, an over-utilized resource is being harvested faster or more
heavily than is sustainable in the long term. This usually results from the application of too much fishing
effort than needed to take the long-term potential catch. An over-utilized resource is often being depleted
and yielding less than it could under a reduced rate of harvesting. In some cases, while the resource is still
apparently producing good harvests, these catches are taken very inefficiently, using far more effort than
required.  Improved management, of whatever form, should increase yield or efficiency or both while
protecting the resource from depletion.

                A hilly utilized resource is being harvested at near the long-term  potential yield level. In
some cases, recent yields are less than the  long-term potential level because of cautious management in the
face of uncertainties about the status of the resource or for socio-economic reasons. An under-utilized
fishery resource is not currently being fished heavily enough to obtain the best  long-term yield.  This  is
usually due to poor market conditions for the products of a particular fishery or reduced availability and high
harvesting costs for a species.

                Recent yields from all marine fisheries have been about 69% of the nation's long-term
potential yield.  Some stocks have been depleted and are yielding  less than they could if rebuilt.  Of the  stocks
where assessments have been possible (164), the abundance of 42%  were below the level needed to support
the long-term potential yield.  Other stocks are under utilized for the reasons given above. Of those
assessed, the abundance of 17% were considered to be  above the long-term potential yield level. These
stocks could be  fished down in the  short term and the,a support better long-term yields in future.  In  many
cases, improved management based on better scientific  information is needed to obtain a greater portion of
the potential fishery yield.

                Nearly 30%, 67 U.S. fish and shellfish stocks, are over utilized (Figure 2a).  An even greater
proportion have an unknown potential and so their status of utilization is unknown.  Only about a quarter
are now known  to be fully utilized. This indicates the need for improved management if the nation is to
obtain the best yield from its resources.

                Considering resource status by region (Figure 2b), most of the Alaska stocks are fully
utilized, while the majority of the stocks in the Northeast are over utilized.  In  the Southeast and the Oceanic


                                                                                            Session 4

Pacific, where there are many species of reef fishes and pelagics, the status of the majority of the resources is
unknown, but over utilization is clearly a problem.  The numbers indicate that there is room for
improvement in all regions of the country.


                The degradation of habitat and water quality may result in currently productive marine
fisheries  yielding less in the future. The amount of yield harvestable from a living resource must just balance
production from growth and reproduction, discounted for natural (nourishing) sources of mortality, in order
for that yield to be sustainable (i.e., not deplete the stock in the long term).  Poor habitat can directly result
in higher nourishing mortality of fish or shellfish, thereby reducing the portion of the stock available for
sustainable harvest. More often, and at potentially much lower levels of contamination or other habitat
degradation, the productivity of the stock can be reduced. Lower growth and reproductive rates lead directly
to a lower sustainable yield. This is schematically depicted in Figure 3, where recruitment, the number of
new born coming into the stock, is shown as a function of habitat and spawning stock size. As habitat
deteriorates, the production of new fish or shellfish per adult decreases. This means less can be harvested
while still leaving enough to maintain the resource base.  If the habitat  for a currently productive fishery
degrades, the stock may not be able to withstand the pressure  of fishing even if this harvesting effort remains
unchanged.  Stocks now listed as fully utilized could become over utilized in this manner.

                Habitat and water quality changes may also impede the recovery of the many stocks
currently below the abundance level which would support long-term potential yield.  Again, changes in
resource productivity are the underlying cause of this problem.  For the 164 stocks which are sufficiently
well known for a determination to be made, 42% are below the long-term potential yield abundance level.
This includes many of the nearshore stocks, which are often the most affected by poor habitat. If these
resource bases are to rebuild through improved management controls, then the quality of their habitat may
play an important role.

4.0             EXAMPLES

                Pacific Salmon

                The fishery for salmon on the west coast of the United States is an important symbol for
this region of the country. Around 11 million fish are  caught each year by commercial and recreational
fishermen with a direct (first sale) worth of over $150 million.   This does not include the large indirect
monetary and nonmonetary value of this resource.  Stocks have declined in a number of rivers, often due to
the loss of suitable spawning habitat or access to spawning sites. Chinook salmon in the Sacramento river
are now  listed as a threatened  species under the Endangered Species Act. Sockeye salmon in the Snake
River are listed as endangered. Coho salmon in the lower Columbia River are extinct. The productivity of
other stocks, such as pink salmon or chum salmon, may be at risk of reduction if spawning habitat is not

               Atlantic Anadromous Fish

               Atlantic salmon, striped bass, shad, and river herring are  not major fisheries in terms of the
amount of landings obtained (about 4000 MT) from the stocks, but they are important as recreational
fisheries  and as indices of environmental conditions in rivers of the Northeast.  Spawning habitat for all
species is critically dependent on water quality. Salmon young can spend up to 3 years in freshwater before
migrating to sea.  Striped bass  larvae  and juveniles utilize fresh and brackish water habitats during their first
year.  There is evidence for both species that water quality may have major impacts on reproductive success.

                                                                                            Session 4
                Southeast Shellfish
                The shellfish resources of the Southeastern U.S Atlantic coast and Gulf of Mexico are the
most valuable commercial fisheries resource in the nation, worth some $450 million annually. Shrimp
dominate the landings and the value, but lobster and (Tab also contribute.  These species are dependent on
nearshore habitats during their early life.  Shrimp use marshes and estuaries  as nursery grounds. The loss of
these habitats, due to changing water flow such as through the Everglades to Florida Bay or filling and
pollution, may have serious consequences for the Gull shrimp fisheries in particular.

                Nearshore Fisheries

                Recent documented yields from nearshore fisheries have been about 225,000 MT worth
nearly $375 million commercially. But, many of the bindings of these fisheries for crab, oysters, clams, and
scallops go unrecorded.

                These stocks are the most vulnerable to water quality and habitat problems by their very
nature, near to  the shore.  A large number of shellfish beds have been closed due to contamination.  Many
species utilize coastal wetlands as nursery grounds, but half of these wetlands have disappeared.  A majority
of these stocks  are over utilized  and at low abundance levels relative to the level that would give the best
potential yield.  In order to rebuild the stocks and maintain those fully utilized, their habitat needs to be
maintained or improved.

5.0             CONCLUSIONS

                The marine fisheries of the U.S. are a very valuable resource, but they could be even more
valuable. If resource management is improved to bring  us closer to obtaining the long-term potential yield
from more of our resources, the  nation may realize additional benefits of $1  to $2 billion annually in first-
sale  value of the landings.  However, these benefits are multiplied in terms of employment and indirect
effects for the nation. According to recent analyses of the economic impact of commercial fishing2 each $1
million in harvester revenue has a total (direct, indirect, and induced) impact of 14:1 on the gross national
product and generates nearly 350 person-years of employment. The recovery of depleted stocks and the
maintenance of currently productive stocks is an important goal for the National Marine Fisheries Service
given these large economic impacts.

                The attainment  of this goal of obtaining the best long-term potential yield from U.S.
resources could be undermined by loss of habitat and poor water quality. This will not just be from the
dramatic effects of closed areas and fish kills, but the more subtle impacts  on productivity of our living
marine resources.

6.0             REFERENCES
                NMFS.  Our Living Oceans:  The First Annual Report on the Status of U.S. Living Marine
                Resources.  NOAA Tech. Memo. NMFS-F/SPO-1. pp. 123.  1991.

                Kearney, A. T.  Economic Activity Associated with Fishery Products in the United States.
                Report to National Marine Fisheries Service under SK Grant No. NA88AA-H-SK001.  1989.

                                                                                           Session 4
              The Contribution of Clean Water to  Commercial Fisheries
                                            Ivar E. Strand
                          Department of Agricultural and Resource Economics
                                University of Maryland at College Park

                A primary beneficiary of improved water quality in the United States may be the
 commercial fishing industry. The vast majority of commercially harvested fish depends on estuaries at some
 stage of their life history.  Moreover, cleaner water improves consumers' actual and perceived quality of
 seafood. Generally, there is little definitive research that shows the value to the commercial fishing industry
 from improved water quality. Reasons for the research record are discussed and exceptional studies are
 noted.  However, there are many reasons why improved water quality may not translate into gains from
 commercial fishing and these are also highlighted. Particularly important is the management of fisheries and,
 without its improvement, potential gains from improved water quality may  dissipate.

 1.0             INTRODUCTION

                In reauthorizing the Clean Water Act, Congress may wish to consider the gams to the
 various sectors that are positively influenced by it. The Act is costly and a prudent manager would consider
 whether those costs are excessive in light of the benefits received".  The principal benefactors of cleaner
 water have been the users of the water—the public, the recreation industry, and the commercial fishing

                The historic 1972 amendments to the Water Quality Act have been in effect for about
 twenty years.  Dramatic changes have been made in the way that industries, municipalities, and citizens can
 use the nation's waters.  In 1988, the annual expense on water pollution abatement was estimated to be $27
 billion (constant 1982 $).'  A legitimate question might be "Have these expenditures improved the well-being
 of producers and consumers of fish?"

                A superficial look at the trends in U.S. landings gives the  impression of dramatic gams over
 the last twenty years, from annual landings of around 2.5 million metric tons (MMT) to annual landings
 around 5 MMT.  With an average price of around $800/ton, it would appear that we had a $20 billion
 increase in fishery production. This value along with contribution to consumers and the recreation industry
 would make the $27 billion cost reasonable.  Closer examination of this doubling in output, however, gives no
 credence to causality between passage of the  amendments and enhanced fishery production.

                The outward expansion of the U.S. fishery management jurisdiction in 1976 extended our
 control of fishing to 200 miles of the coast. Many previously overfished stocks were brought under U.S.
jurisdiction. The result, after years of eliminating foreign harvest, was to increase  offshore annual production
'Some argue that clean water transcends this logic and that the gains are not relevant.  Most economists do
not subscribe to  this position, although they usually admit that the benefit-cost logic is only a portion of the
information necessary for a complete policy analysis.


                                                                                            Session 4

(in the zone 3 to 200 miles from the coast) from about 0.25 MMT of harvest to about 2.6 MMT (see
Figure 1).  The inshore component of the annual landings, the resources likely to be most dependent on the
quality of the estuarine waters'", rose only from 1.27 MMT to 1.75 MMT. Moreover, the real (1982 $)
annual value of inshore production has risen only by $140,000 (see Figure 2).

               There are obviously many reason;, why these figures do not tell the entire story". After all,
there is reason to believe that there would be no commercial fishing industry if the trends in water quality of
the 1960s had  continued.  The next section contains an explanation of the chain of events that links improved
water quality with improved well-being of fish producers and consumers.  In going through the chain of
events, I draw out existing literature which demonstrates the linkage and also note the potential reasons that
the linkage is difficult to demonstrate and may not even exist in some cases.  My  experience draws mostly
from research on the Chesapeake  Bay and thus, so does much of the cited literature.

2.0            AN OVERVIEW

               To begin, consider an overview of the process that transforms legislation into gains.
Figure 3 presents a crude schematic of the events iJiat might have followed the passage of the 1972
Amendments.  In Section 1 of the diagram, restricdons (denoted by I) change the level and/or  quality of the
effluent flow.  Other factors (labeled intervening effects and designated with a *)  can change or mask the
influence of changed effluent flow. Understanding and accounting for them is critical to estimating gains.
Both physical and economic effects factors are important in this level. The second section contains the
relationship between the changed effluent flow and the stocks of fish.  By and large, this is a physical process
and my discussion of it is limited.  Finally, improved water quality and enhanced stocks are translated into
gains to fish producers and consumers.  This is primarily an economic effect and  more discussion will be
made of it.
               An important element that is often overlooked is shown by the arrow going directly from
the water quality box to the producer/consumer box  These effects arise because cleaner water represents
an actual or perceived improvement in the quality of the fish.  Willingness to pay for the fish is increased and
prices rise.  Consumers are better off because they perceive themselves as obtaining a higher quality product
and producers are better off because of the  higher prices.


               Essential  to understanding the gains from reauthorizatiori are studies which have examined
the effect of pollutants on  fish stocks. The conceptual modeling aspects of detecting changes in fish stocks
resulting from changes in pollutants are reviewed in Vaughan et al.3  Cross et. al.4 have shown effects using
simulation models. The primary issue that we are addressing, however, is the actual evidence of improved
water quality on fish stocks.

               The number of studies which show how parameters of water quality influence stocks of fish
are few.  Although I am no expert in  this area, the best and most comprehensive works to my knowledge are
by Summers, et al.3 and by Prager and MacCall.6  Summers et al. study the history of pollutants and fish
stocks in five major northeastern estuaries (Hudson River/Ruritan Bay, Potomac River, Delaware
River/Bay, Connecticut River, and Narragansett Buy) for the period  1880 to  1980, whereas Prager and
MacCall study Pacific coastal pelagics for the period 1946 to 1981.
The focus on inland waters arises from conclusions drawn by Summers et. al.4". . . obvious relationships
between historic stock abundance and gross indicators of pollutants are best seen for estuarine resident
fisheries and shell fisheries." (p. 206).

cNot the least is the fact that landings are a poor measure of fish stocks and gross dockside revenues are a
poor measure of well-being in the fishery. For a thorough discussion of appropriate measures of well-being in
a commercial fishery, see Thurman and Easley.s


              Figure 1:  U.S. Commercial Landings
                   By Water Area, 1974-1991u
                                                                                Session 4
     Thousand Motric To™
    7<  75 78  77  78  78  80  81  82838488888788869001
     Inshore (0-3 mta)
                            OfTWwre (3-200)      -*- Intanmtonal (>200)
         Figure 2:  Value of U.S. Commercial Landings
                   By Water Area, 1974-199113
     Millon $ (1982)
    • Irahora (0-3 rrUti)
                             OMwre (3-200)
                                                - International (>200)

                                                                                        Session 4
               Summers et al. found 68 significant stock-pollutant relationships.  Twenty-six of the 68 were
"trend" macropollutants without much variation from year to year and hence questionable from an omitted
variable standpoint.  However, the remaining 42 were linked with dissolved oxygen and/or dredging activity,
both of which vary greatly from year to year.  They conclude:

               "...results do indicate that the methodology does establish defensible links among stock
               histories, natural environmental variation, and macropollutant trends that permit the
               generation of hypothesis pinpointing those stocks that are most likely to be affected by
               particular variates. " (p. 206)
                   Figure  3: A  Schematic  of Improved  Welfare
                                                                SECTION 1:

                                                              ACT/CLEANER WATER

                                                                SECTION  2:

                                                          LEANER WATER/MORE FISH
                      WATER BODY QUALITY
                                                                 SECTION 3:

                                                               MORE PRODUCTION
                                                                 LOWER PRICES
                               PRODUCERS/CONSUMERS OF FISH
                                             Figure 2
               Prager and MacCall studied the effect of climate and contaminant loadings on the
reproductive success of three coastal pelagic species (northern anchovy, Pacific sardine, and chub mackerel)
on the West Coast. Their results "for Pacific sardine suggest that contaminant stress, at a time of severe
overfishing, contributed to the decline and collapse  of this stock." (p. 22).  Thus, there is reasonable evidence,
at least in the Northeast and West Coast, that the stocks of some species are negatively influenced by poor
water quality and presumably, higher water quality will enhance fish stocks/1
               If this information is essential to assessing the impending legislation, why are there so few
studies documenting the effects?  One obvious reason is the difficulty in accomplishing them. Long-time
series of contamination and of fish stock variables are necessary. Moreover, the system's "noise" and general
problem of correlation among included and omitted variables make the results of the analysis tenuous.
dAnother less comprehensive analysis shows sequential effects among nutrients, submerged aquatic
vegetation, and striped bass recruitment.7

                                                                                            Session 4
                Rather than dwell on the statistical and data limitations, let me suggest other more
 provocative reasons. Most people assume that reauthorization of the Clean Water Act will translate into
 improved water quality and enhanced fish stocks. While this is perhaps true, it is important to note that it
 may not.  Let me raise three situations in my experience that cast doubt on the assumption.

                First, water quality is a multidimensional concept. Improvement in water quality to a
 manager of a municipal wastewater treatment plant (WWTP) may mean reduced bacteria, even with greater
 chlorine concentrations in the effluent.  Whereas the reduced bacteria enhances beach use, may improve
 human health, and perhaps perceptions of the quality of fish, the increased chlorine concentrations may have
 effects on the successful spawn of marine life.  Maryland's fishing industry, for example, has been concerned
 about the lethal and sub-lethal effects of chlorine on various Bay organisms.9

                There are also reasons to believe that subsidizing abatement  processes does  not necessarily
 lead to enhanced water quality.10 The general argument is that, although the effluent per unit of output  may
 be reduced, subsidies increase the total output.  The net effect can be reduced water quality.  Success in
 controlling nitrogen concentration in the Chesapeake Bay through subsidization  of Best Management
 Practices (BMPs) has been particularly unimpressive."  Whether this is a case example awaits study but  it is
 clear that the "stick" approach of prohibiting the use of detergent phosphates has led to dramatic
 improvements in Chesapeake Bay phosphorus concentrations, whereas the  "carrot" approach has not
 improved nitrogen concentrations.

                Believe it or not, some desirable species appear to be dependent on the industrial and
 municipal effluent.  The recruitment of striped bass in the Potomac River apparently is positively related to
 sewage nutrients pumped from various WWTP along the Potomac. To quote Tsai et. al.12

                "We hypothesize further  that the improvements in sewage treatment processes since the
                early 1970s have greatly lowered sewage nutrient loading, lowered fertility in the spawning
                and nursery regions, and contributed to the recent decline of striped bass in  the Potomac
                Estuary, (p 1.)"

                While questions may remain concerning the analysis on which the conclusion was based, the
 point is that sewage does provide nutrients and, in moderation, they can be beneficial to marine organisms.
 It is the excessive release of them that causes problems.

                Thus, one cannot state with certainty that legislation which is designed to improve water
 quality and fish stocks will have the intended effect. Each  of the above cases may deserve research attention
 but the type of analysis differs greatly from an assessment of pollutants on stocks.


               Fisheries  management is another factor which cannot be ignored when examining these
 relationships.  Poor fisheries management can negate  all gains from unproved water quality and may hurt the
 commercial sector (see McConnell and Strand,13 for the conceptual basis of this argument). As illustration,
 consider a oyster bed in an area designated  as contaminated. It has been serving as a broodstock for the
 oysters in noncontaminated areas for years.  Water  quality improves,  causing the water area around it to be
 opened for oyster harvest.  Without good  management, they may be eliminated from the broodstock causing
 declines in future oyster populations. This is particularly relevant, considering that numerous U.S. fisheries
 stocks have been cited as severely overharvested and that the Magnuson Fisheries Conservation and
 Management Act is also in the process of reauthorization.

               The point is that fisheries management and water quality management are complementary
and there is potential for tremendous gains to arise from the reauthorization of the two Acts  if linkages
between the two are explored. It may require tougher fisheries management legislation to get higher water
quality standards.


                                                                                           Session 4
6.0             CONCLUSIONS

                My initial review of the evidence for gains to commercial fisheries was more alarming than
it should be.  To observe only $140,000 per year in increased value of commercial harvest after twenty years
of legislation does give one pause for reflection. However, the figure of $140,000 is meaningless for several
reasons.  Most obviously, the actions taken in the 1972 Amendments may have been necessary simply to
preserve an annual $1 billion gross receipts from commercial fishing.

                The fact that there are very few studies available which document the relationship between
pollutants and fish stocks may be more alarming. Again, however, there  several important documents that
do find statistical relationships between fish stocks/spawning success and pollutants. This research is  done
over the  period of declining water quality and is re;asonably convincing.

                The fact that only a few studies e:dst  may be a serious concern, depending on why there are
not more. Are agencies simply ignoring the problem and not devoting resources to it?  If so, perhaps more
effort should be  made. If they exist because of lack of data, we need to assess whether the data are worth
collecting, recognizing that it will likely be a long time before the analysis will be complete.

                Finally, if it is because the effects are not present, then we may need to assess our policies.
Perhaps the most important set of policies we need to consider are those associated with nonpoint pollution
from agriculture and those associated with fisheries management.  The former relate to whether scarce
funding is going  into projects with little net effect on the water quality. Best management practices must be
revealed  to have a positive effect on the nation's waters. At the same time, improvements in fisheries
management  are necessary if we are to receive  all of the benefits from the improved waters.

7.0              REFERENCES

1.               Council on Environmental Quality. Environmental Quality: 21" Annual Report.
                Washington, D.C.  1990.

2.               U.S. Environmental Protection Agency.  Progress Report of the Bavwide Nutrient
                Reduction Reevaluation.  USEPA Chesapeake Bay Program, Annapolis, Maryland.  1992.

3.               Vaughan, D.S., et. al. "Modeling Approaches for Assessing the Effects of Stress on Fish
                Populations," Contaminant Effects on Fisheries.  John Wiley and Sons, New York. 1984.

4.               Cross, FA.., D.S. Peters and W.E. Schaaf. "Implications  of Waste Disposal in Coastal
                Waters on Fish Populations," Aquatic Toxicology and Hazard Assessment: Seventh
                Symposium. ASTM  STP 854.  American Society for Testing and Materials, Philadelphia,
                pp. 383-399.  1985.

5.               Summers, J.K., et. al. "Assessment of the Relationships .Among Hydrographic Conditions,
                Macropollution Histories, and  Fish and Shellfish Stocks  in Major Northeastern Estuaries."

6.               Prager, M.H. and A.D. MacCall. "Detection of Contaminant and Climate Effects on
                Spawning Success of Three Pelagic Fish Stocks off Southern California: Northern Anchovy
                Engraulis mordax, Pacific Sardine Sardinops sagax, and  Chub Mackerel Scomber japonicus,"
                Contribution No. MIA-91/92-26 of the Miami Laboratory. Southeast Fisheries Science
                Center, mimeo. 47 pp. 1992.

                                                                                         Session 4
7.              Thurman, W.N. and J.E. Easley, Jr.  "Valuing Changes in Commercial Fishery Harvests: A
               General Equilibrium Derived Demand Analysis," Journal of Environmental Economics and
               Management. Vol. 22, pp. 226-240. 1992.

8.              Strand, I.E. and N.E. Bockstael. "Interactions Between Agriculture and Fisheries:
               Empirical Evidence and Policy Implications," Commodity and Resource Policies in
               Agricultural Systems.  Springer-Verlag, New York.  1991.

9.              Breisch, L.L., DA. Wright, and D.M. Powell.  Chlorine and the Chesapeake Bay: A Review
               of the Research Literature. University of Maryland Sea Grant Publication No. UM-SG-TS-
               84-02.  College Park, Maryland. 1984.

10.             Pearce, D.W., and R.K. Turner. Economics of Natural Resources and the Environment.
               Johns Hopkins University Press. Baltimore, Maryland. 1990.

11.             U.S. Department of Commerce. Fisheries of the United States.  1974-1991.

12.             Tsai, C.M. Wiley, and A.  Chai. "Rise and Fall of the Potomac River Striped Bass Stock: A
               Hypothesis  of the Role of Sewage," Transactions of the American Fisheries Society. 1991

13.             McConnell, K.E. and I.E. Strand.  "Benefits from Commercial Fisheries when  Demand  and
               Supply Depend on Water Quality," Journal of Environmental Economics and Management.
               Vol. 17, pp. 284-292. 1988.

14.             U.S. Department of Commerce. Fisheries of the United States.  1974-1991.

15.             NOAA Technical Memorandum NOS-OMA-31.  Rockville, Maryland.

16.             MacKiernan, G.B. Dissolved Oxygen in the Chesapeake Bay. University of Maryland Sea
               Grant Publication No. UM-SG-TS-87-03. College Park, Maryland.  1987.

                Tuesday,  October 20, 1992
                                                          Session 5
         Session 5: Export Opportunities in Water
                 Technologies and Services

                    SESSION SUMMARY

MODERATOR:  Daniel C. Esty


Liliana Morales—Paper Unavailable

William T. Lorenz—Export Opportunities in Water Technologies and

Alfred Slatin—Exporting Our Best Ideas:  How the U.S. Can Capitalize on
the Global Market for Innovative Waste Treatment Technologies

                                                                                          Session 5
             Export Opportunities in Water Technologies and Services
                                         William T. Lorenz
                                      William T. Lorenz & Co.
               It is estimated that the global market for environmental products and services exceeds $200
billion, and is growing at 7% per year.  OECD countries account for about 85% of the spending. Table 1
presents the macro spending on the environment in most of the regions of interest, and the breakdown
between public and private spending in each of these regions. The question of who pays for environmental
activities is interesting.  As a country moves from the role of being a LDC to a NIC, and then to a mature
industrial nation, the percentage of government speniling declines.  This is a move away from the society pays
concept to the fully developed polluter pays concept (hat we have in the U.S. One factor that tends to
moderate this move  is the state-owned enterprise in many of the regions that we examined. Definition
becomes critical. The expenditure may be made in t tie industrial sector, but the industry may be state-
owned. Woven into the fabric of new and proposed environmental legislation around the world is a shift to
the polluter pays concept. There are always government expenditures due to public infrastructure
requirements, but even these expenditures decline as a percentage of overall spending over time.
Privatization and contract operations are the primary reasons.  Industrial countries appear to have spent in
the range of 0.8 to 1.7% of GNP on the environmenl. In the 1970s, the U.K. followed by the U.S., devoted
the largest shares of GNP to pollution control.  But l.he  GNP share of environmental expenditures in the
U.K. declined sharply in the 1980s, and in the U.S. only stabilized  in the mid-1980s after declining for more
than five years.
                                              Table 1
Environmental Expenditures
United States
Europe and U.K.*
Pacific Rim
Australia/New Zealand
Spending ($Billions)
Percent Spending by Sector
Note: * - Includes Eastern Europe but excludes USSR
2.0             UNITED STATES
Population (1990) = 248.7 million,- GNP (1989) = $5.2 trillion

               Average annual U.S. environmental expenditures as a percentage of GNP, 1981 through
1990, were 1.4%.  Table 2 is estimated 1990-1995 environmental spending in the U.S. including capital and
O&M spending.  This table is based upon legislated driving forces, and is as good a macro picture of the
market as any that we have seen.  There has been some slowing in certain markets.  The recent relegation of

                                                                                             Session 5
 the environment to fourth place in a priorities list of the American people is a function of the recession and
 the rhetoric from the 1992 election campaign. In a slow economy, environmental spending suffers.

                                               Table 2
(billions of dollars)

Point Source
Solid Waste
20. 3
25. 5
Source: William T. Lorenz & Co. and U.S. EPA data
                Solid wastes represent a fairly stable opportunity for goods and service suppliers. Recycling
markets will grow at more than 10% through 1995.  Waste-to-energy markets will grow at less than 10%
through 1995. Spending in the U.S. for solid waste management amounts to more than $20 billion annually,
versus about  $2 billion in Canada.  There is a trend in both countries toward recycling which will increase as
disposal options become dearer. Hazardous waste cleanup costs could eventually total over $200 billion.
Only about 50 of the EPA's 1,150 priority sites have been cleaned up so far.

                The annual demand for air pollution control equipment in 1992 is projected to  be $25
million for mechanical collectors, $35 million for solvent recovery, $40 million for wet scrubbers, $160 million
for FGD,  $100 million for ESPs, $135 million for oxidation systems, and $195 million for fabric filters.
Equipment is a very small percentage of total air pollution control spending.  Acid rain legislation could lead
to $80 billion worth of scrubber systems and related expenditures.  Expenditures on  air pollution control for

                                                                                            Session 5

mobile sources totaled $12 billion in North American in 1990.  A further $27 billion was spent on stationary

                Figure 2 pictures the breakdown of environmental spending in the U.S. in 1990.  (Hazardous
waste spending is included in the solid waste category.)  Municipal wastewater treatment capital expenditures
were $2.8 billion in 1990, with four times that amount spent for O&M of existing systems.  Engineering ($240
million), equipment ($370 million), instruments ($65 million), construction ($1.7 billion), and materials ($90
million) were the components in the 1990 municipal capital expenditures.  Figure 1 presents the breakdown
of total 1990 environmental expenditures, $112.7 billion, by product or service.  Electric utility and industrial
facilities also had sizable capital spending in 1990 for wastewater treatment with $5 billion. Potable water
treatment facilities require about $5 billion annually. The government expects municipal wastewater capital
spending of $60 billion by the year 2000 in order to meet the requirements of the Clean Water  Act.  We  do
not expect that level of spending, but do anticipate that over $30 billion may be spent.

3.0             CANADA
Population (1990) = 26.5 million; GDP (1989)  = $513.6 billion

                Average annual environmental expenditures as a percentage of GNP, 1981 through 1990,
were 1.2%. The market,  not including services, totaled approximately $1.4 billion in 1990.  The market is
about $5 billion annually (see Table 3). The estimates in Table 3 include only tradable products and
services,  not non-purchased services (primarily O&M) which represent at least an equal amount annually.
We estimate the total spending is more like $10 billion.  The growth is 5 to 7%  per year. Canada, a member
of OECD, is often perceived abroad as being a leader in environmental matters. The Department of the
Environment was created in  1971 and every province has a Ministry of Environment.  The Canadian
Environmental Protection Act (CEPA) was introduced in 1988. The Government's substantive response  to
worldwide interest in sustainable development was the release  of the Green Plan in 1990.  By the year 2000,
the government plans  to have stabilized emissions of carbon dioxide and other greenhouse gases and to have
virtually eliminated toxic discharges. In the same timerrame, the Green Plan aims to reduce emissions that
cause smog in  problem areas by 40%, and solid waste by 50%. CEPA provides for better enforcement and
tougher punishment of polluters.  Environmental legislation is  also placing increasing emphasis on strong
enforcement and compliance provisions.  Individual provinces and municipalities are also directing their
attention to stricter environmental controls.  Ontario seems to be in a leading role. The management of
hazardous wastes in Canada  is the responsibility of both the Federal Government and the provinces.  The
Green Plan is  fully funded.  The government has committed $2.6 billion in new funds to federal
environmental expenditures over the next six years, adding to existing federal expenditures of $1.2 billion.
Green Plan funds will be spent as follows:

                •       Clean air, water, and land - $740 million
                •       Sustaining resources - $305 million
                •       Special spaces and species - $152 million
                •       Arctic strategy - $87 million
                •       Global environmental problems -  $500 million
                •       Environmental regulation aad information - $435 million
                •       Environmental assessment ;ind stewardship - $240 million.
                •       Emergency preparedness - S150 million

Annual environmental spending on tradable products; and services breaks down, by media or law, as follows:

                •       Air - 14%
                •       Water - 50%
                •       Solid waste - 21%
                •       Hazardous waste - 2%
                •       Conservation - 10%
                •       Other (noise, laboratory, and monitoring) - 3%


                                                                          Session 5
                   FIGURE 1
         [H Environmental Consulting
         HI Environmental Engineering
         |~~1 Construction
         [TTI Remedlation/Correctiva
         I   I Laboratexy Services
         i   1 Waste Disposal
         |=| Comptonc*

                                                 HH WATER
                                                 |    | SOLID WASTE
                                                 §• OTHER

                                                                                            Session 5
                                              Table 3
Market Segment
Federal and provincial
1990 SMillions
Source: I.S.&T. Canada, March 1991
                Municipalities are the largest potential customers. Municipal expenditures on water,
wastewater, and solid waste control, and private industrial expenditures designed to meet new regulations,
will fuel much of the increase in Canadian environmental activity. For example, the costs of complying with
new regulations controlling pulp mill effluent are estimated to be $3.5 billion. Technical capacity and cost-
effectiveness are the key buying criteria.  The Canadian environmental industry is expanding rapidly, but
there appears to be room for increased penetration of the market by foreign suppliers.  Only 40 to 50% of
the demand is filled by Canadian companies. The  balance is supplied by foreign firms, 70 to 80% of which
come from the U.S.

4.0             MEXICO
Population (1990) = 87.9 million; GDP (1989)  = $187.0 billion

                Mexico's economy grew 3.9% in L990 and 4.8% in the first half of 1991.  Between  1990 and
1995, the Mexican government plans to spend $2.5 billion to fight pollution.  The government plans to spend
at least $100 million on its pollution control program in Mexico City  alone through 1992.  Mexico City is
considered one of the most contaminated cities in the world. Spending for pollution control equipment was
$189 millon in 1987 and $248 million in 1990.  Equipment represents 10 to 15% of total environmental
expenditures in a developing or newly industrialized country when a substantial portion is imported, which is
usually the case. The  market is expected  to grow at an average rate  of 15% per year.  In 1990, the estimated
pollution control equipment market of $248 million broke down  as follows:

                •      Air - $78 million
                •      Land - $83 million
                •      Water - $87 million

                Market demand has grown due to the liberalization of trade policy, economic conditions,
and the willingness of the federal government and  the private sector  to protect the environment.  Many rivers
in Mexico are being contaminated because of effluent discharge  and  untreated residual waters. Eighty
percent of Mexico's major residual water  problem  discharges are concentrated in 20 of Mexico's  270 rivers.
The Secretariat for Urban Development and Ecology (SEDUE) is directing the installation of treatment
plants in  only the most polluted of these 20 rivers.  The government  developed a tough Ecological Law which
went into effect in 1988. This law regulates:

                •      Auto and industry air pollutants;
                •      Municipal, agricultural, and industrial wastewater;

                                                                                           Session 5
                •      Municipal and industrial toxic waste; and
                •      Noise pollution.

                The law demands significantly increased use of equipment and services to detect and reduce
pollution. One of the examples of the willingness of the government to solve the pollution problem is
SEDUE's 1990-1994 National Program to Protect the Environment presented in 1990.  The highest priority
projects will be funded.  Five watersheds have been given a high priority:

                •      Lerma-Santiago
                •      Panuco
                •      San Juan
                •      Balsas
                •      Blanco

                Specific programs designed for each one will include:

                •      Sanitation;
                       Appropriate hydraulic usage;
                       Control of wastewater discharges;
                       Construction and operation of treatment plants; and
                       Restoration of damaged surrounding areas.
                In order to preserve water resources, the systematic control of water quality will be
undertaken. Treatment of estuary and marine waters will be carried out in areas of petroleum production.
The national monitoring network capability will be increased.  Sixty percent of the products and services are
purchased by government agencies and 40% by private industry.  The federal government, however, wants
municipalities to take care of wastewater problems. The current position of U.S. suppliers looks promising
because of the quality of U.S products and services and the proximity of the two countries.  There are
domestic manufacturers and consulting firms.  The Comision Nacional del Agua is the public agency
responsible for water.

5.0             EUROPE AND THE U.K.

5.1             Overview

                The European Community (EC), with 320 million people, includes Belgium, Denmark,
France, Ireland,  Italy, Luxembourg, the Netherlands, Germany, Greece, Portugal, Spain, and the United
Kingdom.  In 1990, environmental protection spending by EC countries was over $50 billion. It is expected
that EC spending for environmental protection will increase from about  1% of GNP  in the 1980s, to 2 or 3%
of GNP in  the mid-1990s.  The combination of Western and Eastern Europe will create a bloc of 25 nations
and some 480 million people which could eventually outstrip the  economies of the U.S. and Japan. Figure 3
presents Eastern Europe populations. Marked contrasts  exist among Europe's three  regions.  Denmark,
Luxembourg, the Netherlands, and West Germany are the most progressive EC  members.  Germany, France,
and the U.K. are much like the U.S. In Southern Europe, fewer regulations have been enacted and
enforcement of these laws has been weak. This has led many European companies to relocate to the South
seeking to reduce costs. Eastern European countries have polluting industries, but lack healthy economies
and environmental laws. For the few laws that do exist, enforcement is practically nonexistent.  Norway,
Sweden, and Switzerland have the toughest laws and most advanced regulatory systems outside the EC.

52             Eastern Europe
Population  (1989) = 113 million; GNP (1989)  = $650 billion

                The bill for cleaning up Eastern  Europe will be  huge, perhaps as much as $1 trillion.
Cleanup costs for East  Germany alone could exceed $330 billion. Poland could  spend $20 billion on its


                                                                                          Session 5
                                                    Figure 3
                                         Eastern European Populations
             Bulgaria  I

        East Germany




                                     10             20            30
                                             Population (MWons)
environment over the next decade. The market in Eastern Europe, excluding the USSR, amounted to $1.6
billion in 1990 and an estimated $2.1 billion in 1991. This is expected to increase to $10 billion by the mid-
1990s.  The total Eastern European and USSR market was $4.7 billion in 1990.  The West German
government estimated that it will take up to $200 billion to bring Eastern European industry up to Western
environmental standards.  This estimate does not include the large sum that will be needed to reduce
pollution levels in soils and surface ground waters.

               The largest market sector is water pollution control, and represents 60 to 70% of the total.
Water pollution control spending should increase from $1.4 billion in L991, to over $5 billion in 1995.  Most
of the spending will be for treatment facilities. The most rapid growth, however, is in the waste management
sector, which may almost double in five years.  East Germany accounts for more than 40% of the total, but
this is expected to change over the next five years, as other makers grow more rapidly. All makers will
experience dramatic growth  by Western standards, particularly the more developed countries  of
Czechoslovakia, Hungary, and Poland.  The economic situation in the USSR is too  uncertain  to allow any
objective market forecasts, but the market was estimated to be about $3 billion in 1990, with water pollution
control representing the largest segment.

               Growth in this market will be driven by the enforcement of istringent legislation and
regulation by governmental and international agencies, by privatization programs in industry, by the need for
clean technology, and by international aid programs. The immediate priority will be reducing air pollution,
which is also  affecting Western Europe.  Next v/ill come cleanups of contaminated water and soil.  However,
these efforts are not likely to begin until  the necessary environmental laws are enacted and new institutions
created or existing ones empowered to make certain these laws are enforced. There are several sources
from which money may become available:

               •       Loans from developed countries;

                                                                                            Session 5
                •       Loans and donations from Western European countries that are threatened by
                       pollution originating in Eastern Europe;

                •       Loans and aid from world organizations such as the World Bank and United
                       Nations; and

                •       Debt for nature swaps.

                Eastern European suppliers are concentrated in the areas of water treatment and purifying
equipment and electrostatic air filters. Very few local companies are engaged in the supply of pollution
control goods and services, and these have limited expertise and specialization. There are opportunities for
Western companies to bring capital, modern technology and experience to the market.

53             Southern Europe

                In this group of countries fall Italy, Spain, Greece, Portugal, and Yugoslavia.  All but
Yugoslavia are  members of the EC.  Italy and Spain have the fastest growing economies and probably the
worst environmental problems in the EC.  Yugoslavia, Greece, and Portugal are  like the countries of Eastern
Europe.  The main characteristics shared by these five countries are that they are environmentally
underregulated and enforcement of existing laws is lax.

53.1            Italy
Population (1990) = 57.7 million; GDP (1989)  = $803.3 billion

                In 1990, environmental protection spending by Italy was over $6 billion. Average annual
environmental expenditures as a percentage of GNP, 1981 through 1990, were 0.65%. The government
regards the hazardous waste problem as extremely serious and emergency legislation is backed up with
funding of over $500 million to set up treatment measures on a regional basis throughout the country, but
concentrated mainly in the industrial  north. Roughly half of Italy's wastewater treatment plants are not
working and cities such as Milan, Palermo, and  Florence have little or no wastewater treatment at all.  Its
adoption of West Germany's air regulations in 1990 is a sign that Italy intends to catch up to other EC
members.  The investments that will be required of the country's public and private sectors are enormous. A
billion-dollar project is underway to treat the municipal wastewater of greater Milan. The  Italian
government owns a larger share of industry than other EC governments. Therefore,  the public sector buys
the major share of environmental goods  and services. The government is using its considerable influence on
local industry to promote environmental effort.  Under billion-dollar agreements with Enimont and Fiat, the
companies will build treatment plants, install air pollution control devices, and make other  efforts to
implement Italy's environmental program to become role models. In 1990, there were over 3,000 companies
involved in the environmental services industry with revenues approaching $4 billion.

532            Spain
Population (1990) = 39.3 million; GNP (1989) = $398.7billion

                In 1990, environmental protection spending by Spain was over $2 billion.  The country will
have to spend billions of dollars to achieve an acceptable level of environmental standards, but the Olympics
in 1992 provide incentive.  Some multinational companies that operate in Spain have acknowledged the
stricter times that will come as the country moves toward EC standards.  These companies are designing
pollution control and waste management systems according to the stricter standards to which they have
grown  accustomed elsewhere.

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Western Europe
                Green parties have become a political force all over Western Europe.  The Single European
Act (SEA) has the following objectives:

                •      To preserve, protect, and improve the quality of the environment;
                •      To contribute to protecting human health; and
                •      To ensure a prudent and rational utilization of natural resources.

                The underlying principles of EC action are that preventative action should be taken, that
environmental damage should be rectified at the source, and that the polluter should pay. Environmental
protection requirements are to be a component of other EC policies.  The current (fourth) action program
runs from 1987 to 1992 and covers a wide range of activity to combat pollution and protect the environment.
In 1987, the Council of Ministers suggested priorities for action, including:

                •      The reduction at the source of pollution and nuisance in various areas;

                •      The control of chemical substances and preparation;

                •      The prevention of industrial accidents;

                •      Measures on the elevation and best use of biotechnology with regard to the

                •      The protection of Europe's natural heritage; and

                •      The encouragement of agricultural practices which  are environmentally beneficial.

                Western European countries will spend $200 billion to clean up sites within their own
borders.  The EC environmental protection market exceeded $50 billion in 1990, with 21% for air pollution
control, 48% for water quality, 27% for solid and hazardous waste  management, and the balance for noise
and other.  Table 4 presents the 1990 environmental expenditures by the large EC spenders.  Approximately
$15 billion will be spent  on a Mediterranean pollution abatement program in the 1990s, with $60 billion long
term, to be co-financed by the European Investment Bank and the  World Bank.  In the EC, national

                                              Table 4
West Germany
United Kingdom
The Netherlands
1990 SMilUons
Source: European Commission, 1991

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 programs to ensure compliance with EC directives have been announced.  For example, Spain is spending
 $1.3 billion and the U.K. $2 billion to  curb air pollution. In Denmark, the government is spending $3.2
 billion to eliminate nitrogen and phosphorous from waste water.  There is increasing emphasis on the O&M
 and modernization of existing installations rather than on new complexes.  New markets will not emerge
 alongside already existing ones.  They will replace them, at least in part. Some European markets that are
 well ahead in adopting and complying with environmental protection standards have reached a peak. They
 contributed to the environmental services industry's growth in the 1980s, but in the 1990s will undergo a
 downward trend. One such market is stack gas emission control for large  plants in Germany.

                Cooperation agreements have been set up with U.S., Japanese, and non-EC European firms.
 Mergers are also occurring. In Denmark, the third largest  industrial group, Danisco, now controls several
 companies in the environmental services sector, including DDS and Niro Atomizer.  In the U.K., a vertical
 integration of the water industry has been initiated.  In Germany, vertical integration and diversification are
 underway.  Europeans look to U.S.  consultants for internationally recognized experience in environmental
 protection.  The strategies of the leading European firms differ, depending on  each country's selling points.
 Broadly speaking, German  firms tend  to support the harmonization of environmental standards in order to
 ensure markets in the rest of the EC for their advanced technology.  French firms, with their experience in
 O&M of infrastructure and installations, are seeking to adapt their strategies to the opportunities offered by
 privatization. The U.K. is particularly dynamic in the area  of services. The Netherlands is making a
 considerable effort in research and innovation.   Denmark, very advanced in some areas but without large
 groups, is striving to advance in the area of innovation and the regrouping of its firms. The chief concern in
 Spain and Italy appears to be that of opening up to foreign technologies and expertise, while at the same
 time preserving a certain autonomy in their firms.

 5.4.1            Belgium
 Population (1990) =9.9 million; GDP (1989) = $136.0 billion

                In 1990, environmental protection spending by Belgium was over  $1.6 billion. Belgium was
 the first country to vote Greens into national office in 1981. Belgium is divided into three regions.  While a
 central parliament retains certain traditional authority, environmental protection is among the  powers
 delegated to the regions. The  Flemish Public Waste Agency (OVAM) was created by a decree on the
 management of waste enacted  in 1981.  The  agency has the authority to plan, regulate, and establish facilities
 for the management  of solid and hazardous waste for the Flemish Region  of Belgium. OVAM operates
 under the administrative control of the Minister of the Environment.

 5.42            Denmark
 Population  (1990) =5.1 million; GDP (1989) = $73.7 billion

                In 1990, environmental protection spending by Denmark was over $1.1 billion.  Denmark is
 subdivided  into 16 counties, each having an environmental agency. Denmark has established a complete
 system and set of procedures for the management of hazardous waste including a  central treatment system
 (Kommunekemi).  The administration of the Danish system is organized in a decentralized way. The
 Kommunekemi facility is a  publicly owned and  operated facility.  In 1990, there were about 400 companies
 involved in the environmental services industry.  Like most  other European countries, one of Denmark's
 major thrusts has been research in the field of recycling and waste source reduction.

5.43            France
Population  (1990) =  56.4 million; GDP (1989)  = $819.6 billion

                In 1990, environmental protection spending by France was over $9.8 billion.  Average annual
environmental expenditures as  a percentage of GNP,  1981 through 1990, were 0.85%. The new  national
environmental plan will increase the nation's environmental budget to almost 2% of the GNP. In France,
only 35% of the sewage in the  southern regions of the country is treated.  Sewage systems in major cities are
due for revamps.  Current concerns about these conditions  could double the French market for sewage


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systems in 5 to 10 years.  France is recognized as a European leader in industrial risk assessment and
emergency planning. A sweeping environmental plan introduced in 1990 may go a long way toward catching
up the country with its neighbors. It will also consolidate all of the environmental regulatory and
enforcement activities of various national, departmental, and local agencies under an Environmental Institute.
There are six basin authorities responsible for water  management and pollution control. The basin
authorities generate significant income through the assessment of fees for drinking water and water pollution
discharges. Specific goals for the year 2000 include:

                •       Reducing air pollution by 30%;
                •       Increasing wastewater and water treatment to 67% of ail discharges;
                •       Stabilizing carbon dioxide emissions; and
                •       Recycling 50% of all primary industrial materials.

                The Ministry has a 1991 budget of $230 million, up from $160 million in 1990.  In order to
help fund their new plan, the Ministry has proposed substantial taxes based on the polluter-pays principle.
There are a wide variety of waste collection and  transport firms.  The Generale des Eaux, Lyonnaise des
Eaux, and SAUR distribute water to 18 million, 8 million, and 4.8 million people, respectively. A fourth
company is SOGEA, a subsidiary of Saint Gobain-Font a Mousson, which serves  a population of 2.7 million.
These companies are also significant in wastewater treatment and solid waste management.

5.4.4            The Netherlands
Population (1990) = 14.9 million; GDP (1989) = $205.9 billion

                In 1990,  environmental protection spending by the Netherlands was over $2.5 billion.
Average annual environmental expenditures as a percentage of GNP, 1981 through 1990, were 1.4%. The
government wants to spend up to 3.5% of GNP to reduce pollution.  The Netherlands saw the need in 1989
to elect Greens to parliament. The socialist Labor party, however, has an excellent record on environmental
affairs.  A very ambitious, long-term National Environment Plan was adopted by the Netherlands in 1989.
By 2010, the plan is blended to  reverse the country's environmental degradation problems. The plan
contains some 200  pollution fighting measures, and its eventual goal is to  reduce all types of emissions by 70
to 90%.  The cost of the plan was to rise to $3.4 billion by 1994, of which at least  half would be paid for by
higher  taxes  on pollution  industries. A further $1 billion would come from higher indirect taxes, and the
remainder through savings in the budget.  The overall level of expenditure on  the environment was estimated
to rise  to $7.5 billion on an annual basis.  An important development in the Netherlands is that all major
companies will be required to demonstrate to the government that they are in compliance with the new
policies.  Other significant new initiatives include:

                •       The creation of a single permit for all of a company's environmental emissions
                       rather  than a collection of separate permits that apply to various environmental

                •       Stricter incineration standards; and

                •       A government seal of environmental approval for consumer goods.

Plans also include removal of 7,000 toxic waste dumps. The U.S. is  third behind domestic and West German
suppliers of environmental products.

5.4.5            West Germany
Population (1990) = 62.5 million; GDP (1989) = $945.7 billion

                On October 3,  1990, East Germany acceded to West Germany and ceased to exist as a
separate nation.  This discussion, however, considers West Germany as a separate state.  In 1990,
environmental protection spending by West Germany was over $14 billion, up from only $5 billion in 1981.


                                                                                            Session 5
Average annual environmental expenditures as a percentage of GNP, 1981 through 1990, were 1.2%. It has
marginally risen over the last few years, and data suggest it now stands at more than 1.5% of GNP. West
Germany  represents the largest market in Europe, accounting for one-third of EC expenditures for
environmental protection in 1990, and about 7% of global spending. The average annual growth rate in
market segments ranged from 8 to  14% between 1981 and 1990.  The country's political parties are debating
how to form an ecologically oriented economy that emphasizes sustainable development. Eco-taxes are one
proposal being discussed.  Tough environmental laws effective on January 1, 1991, require most companies to
name top  managers who are responsible for complying with environmental laws and for presenting
compliance plans for the  companies to the government.

               West Germany has had a water management law in place for more than 20 years.  A law is
being debated that would extend this principle to cover air and soil contamination. Comprehensive new
hazardous waste regulations have been introduced that require generators to show proof that their wastes
cannot be recycled before disposal  is permitted.  Stiffer law enforcement is  helping to bring about the shift in
thinking.  The number of charges filed is already between 25,000 and 30,000 per year, and the total is
increasing from 20 to 30% annually.  The country has successfully completed an FGD program for all major
combustion facilities and is embarking on a program for flue gas denitrification.  Another environmental
policy initiative is a proposed tax on industry that is designed to finance cleanup of old waste sites.  In 1990,
there were about 4,000 companies involved in the environmental services industry.

5-5            The United Kingdom
Population (1990) = 57.4 million; GDP (1989) = $818.0 billion

               In  1990,  environmental protection spending by the U.K. was over $8.8 billion.  Average
annual environmental  expenditures as a percentage of GNP, 1981 through 1990, were 0.74%. Expenditures
for water,  electricity, and roads will total $33 billion between 1989 and 1994. The investment in water is
designed to comply with both EC and national directives.  For 1992, the market for water pollution control
equipment is estimated at:

               •       $706 million, or 49%, from water supply companies;
               •       $677 million, or 47%, from industry and commerce; and
               •       $57 million, or 4%, from residential, agriculture, and leisure.

               The U.K. discharges significant quantities of untreated sewage into the North Sea. Landfill
capacity is rapidly declining while U.K. industry's annual output of hazardous wastes is 4 to 5 million metric
tons. Surface and ground water in much of central England is polluted with nitrates.  The U.K. has been
Europe's largest environmental polluter on a total volume basis.  EC legislation is forcing the U.K. to
strengthen its commitment to environmental improvement. The  government is supporting a 25-year plan to
reduce water pollution. In 1990, the total market for air pollution control equipment in the U.K. was
estimated  to be $770 million.  Growth is projected at approximately 9% per year. EC pressure will stimulate
the market.  The standards for air pollution control in the U.K. must be brought in line with those of the EC
by 1992. Specific areas with require attention include:

               •       The discharge of gases from high sulfur coal;
               •       The release of CFCs and gases; and
               •       Vehicle exhaust pollution.

               The percentage of total demand for air pollution control from each of the major industries
is as follows:

               •       Electric power - 32%
               •       Chemicals - 19%
               •       Steel  and  metallurgical -  16%

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                •       Mining - 5%
                •       Other industries - 28%

                Municipal sewage treatment works are controlled by the privatized water companies. They
operate such works under the National Rivers Authority consents, which stipulate quantity of effluent which
may be discharged and the quality standards which need to be met.  The water companies will spend $4
billion by 1992 on these needs.  Discharges by industrial concerns directly into the river are controlled by the
same consents.  Discharges by industry into sewers come under the authority of the water companies. In
addition, a new water pollution law, the Green Bill, the nation's first major environmental statute since 1974,
was introduced  in 1990. Official bodies have increased scrutiny of effluents discharged from chemical,
industrial, and energy generation sectors.

                The nation's solid and hazardous waste management businesses are also to be privatized,
and the EC is likely to  monitor these developments closely because it does  not consider privatization a
progressive environmental step.  Large industrial companies are now spending considerable sums on water
purification and pollution control consultancy services and equipment.  Over the past few years, the total
amount spent annually  has averaged about  $1 billion.  In 1990, there were about 1,500 companies involved in
the environmental services industry.  U.S. environmental consulting firms have a significant advantage in this
market.  Industry observers identify the U.S. as  a strong competitor with Japan and Germany in supplying
the market.

6.0             PACIFIC RIM

6.1             Overview

                The Pacific  Rim is the world's  largest business area. U.S.  firms are beginning to take
advantage of the opportunities that Asia and especially the Association of Southeast Asian Nations (ASEAN)
offer. ASEAN includes six countries (Indonesia, Malaysia, the Philippines,  Singapore, Thailand, and Brunei).
Industry estimates suggest that the bill for environmental projects in Asia could run as high as $200 billion
over the next decade. The ASEAN market consists of over 305 million people with the world's fastest
growing economies. The total market for environmental control equipment and services in ASEAN is
estimated at more than $1.5 billion in 1991. In  1992, environmental spending will again be up substantially.
Asia has inherited some of the world's worst environmental problems, but there is a rising sense of urgency
that something must be done to halt and prevent further environmental damage.  Regional and global
policies on the environment will be forthcoming at the UNCED meeting in Brazil in 1992, eventually
resulting in industries having to observe strict environmental standards  as an integral part of their business.
This will lead to another increase in  demand for environmental products and services. The U.S. Department
of Commerce has recently emphasized the  opportunities in Malaysia, Taiwan, and Thailand.

               Indonesia's regulatory environment is rapidly changing, as  is that in Thailand where
spectacular economic development is placing a significant burden on the environment. The national plans of
China, Indonesia, and Thailand have safe drinking water as among their major socioeconomic objectives.
One study estimated that $20 billion to $30 billion would be required annually to provide safe drinking water
to all people on earth.  New  industry is  putting  a tremendous strain on what was already an overloaded waste
management system.  Recognizing this, private and government demand for solutions to ecological and waste
management problems  has never been stronger. Traditional laissez faire attitudes on environmental issues
are gradually giving way under international pressure and regional concern  to action now before the
catastrophic mistakes of the West are repeated  in Asia.  The region's governments are actively implementing
increasingly tougher legislation to control the pollution and emissions of industry, while the private sector is
rapidly waking up to its role  in safeguarding the future of the planet.

               Ministerial support for environmental protection in Asia reached a milestone in 1990 at the
Conference on Environmentally Sound and Sustainable Development when ministers of Economic and Social
Commission for Asia and the Pacific member countries declared a Regional Strategy for achieving


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 environmental goals.  Indonesia, Malaysia, Thailand, and Singapore continue to implement tougher
 legislation.  Projects designed to provide adequate water and sewage treatment are being researched and
 started through ASEAN. High on the list of priorities are the projects to provide adequate water and
 sewage treatment plants for the swelling inner city areas of the region. The task is enormous.  In central
 Jakarta, only 28% of all households have publicly supplied water. Developments in solid waste management
 have been on the increase in the region, with many countries finding new and innovative ways of recycling
 waste. Worldwide education and training expenditures for the water and sanitation area will amount to $20
 billion annually by the year 2000. Consulting, remote sensing, monitoring, R&D, and other service industries
 will also grow rapidly.  Financing for Pacific Rim projects has been considerably eased by loans for the Asian
 Development Bank, the World Bank, and other funding agencies.

 62             Hong Kong
 Population (1990)  =5.8 million; GDP (1990)  = $57.0 billion

                Hong Kong officials announced a $2.6 billion cleanup plan. Sewage systems and a switch to
 low sulfur fuels will absorb the largest share of this figure. Total environmental outlays by the Hong Kong
 government may easily double before 1997. As far as the immediate outlook is concerned, the
 Environmental Protection Department started 1991 with $970 million worth of approved projects on the
 books. The legislative council has been asked to significantly strengthen the current standards for water  and
 air quality, noise control, and waste disposal. According to the government's civil engineering services
 department, of the $130 million plus that will be spent annually on environment projects for the next 10
 years, consultants will receive 14.5% of the total business.  In 1990, plans required consultancy work on five
 sewage master plans, including a proposal to construct sewage outfalls of 35 kilometers in length.  There is
 also engineering/design work to  be  done  on the control of effluents in Tolo Harbour.  Four distinct markets
 for environmental equipment and services exist in Hong Kong:

                •       Large-scale governmental projects (e.g., waste management, treatment, and
                       disposal) on a design-build-operate basis;

                •       Equipment and  engineering/design for the private industrial sector;

                •       Instrumentation for the public and private sectors; and

                •       Technical consulting and design services.

                The Hong Kong Government issued a benchmark White Paper on Pollution Control in
 1989. The document outlines a comprehensive 10-year plan to remedy the problems of Victoria Harbour,
Southside  beaches, and the rest of the territory. Of the total expenditures planned, 60% has been earmarked
for the construction of sewage and drainage facilities and most of the remaining 40% is allocated for landfills
and waste transfer stations.  The government announced a $16.5 billion infrastructure program that will
require the use of modern environmental technology. Because U.K. engineering firms are both more
numerous and more active than their U.S. counterparts, the U.K. has a 2-to-l lead over the U.S. in supplying
products and services for Hong Kong projects.  U.S. technology enjoys a  good reputation in the territory.

63             Korea
Population (1990) =  43.0 million; GNP (1989)  = $200.0 billion

                Korea will spend $750 million  over the next five years on pollution control equipment, and
annual expenditures are expected to increase by $100 million per year beyond this five-year horizon. The
Environmental Master Plan delineated priorities for pollution control for air, water, and solid waste through
the 1990s.  By 1991, the implementation of the  highest priority measures  required a total capital investment
of $6.2 million and for O&M, $2.7 billion. Korea's rapid industrialization has brought about severe pollution
problems especially in the large urban centers and industrial areas.  The  Korean Government is now cracking
down on polluters by strengthening environmental legislation and increasing its spending at an  unprecedented


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rate.  At present, the most serious problem in Korea is water pollution caused by local manufacturing
industries.  Korea has considered construction of 15 waste-to-energy plants at $100 million each.  There are
not 500 registered firms in Korea that manufacture or  install environmental systems and facilities. Two
Korean companies manufacture pollution control equipment and facilities under technology transfer
agreements with foreign companies.

6.4             Singapore
Population (1990) = 2.7million; GDP (1989) = $27.5 billion

                No city in Asia is as clean or as health conscious. Singapore handles waste through  its
Ministry of Environment (ENV)  which controls all aspects of public cleanliness.  The National Council on
the Environment is  Singapore's first non-governmental organization, formed in 1990, as a public voice on
environmental issues.  Singapore is leading the fight against industrial emissions with legislation already in
place to ensure effective emission control at the source. All new factories with high pollution potential are
required to install control  measures before they begin to operate, while existing factories have to retrofit
pollution control  equipment.  A ban on open-air burning of industrial waste  has reduced smoke and dust
fallout.  Chemical companies are required to meet three mteria before their processes are allowed:

                •      Waste must be adequately treated and disposed of;
                •      Chemicals must be handled and stored safely, and
                •      There must be  suitable land for the plant.

                Unlike some cities, Singapore rigorously enforces the regulations it promulgates. The
compact size of the island makes it easier to monitor factories and industry.  In Singapore, some industrial
effluents are pretreated and placed in public sewers. Sludge is disposed of in dump sites.  The feasibility of
recycling some hazardous  wastes will be  studied in the future.  Singapore has 3,700 manufacturing
establishments with employment  of 340,000.  Singapore's manufacturing output grew almost 70% between
1986 and 1989.  ENV and Mitsubishi Corporation of Japan have signed a Memorandum of Understanding
that prepares the ground for Mitsubishi to collaborate closely with ENV in technology development and
training in  environmental engineering and management projects in Singapore and the  region.  Also, both
parties will work on the study, design, and commissioning of environmental projects such as the construction
of incineration plants outside Singapore.

6.5             Taiwan
Population (1990) = 20.5  million; GNP (1989)  $121.4 billion

                Taiwan is becoming a very active environmental market with recent legislation leading to a
$35-billion  plan to clean up the islands by the year 2000. According to figures released by the Taiwan
Environmental Protection  Agency, total environmental protection spending in the country now stands at $1.2
billion annually or 0.9% of the GNP. By 1992, that figure will reach $4 billion. Spending on environmental
products and services may total more than $40 billion between 1988 and the year 2000.  Public expenditures
made for national environmental improvement projects are growing at impressive rates.  It is predicted that
total environmental investment will increase at a rate of 25% per annum.  By 1994, Taiwan's pollution
control expenditures will account for about 2.0% of its GNP.  Most is spent by public agencies and state-run
firms, while the remainder is spent by the private industrial sector.  Public purchases,  with a projected annual
growth rate of 25 to 30%,  will continue to lead the sales.  Stricter enforcement of regulations are also
creating a tremendous industrial  demand for pollution control systems.  In the later 1980s, the government
announced the following major pollution control projects:

                •      Water pollution control - $1.6 billion to be spent over six years on modernizing
                       sanitary sewage systems, dry weather flow interceptors and ocean outfalls;

                •      Air pollution control - $2.9 billion to be spent over six years on air pollution control
                       and air  quality  monitoring;


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                •      Solid waste disposal - $913 million to be spent on 15 major projects for solid waste
                       disposal and shore fill reclamation projects; and

                •      Hazardous waste control - $62 million to be spent on high-pressure incinerators and
                       waste treatment centers.

                Taiwan has discussed the construction of more than 20 waste-to-energy facilities, each of
 which would cost more than $100 million.  In addition, the government will raise not less than $3.3 billion
 from government expenditures to improve pollution control and prevention.  In the coming years, both state-
 owned and private sector industries will be called upon to tackle the  extensive problems of environmental
 pollution. Private factories have drastically increased their spending on pollution control since 1989, when
 fines for pollution were increased dramatically.

 6.6             Thailand
 Population (1990) = 55.7 million; GNP (1989)  = $64.5 billion

                Estimates suggest  that Bangkok Authorities will need to spend at least $14 billion to
 upgrade the city's sewage system to present requirements.  Ecological and environmental problems stem
 from the application of science and technology.  In the future, the country will attempt to strike a balance
 between sustaining development  and maintaining, improving, and repairing the environment. Environmental
 pollution problems which Thailand is facing are air, water, and noise pollution, solid waste, and toxic
 substances.  Water pollution is considered to be the major pollution problem in Thailand.

                Under the sixth (1986-1991) and seventh (1992-1996) five-year National Economic and
 Social Development Plans, the government has expressed clearly its concern over the environmental
 problems and its intention to enforce the law more seriously and support more environmental campaign
 projects at all levels. The Board of Investment, in granting promotional privilege to new investments,
 requires that projects must  not in any way damage the country's environment.  Thailand regulates industrial
 wastewater under the Improvement and Conservation of the Natural Environmental Quality Act of 1978.
 However, actual control of water pollution is carried out by the Ministry of Industry which sets standards,
 licenses discharges, and enforces regulations.

                Bangkok is converting from ground water sources to piped water systems to mitigate  ground
 water subsidence problems.  The master plan of the Bangkok Metropolitan Administration (BMA) for the
 construction of wastewater treatment plants has been drafted to identify and recommend areas where
 wastewater treatment plants need to be built and to ensure the public of the authority's commitment to
 solving the problems.  Twelve major plants are proposed with a total capacity of 1.7 million cubic meters per
 day and a cost of $640 million. Three industrial hazardous waste treatment centers have been planned. The
 number of factories in Thailand has increased from 85,000 in 1986 to almost 100,000 in 1991.  In 1991, the
World Bank and Denmark each advanced $700,000 to Thailand for two wastewater treatment plants.  The
loans were for consulting and design fees for both projects. An additional  $200,000 was also advanced by the
Thai Industrial Works Department. The World Bank has also advanced $30 million to the Thai government
so it can increase the efficiency of industrial plants and reduce pollution. TPI, a joint venture of TAMS and
Malcolm Pirnie of the U.S., prepared a master plan for management of Bangkok's solid waste for the BMA.
Recycling and composting were important parts of the plan.

7.0             AUSTRALIA
Population (1990) =  76.9 million; GNP (1989)  = $240.8 billion

                Australia spends under 1% of its annual GNP on environmental matters.  The 1990
expenditures were estimated to be $2.1 billion.  Dramatic increases in the 1990s will result from  major
infrastructure spending related to the environment. The major industries in Australia are mining, industrial,
and transportation equipment and food processing.  Australia has undergone considerable industrial
development in the past two decades.  Once the richest  nations in the world in per capita GNP,  it is no


                                                                                           Session 5

longer even in the top ten.  The Labor party is seeking to privatize some state-owned industries.  Industrial
activity in Australia is characterized by a high concentration of hazardous waste-producing industries in
Sydney and Melbourne.  There was the development of the 1986 National Guidelines for the Management of
Hazardous Wastes.  Some of the key principles are:

                •      The polluter-pays principle should apply;

                •      Generators and TSDs should be regulated;

                •      The classification system for hazardous wastes should be applied nationally;

                •      The manifest system should be implemented;

                •      Specific technical and environmental guidelines should be developed as site-
                       selection criteria for hazardous waste facilities;

                •      A national high-temperature incinerator should be built;

                •      A national system for the exchange of  industrial waste should be  established; and

                •      Australian and overseas R&D on hazardous waste management should be

                After the publication of the guidelines in 1986,  the six Australian states developed a single
nationally coordinated approach to hazardous wastes.  Over 20 million tons of hazardous waste are generated
annually. In the late 1980s, Australia was still  exporting a small amount of its hazardous wastes.  Air
pollution control is in the developing stage and expenditures are somewhat limited.  Over 10 million tons of
solid waste are generated annually, and these solid wastes are primarily managed through landfilling.
Massive expenditures are underway in Sydney and other major cities (Canberra,  Melbourne, and Brisbane)
to build and upgrade sewage systems.  The spending in Sydney may turn out to be the world's largest water
quality expenditure. French (Bouygues, Generale, and Lyonnaise), U.K. (Acer Consultants), and U.S.
(James M.  Montgomery & Co. and others) firms are involved.

8.0             NEW ZEALAND
Population  (1990) = 3.3 million; GDP (1989) = $39.1 million

                Annual environmental expenditures average almost 2% of the country's GDP.  The 1990
expenditures hi New Zealand approached $800 million.  New Zealand is one  of the  first nations to create a
comprehensive welfare state. Most mines, forests, transportation faculties, power plaints, and communication
facilities are publicly owned. Anti-nuclear feeling is very high in this ANZUS nation.  New Zealand's
economy is dominated by livestock raising. Over 300,000 tons of hazardous waste are generated annually.
Air pollution control is in place and expenditures are small.  Over 2 million tons of solid waste are generated
annually, and the solid wastes are primarily managed tlirough landfilling.  Over 88% of the population is
served by wastewater treatment plants, a higher percentage than in the U.S. (80%), and exceeded only by
top-tier European countries (e.g., Denmark, Germany,  the Netherlands,  and Switzerland). Expenditures are
underway in Wellington and Auckland to upgrade water and sewage systems. The spending is not large by
U.S. standards.  U.K. and U.S. firms are involved in a minor way.

                                                                                          Session 5
            Exporting Our Best Ideas:  How the  U.S. Can Capitalize on
         the Global Market for Innovative Waste Treatment Technologies
                                            Alfred Slatin
                             Zimpro Passavant Environmental Systems, Inc.

                The worldwide market for water pollution control equipment is enormous, but the most
profitable opportunities for U.S. suppliers may lie in exporting innovative, non-conventional technologies.
These are technologies designed to solve  specialized waste treatment problems, where higher degrees of
treatment are required, and where competition from local suppliers is not prohibitive.

                In the United Kingdom and European Community alone, it is estimated that as much as
$1.2 billion per year will be spent on innovative technologies by the end of this decade.

                Barriers to exporting innovative U.S. technologies are not unlike the barriers that block the
adoption of innovative technology within our own country, conservative design favors conventional
technology, even though this choice is obviously less effective and potentially more costly.

                The U.S. EPA can help  facilitate the global acceptance of innovative U.S. technologies. EPA
is well-respected around the world as a regulatory body, and should promote its innovative technology
programs (such as SITE) as global models.

                Specifically, EPA might consider helping foreign countries establish data bases on innovative
technologies, and entering  into pilot testing projects with foreign entities as methods of nurturing the
adoption of U.S. technologies  abroad.

                The payoff for U.S. firms can be significant. Zimpro Passavant Environmental Systems, Inc.,
a Wisconsin company whose proprietary wet air oxidation and PACT* systems are member  technologies in
the SITE program, is generating nearly 50% of its revenues from overseas sales. Keys to success have been
cooperation agreements with qualified local firms, commitment to full technical support, and above


                In approaching export of American technology in the environmental area, my first thought is
that no nation, or for that matter, no population of human beings is terribly concerned about the
environment as long as poverty, starvation, and infant mortality from disease are epidemic in their society.
Priority action on pollution will not occur until the basic needs of survival are met.  I think we can clearly see
this in the countries with emerging economies. I don't think it's any exaggeration to cite the  rapid growth of
environmental interest in Japan as its economy developed, then in Taiwan and now hi Malaysia.  Perhaps the
best example is India; now that this country is producing sufficient food to maintain its population, it is
investing  in environmental  projects. So we may properly say the greatest stimulus to export of American
technology will be economic assistance to emerging countries: loans, aids, technical assistance, tariff policies.

               It's probably also accurate to say that more advanced economies that are still in a dramatic
growth phase, such as Mexico,  will become very ardent  defenders of their water quality once the situation has
reached crisis dimensions, but  may not be inclined to act without outside stimuli before a crisis is reached.


                                                                                            Session 5

On the other hand, the experience of our country and more recently, Europe, shows that more mature
economies will move to remedy current practices and to rectify past environmental sins before a crisis is
reached, but still at rates that are slower than the most concerned group of citizenry will want.  A fiscal
component, whether it be Keynesian economics o;r budget control will act either as a damper or stimulus to
the rate of spending.

               In this connection, it's interesting to think of the trend that seems to have been led in
Europe by the United Kingdom, toward privatization of publicly owned water and wastewater treatment
facilities.  In the U.K., to stimulate investment, the new water companies have obtained  significant tax
concessions plus an important incentive in that targeted investment will allow them to raise their rates to a
higher level than the increase due to inflation. These are incentives which warrant a great deal  of scrutiny
within the United States as the movement toward privatization, directed by the President's initiative, move
forward. Legislation here could initiate similar aciions in export markets, which would help in export sales
since public agencies frequently are under special pressure to buy domestic products, while  privatized
operations have a profit or loss target and performance criteria are paramount in their decision making.

               Clearly, the United States has maintained a significant lead in the advancement of water
quality since the early  1970s, and our technologies have therefore a preeminent place in  the market. What
we do not have—and this  conference has been called to help create—are strong programs to enable American
companies to rapidly reach export markets while that competitive advantage is still valid.


               There is a lot of information to support the contention that the worldwide market
opportunities for U.S.  companies are huge, but they are not necessarily readily accessible. The  vast majority
of projects reaching the construction stage employ internationally available conventional treatment
technologies and rely heavily on existing civil engineering practices.  It  is difficult to see  U.S. companies
competing successfully for these contracts given the low (and sometimes negative) margins that  currently
exist in a highly competitive environment, where  some of our  international competitors can also offer
government-supported financial incentives.

               Of greater attraction should be  those projects which seek to solve problems which are  not
amenable to conventional technology. These might fall into several categories, among them:

               1.      Where conventional technologies cannot achieve the desired technical  performance,
                       such as destruction of intractable/toxic organics. Examples are chemical plants,
                       pharmaceutical producers, refineries.

               2.      Where the cost or land requirements of conventional solutions are too great; for
                       example, upgrading POTWs.

               3.      Where there is public resistance to "conventional solutions," as in the incineration of

               The market for innovative technologies, while of course not as large as the total market,
remains attractive for U.S. firms. For example, in the United  Kingdom and the European Community alone,
it is estimated that some $93 billion will be spent on wastewater treatment in this decade (1991-2000). And of
that, the  share invested in innovative technologies is expected to increase  from 2% (or $180 million) in 1991,
to 8 to 15% a year (or $640 million to $1.2 billion) by the end of the decade. Further, these numbers do not
include the market for in-house waste treatment or merchant (commercial) treatment of hazardous waste.
Our  estimates are that this segment itself could account for an additional $10-15 billion  per year in capital

                                                                                            Session 5
3.0             THE CHALLENGE

                We know from our own experience that it is difficult to get a customer to accept an
innovative solution.  The degree of conservatism within consulting engineers, the utilities, and other
customers will often result in the retention of conventional solutions albeit with both cost and performance
penalties. (It's the "no one ever got fired for buying an activated sludge plant" syndrome).

                Realistically then, we should be looking for mechanisms whereby the U.S. EPA can promote
U.S. technology exports at minimal cost by tackling the blocks which hinder the  adoption of innovative
technology and by highlighting (and endorsing) the U.S. capability in this area.

                To this end, EPA can do and should do much to promote innovative, but commercially
proven technologies. EPA can and does help distribute information about U.S. technologies, such as wet air
oxidation, and can help sell them by promoting our government's financial assistance such as loan credits,
and by encouraging the use of these technologies through demonstrations.

                The Japanese have a substantial MITI fund to enhance overseas marketing efforts and
provide financing with the proviso that the financed plants must use Japanese equipment.  Significant
programs along those lines would mean a great deal to American companies, and I rush to add, to the
American economy,  if the money is in fact spent with United States producers, using our labor and material.
Programs could undoubtedly be in the form of loan guarantees, or other indirect use of credit,  particularly in
the former Soviet block or in nations whose economies may have reached the point where pollution control
is clearly necessary, but where the economy is not yet wealthy enough to assure  normal credit avenues for
the projects.  (Denmark, much smaller than we, has successfully promoted its technology through
government participation as  far away as Malaysia).

                EPA could  facilitate the inclusion of environmental requirements in free trade agreements.
This might require close cooperation with the U.S. Department of Commerce, but tighter liaison here might
be a good idea in view of the efforts U.S. DOC has undertaken to promote U.S. waste treatment technology

                But the solution to the acceptance problems I alluded  to earlier may lie in the concept of
BOAT or its foreign counterparts (BATNEEC in the United Kingdom). These classifications are  extremely
powerful.  They say that for  a specific problem, an optimum technical solution can be defined, and what is
more, the regulators will act as a potent force in promoting that solution.

               The theory  is fine, but in practice most environmental  regulators around the world (even in
developed countries) are woefully equipped to recognize specific examples and applications of BOAT.
Contrast this to the U.S. where, for all its problems, the EPA has already developed the detailed protocols
for  determining BOAT and has considerable experience in managing programs such as SITE and VISITT.
We should  also recognize that most regulatory agencies (although they  may not  care to admit it) look to the
U.S. EPA for inspiration, as was demonstrated by the close collaboration on Mexican regulation. EPA should
enhance its role of world leadership.

4.0              DATABASE

               What regulators and technology users require is a "consumers guide to BOAT". It could
take the form of a database with  the ability to match problems with solutions which have been  rigorously and
objectively proven and giving detailed and up-to-date information on costs and performance.

               Such a database would need to be a collaborative venture between participating
environmental agencies and might be managed by a suitable private venture. Entry to the database would
necessitate  conformity with strict  guidelines. Many of the technologies would be the result of supervised pilot
trials (as in the SITE program). These trials could be conducted on a bilateral or multi-lateral basis.  For


                                                                                           Session 5
example a UK-based trial would be recognized and supervised by observers from U.S. EPA, UK HMIP, and
perhaps regulators from the European Community ,ind Japan. Under these circumstances, grant-aid may be
available from national funds to meet some of the costs.

               The existence of such a database and its use by regulators and engineers would transform
the sales prospects for good technology and help clear away some of the "tire-kickers."  It would also assist in
defining the limitations of conventional technology. As such, it would be of inestimable value to U.S.
technology suppliers. I say this because even without, a great deal of government assistance, U.S. firms are
successfully marketing innovative treatment technologies overseas—adding to the U.S. economy and job base
as they go.


               Beyond development of a database, the U.S.  EPA could facilitate the application of
innovative American treatment technologies by supporting demonstration of these technologies at overseas
sites. For example, U.S. companies could work with offshore partners to include innovative U.S. processes in
wastewater treatment pilot plants.

               In such projects, innovative technologies would first be identified by the participating
companies  for inclusion in the pilot plant. Local regulatory agencies would be heavily involved in assessing
the performance of the pilot plant, thereby assuring active and positive collaboration with regulators—a
situation that would encourage, rather than discourage, the use of innovative technologies.

               Regulatory agency involvement would be encouraged in  other ways, as well. The existence of
a showpiece wastewater treatment facility would benefit the host country  by serving as an example to other
nations with similar wastewater treatment problems. The U.S. EPA and the host country regulatory authority
might jointly recognize the pilot project, and apply BOAT protocols. U.S. government assistance could be
provided in the form of suitably qualified personnel who would act as observers or advisers.

               Finally, U.S. and  other governments might also be willing to contribute to the costs of
developing the pilot treatment plant database,  devising database software and perhaps the running costs.
The database could then be provided free  of charge to others  (similar to  VISITT).

               Pilot-plant  projects such as this would be an excellent way for U.S. companies to showcase
innovative technologies, define suitable wastewaters for treatment, and win international acceptance of the
technologies, particularly among key regulatory audiences. These projects  would become important
"launching pads" for U.S. exports and would be of significant benefit to American firms who are aiming at
international markets.


               Our company, Zimpro Passavant Environmental Systems, Inc., is an example. As Table 1
illustrates, we have expanded our international business over the past seven years such that more than 40%
of our anticipated revenues  for 1992 will come from exports. A healthy portion of our business came from
overseas markets in 1989 and  1991, as well. And, as can be seen in Table 2, our activity includes Canada, as
well as Europe, the Middle  East, and particularly in the last five years, the Far East—specifically Taiwan.

               How are we doing this? Through carefully constructed relationships with appropriate
regional "partner"  companies, supported by an all-out commitment to technical support in the field, and with
a great deal of patience!

               While we have had a very rewarding license arrangement with a Japanese company for
some  18 years, and have had a similar licensing agreement with a Indian company, we do  not currently seek
licenses for our technology.  We now prefer what we call "cooperation agreements" whereby we are


                                                                                           Session 5
represented in one way or another in the importing country by technically qualified firms, but where the
critical components of our technology are controlled by us. That is to say, we will dp the detailed process
engineering and we will supply key equipment, operator training, and startup assistance; and in most cases,
the cooperating company will supply civil engineering, the general site supervision or contracting such as
buildings, foundations and structures, and provide the interconnecting piping.

                                              Table  1

                              Zimpro  Passavant Export Revenue
1992 (est.)
Export Revenue (OOO's)
                                              Table 2
                        Zimpro Passavant Exports ($000's)  by Country









               Depending upon costs or other special considerations such as tariffs, local preference, and
delivery, we will either purchase other components in the importing country or supply them from the United
States. This seems to be an effective method of protecting the interests of all parties and so far has worked
very effectively. In passing, at this point it's probably appropriate to say that we are concerned that some of
the regulations being written within the Common Market not take the form whereby they excessively
discourage the supply of U.S. components.

               As an American company, what do we have to sell? For Zimpro Passavant, this is a
particularly appropriate question since the name of the company is derived both from the origin of Zimpro,

                                                                                            Session 5

that is FJ. Zimmermann, who developed the wet air oxidation process and Passavant Werke of Aarbergen,
Germany, whose American subsidiary merged with Zimpro in 1987. Obviously we have found considerable
value in some European technology and I, therefore, must again stress that there are many companies
throughout the world who produce wastewater treatment equipment. The strength of American exports must
be in proprietary, unique products or products designed to meet a new need which is not yet resolved
throughout the world.

                Let me give you several examples, based on our experience. In Portsmouth, New
Hampshire, we have supplied a unusual configuration of our proprietary Hydro-Cleair11 filter which is being
used after primary treatment to remove most  of the remaining BOD and suspended  solids from municipal
sewage prior  to ocean discharge. The effluent from tliis plant will meet the standards for ocean discharge at
40 mg/1 of suspended solids and close to zero coliform at a fraction of the cost and at  a fraction of the land
use of a conventional full primary and secondary treatment plant.  In Great Britain alone, there are an
estimated 700 ocean outfalls which could utilize this technology; and throughout the world there are a
number of locations where the cost and size of a full-blown treatment plant prior to  ocean discharge would
be prohibitive.  This simple concept could greatly reduce the bacterial and physical contamination of direct
ocean discharge.

               We also have been successful in such countries as Korea, Japan, and Canada with our
proprietary PACT*  wastewater treatment system, which enhances biological treatment with powdered
activated carbon.  When wastewater is contaminated vath compounds that are either toxic to treatment
bacteria or are resistant to biological  degradation, this technology can produce a very high quality effluent.
We are just now beginning marketing efforts in Mexico  and the Common Market. This system is producing
effluent that meets a permit level of 10 mg/1 BOD,  10 mg/1 suspended solids and 1 mg/1 phosphorus on one
particular discharge which, until the introduction of this system, created a dead and highly odoriferous river.
PACT* was part of the EPA innovative technology  program.

               When this system is  coupled with our carbon regeneration system, utilizing wet air oxidation,
we not only regenerate the carbon, but we turn secondary sludge to an inert ash, without producing dioxins
or nitrogen oxides.

               This leads me to  our third innovative technology—wet air oxidation.  A recent installation of
Zimpro wet air oxidation technology at Sterling Organics in the U.K. is eliminating a problem with an ocean
discharge. At Yorkshire Water, one of the new British water companies, wet air oxidation is the cornerstone
of a new installation that will treat wastewaters too severely contaminated for treatment in Yorkshire Water's
sewage treatment plants.  Wet air oxidation  in other configurations is being used in Taiwan by Chinese
Petroleum Corp., in Belgium by Finaneste, and elsewhere throughout the world in petrochemical  plants
where a caustic wash water is utilized to adsorb  sulfides and mercaptans from the production of chemical
feedstocks. These materials cannot be biologically treated and are serious contaminants. When they go
through wet air oxidation, they are converted to  sulfates which precipitate out.  The residual compounds in
the wastewater are largely converted to  acetic  acid (vinegar) which is highly biodegradable, producing an
effluent which is wholly compatible with environmental considerations.

               We are currently embarking on efforts to introduce our wet air oxidation technology to the
treatment of mixed waste which is both organically contaminated and radioactive. We are collaborating with
international firms in the nuclear engineering field to achieve this end.  We anticipate substantial
international interest in this development.

               Thanks to our affiliation with the Black Clawson company, we are embarked on a program
of expansion of our technology into the  pulp and paper  industry, specifically as a process for the waste sludge
produced through the deinking processes when wastepaper is recycled for reuse.

                                                                                            Session 5
7.0            CONCLUSION

               We are not trying to sell refrigerators to Eskimos.  We do not attempt to simply compete
with local producers, nor do we see any point in trying to match highly sophisticated systems to simple
problems. We do see a great deal of merit throughout the world in using American technology to cope with
complex problems, based on the experience of our roughly 40 years in wastewater treatment. I think there is
a great deal to be learned from this successful approach. Our own export volume was negligible seven years
ago, but today is a very large percentage of our sales. Frankly, we could do even better with our
government's interest and support, not only through the programs I suggested earlier, but by federal support
in whatever form it takes for private sector research initiatives.  These could be tax abatement or direct
funding to stimulate research and  development by equipment suppliers. Such programs in the past have
tended to limit proprietary developments by insisting that patents arising from the work be licensable. The
key to commercial development is to make developmental effort profitable. We can't get very enthusiastic if
the fruits of our efforts are  universally available.

                    Luncheon Address by Keynote  Speaker
                                        Donald H. DeMeuse
                           President and Chairman/Chief Executive Officer
                                      Fort Howard Corporation

               It's a privilege to be here, and I want to show my appreciation with some straight talk.

               There was a time when I would picture the 35,000 pages that comprise federal
environmental regulations as 35,000 thousand-dollar bills leaving my company's coffers never to be seen
again.  Now this farm boy is smart enough to know that many of those regulations have helped to protect
our environment.  I'm also convinced that just as many of them provide a nebulous environmental return to
society, and just as many were mandated  with general disregard for the impact on companies like my own.

               And that's been the rub  between industry and regulators, and industry and  environmental
groups for longer  than I care to remember. Environmentalists and regulators would stand on their
respective street corners and shout across to industry, "Pay!" Industry would shout back, "For  what?"

               Well, I'm happy to share my observation that there is less shouting going on and the groups
appear to be heading to a common neutral corner.  The combative and confrontational style marking the 70s
and 80s is beginning to give way to a more cooperative approach.  I emphasize "beginning."

               What is prompting this sea of change?  One factor might be that the three  groups actually
seem to agree on  something. What they agree on is the goal of cleaning our water and improving our
environment. Most also agree that, given limited resources, making significant progress on environmental
matters in the future  demands that we recognize economic- and market-based realities. There is also
consensus that we must do a better job of establishing environmental priorities to determine where those
finite resources can do the most good.

               Here's what the environmentalists say on this matter.  And I quote Fred Krupp of the
Environmental Defense Fund:  "If we are to succeed in saving our planet—and we are degrading it at an
accelerating rate—we must have solutions which reconcile environmental imperatives with economic needs."

               From the regulatory agencies, I quote from EPA Administrator Bill Reilly, as quoted in
Fortune Magazine:  "Environmental spending cries out for discipline and rationality, for something to put
things in  a reasonable hierarchy."

               To quote someone from industry, me ... ditto!  The challenge at hand is to reconcile the
environment and the  economy.  To find ways so that protection of technology can work synergistically with
increases in production. To foster what some are calling an eco-industrial revolution.  My personal view is
that this weighty challenge can be met if the innovation of American companies is allowed to flourish.

               There's much more to be said on this subject, and I'll come back to it in a  moment.

               While I have your attention during the next several minutes, I want to develop two general
areas.  First, and I've already set the stage for this, are my views on the broad economic impact of regulation
and compliance pressures on industry and how we can achieve  a win-win situation where environmental
improvement coincides with economic growth.  Secondly, I'll share some specific comments  on draft revisions
to the Clean Water Act and how the revisions can be reworked to reflect economic considerations.


                Just how do we begin to meet both the environmental and the economic needs of this
 nation?  Well, for every complex problem, there is a simple, straightforward, and usually wrong answer.
 That's true in this case as well.

                But we can begin by recognizing that there are not infinite resources to respond to ever
 more costly compliance regulations.  Industry's deep pockets are getting threadbare.  In 1990, U.S. businesses
 and industry spent an estimated $116 billion on environmental compliance. By 2000, that piece of the
 economic pie will grow to $200 billion. Last year the paper industry by itself spent more than $1 billion.
 That is an enormous levy on the national product.

                To the extent capital resources are required for environmental compliance, they are
 unavailable for investing in new jobs, production capacity, and new technology.  I might add that  industry
 represents a large portion of the nation's tax base. And if you extend the economic flow chart to its end, you
 realize that diminishing industry's cash stream ultimately diminishes the taxes it pays, increasing deficit
 spending and the economic baggage that it brings with it.

                Some still do not appreciate the massive  expenditures that are being made on the
 environment. This misconception may occur because environmental spending is not immediately apparent
 because most of the expenditures are borne by the private sector and therefore, the costs are hidden.  I
 agree with Paul Portney, Vice President of Resources for  the Future who said, and I quote, "We  should see
 the same public debate on environmental expenditures that we see on defense spending."

                Indeed, in a  study conducted by Jorgenson and Wilcoxen, they estimate that in the absence
 of the  1970s and  1980s environmental policies, real GNP would be about 2.6% higher than its current level—a
 figure that translates to about half of the combined federal, state, and local expenditures on education.
 Other respected studies show much higher figures.

                Obviously, the answer is not in eliminating all environmental regulation.  At the same time,
 in the area of regulation, more is not necessarily better.  Better is better.

                The Science  Advisory Board described very well just what "better" means.  I quote,
 "Although EPA's budget priorities are determined to a large extent by the different environmental  laws that
 the agency implements, it should use whatever discretion it has to focus budget resources at those
 environmental problems that pose the most risk."

                The parallel  in industry is undertaking  those projects that have the best financial return on
investment.  The  process involves setting priorities and targeting your resources.  That's the most formidable
challenge for Congress and the EPA from my point of view, identifying the biggest environmental bang for
the taxpayer and shareholder  buck.

                This fact has not been lost on EPA Administrator Reilly. I quote him here: "Until  recently,
we have made little effort to assess our overall environmental quality objectives, to target our laws and scarce
resources to reduce the greatest risks to human health and natural systems.  Now I think we've got to."

                Mr.  Reilly went  on to say that there are simply more anxieties than we can possibly  create
laws to alleviate and far more risks than resources to  eliminate them. And he candidly said that the
environmental debate has long suffered from too little science.

                I'm reluctant to  be the one to break  the news, but even  if Mr. Reilly or his successor is
successful in doing what he hopes to do, he and the agency won't be off the  hook.  You'll remain at the
mercy of a strong emotional and  political temptation to add more and more environmental mandates on
many fronts.

                The difficulty of holding the media and other pressures at bay while you make difficult
 decisions can't be overestimated. I don't need to remind you that the media routinely create an image of
 risk out of proportion with the problems.  Editors don't want issues that are ambiguous, but most
 environmental issues are by nature ambiguous.

                It's easy for me to stand up here and urge the EPA  to work harder to determine your
 environmental return on investment. Obviously, EPA's commitment to achieving this goal at all levels of the
 agency is crucial. The truth of the matter, however, is that you are only as good as your scientific toolbox.

                While the use of risk assessment as a tool may be far from perfect, thoughtfully done, it is
 key to determining whether or not a problem exists and whether or not resources need to be utilized to
 address the problem. We must simply commit to using this tool and  the information it provides.

                It  is also important that EPA move more quickly to  utilize direct evidence of causation as it
 becomes available as opposed to computer model default assumptions, an action recommended by the SAB.

                Using realistic, as well as EPA's worst-case assumptions, would present a more informative
 and fair picture of the risk to real individuals.  Advocates on both sides can argue for more or less stringent
 regulations, but the public interest is not served if participants in that debate are misled regarding the range
 of risk to which real persons are exposed.

                Risk assessment requires a large number of assumptions and inferences.  Consider just one
 assumption that any human exposure to carcinogens, no matter how small, is harmful and eventually will
 cause some increase in the incidence of cancer in the population.

                Many scientists are now questioning this assumption based on new evidence.  Arsenic, for
 example, causes cancer at very high doses, but evidence has indicated that it is an essential nutrient at very
 low levels. Thus, eliminating all public exposure to arsenic would actually harm public health.

                Compared to other nations and even other U.S. regulatory agencies, the EPA's risk
 methodologies are too conservative and many overstate the risk.  Industry knows painfully well that risk
 assessment drives cost.  Overly restrictive regulations, born of unrealistic risk assessment, can be extremely
 costly with little environmental benefit.  The resulting use of scarce resources with little environmental
 benefit  is not hi anyone's interest, whether you are with EPA, business, or an environmental organization.

                The disparity between federal regulatory agencies in applying risk assessment standards is
 perplexing.  A contaminant level that the FDA believes represents no risk can be enough to drive regulatory
 policy at the EPA.  It can also drive unfounded public anxiety.

                In my company, we have a total quality management process. As part of that process, we
 work on a challenge called "DIRTFT," which stands for "Do It Right  The First Time."  Today, I challenge the
 EPA to get with the quality process and integrate DIRTFT into everything you do.

               A White House plan has been developed, and is now on hold, to revamp federal health risk
 assessment practices by imposing consistent practices across all federal agencies.  It is my understanding that
 this plan moves in the right direction by, among other things, requiring that a range of risk be provided in
risk assessment based on both average exposure as well as worst case exposure.  I hope a reasonable and
consistent plan across all federal agencies can be finalized.

               One individual who we're associated with through our involvement in the National Recycling
Coalition and the Recycling Advisory Council, and who has close contact with leading environmental groups,
had an interesting suggestion. He proposed that an independent third party, such as the National Academy
of Science, be  charged with establishing realistic risk assessment formulas.  This would be particularly useful


in the development of ecological risk assessment, an area which is even further behind health risk assessment
in terms of consistency of approach or rationality.

                Such a group, at least in theory, would have the necessary financial resources and be in a
position to apply the best possible science to this processes. As a neutral and respected third party, this
group might be able to pull the extreme positions close to the center.  I, for one, believe the idea deserves
more discussion.

                Whatever the case, I believe it is critical that industry and government form a new
partnership between us if we  want to maintain our competitive position in this world.

                Isn't it ironic that in one respect, technology is making our job harder. One of the greatest
dangers of the 90s is our scientific capacity to discover ever diminishing levels of contamination. This may, if
we're not careful, lead to investing greater resources on smaller and smaller levels of pollution with little real
return in actual risk reduction.

                Allow me to restate the fundamental tenet we started with:  To make significant progress on
environmental matters demands that we recognize; economic realities and maximize marketplace
opportunities. It's interesting to note that if you turn this tenet upside down, it's still true. To make
significant progress on economic matters requires that we recognize environmental realities.

                I believe my company is representative of general industry in this area.  Environmental
considerations are of major significance  in all aspects of our business planning, from capital expansion
projects, to product introductions, to employee recycling efforts.

                To your credit, this environmental orientation has also gone beyond  industry.  For example,
the World Bank and the  Department of Defense are now making efforts to better integrate environmental
considerations into their activities. It seems apparent that with the environmental stewardship mentality now
prevailing in this country, this ecological strategic  thinking will  continue to grow.

                But let's switch back to economic considerations.  It is imperative, for the sake of  U.S.
industrial competitiveness, that the EPA not forsake economic considerations in its policies and planning.
Both regulatory analysis, which compares optional ways to achieve desired goals, as well as thorough and
honest cost/benefit analyses can help guide policy makers.  As a nation, we can't afford environmental laws
or resolutions that have not addressed the subject of costs or benefits during their development.

                There is a growing school of thought that the  EPA can actually boost U.S. competitiveness
through environmental policies that  emphasize performance standards, market incentives, and innovation.
The rationale behind the thinking is that today's environmental problems  stem from a lifestyle that relies
heavily on diverse products and processes that defy traditional  regulation.

                Fred Krupp seems  to support that thinking. In a recent  speech, Krupp said, "In many cases
we have reached the point of diminishing returns  in the use of rigid mandates for specific anti-pollution
technologies, which is the way many regulations have been. We cannot regulate our way  out of every
environmental problem—we have  to innovate our  way out—and that innovation has to come from the

                In his landmark  study called Project '88, Harvard Professor  Dr. Robert Stavins described
ways in  which everyday economic decisions of individuals, businesses, and the government might work
effectively for the environment. One of his examples dealt with the development of tradeable permit systems
for nonpoint source pollution—the nation's No. 1 water pollution issue. In Denver, Colorado, environmental
groups,  industry, and local and state governments worked together to create  an innovative permit trading
plan for nonpoint source pollution in the Dillon Reservoir, the major source of water for the city.  The plan

not only saved money, but provided a greater likelihood of achieving environmental improvements. The
same type of program is now being developed for other Colorado sites.

                While I'm on this subject, I might mention that Colorado is an exception as far as individual
states aggressively coming to grips with nonpoint source pollution.  Most states are wallowing without clear
direction. Perhaps more federal dollars should be shifted from industrial point source efforts to nonpoint
source areas where opportunities for environmental gains are significantly greater.

                I suggest that one way to fuel the type of environmental innovation shown in Colorado is to
involve  affected U.S. companies in agency management strategies.  The communication my own industry has
experienced with  Bill  Reiliy is unprecedented. It helps to explain the strong voluntary support from the
paper industry for the agency's  33/50 program.  But the tune is ripe to take that positive  interaction to the
next level.  If the EPA can foster a meaningful dialogue with the stakeholders earlier in its processes, it can
be more effective in setting priorities and establishing cost-effective solutions as early as possible.

                This  will require leaving behind what some EPA critics call the  agency's  "command and
control" mentality, and it may require leaving behind  mandated control technologies in favor of simply
establishing target standards based on the best possible science.  Set the target, not the tool.  Industry will
respond with innovation thanks to an innate aversion to costs.

                And  when you tell us what needs to be done, above all use sound science.  In this day and
age, it's time we got a little bit  enlightened.  It's simply not feasible to  achieve a  "zero discharge."  With
today's scientific technology, we can measure a little bit of everything everywhere, so to talk about zero
discharge is absurd.

                That's what the EPA can do.  But, as they say,  it takes two to tango.

                An outreach effort on behalf of the nation's environmental agency has to be matched with  a
general commitment to corporate environmentalism.  At Fort Howard, we believe  corporate
environmentalism is made up of five ingredients:  First, we make environmental  concerns part of everyday
business decisions, not something extra. Second, we've assigned a high-level group of managers from several
professions to meet regularly and closely monitor environmental issues emanating from the company.  Third,
we aggressively pursue dialogue with environmentalists, both hi our plant communities and at the national
level. Fourth, we do things because they are right, not because someone forced  us. Fifth, we are not afraid
to be leaders in what  we do.

                This  is not corporate ecobabble.  The widespread shift toward corporate environmentalism
goes beyond Fort Howard, and it's not altogether altruistic. Our markets have changed.  A combination of
baby boomers having  children and a significant part of the population moving into its  senior years mean an
enormous percentage  of the population is taking the attitude of stewardship.

               Our  own experience in communicating with consumers backs this up.  The largest
percentage of individuals who write to us or call our 800 numbers have inquiries that are environmentally
related. They want to know about our bleaching operations, our use of post-consumer wastepaper, and other
complex issues. Not too many years ago, most of our consumer contacts were from folks who wanted to
know where they  could find our napkins with the cute blue geese on them.

               Concern for the physical environment, its purity, safety, and inviolability has become one of
the  most deeply ingrained emotional and moral issues of our day.

               It is against this background that congressional  staff and policy makers are considering
Clean Water Act Reauthorization. In inviting me to make some  comments this morning,  I was specifically
asked to mention the  economic ramifications of the Clean Water Act.


                The next Congress will consider reauthorization of the Clean Water Act.  Already we have
seen a Senate staff draft, and I emphasize staff draft, which presents a number of major concerns to those
who seek balance in environmental law.  If adopted, this draft could have these possible effects:

                •       It would totally prohibit the discharge of hundreds of substances based on arbitrary
                        thresholds, without an assessment of the environmental impact of such discharges
                        or the impact of implementing such a ban.

                •       It could "require" changes in production processes, products, or raw materials, an
                        unprecedented action that could give the federal government control over industry's
                        ability to  manage and effect our competitiveness without offsetting environmental

                •       If adopted, the draft would no longer allow EPA to use Best Conventional
                        Technology (BCT) for conventional pollutants (BOD, pH, TSS).  This is despite the
                        fact that no consideratioa has been given to the social, environmental, or economic
                        impacts that may occur if such pollutants are regulated under a new, more stringent

                •       It would create an antidegradation provision that would sharply curtail modifications
                        or expansions at existing industrial facilities, and development of  new facilities. This
                        is regardless of the nature or amount of the proposed pollutant discharge, its
                        overall effect on the designated use, or the availability of countervailing decreases in
                        other pollutants.

                •       Under the draft, states would be required within  three years (with the possibility of
                        a three-year  extension) to designate all of their waters for "fishable/swimmable"
                        designation.  This is true even though the states may find that the less restrictive
                        navigational, agricultural, or industrial uses are the only uses attainable  consistent
                        with the state's social and economic well being or that fishable/swimmable uses
                        may never be attainable due to naturally occurring or unalterable manmade
                        physical, biological, or chemical conditions.

                •       And it would arbitrarily provide "bonus points" toward Superfund designation for
                        areas of concern in the Great Lakes. This would help ensure that these sites
                        become Superfund sites even though they would not otherwise score high enough to
                        warrant such designation. It, of course, makes absolutely no sense  to put sites on
                        the Superfund list that do not qualify on their own merits.

                I would note that, according to EPA, less than 15% of the remaining water quality problems
can be attributed to industrial (point source) dischargers, yet almost all of the provisions in S 1081 focus on
this area and will divert government and industry resources away from the major remaining water problems.

                Well, fortunately this is only a st;iff draft.  However, it points to the fact that there are  many
provisions that are being tossed  about, at least by a few, which, if adopted, would result in large expenditures
and decreased flexibility with little  offsetting environmental benefit.

                It is my belief that only minor changes need to be made to the current comprehensive Clean
Water Act  and that a full and complete evaluation of the current statutory authorities and the  potential
impact of any major new provisions should be made before proceeding.

                The 1987 Amendments significantly strengthened the statute.  Additions included stringent
new toxics  and water quality standard provisions, new provisions regarding technology-based effluent
guidelines,  the anti-backsliding provision prohibiting less stringent discharge limitations in  revised permits,


 and more. EPA and the states are implementing each of these programs.  Compliance is underway and
 continued improvements in water quality are occurring.  Major changes to the Act simply are not necessary.

                In the regulatory area, too, there are areas of concern. While the final guidance has not
 been issued in proposed form, one issue that immediately comes to mind is the Great Lakes Initiative or
 GLI. I should tell you that even if you are not involved  in the Great Lakes, you should be interested.  Many
 in EPA have indicated their plans to use the GLI as a model for other areas of the country. Accordingly, if
 appropriate methodologies, sound science, and other principles we have discussed today are not utilized in
 the development of water regulation of the Great Lakes, the error will be translated to other areas of the
 country in the coming months and years. Let's look at some of the concerns:

                One concern deals with the proposed methodology for determining a chemical's ability to
 concentrate in an organism (known as bioaccumulation factors or BAFs), a methodology that could result in
 the bioaccumulation factors being overstated by a factor of up to 1,000. Such an approach could result in an
 unwarranted explosion in the number of regulated substances  for no environmentally sound reason.
 Obviously, this is an example where sound science should be brought to bear.

                Also, under the pending GLI, only the most stringent  value for a substance will be
 developed to protect many varied ecosystems in the entire Great Lakes. Thus, if a value for a pollutant is
 developed to protect a sensitive fish or animal in New York State, the value will also be applicable in all
 other ecosystems on the Great Lakes potentially thousands of miles away where the species may not even
 exist and conditions may be entirely different. This approach  abandons local flexibility and will result in
 overly restrictive controls for many areas.

                Stunningly, it might even be possible for a discharger under the pending GLI to have to
 expend astronomical sums of money for negligible environmental benefits because a credit may not be
 allowed even for pollutants coming into a company's intake as a result  of background pollutants already in
 the stream.  Forcing companies to treat background levels only to put the water right back into the stream
 particularly highlights the failing of policy makers to focus our finite resources where they can do the most
 good. Again, higher costs with little benefit will be the result.

                The GLI will also allow the establishment of stringent permit values based on far  less
 reliable data sets (known as Tier II values) than in the past . . an approach to which the Science Advisory
 Board has urged modifications. This approach is made more  untenable by the fact that inadequate time is
 allowed for the completion of studies to refute the questionable water quality values.  This is because the
 GLI proposes to require compliance within three years with these permit values if no new data is developed.
 In addition,  if the values are subsequently found through research to be overly stringent, the anti-backsliding
 provision in the  Clean Water Act could prevent any relaxation.

                In other words, stringent regulations would be established based on weak and incomplete
science. However, reverse adjustment may not be allowed even if such a recommended change was based on
more comprehensive scientific findings.

                Finally, under the GLI, a stringent antidegradation proposal would, without a full
antidegradation review, preclude increases in plants currently operating at less than full capacity and even
below allowable  permit limits. As you might expect, this is not an unusual situation for many facilities given
the current recession. In addition, under this proposal, the flexibility of plant operators to alter production
processes or obtain new or slightly different raw materials is limited, even if then- permit limits are met.

                As currently written, municipal POTWs will also face  major problems.  For example, any
new industrial or commercial hook ups to municipal plants could increase emissions for some substances
over current levels triggering an antidegradation review.


                I urge EPA to carefully review the concerns I have noted using the principles we have
discussed today because to do otherwise risks unnecessarily high costs for minimal environmental benefits.  It
is also my hope that, given the massive nature of this effort and its potential impact, a full regulatory review
and cost/benefit analysis will be done and policy modifications made where appropriate prior to publication
of the proposal in the Federal Register.  The SAB findings should also be carefully weighed.

                Both the GLI and the Clean Water Act represent opportunities to take advantage of the
new environmentalism I've talked about today.  A new environmentalism that is shaping up to be global in
character, to be more cooperative than confrontational, and with business at the center. Our challenge is to
aggressively move into a new era when practical and economically sensible policies, combined with good
science, will provide more effective and efficient environmental protection and natural resource management.
Environmental protection and sound business management are mutually achievable objectives.

                Indeed, in my view, there is the bash; for  a win-win approach for environmental agencies,
environmentalists, industry, and the public at large.  ITie key points include:

                •       A commitment to the goal of a clean and safe environment and a genuine effort to
                       work toward  that goal at all levels.

                •       A recognition by all parties that our resources are finite and must therefore be
                       targeted to the areas of greatest environmental return. Projects with high costs and
                       little environmental benefit should be scrapped.

                •       A greater  commitment to tbe use of sound science and responsible risk assessment
                       methodologies to better help us honestly determine where the priority concerns lie
                       and where resources need to be placed to do the most good.

                •       A commitment to allowing the most feasible and cost-efficient approaches to
                       achieving the environmental goal.

                No one can argue  if funds are spent in a  cost-effective manner on environmental programs
that result in significant improvements to our environment. What should  offend all of us, and I  am including
environmental activists here as well, is the expenditure of our finite resources on environmental  programs
that result in high costs for negligible benefits.  No one benefits . . . least  of all the environment when scarce
resources are misallocated.

                I like the way Bill  Reilly describes it.  He refers to it as allying the green of environmental
protection with the green of profits to  form  a new environmentalism in this country.

                But we are at a  point where the road ahead forks and we must decide which direction to
take in the name of the environment.

                The now infamous Woody Allen described our predicament in his own inimitable way. He
said, "More than any time in history, mankind faces a crossroads.  One path leads to  despair and utter
hopelessness, the other to total extinction.  Let us pray we have the wisdom to choose correctly."

                My personal view is not nearly so bleak as Mr. Allen's.  But we have a lot riding on our
ultimate path.  After all, we all live downstream from something, and we  all want  to leave the same legacy
for our children. Our goal should be to leave the next generation with a  stronger economy, a cleaner
environment, and a sense of mission to protect both.

                Thank you very  much.

                                                            Session 6
                 Tuesday, October 20, 1992
     Session 6:  Pollution Prevention in Water-Intensive

                     SESSION SUMMARY

MODERATOR:  Wendell (Ray) Cunningham


Charles D. Malloch—Pollution Prevention in Water-Intensive Industries:
One Chemical Company's Views

W. Jeffrey Pardue—Balancing Economics and the Environment:  The Case
for Retaining Section 316(a) of the Clean Water Act

Deborah Sparks—Environmental Opportunities Missed:  Can The Clean
Water Act Make a Difference in the Future?

Dennis R. Sasseville— Voluntary Pollution Prevention Initiatives Will Shape
U.S. Industry's Regulatory Relationships and Economic Future

                                                                                          Session 6
                 Pollution  Prevention In  Water-Intensive Industries:
                             One Chemical  Company's  Views
                                         Charles D. Malloch
                                  Director, Regulatory Management
                                   Environment, Safety and Health
                                         Monsanto Company

               Water resources can be viewed as a positive, important need as well as a significant concern
for the chemical manufacturing industry.  Industrial uses of water require varying levels of purity and
availability necessitating an appropriate supply of this resource.  The "flip side" of the coin directs that "used
up" water resources be returned to, but not adversely impact, the environment.  The chemical industry will
continue to have water resource needs and must also continue to find new economical and socially
responsible means of meeting its water quality obligations.  Pollution prevention and minimization of use are
but two tools toward this end. Statutory changes to the Clean Water Act as well as regulatory redirection by
EPA may be necessary to encourage, motivate, and provide incentives to maximize pollution prevention

1.0            INTRODUCTION

               This paper was prepared at the invitation of the U.S. Environmental Protection Agency as
an element for its "Clean Water and the American Eiconomy" Conference on October 20, 1992. While the
paper specifically addresses  the author's company and its approaches to pollution prevention issues, it also
discusses some publicly expressed views of the Chemical Manufacturers Association (CMA) which represents
the chemical industry.  CMA references will be noted with all other points attributed to Monsanto Company.


2.1            Industrial Water Uses and Supply

               Monsanto operates over thirty manufacturing facilities  within the United States. These
plants require water resources of widely varying degrees of purity for use either directly or indirectly in
support of manufacturing operations. Uses include process needs for water meeting drinking water purity in
the manufacture of food and pharmaceutical products, as well as indirect uses for cooling, pollution control,
and other support operations. Without water resource availability at appropriate purity levels or at the
quantities needed, many of Monsanto's production processes could not be sustained.

               Monsanto's water resources come from a wide variety  of sources.  For drinking water purity
(or equivalent), the most common source is from municipal water suppliers followed by water wells and from
rivers, both subjected to varying levels of treatment.  Water for  indirect process uses and for cooling needs is
generally obtained from local rivers or other water bodies.  Without an appropriate water resource,
Monsanto operations could  not be sustained.

22            Wastewater Treatment

               Monsanto's U.S. plants treat wastewater to levels consistent with internal Monsanto
standards which equal, or exceed, those requirements mandated by the  Clean Water Act (CWA). Monsanto
has approximately 21  NPDES permits covering 17 significant wastewater treatment operations at 17 plants.


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These treatment facilities utilize technologies recognized as current state of the art, such as biological
oxidation, activated carbon, and secondary biological treatment.

                Monsanto also operates treatment units to pretreat wastewater before its transfer to
municipal wastewater treatment plants, (i.e., publicly owned treatment works (POTW)), in municipalities in
which we operate.  Again, Monsanto conforms to its own guidelines or the EPA's pretreatment regulations
or state and local requirements, whichever is stricter.  These treatment facilities employ somewhat different
technologies than discussed above, such as pH neutralization, activated carbon adsorption, and steam

                Monsanto spent $365 million in 1991 on combined multi-media capital,
operation/maintenance and remediation costs to meet its environmental, safety, and health  obligations.


                For a number of years, Monsanto's corporate environmental stewardship philosophy has
embraced an ethic of "doing the right thing". This ethic governs both our internal commitment to set the
best course of action for the company as well as striving to meet public expectations.  The rising level of
public awareness on environmental issues has heightened their expectations in terms of expected corporate

                Over the last 20 years, a number of significant national or worldwide events have occurred,
each contributing to the changing attitudes of the communities in which we are located. Instead of
welcoming new manufacturers, communities and their environmental groups today often protest new facilities
and ask sophisticated questions concerning new operations. They want companies to not only  meet  the law,
but to go well beyond the law in environmental protection. In at least one case, Monsanto  has had  to
rethink plans for a new facility as a result of the attitude in the community in which we intended to  locate.
This attitude change is real and will likely continue to be strengthened.

                At Monsanto, CEO Dick Mahoney, has said, "Our right to operate and the ability to reach
our goals will be available to us only as long as we come closer and closer to public expectations." Monsanto
has been striving to meet these expectations by allowing the public to see us acting, and performing, in good
faith on environmental issues.  We want to earn a level of trust that causes the public to give us the benefit
of doubt, to allow us the right to operate, to give us credit for our efforts.  Meeting public expectations is not
easy, but it is essential if we are to succeed as a company.

                One major driving force, among many, was enactment of Title III, the Community  Right-to-
Know Act of 1986, which required all manufacturers, for  the first time, to annually  report emissions and
releases of some 320 chemicals. These reports are given to federal and state regulators who in turn make
them  available to the public. We also make our reports directly available to the public.

                It should be noted that the federal law only requires manufacturers to report; nothing else
was required.  No clean-ups, no reduction of waste or releases, nothing but the reporting of releases and off-
site transfers.  Yet this law, as no other, has inaugurated  a revolution in industry and may ultimately result in
more  waste reduction than all the other environmental laws combined.

                Several examples of the Monsanto stewardship both before and since  the 1986 enactment of
the Right-to-Know legislation include the following:

                1.       A milestone for  Monsanto in the pollution prevention arena was reached in 1981
                       with the formation of a waste minimization program focusing on hazardous waste.
                       Put yourself back into 1981.  The Resource Conservation and Recovery Act
                       (RCRA) was just "kicking in," imposing significant new cost burdens  on hazardous
                       wastes.  Monsanto and others in industry were also coming to grips in the  early


                                                                            Session 6
        1980s with a realization that prior disposal of hazardous wastes had left a legacy of
        problems.  The Superfund law had been put into place to address those problems,
        at significant expense to waste generators.

        Our progress on hazardous waste minimization was encouraging when we tallied
        the results in 1987 noting that waste generation had been reduced by 50% from
        1982 levels.  We thought that was good progress, and it was.  But we also noted
        that reductions from process improvements were starting to run dry. Significant
        further progress was going to require some fundamental work on processes,
        necessitating commitment of significantly higher funds to R&D.

2.       Outside the company, public concerns began to focus on multimedia releases.
        These included releases to air, water, and land, and were  not just associated with
        hazardous  waste. There were increasing concerns on the  part of the public that
        releases to one media were not remedied by simply scrubbing them to, or burying
        them in, another media. As a result, we redirected our corporate efforts to
        pollution prevention, and Monsanto's executive leadership stepped in to catalyze
        that redirection.

        In June of 1988, our CEO, Dick Mahoney,  looked at the Title III data and said that
        the numbers were not acceptable, not to him, not to Monsanto, and certainly not to
        the public.  On July 1 of that year, Monsanto announced its Title III numbers to
        the public  together with Mr. Mahone/s commitment, and the corporate
        commitment, that we would reduce Monsanto's Title III air emissions, worldwide,
        by 90% by the end of L992.  We would then work towards the  ultimate goal of zero

        By the  end of 1991, we  had reduced our ah- emissions by  over 66% and will reach
        the 90% goal by the end of 1992.  Many projects are being installed to finish this
        commitment, and when we report the calendar year 1993 releases, they will show a
        greater than 90% reduction of the 1987 reported base.

3.       Also back  in 1988,  the Chemical Group of Monsanto, by far the largest unit within
        the corporation, established a multimedia goal of reducing 70% of targeted releases
        by the end of 1995. We are currently working to update this multimedia program
        to broaden its scope and make it even more responsive to public expectations.
        Later hi 1992, we expect to announce this expanded initiative.

        Most recently, the Pollution Prevention Act of 1990 requires all companies
        reporting releases under Title HI to expand their reports  to now quantify the
        amount of chemicals in waste streams prior to recovery or treatment.  In other
        words,  chemicals which are recycled, used for energy recovery, or destroyed before
        being released to the environment or transferred off site for further processing are
        now reported for the first time.

        Public reaction to the first set of numbers for calendar year 1991 under this new
        reporting scheme has yet to be assessed, but within EPA and in public interest
        groups, there appears to be an increasing emphasis on  source reduction as a means
        to reduce waste.  Monsanto is fully supportive of source reduction as being the best
        route to achieving pollution prevention since it pays both environmental and
        financial dividends. However, we believe industry should also be given full credit for
        recycle, energy recoveiy and treatment where they are  the best technological and

                                                                                          Session 6
                       economic solutions available. Pollution prevention approaches are a way of life at
                       Monsanto and are strong driving forces in its environmental stewardship programs.


                The U.S. is reaching a significant crossroads as it moves from traditional command and
control treatment approaches  for solving wastewater problems to seeking pollution prevention/market
incentive approaches to achieve additional reductions hi an economical and beneficial manner. Over the last
several years, both the U.S. EPA and the regulated industrial community have begun to seek voluntary
actions as a supplement to existing command and control regulations to achieve environmental
improvements.  Remaining environmental problems, particularly in the wastewater area, will require more
complex and diffuse solutions, many of which will be more site specific in their nature than ever before.

                EPA Administrator Reilly, in his testimony before the House Public Works Committee on
January 20, 1991, noted that "many of our old ways of doing business are simply not appropriate to address
the complex and varied problems that lie ahead.  Increasingly, we will have to craft solutions to complex
problems on a geographic-specific basis, and we will have to find new ways to implement nontraditional
solutions.  Traditional national regulatory approaches are not effective for every problem. The extent and
complexity of these future risks require the flexibility to use a much broader array of tools, to promote
grassroots involvement, voluntary approaches, economic incentives, negotiations, and education to supplement
and enhance existing traditional regulatory approaches."  Mr. Reilly was  testifying on Clean Water Act
reauthorization at the time.

                CMA noted in its testimony  on May 14, 1991 before the House Public Works Committee's
Subcommittee on Water Resources that Mr. Reilly "suggests a willingness to look beyond traditional"
command and control techniques to help solve remaining environmental problems.  He "suggests the
potential for more innovative approaches in combination with existing regulatory approaches."  CMA also
went on to suggest that Congress "needs to encourage innovative approaches"  in the next round of
environmental legislation. Further, CMA supported that "voluntary, crossmedia programs to address
pollution prevention are an  appropriate complement to existing regulatory controls." Finally, CMA believes
that "to get more reductions, quicker, and without the accompanying shell game of moving the pollution
around from one media to another, industry needs encouragement and flexibility, not more regulation."

                While there are some current Clean Water Act statutory restraints as well as EPA
regulatory impediments, Monsanto has been able to institute some wastewater pollution prevention activities
which do support the CMA, and Monsanto corporate beliefs that such reductions outside the  command and
control format is an appropriate approach for the future.

                Several examples within Monsanto help illustrate this point.  Monsanto's West Virginia plant
modified one of its production units and updated the operating procedures in  that department, resulting in
elimination of 116,000 pounds of aniline and 114,000 pounds of acetone from  its wastewater.  Also, a
Monsanto plant in Ohio modernized equipment in two departments and increased purity of a raw material to
eliminate releases of almost 300,000 pounds of Title Ill-listed chemicals and 12,000 pounds of non-Title III
chemicals.  Included in this reduction were 77,000 pounds of styrene formerly released in the  plant's
wastewater and 10,000 pounds of styrene formerly emitted to the air as a result of evaporation from the
wastewater.  Modernization projects  such as carried out by these two plants not only reduced releases to the
air and water, but also reduced production downtime, improved yields, and increased consistency in  product

               Process control instrumentation upgrades and equipment improvements were made  at a
Massachusetts plant in the fall of 1990 which  reduced the amount of butanol being sent off site to the
regional POTW by close to  100,000 pounds per year. The most significant improvement was  the replacement
of an in-line density meter with a nuclear density meter which more accurately measured change from

                                                                                            Session 6

aqueous phase to organic phase in the line draining to the process sewer. This change reduced not only the
amount of butanol released to the sewer, but also the amount of butanol used in production.

                At a Monsanto plant in Illinois, a new technology was licensed to replace major process
steps in the production of a chemical used in mothballs.  The old process was a  "wet process" while the new
process is a "dry process".  The result has been the virtual elimination of all water  discharges, as well as a
substantial reduction of air emissions.

                These are four examples within Monsanto of pollution prevention activities, each of which
took time to implement, but each of which were consistent with the  corporate commitment to reduce
environmental releases.


                The U.S. Clean Water Act and its implementing agency, EPA-issued regulations should be
modified to encourage pollution prevention and market incentives to further water quality improvements.
While it can be said that the EPA effluent limitation guidelines programs promulgated over the last two
decades are based on a treatment technology-driven approach, such  approaches  have also encouraged some
reductions of pollutant loads through in-plant source reduction activities. Within Monsanto, we do not look
solely at end-of-pipe treatment scenarios to acbieve our effluent limitations, we also look back into the
processes  generating the wastewaters to determine if there are more economical ways to achieve the same
reductions. Several of the examples noted above speak to this approach.

                Monsanto (and CMA in its May 14, 1991 testimony noted previously) support voluntary
pollution prevention programs using a hierarchy of approaches: source reduction, followed by recycle/reuse
activities,  lastly treatment.  CMA's testimony notes further that "pollution prevention efforts should be
voluntary  to allow creative development of the  infinite variations  in methods of achieving prevention of
pollution.  Source reductions should be encouraged, not mandated, because ElPA lacks sufficient expertise on
industrial  manufacturing processes to be able to judge whether source reduction is feasible in particular
circumstances.  Pollution prevention should be  crossmedia in order not to shift pollution from one media to
another. If Congress wants to encourage more voluntary pollution prevention under the CWA, it should
consider adopting incentives for additional pollutant reductions.  Market incentives also might encourage
more voluntary pollution prevention efforts."

                CMA, in its May 14, 1991 testimony, also "supports the use of certain types of positive
market incentives such as tax credits, accelerated depreciation schedules, streamlined permitting and
monitoring requirements and tradeable credits  to achieve this goal.  CMA can support positive market
incentives, while effluent fees and taxes are inappropriate because they apply across-the-board unfairly,
without consideration of efforts a facility may have already made to  reduce discharges.  Facilities  that may be
unable to  reduce discharges any further as a result of earlier reductions  would be  penalized. Further, these
taxes and  fees would raise the cost of U.S.-based production and harm the international competitiveness of
U.S. manufacturing.  Reduced competitiveness  of U.S. manufacturers increases imports, and results in the
loss of manufacturing jobs."

                While the above lays out a generic framework and  concept that should be embraced  in any
statutory or regulatory changes,  some specific CWA revisions may be needed. The following thoughts
embrace several such possible revisions which some industry trade groups and Monsanto believe may help
promote pollution prevention activities.

                1.      Antibacksliding requirements of CWA Section  402(o) and EPA's regulations
                       severely restrict the circumstances under which permit limits may be made less
                       stringent in the future. This may discourage dischargers  from employing innovative

                                                                                              Session 6
                        technologies or making process changes which might not perform as well as
                        anticipated.  EPA should consider revising its antibacksliding regulations to provide
                        needed flexibility in future permit modifications or renewals. To encourage
                        pollution prevention, the statute may also need to be modified  to remove
                        unnecessary restrictions on changes to permit limitations (e.g.,  changes to water
                        quality-based effluent limitations to reflect revised waste load allocations).

                2.      Antidegradation may be another disincentive to pollution prevention as embraced in
                        EPA's policy.  Antidegradation can place severe restrictions on increases in a
                        discharge in order to protect existing uses of water bodies.  This in turn could
                        discourage voluntary reductions because they could result in lowering permit limits
                        that later preclude increased production which could have been accomplished within
                        the old, higher permit limits.  While some modifications to the CWA may be
                        needed, EPA may wish to clarify its antidegradation policy to provide  some
                        flexibility in  its application concerning NPDES permit renewals to encourage
                        pollution prevention activities.

                3.      When CWA Section 301 (k) was added by the 1987 amendments, it seemed to
                        represent an opportunity for a company to seek out innovative  means  to modify its
                        processes to reduce the generation of wastewater pollutants. However, as
                        Monsanto reviewed this provision further, it seemed to act more as a disincentive,
                        than an incentive, to pollution  prevention. Seeking out ways to modify or replace
                        processes takes more time than just adding normal end-of-the-pipe treatment.  This
                        section has a major flaw in its  restriction limiting the time extension to develop
                        innovative technology to March 31, 1991, a date now passed.   A second major flaw
                        with the innovative technology section is it is only available if the particular
                        innovative system "has the potential for industry-wide application".  Sharing such
                        information will be a disincentive  due to the competitive nature of our businesses
                        and does not recognize the site-specific nature of such technologies. If EPA has
                        the desire to encourage innovative solutions to encourage pollution prevention, and
                        if CWA Section 301(k) is to be used, then the  Act needs to be revised to address
                        both of these concerns and add implementation flexibility.

                The above are only a few examples of possible legislative/regulatory changes possible, but
taken in concert with the generic points raised at the beginning of this section could serve as encouragement
and incentive to pollution prevention-source reduction activities.  Experiences gained to  date by Monsanto
with the voluntary-early reduction program under the Clean Air Act Amendments of 1990 would indicate
that excessive "dotting of the i's and crossing  of the t's" in any  such voluntary programs will also serve as a
disincentive. If the true intent is to achieve water quality improvements, at reasonable costs, and within the
confines of a competitive, market-based atmosphere, then the  mindset of Congress and  EPA needs to be in
concert towards making appropriate provisions  to encourage these approaches.

                                                                                           Session 6
                      Balancing Economics  and the Environment
           The Case for Retaining Section 316(a) of the  Clean Water Act

                                          W. Jeffrey Pardue
                                  Manager, Environmental Programs
                                      Florida Power Corporation


               The electric utility industry uses significant quantities of water in the process of producing
electricity.  In this process, heat, defined as a pollutant  by the Clean Water Act, is rejected to the
environment, primarily through discharge to a receiving body of water.

               Historically, the EPA and states have regulated the discharge of heat according to stringent
technology and water quality-based limits established for heated water discharges.  These limits did not take
into account the unique characteristics of heat as a pollutant. Section 316(a) of the Clean Water Act
provides an opportunity for a variance under which a discharger has the option to establish that an alternate
thermal effluent limit is appropriate to ensure that a "balanced, indigenous population of shellfish, fish, and
wildlife  in and on the water body"  can be maintained.  Approximately 189,000 MW of the U.S. electric
production (32%) currently operate with such alternate limits.

               Over the past 20 years, many environmental impact studies, conducted pursuant to Section
316(a), have been conducted, and while some studies have demonstrated adverse impacts, the vast majority
of the studies have established that technology- or water quality-based thermal limits are more stringent than
necessary to protect the indigenous flora and fauna in the receiving body of water.

               The Edison Electric  Institute commissioned Stone & Webster to conduct an analysis of the
cost if Section 316(a) was repealed. Based on the study, the capital cost estimate is a staggering $28.1
billion.  Including the cost of replacement power, the cost rises to $41.3 billion in 1992 dollars. Another
analysis, commissioned by the Department of Energy and written by John Vail from the Argonne National
Laboratory concludes that the capital  cost to the electric utility industry would be in the range of $22.7-$24.4
billion hi 1992 dollars. While each of these studies; has inherent limitations, in terms of accuracy,  there can
be no mistake that the cost is significant.

               In addition to the direct economic costs, retrofitting cooling towers to existing plants has
additional costs, including the costs associated with negative environmental impacts. There would be a
significant loss in generation capacity  that would have to be replaced with new generation which would
increase atmospheric emissions of SO2, NO,, CO2, and  participate matter.  Other impacts would include
increased consumption of water, airborne drift from cooling towers, fogging and icing, and aesthetic impacts.

               Under Section 316(a), the appropriate balance between costs and benefits has been
achieved.  This section of the Clean Water Act should be preserved.

1.0            INTRODUCTION

               The United States Congress, led by the Senate Environmental and Public Works
Committee, is considering a bill (S. 1081) which would  significantly amend the Clean Water Act.  Among the
bill's many amendments is a provision which would delete Section 316(a).  This section of the Act is one of
the more insightful provisions in the Act, and has proven over the past 20 years  to be protective of the
nation's waters while allowing site-specific determinations to be made which have prevented excessive retrofit
costs for technology-based solutions to thermal discharges.

                                                                                            Session 6
                As Congress prepares to consider reauthorization of the Clean Water Act, it is important
 that they be informed with respect to this provision in the Act. Both the Edison Electric Institute (EEI) and
 the U.S. Department of Energy (DOE) commissioned studies to evaluate the merits of Section 316(a).u
 The purpose of this paper is to highlight  important points addressed in those studies, draw upon industry
 experience, and to generally frame this issue for Congressional deliberations during the next legislative
 session.  For more detailed discussions, the reader is referred to the literature references cited in this review.


                The steam electric power industry uses significant quantities of water in the system cycle.
 Non-contact cooling water is utilized to condense steam, exhausted by the steam turbine, back to water for
 reuse in the boiler.  The fundamentals  of the steam cycle in the production of electricity are illustrated  in
 Figures 1 and 2.  The amount of water used in the non-contact cooling process varies  significantly and is
 affected by many factors, including the  size of the power plant, its efficiency in terms of heat production and
 the efficiency of heat transfer in the condenser.  For example, the amount of water used in cooling at
 selected plants on the Florida Power Corporation system are given in the table below.
Anclote Unit 1
Crystal River Unit 2
Higgins Unit 1
Bartow Unit 3
Turner Unit 3
550 MW
520 MW
46 MW
235 MW
75 MW
465,000 GPM
328,000 GPM
55,000 GPM
170,000 GPM
50,000 GPM
                The plants listed above, as well as many other power plants in operation today, use cooling
water in a once-through mode. In this system, water is withdrawn from a source (e.g., lake, river, estuary),
passed through the condensers, and returned to the receiving body. In this process, the temperature of the
water is elevated through the transfer of heat in the condenser.  Some power plants utilize cooling towers to
reduce the temperature of the cooling water prior to discharge.  These may be "helper cooling towers" or
"closed-cycle cooling towers."  In the "helper configuration," the cooling water is passed through the cooling
towers one time and returned to the receiving water body. The cooling towers operate independently from
the cooling water system and are generally built at a location which may be  remote from the generating
plant.  In the "closed-cycle configuration," cooling water is recycled. The only  make-up water requirement is
that to offset evaporative losses and losses due to dissolved solids control. A fraction of the cooling water
must be discharged (blowdown) to the receiving waters in order to prevent the accumulation of large
quantities of dissolved solids in the cooling water.

                According to the study conducted by Stone and Webster  (1992), approximately 189,000 MW
of 32% of the U.S. generating capacity operate in a once-through cooling  mode and under a thermal
discharge variance granted pursuant to Section 316(a) of the Clean Water Act. If this provision were not
part of the Act, utilities would have to develop alternate strategies to meet stringent numerical criteria.
Although options such a cooling ponds or reduction in energy production  are possible, in most cases this
would require the retrofit of some type of cooling tower.  There are significant capital, operation and
maintenance, and environmental costs associated with cooling towers. These will be  discussed later, but first
a brief overview of the regulatory provisions is in order.

3.0             REGULATORY HISTORY

                Prior to the passage of the Federal Water Pollution Control Act in 1972, laboratory studies
had demonstrated that extremely high temperatures could be harmful to fish and other aquatic life.
Activities which could lead to elevated water temperatures were implicated in  some circumstances. Initial


        HEATERS     BOILER

                                                                       Session 6
   Condenser Principles

                     TUBE  SHEET
                    TURBIHE EXHAUST
                             *  s
                     EXHAUST STEAM
                        TO BOILER THROUGK
                        FEEOWATER HEATERS
                                                 \/  BlOX


                                                                                             Session 6
 attention to power plants was limited to facilities located on small rivers where the discharge was into a
 shallow riffle or rapids area. In response, many states established stringent thermal limits as water quality
 standards.  These were in the form of upper temperature limits (e.g., 90°F) or in the form of temperature
 differential from intake to discharge (e.g., 5°F temperature rise). These limits were very restrictive and did
 not take into account the many site-specific variables which may influence whether thermal discharges have
 an adverse environmental impact.

                In 1972, the Federal Water Pollution Control Act established the framework for the
 promulgation of national effluent limitations for specific categories of dischargers and new source
 performance standards (NSPS).  This approach effectively required that all new units and many existing units
 install expensive technology-based controls (cooling towers). The imposition of an industry requirement to
 install alternatives to once-through cooling was struck down in Appalachian Power Co. v. Train, 545 F. 2d
 1351  (4th Cir. 1976). Subsequently, as regulation continued, an alternative was developed. Section 316(a)
 allows dischargers to establish, on a site-specific basis, that an alternate effluent limit is appropriate. More
 specifically, Section 316(a) subjects the discharger to a standard which requires proof that the discharge will
 ensure "protection and propagation of a balanced indigenous population of fish, shellfish, and wildlife in and
 on the water body."  This requirement ensures that even if alternate limits are granted,  degradation of the
 aquatic communities will not occur.

 4.0             THE SCIENCE BEHIND SECTION 316(a)

                Heated water discharges from power plant  cooling water systems meet the regulatory
 definition of a pollutant. Heat is unique when compared with other more traditional pollutants such as
 suspended solids and organic or inorganic chemicals.  Heat is not persistent in the environment.  It mixes
 with the receiving body of water and within a specific distance from the source, the temperature of the
 receiving body of water is indistinguishable between upstream and downstream locations.

                Many of the early laboratory  studies established that elevated temperatures  could produce
 harmful effects on fish and other aquatic life.  However, it is critical to recognize that in order  to produce
 harmful effects, there must be an exposure which is harmful to the species in question.  There  are many
 factors which influence the exposure in the natural environment which are difficult to simulate  in the

                For example, the  amount of cooling water used in the process can influence significantly the
 amount of heat in the receiving body. Smaller amounts of cooling water translate to higher discharge
 temperatures while large volumes of water will result in lower discharge temperatures.  In addition, the size
 and configuration of the  receiving body will strongly influence the degree of thermal effects in the
 environment. Clearly,  a  high-volume discharge into a small, shallow stream or river will have a more
 significant impact than the same discharge into a large, deep river or reservoir.  Another factor is the
 temperature of the receiving body.  The greater the degree of difference between ambient and the discharge
 water, the faster the discharge water will be cooled.  In  some cases, thermal plumes may "float" due to
 density differences brought about by temperature differentials. The manner in which the cooling water is
 reintroduced to the receiving body is also important.  Configurations may include simple outfall pipes at the
 shoreline, discharge  pipes placed a distance from the shoreline in order to get into deeper water, and
 discharge pipes with diffuser ports which enhance the mixing of thermal discharges and the receiving water.
 All of these factors are important to consider when evaluating potential thermal impacts to the aquatic  life
 since  it is the degree and duration of exposure which determine whether adverse environmental impacts will
 occur. Many of these factors are, of course, site specific in nature.

                Similarly, there are many biological factors which must be considered in determining the
 potential for environmental impact. For  example, fish and other mobile organisms have the  ability to avoid
 undesirable temperatures. In other cases, the  location of the discharge may prevent exposure of certain
organisms to elevated temperatures.  A discharge located near the surface in a deepwater habitat would
preclude the exposure of benthic organisms to the effects of a thermal plume.  The life stage of the


                                                                                             Session 6

organism, when exposed to elevated temperatures may also play a role. Immature life stages of many
organisms tend to be more sensitive to environmental stresses than the adult forms.

                Over the past 20 years, many 316(a) studies have been conducted.  In addition to providing
us with important life history and species distribution data about many species,  the studies have provided
some important insights with respect to thermal environmental impact.

                Results have shown that biological field data are often naturally variable, a factor which
makes measurement of impacts difficult to discern with a high degree  of certainty. In addition, the role of
site-specific factors has proven to be the most important variable to influence the occurrence and degree of
impacts. It is precisely the knowledge learned from these studies which has led to better and better site
selection and plant design.

                There have been relatively few adverse impacts at power generating sites where 316(a)
studies have been conducted.3 The consistency of these positive results highlight the importance of the
316(a) provision.


                In selecting the site  for a cooling tower, it may be necessary to remove and/or  relocate
existing cables, pipes, or other structures. Also, the tower location may be influenced by potential
interference with existing facilities such as air intakes or substation equipment.

                In addition to the modifications which would be made to the temperature limitations in the
existing discharge permit,  there are additional permitting considerations which must be considered in
planning and scheduling.  In virtually every case, new construction permits would be  required for air quality
and water quality considerations.  There are new environmental impacts to consider when cooling towers are
installed.  Consideration of these impacts by the regulatory agencies as part of the permitting process could
delay cooling tower installation and operation, each  of wiiich would have economic penalties.

                There will likely be extensive modifications, perhaps even total redesigns of piping and
intake and discharge structures.  Equipment and facilities no longer utilized would have to be removed,
demolished in place, or otherwise rendered safe.

                Because of the higher pressures inherent in the operation of closed-cycle systems, upgrades
and/or modifications would be required for cooling  water piping, pumps, condenser waterboxes, and
condenser tubes.  Also, new electrical service, water trealment systems, and new controls would be required
for the proper operation of closed-cycle systems.

                In closed-cycle systems, the temperature of the cooling water is higher than in once-through
systems and the flow is lower. These factors  operate to decrease the efficiency of the cooling system and
create additional back pressure on the turbine-generator, thereby penalizing the unit's output. Other energy
penalties include auxiliary power for  operating fans in mechanical draft cooling towers, water treatment
system mixers, and additional heating, cooling, and lighting.  Energy penalties are often expressed in terms of
a net heat rate increase (i.e., the increase in heat input required to offset the loss in electrical output to  the
system).  In general, a heat rate increase from 1% to 3% is expected when converting iErom once-through
cooling to closed-cycle cooling.  This means a net generaiting capacity  decrease on the order of 5 MW to 20
MW for typical plants.


               As discussed above, the construction of closed-cycle cooling results  in a net decrease in
station generation. On a system-wide basis,  this reductioia can be significant and require the addition of
generation either by  higher capacity factors on existing units or construction of new generation.  In either


                                                                                             Session 6
 case, there will be Increased environmental impacts due to mining additional fuel, transportation of the
 additional fuel, and an increase in total air emissions from burning the additional fuel. The magnitude of
 these impacts depends on whether the lost generation is made up by minor adjustments to capacity factors,
 in which case the impacts will be relatively minor, or whether new construction and generation is required.

                Cooling towers achieve reductions in water temperature by evaporation.  In some regions of
 the country (e.g., western U.S. and Florida), there are critical shortages of water. Operation of closed-cycle
 cooling towers would exacerbate the existing problem.  An accompanying issue with operation of closed-cycle
 cooling is the quality of the blowdown water. Depending on the quality of the make-up water, and the cycles
 of concentration at which the  cooling system operates, the concentration of chemicals in the blowdown
 stream can reach concentrations which exceed ambient water quality criteria and in some  cases can be at
 toxic concentrations.  This requires either additional capital for treatment systems, the acquisition of a site-
 specific mixing zone, or other  administrative relief mechanisms.  The current trend in environmental
 regulation is to discourage or  prohibit mixing zones for chemical discharges. Cooling towers also present a
 problem in terms of fouling both with biological growth and sediment accumulation in the cooling tower fill.
 Biocides may have to be added as well as other chemicals to retard fouling and/or corrosion.  Discharge of
 these chemicals also presents environmental concerns.

                As cooling towers evaporate large quantities of water, the emissions include water vapor and
 aerosol-size particulate matter. Depending on the source of the  make-up water,  the cycles of  concentration,
 and the efficiency of the drift eliminators, the drift can present environmental concerns where deposition
 occurs on equipment or sensitive vegetative communities.  In some regions  of the country, there is the
 additional concern with the formation of fog and/or ice.

                Cooling towers accumulate solids in the basin of the towers which must be periodically
 removed. Locating a suitable  disposal site can present a problem in some regions where landfills have very
 restrictive rules on what materials are acceptable for landfill disposal.  In most cases, the waste will have to
 be tested to establish that it is not hazardous prior to disposal.

                A less significant environmental concern, but perhaps more contentious from a public
 relations standpoint, are the aesthetic and noise impacts. In many areas,  the construction of large hyperbolic
 cooling towers will create an unacceptable visual impact as far as the public sector is concerned.  Installation
 of mechanical draft cooling towers requires the operation of large fans and motors which, depending on the
 site location and configuration, can lead to violations of a local noise ordinance or nuisance complaints.

 7.0             COSTS

                In developing a basis for cost analysis, Stone &  Webster approached the  problem by
 projecting costs for two hypothetical generating stations.  Inherent in that analysis are many assumptions
which may lead to higher or lower costs at a specific site.  However, the analysis provides a useful
 comparison and certainly gives a good estimate of the costs one could face  in a retrofit situation. Stone &
Webster projects  the capital costs to retrofit closed-cycle cooling on an 1100 MW nuclear plant to be
approximately $251 million or  $230/kW.  The estimated capital costs to retrofit closed-cycle cooling on  a
300-MW fossil fueled facility would be $39 million or $130/kW.  A 15% allowance for contingency is
included in each of these estimates.

               In a separate analysis, the Department of Energy developed cost projections by interviewing
individuals from power companies throughout the U.S. who had  experience in retrofitting cooling towers, not
all of which were closed-cycle.  It is important to note that the estimates are not  specific engineering cost
estimates and the level of detail in providing cost estimates was not consistent throughout the survey. On
average, the capital cost to retrofit cooling towers on a fossil-fueled power station was $108/kW and
$171/kW on a nuclear station.  The range of costs are illustrated in Figures 3 and 4 (U.S. Department of
Energy, 1992).

                                                                                              Session 6
  300 T
  250 •
  200 -
  150 •
  100 -
   50 -
                           Figure 3 - Capital Cost to Itetroflt Cooling Towers - Fo$«il
               1000            1500
                        Poww Production IMW)
        Source:  U.S. Department of Energy  1992
                            Figure 4 • Capital Cost to Retrofit Cooling Towers - Nuclear
   500  •

   4SO  •

   400  -•

  , 350  -

  M300  •
  I 250  -
  I 200  •
  " 150  •

   100  •

     50  • •

      0  - -
        Source:  U.S. Department of Energy

                                                                                            Session 6
                Once the cooling towers are operational, there will be significant additional operation and
 maintenance costs.  Cooling tower piping, spray nozzles, drift eliminators, fill, pumps, fans, and general
 structural components must be inspected and replaced on a regular basis. For those facilities located on salt
 water or estuarine systems, the frequency of equipment replacement may be more frequent.  Control of
 biological and sediment fouling in the cooling tower fill and corrosion prevention will be required. This
 requires additional chemical storage and handling facilities as well as potential adverse environmental
 impacts from the addition of chemicals. Projected annual additional O&M costs range from $270,000 for the
 fossil plant to $1.7 million for  the nuclear plant.

                In addition to the capital and O&M costs, there are energy penalties associated with the
 operation of cooling towers. In the Stone & Webster analysis, replacement of lost power on a system up to
 300 MW would be made up by constructing new combustion turbines at an estimated capital cost of
 $430/kW.  For losses over 300 MW per system, the  cost is projected based on construction of new pulverized
 coal generation at an estimated $l,510/kW.

 8.0             CONCLUSIONS

                The environmental impact of heated water discharges is very site specific and nearly 20
 years of field studies and experience has shown that the real impacts are generally not significant.

                Section 316(a) of the Clean Water Act is not a variance which allows unacceptable
 environmental impacts, nor is  it a process which can be completed without a thorough analysis.

                There are a significant number of generating facilities in the U.S. (32%) which have
 established that alternate effluent limits are protective of the nation's waters.

                The cost to force fit a technology to reduce heated water discharge temperatures is
 significant ($30-50 billion including capital, O&M, and replacement energy costs, 1992 dollars).

                There are additional negative environmental impacts associated with the construction and
 operation of cooling  towers.

                On  balance, when considering the extremely high capital costs of retrofitting  closed-cycle
 cooling and the probability that net environmental impacts will increase, there is no basis to support the
 deletion of Section 316(a) of the Clean Water Act.  On the  contrary, legislators, regulators, the
 environmental community, and the industrial community should acknowledge that at least on this one issue,
 we have achieved what should be our collective objective, namely a proper balance between the environment
 and the economy.

 9.0             REFERENCES

 1.              Stone & Webster Engineering.  "Evaluation of the Potential Costs and Environmental
                Impacts of Retrofitting Cooling Towers on Existing Steam Electric Power Plants that have
                Obtained Variances Under Section  316(a) of the Clean Water Act," Edison Electric
                Institute 1992. 63pp.   1992.

2.              Argonne National Laboratory.  "Impact on the Steam Electric Power Industry of Deletion of
                Section 316(a) of the Clean Water Act: Phase I - Capital Costs,  Phase II - Energy &
                Environmental Impacts," U.S. Department of Energy 1992.  Phase I, 34 pp.; Phase II, 27
                pp.  1992.

3.              Coutant, C.C.  "Testing the Waters," Electric Perspectives, pp. 32-40.  July-August 1992.

                                                                                          Session 6
                          Environmental Opportunities Missed:
           Can The Clean  Water Act Make a Difference in the Future?
                                        Deborah M. Sparks
                                 Program Development Coordinator
                             Environment, Health and Safety Department
                                        Amoco Corporation,

               This paper will examine the impacts of single-media environmental programs on research,
development and commercialization of innovative technology with cross-media, pollution prevention benefits.
It will also consider how regional initiatives which focus only on selected sources can fail to achieve their
environmental goals.  Finally, the paper will review the water-related findings of a multi-media study done
between Amoco and U.S.EPA, particularly as they suggest potential opportunities and benefits for future
multi-media permitting and technology innovation under a thoughtfully amended Clean Water Act.

1.0             INTRODUCTION

               Since the mid-1960's when the first Water Quality Act was passed (and coincident with the
passage of the first Clean Air Act (1963) and the Solid Waste Disposal Act (1965)), the United States has
pursued environmental quality using an arsenal of statutory authorities constructed along media-specific lines.
Subsequently, as regulatory programs evolved and became more complex,  statutory authority was enlarged
and became more prescriptive. A curious, negative feedback loop was created as many regulators
endeavored to incorporate  science into the programs they had been directed to implement, industry resisted
imposition of standards onto its facilities' operations, and congress growing increasingly impatient over what
it perceived as lack of progress in environmental quality, provided less and less discretion to regulators
charged with getting the job done.

               The fact is that substantial progress has been made in the nearly thirty years since those
initial laws were passed.  Measurable improvements have been made in many of the areas which needed
attention—the air is cleaner, more water is "fishable, swimmable, and drinkable" and a tremendous amount of
potentially hazardous material has been reduced with much of the rest rigorously managed.

               But over time, our national  environmental objectives have changed.  The debate has been
shifted by advancements which we could not foresee and in addition, by the successes that the "command-
and-control" approach produced.

               In the past, our efforts were based upon gross assumptions, available technical data, existing
technology and short-term  political priorities. The cost to the American public since 1970 of addressing
environmental concerns in  this way has been about $1.4 trillion dollars (in 1990 dollars) in taxes and higher
prices for products and services.

               As a nation, we are at a point in our environmental evolution where we are focusing our
attention hi areas where  substantial progress has already been made. Our ability to measure  incredibly small
quantities of chemicals seems to be driving a desire to  regulate those chemicals to the same infinitesimally
low levels.  Throughout the 1980's, we measured and reported emissions at the parts per million level.  That
is equivalent to being able  to pick out one minute over a two year period. Today, we routinely measure and
report emissions at the parts per billion level. That's equivalent  to being  able to pick out one second in
thirty two years!  Over the  most recent few years, we have seriously been  discussing at the policy level,


                                                                                            Session 6

 controlling emissions of some chemicals at the parts per quadrillion level.  A colleague has calculated that it
 is the equivalent of picking out a single hamburger from a pile of hamburgers prepared at a rate of 35 billion
 per decade stacking up for a million years!

                Meanwhile, the conservative approaches we have applied  to the identification of chemical
 hazards still depend upon extreme assumptions like one molecule of an agent will cause cancer in humans if
 it causes cancer in rats.  (And that may be based upon force feeding huge quantities of the substance until
 the rat dies).

                Such factors: advances in analytical technology, conservative assumptions about risk and
 generally poor risk communication with the public by industry, media and  government contribute to EPA
 projections of costs associated with environmental protection escalating some 30-40% by the year 2000 from
 our current annual spending levels of $130 billion!


                An example of the high price  we pay as a nation for the pursuit of environmental objectives
 using single media programs can be found in an Amoco example concerning wastewater treatment

                Amoco Chemical Company is the world's largest manufacturer of terephthalic acid (TA)
 and purified terephthalic acid (PTA).  One of the significant challenges related to that process is the
 treatment of wastewater containing complex organic chemicals to levels suitable for discharge.  Motivated by
 a desire to maximize the effectiveness of the wastewater treatment process, Amoco pioneered an anaerobic
 wastewater treatment technology.   It was recognized as  such a significant contribution to technology that it
 received the biennial Kirkpatrick Award in 1991.  This award is presented by Chemical Engineering to the
 company that commercializes the  most notable chemical engineering technology within the previous two

                Some of the unique features associated with this technology are related to its anaerobic
 nature.  The closed reactor, no-oxygen environment in which specially developed bacterial microorganisms
 metabolize complex organic acids to simple, non-toxic compounds generates much less biosludge compared
 to its aerobic technology counterpart (up to 85% less).

                Better control of VOCs is possible due to the enclosed features of the system but safety is
 protected because it does not contain oxygen.

                Significant energy conservation benefits are realized compared to equivalent aerobic systems
 due to reduced electricity demands. There  are no mixers required in this  process.  In addition, methane
 offgas byproduct can be used as a boiler fuel at other units in the facility.

                Resource conservation interests are served through lowered chemical demand due to partial
 stream recycling which is integral  to process performance.  It is more compact than the aerobic systems
 needing only one-third the physical space required for equivalent treatment capacity.

                That's the good news. The bad news for the United States is that when it came time to
 scale this technology up  from the pilot plant to the world scale, Amoco selected the world's largest (2 billion
 pounds per year)  TA facility which it operates  through a joint venture between itself and China American
 Petrochemical Company (CAPCO) in Taiwan.

               The kinds of factors that drove this siting decision  include: the fact that 85% reduction of
organics will not meet U.S. Organic Chemicals, Plastics and Synthetic Fibers (OCPSF) standards as currently
written;  equivalent capital is required to build the anaerobic system as  compared to the aerobic which
discourages its consideration for U.S. facilities  with existing systems even for replacement, since an aerobic


                                                                                            Session 6

system would still need to be added on; only new U.S. facilities (which would be unlikely siting candidates)
willing to build two systems could be considered. Other possible applications might be at new or existing
foreign facilities lacking treatment capacity (like pre installation CAPCO) and those imposing performance-
based environmental standards or at any location where the economic benefits of lowered sludge handling
and energy savings offset capital costs.


                Amoco believes that regional initiatives can fall short of the expectations of their designers
when they focus on one medium or source category. For example, the Great Lakes Initiative (GLI) is aimed
at enforcing the Great Lakes  Water Quality agreement signed in 1972 by both Canada and the United States
(which was later amended in  1978) as well as the 19136 agreement among the eight  Great Lakes state
Governors.  The 1990 Great Lakes Critical Program.? Act requires EPA  to set water quality criteria that will
effectively set a zero discharge goal for the Lakes by certain deadlines. However, the technical complexity of
such a document, (which  will  be required for adoption by all eight Great Lakes states—Michigan, Illinois,
Indiana, Ohio, Pennsylvania, New York, Wisconsin and Minnesota) has confounded attempts to comply with

                The framework for the guidance echoes the recommendations of the International Joint
Commission released in April, 1992. The bi-laterally appointed panel recommended that persistent
bioaccumulative chemicals of  concern be regulated using very stringent standards.  Non-bioaccumulative
pollutants will be somewhat less stringently regulated.  Characteristics such as biodegradability and whether
or not the chemical can be metabolized, are not considered.

                Existing  dischargers will not be allowed mixing zones after the year 2004 and will be
prohibited for all new dischargers for purposes of meeting the most stringent wildlife (few of which exist),
human health or aquatic life criteria.

                Since many of the proposed criteria are below analytical detection limits, discharges will be
challenged to document compliance with the criteria

                It is expected that compliance will require the construction of additional wastewater
treatment capacity to meet these end-of-pipe standards or move to a zero discharge system which would cost
three times as much as add-on capacity.  The latter may be required however, since existing technology of
activated carbon and metals precipitation  may not be able to achieve proposed criteria levels.

                An additional cost of the zero discharge option is the likely loss of a faculty's NPDES
RCRA exemption. To the extent that a facility utilked such an exemption, the implications for Part B
permitting and Subtitle C technical standards are significant.  The predictable increase in tons of solid waste
sludges subsequently sent to secure landfills is substsmtial.

                The bad news part of this story is,  that even based upon Toxic Release Inventory (TRI) data
and studies of PCBs, mercury and lead, only a  very small percentage of  current loadings to the Great Lakes
are from point sources.  Most, if not all of these are impacted by the proposed criteria.  However, the
reports and studies reveal that most of the loadings of toxic chemicals come from non-point sources and
from air. Many of the chemicals targeted by fish consumption advisories, such as PCBs and  DDT, have
already been banned in the U.S. Furthermore, the criteria that are being proposed will only apply to the
U.S. facilities.

                Surveys  not yet published of the economic impacts of these criteria on affected point
sources, (estimated to be less than 10% of the loadings), suggest that the low end costs of applying these
standards will be $100 million each in capital costs for oil and petrochemical plants along with annual
operations and  maintenance costs of some $26 million.


                                                                                             Session 6

                This focus on more stringent control of already regulated point source discharges, while
 postponing or ignoring non-point and uncontrolled sources, and with a resultant minimal beneficial impact on
 Great Lakes water quality is very difficult to defend, in Amoco's opinion.


                Some of you may have heard of a recently completed, voluntary, joint study between U.S.
 EPA and Amoco of its Yorktown Virginia oil refinery.  That 2+ year, multi-million dollar effort had four
 primary objectives: to inventory releases from the refinery; to identify sources and reduction alternatives; to
 rank those alternatives according to certain criteria and to identify barriers or incentives to their

                Over 10,000 analyses were conducted on samples taken from air, water,  groundwater and
 solid waste.  That sampling and analysis program  revealed important facts about this particular site.
 Regarding water, those findings included:

                1.      That existing wastewater treatment technology does an excellent job on the water
                        streams generated at this plant.  The facility's effluent is discharging at about 10%
                        of levels allowable by permit,  under normal operating conditions.  Most organics
                        (except MTBE) in the discharge were below detection limits.

                2.      Of four major studies looking for impacts on the adjacent York River, none showed
                        significant impacts. This project looked at new biomarkers as indicators of change.
                        No impact of refinery discharge on the two species of fish were found. (However,
                        the study did reveal the presence of contaminated  sediment in a stormwater settling
                        basin within the facility boundary which did effect individual fish).  Thus, real
                        improvements in water-related effects could be  achieved by addressing these on-site
                        sediments and not the plant's  water discharge.  Major stresses on river ecology are
                        more likely to result from oxygen depletion as a result of natural thermal inversions
                        and tidal action in the river.

                3.      Site-specific features of this facility reduced possible groundwater contamination.
                        The existing underground process sewers are leaking—but inwards rather than out
                        of—the system, collecting some 35,000 gallons per day of groundwater and carrying
                        it to the faculty's wastewater treatment plant. The effect is the  prevention of off-
                        site migration and contamination of groundwater.

                The effort at Yorktown convinced Amoco of the value of site-specific data in identifying and
prioritizing potential environmental investments at facilities.  Such data would help to avoid overinvestment
in command-and-control  standards being applied to sources, which on a site-specific basis, do not present
real  relative risks.

                We believe that the project also served to dispel some myths regarding industrial facilities,
such as: all sites are the same and should be regulated  in the same way, that large amounts of facility-specific
data already exists and that environmental controls are  always or equally economic.


                Amoco believes that the three examples  described here, taken from our own experiences,
illustrate some of the cumulative negative effects of media-specific regulations.  These effects can range from
those on innovative technology development and commercialization, to potential inadequacy of narrowly-
focused regional initiatives on long-term environmental quality and to the potential for overinvestment in
mandated controls when they are tied to generic, industry-wide standards which do not allow consideration of
site-specific conditions.


                                                                                            Session 6

                We believe that statutory language could be developed which would provide for innovative
policy and implementation not unlike the innovation we seek in the area of technology. Waiver-like
mechanisms to prescriptive provisions could be provided when certain site-specific demonstrations could be
made.  Those demonstrations should be crafted in such a way as to encourage the collection and
maintenance of site-specific environmental data. This data would serve to document environmental
performance across at least one, and preferably all media, so as to demonstrate continuous progress toward
facility-specific goals.

                Under such multi-media environmental demonstrations, maximum flexibility is afforded to
the facility's management in meeting performance-based standards. Such flexibility encourages
comprehensive assessment, source identification and potentially, innovative process modification or
technology development aimed at achieving highest emironmental benefit at lowest economic cost.

                The potential to identify and implement pollution prevention routes to achieving such
improvements is greatly increased.  Furthermore, we believe site-wide data collections and assessments could
support a systems-based self-auditing approach to  environmental compliance. In theory, such a program
could make enforcement much easier to administer and much more objective.

                Amoco believes that such features would make a considerable difference in the economic
viability of individual U.S. facilities and whole industrial sectors relative to our global competition.

                We believe that this directly translates to retaining industry, jobs and tax bases in the United
States while maximizing further environmental progress opportunities on currently controlled sources.  The
nation's environmental savings could be allocated to numerous alternative environmental investments like
currently uncontrolled sources, resource conservation or habitat restoration. In fact, we might even consider
investments in other societal priorities like research and development of innovative technologies, health care,
education, rebuilding our national infrastructure or similar worthy expenditures.

6.0             REFERENCES

1.               Chilton, K., Environmental Dialogue:  Setting Priorities for Environmental Protection.
                Washington University, October  1991, pg.l.

2.               Illustration from Klee, H., "The Greening of Chemical Engineers", Speech delivered March
                24, 1990, Notre Dame University.

3.               U.S. Environmental Protection Agency, Environmental Protection Agency's Report to the
                President on the 90-Day Review of Regulations.  May, 1992, pg.l.

                                                                                        Session 6
                Voluntary  Pollution  Prevention Initiatives  Will Shape
          U.S. Industry's Regulatory Relationships and Economic Future
                                       Dennis R. Sasseville
                                     Associate Vice President
                             Environmental Science & Engineering, Inc.

The environment of the United States remains among the best in the world. Environmental regulation of
industry is pervasive and comprehensive, but has been widely accepted as essential to protecting and
maintaining our quality of Me. There is a perspective that, at best, underestimates the costs of
environmental requirements on our industries, and at worst, concludes that no price  is  too great to pay. As
in Eastern Europe and elsewhere, events throughout the world have demonstrated that without a strong and
prosperous economy, the environment as well as living standards suffer.

Future water resource  legislative  actions and regulatory policies need to carefully consider:

               •      The significant environmental expenditures and accomplishments of water-intensive
                      industries over the last 20 years;

               •      Customer and market forces can shape industries' actions and orientations as much
                      or more than do environmental regulations;

               •      Major industry has demonstrated a commitment to sound environmental
                      management by instituting voluntary pollution prevention initiatives; and

               •      Any additional regulation of water resources should recognize and incorporate the
                      legitimate and historical use of surface water as an economic resource.

For its part, U.S. industry needs to continue to demonstrate the effectiveness and soundness of voluntary
pollution prevention initiatives by its willingness to adopt increasingly sophisticated and comprehensive
measures as alternatives to regulatory command and control.

1.0            INTRODUCTION

               The condition of the environment of the United States is good and  becoming progressively
better. Twenty years of strict environmental controls have improved our waterways and air measurably.
While cleanup of abandoned hazardous waste (CERCLA) sites has been slow, many non-CERCLA sites
have been cleaned up by private parties. As important, the proper management of wastes generated today
ensures that there will be fewer new CERCLA sites  to clean up in the 21st century.

               However, progress in restoring and  preserving the environment will not likely come from
additional pages of regulations or a command-and-control approach.  With annual environmental
expenditures accounting for at least 2.1% of our GNP, more cost-effective means must be employed to reach
desired environmental goals and the  timetables for some of those  goals need to be revaluated. As voluntary
pollution prevention initiatives take hold among U.S. industry, a new balance may well be struck between the
necessary protection of the environment and human  health and the need to maintain a strong and prosperous

                                                                                             Session 6

                Selected factors that affect industries' response to environmental regulations and voluntary
 initiatives are examined. The pulp and paper industry is profiled as an example of a major industry, critical
 to our national economy, that has demonstrated leadership in pollution prevention initiatives.


 2.1             Public Perception/Media

                The public perception of an issue ofte:n will define that issue for policy purposes. For the
 U.S. public in the  1990s, environmental and human he,dth protection receives top priority. A Wall Street
 Journal-NBC poll  asked for a response to the statement, "protecting the environmeni: is so important that
 requirements and  standards cannot be too high, and continuing environmental improvements must be made
 regardless of cost." In 1991 90% of the respondents agreed compared to 45% in 1981. Even though pollster
 questions such as this one can be framed to produce a desired outcome, one does not need formal polls to
 show that virtually all of your friends, neighbors, and relatives also agree with this statement at face  value.
 Public influence, even pressure, is a real and formidable marketplace force.  Just recently a survey was made
 of the 100 largest manufacturers in Minnesota for their senior executives' opinions on environmental issues.
 Sixty-five percent of the executives cited the possibility of damage to their company's public image as a major
factor contributing to their approach to compliance, with the possibility of fines having only a minor or no
 effect on their approach.1

 22             Regulations

                Regulatory-driven compliance programs have been the norm since Congress put teeth, and
 funding, into the first major environmental acts of the  early 1970s, the Clean Air and Clean Water Acts.
 Federal environmental regulatory growth has been steady since the benchmark year of 1972. Over 18,000
 pages of regulations appeared under Tide 40 CFR in 1991.  As recently as 1986, the number was half of the
 1991 figure.  The U.S. Environmental Protection Agency now has a staff of 18,000 and an operating budget
 of $4.5 billion.  That accounts for about a seventh of the staff and a third of the spending of the  entire
 federal regulatory  system.  In 1990, the Agency estimated that complying with its regulations was costing
 Americans $115 billion per year, or 2.1% of the GNP.  In the 1990s, EPA projects that compliance costs  will
 total another $1.6  trillion, not including the Clean Air Act.2  The  impact on the U.S. economy is  clearly not
 incidental and a regulation approach can only achieve a finite level of success. Regulations set mixed goals,
 drain Agency and  industries' resources and do not encourage creative risk taking by ajiy of the parties
 involved.  In  the Minnesota executive survey, fully 75% of the respondents viewed the regulatory agencies as
 "enforcers" as opposed to a "resource."1

                Fortunately, the signs of change are prevalent and led by EPA Administrator Bill Reilly.
 Encouraging actions are also forthcoming from the Administrator's senior staff.  Region I Administrator
 Julie Belaga, a veteran of tough floor fights during her  10 years as a Connecticut legislator, has been winning
 points with New England business for her emphasis on voluntary compliance.3

 23             The Industry Itself

                If pollution prevention initiatives are to truly be  successful,  workers and executives  need to
 "buy in." Pollution prevention starts between the ears aid most of the highly successful programs, like the
 one initiated  by Northrop, the manufacturer of the B-2 bomber, ceed to have the solid commitment of the
 highest levels of management. If U.S. companies do not want increasingly burdensome regulations, then U.S.
 CEOs must take the initiative and supply the vision matched with specific, but attainable goals.  At  Northrop,
 a cultural shift has occurred away from traditional compliance methods and  the "trench" mentality of the
 pollution "war." The company is well on its way to its 1995 zero discharge goals; set by its CEO.  U.S.
 companies need to examine the leadership role adopted by Northrop and others and adapt an approach
 suitable to their company.4

                                                                                            Session 6

 3.1             A Perspective of the Industry

                The pulp and paper industry is truly one of America's current success stories and bright
 spots on the economic horizon. The United States has 12% of the world's paper and paperboard mills,  16%
 of the world's pulp mills, and is responsible for 30% of worldwide paper and paperboard production.  As the
 world's number one producer, U.S. mill output is greater than that of the next four countries combined:
 Japan, Canada, Germany, and China.  All told, U.S.  mill production amounts to 5% of the total value of U.S.
 manufacturing output, placing pulp and paper among our nation's top ten manufacturing industries.5  At a
 time when everyone is becoming acutely aware that global competitiveness is key to economic fitness, only
 two U.S. industries rate an "A" in competitiveness when compared to Japan and Europe, pharmaceuticals and
 forest products.6

 32             An Environmental Profile

                The pulp and paper industry has deep roots in the American manufacturing landscape and
 is one of the oldest heavy manufacturing industries still viable in our  country. Growing awareness of
 environmental concerns by the public in the 1960s led the industry to increase its research funding in the
 area of pollution control technologies. The industry  even established its own research arm devoted
 specifically to  pollution technology research and evaluations, the National Council of the Paper  Industry for
 Air and Stream Improvement (NCASI). The industry now invests over $1 billion per year in environmental
 controls and has extensive experience in voluntary chemical and wastewater reuse programs.  Today,  the
 industry regenerates about 98% of the chemicals used to produce pulp from wood chips and it uses 60% less
 water per ton of product produced than it did 23 years ago.  Biological oxygen demand  has been reduced by
 70% even though paper production increased 50%.  Since 1985, the pulp and paper industry has voluntarily
 spent over $1  billion on process modifications to reduce already trace levels of dioxin in its wastewaters by
 over 75% .7

                The pulp and paper industry's ongoing environmental commitment is reflected hi its strong
 participation in the U.S. Environmental Protection Agency's "33/50" voluntary pollution prevention initiative.
 The industry's level of participation in the 33/50 program is nearly double the average of other industries.
 Its commitment is also reflected through a set of mandatory environmental and forestry principles specified
 by its national trade association.7

                Probably the greatest success story that the pulp and paper industry has to tell involves
 recycling.  The industry has set for itself a voluntary  goal of recycling for domestic use and export 40% of all
 by paper used in the United States by 1995.  That amounts to nearly 40 million tons, 50% more than was
 recycled as recently as 1988. Today, U.S. papennakers utilize 24 million tons of recovered paper and
 paperboard accounting for 28% of the industry's fiber needs. Three out of every four U. S. mills recycle
 some  recovered paper and 200 depend on it entirely. To reach its 40% goal, the industry has committed to
 spend billions  of dollars on new manufacturing facilities and equipment. As of early 1992, 90 such projects
 were either under construction or publicly announced.7

3J            Where Does the Industry Go From  Here?

               The simple answer is that there is always more to be done and that voluntary initiatives have
 the demonstrated ability to achieve the desired results.  The pulp and paper, as well as all other U.S.
 industries, must continue to demonstrate the effectiveness and soundness of voluntary pollution prevention
initiatives.  To produce the achievements necessary to hold additional command-and-control measures at bay
will require  a focused commitment to public concerns, the concepts of environmental stewardship, and to

                                                                                          Session 6
developing a fully Integrated approach to mill production and environmental controls. Some areas for
increased attention in the future include:

               •      Expand participation in lie 33/50 program and evaluate commitment to voluntary
                       state initiatives and agreements.

               •      Integrate Total Quality Management (TQM) efforts into mill pollution prevention
                       initiatives. In some companies TQM efforts are being fully integrated with
                       (previously separate) departments for environmental control, safety, and health.

               •      Perform formal Life Cycle Analyses (LCA) at a product's  design stage to develop
                       "environmentally compatible" products, thus preventing environmental damage and
                       saving future environmental control costs.

               •      Promote  university education in pollution prevention methods in process
                       engineering programs as well as in the traditional pollution control courses.

               •      Remember the customer; next to environmental regulation itself, the
                       customer/market forces are the primary motivation to change the way the industry
                       makes paper.8

4.0            REFERENCES

1.             Fredrikson and Byron.  "Environmental Issues for the 90's, A Survey of Executive Opinion,"
               Minneapolis, MN. April, 1992.

2.             Brimelow, P., and L. Spencer.  "You Can't Get There From Here," FORBES,  pp. 59-64.
               July 6, 1992.

3.             Kessler, M.W.  "Regional Administrator Julie Belaga Sees  Changing Attitudes on
               Compliance," Bureau of National Affairs. Environmental Reporter,  pp. 742-743. July 3,

4.             Beroiz, D J.  "Northrop Zero Discharge Program," April, 1992.

5.             Storat, R.E.  "The U.S. Pulp, Paper and Paperboard Industry: A Profile," American Paper
               Institute. Presented at Pollution Prevention in the Manufacture of Pulp and Paper-
               Opportunities and Barriers.  Washington, D.C.  August 18, 1992.

6.             Kupfer, A.  "How American  Indusiay Stacks Up," FORTUNE, pp. 30-46. March 9, 1992.

7.             The U.S. Pulp, Paper and Paperboard Industry.  American Paper Institute, Inc.  "Paper:
               Linking People and Nature," Washington, D.C.

8.             Closset, G.P. "Trade-off Issues,"  Presented at Pollution Prevention in the Manufacture of
               Pulp and Paper -  Opportunities and Barriers. Washington, D.C. August  18, 1992.

                                                           Session 7
               Wednesday, October 21, 1992
      Session 7:  Economic Incentives—Future Role in
                   Clean Water Programs

                     SESSION SUMMARY

MODERATOR:  Richard D. Morgenstern

Claudia Copeland—Funding  Water Quality Programs Using Toxicity-Based
Discharge Fees

Scott Farrow— The Existing Basis and Potential for Damage Fees and
Tradeable Allowances

Ken Kirk—Paper Unavailable

Raymond Squitieri—Are Permits and Charges the Last Word in Water

Zach Willey—Implementing Market-Based Instruments for Clean Water in

                                                                                           Session 7
                             Funding  Water Quality Programs
                           Using Toxicity-Based Discharge  Fees
                                          Claudia Copeland
                                   Specialist in Environmental Policy
                                    Congressional Research Service

                The question of how to fund and pay for government programs in an era of fiscal and
budgetary constraints is being raised with greater frequency.  Water quality programs are no exception.
Some in Congress have recently discussed creating a new source of federal funding to meet the needs of the
nation's clean water programs. The concept underlying this proposal is to impose fees or charges on
discharges or products with potential for contaminating or degrading the  aquatic environment and obtain
revenue to support activities for abating or managing water pollution.  One component of the proposal under
review in Congress is a system of fees for industrial discharges for conventional and toxic water pollutants,
with varying fees imposed according to the toxicity of the particular chemicals.

1.0             INTRODUCTION

                Whether one is talking about environmental, social service, educational, or other programs
of government,  today's funding problems find common ground:  against a background of unchanged or even
growing needs,  traditional revenue sources  (especially from the federal government) are increasingly scarce.

                Water quality programs are no exception, and a particularly large funding issue is associated
with municipal  sewage treatment plant construction.  Federal, state and local governments have contributed
nearly $75 billion towards sewage treatment construction projects,  yet remaining funding needs are  estimated
to be $83 billion.  Those needs will not be fully met by the end of fiscal year 1994, when authorizations are
due to cease for the principal  federal program that iissists sewage treatment plant construction, the  revolving
loan fund program in the Clean Water Act.

                Recognizing that states alone cannot meet water program funding needs and that the federal
government has a continuing responsibility to assist states and localities financially, some policymakers and
others have recently sought new revenue sources to meet these needs.  For example, a group called the
Clean Water Council has recommended establishing a Water and Wastewater Treatment Trust Fund to be
capitalized by the collection of federal fees imposed on water and  sewer bills.  These revenues would be
deposited in the new Trust Fund, which would operate like existing federal transportation trust funds and
would be used to finance local construction of water and wastewater infrastructure.1

               Another recent proposal involved establishing a federal chartered private corporation for the
purpose of disbursing funds for a long-term federal commitment to water pollution control projects.  Under
this proposal, a federal corporation would manage fluids derived from two sources:  $2 billion per year
provided through appropriations from general revenues and $3 billion per year provided from fees on certain
commodities that contribute to water pollution. The guiding principle of the second portion of the  proposal
was that "the source of funds should be intimately tied to commodities that affect that quality of the water we
are seeking to keep clean."2

                Interest in these recommendations led the staff of the House Merchant Marine and
Fisheries Committee, Subcommittee on Fisheries and Wildlife Conservation and the Environment, to request
assistance of the Congressional Research Service (CRS)  in detailing the elements of a similar proposal, one


                                                                                             Session 7

 to establish a National Clean Water Investment Corporation. The central element of the Subcommittee
 staffs proposal was to be a system of assessing fees on discharges of conventional and toxic water pollutants
 from industrial sources, with varying fees imposed according to the toxicity of particular chemicals.  The
 revenue goal was to be $2 billion per year. By incorporating toxicity factors in the charge rates, the
 industrial wastewater discharge fee has considerable potential for providing economic incentive to reduce

                Environmental Fees and Charges

                The  concept underlying industrial wastewater fees is to impose a charge on chemical
 releases with potential for contaminating or degrading the aquatic environment and obtain revenue to
 support activities for abating or managing water pollution. The industrial wastewater discharge fee is directly
 intended to generate revenues. However, the related goal is to provide users of the chemicals with an
 economic incentive to reduce pollutant loadings.

                Using market-based incentives to protect the environment differs greatly from traditional
 regulatory methods of protecting public health and welfare.  Yet, the rationale  for using market-based
 approaches is straightforward.  By using direct or indirect price  or cost signals on pollution, individual
 decision makers can determine what is best for their own circumstances.  Environmental objectives are
 achieved through the  response of polluters to governmentally imposed changes in the costs of using certain
 inputs and/or in disposing of waste products.

                Environmental fees and charges have been implemented in a number of locations.  In
 particular, the  Federal Republic of Germany in 1976 enacted an effluent charge law for controlling water
 pollution.  According  to one evaluation of the German system, "Although the actual charge is lower than
 abatement costs in many instances, it has proven to be high enough  to provide  an incentive to reduce
 substantial waste discharges into public waters.  As a consequence, compliance as well as water quality has
 improved and the costs of enforcement have decreased."3

                Academics have been the major proponents of market-oriented changes in environmental
 regulation in the United States.  More recently others have raised the issue in various forums.  For  example,
 a project sponsored by U.S. Senators Timothy Wirth and John Heinz presented market-type options for a
 number of air and water pollution, hazardous substance, and climate change problems.4  Interest in
 examining alternatives or  supplements to current regulatory systems comes from several sources, including
 recognition of the costs of environmental controls, the seeming intractability of managing toxics and nonpoint
 sources of pollution that are less amenable to traditional  regulation than conventional pollutants, and the
 potential of environmental fees as a revenue sources.


                This  proposal addresses a specified group of 192 chemicals (189 toxics and three
 conventional pollutants) released to surface water by industrial direct dischargers and indirect dischargers
 (firms that discharge wastes to municipal sewers for treatment by a local sewerage utility) throughout the
 United States.  The revenue objective would be to generate $2 billion annually, but an alternative revenue
 goal could also be specified.

                The 192 pollutants are grouped in five categories consisting of a base group and four other
 groups that reflect increasing toxicity to aquatic life and to human health. A rate is established for each  of
 the five categories that would be applied to actual loads, or discharges, of the individual chemicals.  Toxicity
 characteristics,  developed  by the Environmental Protection Agency's Office of Water in connection with
 standard setting under the Clean Water Act, yield a toxic weighting factor for each pollutant  and, hence,  a
 means of ranking and grouping the chemicals according to their relative toxicities. The EPA's toxic
weighting factor system was developed as a tool for evaluating technological options for industrial water
pollution control.


                                                                                            Session 7
2.1             Pollutants Subject to Fees/Charges
                Two key issues associated with iJiis proposal are identifying which chemicals would be
subject to fees and determining the rate or rates applicable to discharges of those chemicals. A fee or
charge can be applied most easily to discharges from point sources, since the discharges can be accurately
measured or calculated. Measurement or calculation based on actual or estimated discharges is essential.
Also important is basing the entire proposal on as comprehensive a list of chemicals as possible, so that all
pollutants with potential for causing environmental harm are made subject to the same manner of incentives
to reduce discharges.

                The group of 192 chemicals in this proposal includes three conventional pollutants
(suspended solids, biological oxygen demand, and oil and grease) and 189 toxic pollutants. The toxics include
metals and metal compounds; organic chemicals (halogenated and non-halogenated); non-metallic inorganics;
pesticides;  and acids, bases, and salts.  The pollutant list is based on data received pursuant to EPA's Toxics
Release Inventory (TRI), mandated by Section 313 of the Superfund Amendments and Reauthorization Act
of 1986 (SARA). Section 313 mandates that firms in Standard Industrial Classification (SIC) categories 20
through 39 (major manufacturing categories) report to EPA and states the amounts of more than 300 toxic
chemicals that they release directly to  air, water, or land, or that they transport to off-site facilities, including
POTWs, that treat or dispose of the chemical wastes.

                This data set substantially addresses the issue of which chemicals should be subject to fees
and charges, as it is both comprehensive and current. The 189 toxic pollutants were reported to be
discharged to surface waters and publicly owned treatment works (POTWs) in 1988 from industries in the
SIC categories that are subject to the TRI requirements of SARA.  TRI estimated discharges to water in
1988 totaled 865 million pounds; 554 million pounds (64% of the total) were discharged to POTWs, and 311
million pounds (36%) were discharged to surface waters.

                Some pollutants that  are highly toxic when discharged to water, such as dioxins and some
pesticides (DDT and endrin, for example), are not included in the list of pollutants to be subject to fees,
because currently they are not subject to TRI reporting and data on actual or  estimated discharges are not
available. Moreover, the three conventional pollutants (TSS, BODj( and oil and grease) that constitute the
core of the "base group" are  not covered by the TRI reporting requirements. Conventional pollutants are
included  in the proposal because discharges of these substances can, in fact, impair water quality and because
they provide a reference point for relative toxicity of the other chemicals.

                Despite certain limitations, the TRI data are the best source of information available on
discharges to surface waters  and POTWs, since TRI has the potential for reporting actual discharges and is
highly current.  Moreover, the TRI list of chemicals, drawn from Section 313 of SARA, is known and
understood by the regulated  community that would be subject to the fee proposal—including industries that
discharge wastes to POTWs, even though those industries (indirect  dischargers) are not subject to Clean
Water Act permit requirements.

                EPA's Office of Water has other databases on discharges by sources required to obtain
Clean Water Act permits.  Such data might be more inclusive (in terms of industry categories, for example),
but are likely to  be less useful than TRI data because they contain estimated discharges only, are less current
than TRI data (making the information questionable for assessing impacts of the proposal), and provide no
data on indirect  discharges for which permits  are not required.

22             Design of the Fee/Charge System

                Table 1 identifies 1988 estimated discharges to  surface waters and POTWs in the five
groups included  in this proposal, the fee rate that would apply to chemicals in each category, and the
estimated revenues (total and per category) from the proposal.

                                                                                             Session 7
                                               Table 1

                                Wastewater Fee/Charge Summary

Group 1
Group 2
Group 3
Group 4
Median Toxic

1988 Loadings
Toxic Weight

Fee Rate Per

23             Toxic Weighting Factors Used in the Proposal

                This proposal is based on the concept that the rate of fee or charge should be tied to the
environmental harm or threat of harm that is caused by the discharge of chemicals or pollutants.  Thus, the
toxicity of the substance is important as a basis for determining the amount of the fee.

                Under the proposal, toxic weighting factors are used to rank each chemical and place it in a
group, for purposes of determining the applicable charge rate. EPA uses toxic weighting factors in the
process of evaluating technological options under the effluent guidelines program.3 Toxic weighting factors
are derived from water quality criteria  by a simple numerical  computation using a methodology established in
1981 and applied to effluent guidelines rulemakings  since then.

                The cost-effectiveness analysis evaluates the incremental  cost of a given pollution control
option for an industry or industry subcategory and the incremental removal of particular toxic chemicals by
that option. The cost-effectiveness calculation compares the annualized cost of a technology option to the
"pound equivalent" pollutant loadings removed from surface waters by the technology.  The analysis is based
on the option's removal of "pound equivalents," or a pound of pollutant controlled by the technology
weighted for its toxicity.  This reflects the fact that some pollutants are more toxic than others and removal
of pollutants by one technology may be more or less effective than another technology based on its ability to
remove the more toxic chemicals.  A weighting factor for a pollutant parameter is calculated by dividing the
relevant water quality criterion, expressed as a concentration in micrograms per liter, into the  criterion for a
selected standard pollutant, copper.

                EPA has developed toxic weighting factors for 127 priority pollutants and approximately 250
pesticides, because control of these chemicals has been the focus of regulatory activities since  1977.
However, EPA has developed toxic weighting factors for less  than one-half of the  TRI pollutants  discharged
to water, since the list of TRI pollutants is broader than the list of priority pollutants subject to Clean Water
Act regulation.  For the purpose of this proposal, then, TRI pollutants for which no factor has been
developed were assigned a factor equivalent to the median of the TRI pollutants for which such factors  have
been developed:  0.07. This somewhat arbitrary assignment provides a means of including these chemicals in
the proposal, although it is likely that actual toxic weighting factors,  if available, could well be lower or

                                                                                              Session 7
2.4             Other Toxicity Ranking Options
                A ranking system based on EPA's toxic weighting factors is not perfect, principally because
it currently does not cover all chemicals of potential interest or concern.  Other systems of ranking chemicals
according to their toxicity might be examined, but compared to toxic weighting factors, none has as adequate
a database or as developed a methodological approach.

                Under one alternative approach, a ranking system could be developed based on evaluating
the bioconcentration and/or bioaccumulation effects of chemicals.  EPA defines a bioaccumulation factor
(BAF) as the  chemical's concentration in the tissue of test species divided by its concentration in ambient
water and the diet. Bioconcentration factor (BCF) is defined as the tissue concentration of the  chemical
divided by its  concentration in water (but not including diet). These factors provide a measure for evaluating
pollutants that are highly persistent in the environment.  This approach may be useful for some  but not all
pollutants actually discharged into the aquatic environment (some highly toxic pollutants may not, in fact be
highly persistent—formaldehyde, for example—and vice versa—manganese, for example).  Further,  at the
present time, neither data nor methodologies are comprehensive enough for EPA to have developed BCFs  or
BAFs for all toxic pollutants  discharged to water.

                Another option could be a pollutant ranking system now being developed by EPA. It is
based on summarizing scores assigned to 15 parameters in three categories: toxic effects (e.g., acute and
chronic toxicity, wildlife and human health toxicity), environmental fate (bioconcentration/bioaccumulation
and environmental persistence), and exposure data (frequency of detection in ambient water and sediments).
As conceived by EPA's Office of Water, Health and Ecological Criteria Division, this ranking system could
be used to prioritize pollutants for ambient water criteria development or by others in EPA to select
pollutants for  rulemaking or standard setting. While the inclusion of multiple parameters has the potential to
strengthen the results of chemical ranking, sufficient data in  the broader array of categories is currently
lacking.  EPA has so far attempted to rank about 300 chemicals using this system, but 30% were judged to
have insufficient data to complete the analysis.6

2.5              Applicable Fee/Charge Rates

                Fee or charge rates under the proposal are  determined based on the categories of
chemicals, their relative toxicity to one another, and the total amount of revenue to be collected.  A rate of
$0.00647 per pound of pollutant discharged is established for chemicals in the base category, which consists
primarily of conventional pollutants and other chemicals with toxic weighting factors of less than 0.001 (very
low toxicity).  Each of  the other categories' charge rates is then established in relation to the base rate in
order to reflect relative toxicity. The median toxic weighting factor in a particular group is assigned to all
chemicals in that group to simplify computation. Chemicals in Group 1, consisting of chemicals with toxic
weighting factors ranging between 0.001 and 0.0099 with a median toxic weighting factor of 0.0075, are 37.5
tunes more toxic than pollutants in the base group, which  have a median toxic weighting factor  of 0.0002.
Thus, the rate of fee for discharges of Group 1 chemicals  is  37.5 times the base rate ($0.2426 per pound

                Pollutants in Group 2 consist of chemicals with toxic weighting factors ranging between 0.01
and 0.099.  Pollutants in Group 3 consist of chemicals with toxic weighting factors ranging between 0.1 and
0.99.  At the other extreme,  pollutants in Group 4 (consisting of chemicals with toxic weighting  factors of 1.0
and above) have a median toxic weighting factor of 1.96 and are more than 9,800 times more toxic than
chemicals in the base group.  Industrial sources releasing chemicals in Group 4 would pay a fee of $63.40 per
pound discharged. Table 1 identifies the toxic weighting ratio of each category compared to the base, the
rate that would apply to chemicals in each category, and the estimated revenues (total and per category)
from the proposal.

                                                                                              Session 7

                At first glance, the base rate and rates applicable in some of the categories appear
 exceedingly small.  However, these rates result  from several factors: (1) the large volume of pollutants on
 which the proposal is based—4.25 billion pounds of toxic and conventional pollutants discharged in 1988; (2)
 the desire to reflect relative toxicity in the rates applicable to each separate category, and (3) the defined
 revenue goal of $2 billion. For example, if the  base fee rate were to be set at $0.10 per pound, while the
 same toxic ratios were retained for each group  or category, the total estimated annual revenue would be
 approximately $31.1 billion!  (Emphasis added by author.)

 2.6            State-bv-State Impacts of the Proposal

                From the TRI data, it is possible to identify on a state-by-state basis the fees that industries
 in SIC Codes 20 through 39 would pay under this proposal for discharges of TRI chemicals, based on  1988
 reported discharges.  The amount of total fees paid by industries would range from $37,200 (Nevada) to $320
 million (Louisiana). In the majority of states, fees of the size estimated here are likely to have minimal
 impact.  For example, fees measured as a percent of a state's gross state product are one-tenth of 1% or
 less, except in the case of Louisiana, where the estimated fees would be equivalent to 0.4% of the 1989 gross
 state product.7

                These results are valid for general estimating purposes only, since more precise discharge
 information will no doubt become available on  all pollutants subject to the proposal. Dischargers would have
 incentive to improve the accuracy of reported amounts used as the basis for  fees/charges.  Since the program
 would apply to all industries which discharge these chemicals (not just those covered by TRI reporting
 requirements which are in SIC Codes 20 through 39), it is difficult to estimate the full impact of the
 proposal. For example, TRI does not  currently cover the mining/resource extraction and agriculture/forestry
 industries, although their discharges of conventional and toxic pollutants to water are significant.  If all
 dischargers  were to be subject to the proposal and fee rates were unchanged, actual revenues would be
 higher than those  estimated.  Alternatively, if the industrial discharger base were expanded, but the $2 billion
 revenue goal remained fixed, impacts on individual dischargers would be reduced.

 2.7             Industry-Specific Impacts

                It appears unlikely that the industrial wastewater discharge fee described here would  have a
 significant impact  on the majority of affected industries.  The major exception is the chemicals and allied
 products industries (SIC 28), which accounted for 68.6% of TRI discharges in 1988 and would  pay 67.9% of
 estimated fees paid by all industries.

                Impacts on most industries would not be large.  For example, the industry-total amounts
 estimated in this analysis represent less than two-tenths of 1% of the 1989 Gross National Product (GNP)
 contribution of the food products,  textile products, and metals industries, respectively, and less than four-
 tenths  of 1% of 1989 GNP of the paper products industry.  A slightly larger  impact would occur with the
 chemicals and allied products industries, where  the estimated fees represent  1.4% of their contribution to
 1989 GNP.8

                Likewise, in terms of corporate profitability, the estimated fees would  generally have  a small
 impact:  0.79% of  the food products industry's corporate profitability and 1.41% of the  meiaL indusirit;;
 profitability  in 1990. Again, however, the initial impact would be greater on companies in the chemicaL and
 allied products industries, where the estimated fee represents 6.64% of 1990 corporate  profitability.* ', .; i'at
 extent  that imposition of fees resulted in changed behavior (substitution of less toxic chexnica; inputs o
 processes involving reduced wastewater discharges), the actual and relative burdens of the fees/charges
would be reduced.

                Discharges of four chemicals—ammonium sulfate, phosphoric acid, methanol, and sulfuric
 acid—total 625 million pounds, or 72% of toxic chemicals discharged to water in 1988.  Fees paid on these
discharges would be $1.4 billion. A number of industries utilize  and  discharge these four chemicals, but four


                                                                                            Session 7

 industries would account for $1.3 billion of that amount:  chemicals and allied products ($950 million in fees
 on these four chemicals), paper products ($251 million), food products ($58 million), and metals ($28


                The principal purpose of the industrial wastewater discharge fee described in this analysis is
 to raise revenues for a National Clean Water Investment Corporation.  Indeed, the actual rates are based on
 three factors:  volumes of the chemicals discharged, the relative rankings of chemicals in terms  of toxicity,
 and the defined revenue goal of the proposal. So long as revenue-raising is a key objective of a fee system, it
 will be necessary to build into the system a means for making adjustments over time.

                For example, to maintain a predictable revenue stream, the design of the system would need
 to provide for periodic changes in the fee rates to account for effects of inflation. Alternatively, if revenue
 needs were to decline over time by virtue of having met most or all funding needs for clean water activities,
 rates would presumably be adjusted downward.

                Similarly, the fee system would need to recognize  and adjust for uncertainties in its initial
 design.  One major uncertainty could result if the imposition of fees led to reduction in use of the chemicals,
 since revenues would decline. It is difficult to estimate the extent to which chemicals  use would be altered as
 a means of avoiding paying the fees, but the potential for reduced revenue should be considered.

                Other adjustments would be required if the number of chemicals subject to fees was
 modified.  Likewise, changes made to the industrial discharger base (sources that would pay the fees) would
require certain rate adjustments if the specified revenue goal remained fixed.

               The lack of comprehensive toxic weighting factors for all chemicals that might  be included
 in the industrial wastewater fee is an additional uncertainty.  For the  purposes of this  analysis and as a means
 of ranking the chemicals, a toxic weighting factor was assigned to those chemicals for  which EPA has not
 developed toxic weighting factors.  Better information would undoubtedly alter the relative rankings of some
 chemicals, the fee rates that would apply to those chemicals, and the  revenues that could be anticipated.

               These considerations are not likely to be obstacles to establishing a system of fees or
 charges, but they point to the need to design  a system that is sufficiently dynamic to anticipate changes over

4.0              REFERENCES

 1.             Apogee Research, Inc.  America's Environmental  Infrastructure:  A Water and Wastewater
               Investment Study Prepared for the Clean Water Council.  Washington, D.C. December

2.             Levy, P.F.  "Statement on Reauthorization of the Clean Water Act," in U.S. Congress.
               House Committee on Public Works and Transportation.  Subcommittee on Water
               Resources.  Reauthorization of the Federal Water Pollution Control Act.  Hearings, 102d
                Congress, 1st session.  GPO, Washington, D.C. (102-31)  p. 1895. 1991.

3.              Brown, G.M. The Effluent Charge System in the Federal Republic of Germany,"  U.S.
                Environmental Protection Agency, Office of Policy Analysis. Washington, D.C.  July 1985.

                                                                                         Session 7

4.             "Project 88, Harnessing Market Forces to Protect our Environment: Initiatives for the New
               President," A Public Policy Study Sponsored by Senator Timothy E. Wirth. Colorado, and
               Senator John Hei"*, Pennsylvania.  John F. Kennedy School of Government, Harvard
               University,  Cambridge, MA. Draft, October 1988.

5.             U.S. Environmental Protection Agency, Office of Water Regulations and Standards.  Cost-
               Effectiveness Analysis for Effluent Guidelines. Vol. 1.  May 1988.

6.             U.S. Environmental Protection Agency. "Briefing Notes:  Office of Water, Regulation and
               Standards Pollutant Ranking Scheme (draft)," 1990.

7.             Trott, E.A., A.E. Dunbar, and H.L. Friedenberg. "Gross State Product by Industry, 1977-
               1989," Survey of Current Business.  U.S. Department of Commerce, Economics and
               Statistics Administration, Bureau of Economic Analysis.  December 1991.

8.             Mohr, M.F,  "Gross National Product by Industry, 1987-89," Survey of Current Business.
               U.S. Department of Commerce, Economics and  Statistics Administration, Bureau of
               Economic Analysis.  Vol. 17, No. 4.  pp. 25-27.  April 1991.

9.             "National Income and Products Accounts, Selected NIPA Tables,  Table 6.16C - Corporate
               Profits by Industry," Survey of Current Business.  U.S. Department of Commerce,
               Economics and Statistics Administration, Bureau of Economic Analysis.  Vol. 71, No. 11,
               p. 22. November 1991.

                                                                                           Session 7
                  The Existing Basis and Potential for Damage Fees
                                 and Tradeable Allowances
                                            Scot): Farrow
                                         Associale Professor
                       H. John Heinz III School of Public Policy and Management
                                     Carnegie Mellon University


               The potential for using damage fees and tradeable allowances is discussed as an extension of
existing authority in the Clean Water Act.  The  importance of geographic targeting of economically based
policies is emphasized based on an index of fishable and swimmable water.

1.0            INTRODUCTION*

               There is no secret about the two classes of economic instruments potentially applicable to
water policy.  Taxes, in their infinite variation, and tradeable allowances capture the span of direct economic
incentives.  The trick for market-oriented policy entrepreneurs is to surmount the thousand and one pitfalls
between economic abstraction and real world implementation by Congress, agencies, firms, and households.

               This paper focuses on two variations of taxes and tradeable allowances where potential for
implementation already exists in the Clean Water Act and related legislation.  The variations are a means of
applying natural resource damages and total maximum daily load allocations in highly polluted waters.  Prior
to discussing these specific economic instruments, however, the  issue is addressed of how much cleaner water
should be to achieve economic efficiency.

               Existing research by Myrick Freeman1 and preliminary estimates by Randy Lyon and myself
question the economic efficiency of current plans to make America's water cleaner.  Importantly, however, it
is quite likely that it is very worthwhile to make some waters cleaner, even much cleaner, but it is unlikely
that all technologically improvable waters are economically worth  improving.

               A question related to that of economically efficient improvements is the question of
determining the current status of water quality, and what the projected impact that new policies might have
on water quality.  The first section of the paper addresses this physical quality issue  The second section
presents a resource damages approach to improving water quality that permits questions related to the
explicit balancing of costs and benefits.  The third section presents a tradeable allowances approach which
focuses on the cost effectiveness of achieving the allowable maximum daily loading in a watershed. Emphasis
is given to the fact that these approaches build upon existing legislation instead of creating economic
incentives de novo.
"This paper draws upon research the author has conducted with Randy Lyon and Jim Tobey. The views
expressed, however, are solely those of the  author and are not necessarily those of emy organization with
which I am or have been affiliated.


                                                                                              Session 7

                The fisfaable and swimmable goals for water quality in the Clean Water Act resonate with
 the actions and values  of people throughout the  country. Economists wishing to address the usefulness of
 economic incentives require a means to link economic valuations of improved water quality with physical
 water quality measurements. Elsewhere,2 Randy Lyon and I have provided one such link, creating a baseline,
 continuous index for river and stream water quality in fishable and swimmable terms for each state and for
 the nation in 1988. The index that is created links an index based on physical units and is used to estimate
 household willingness to pay for improvements in water quality developed by Carson and Mitchell3 with
 state-reported estimates of fishable and swimmable waters.

                Economists4-3 have found a water quality ladder, developed at Resources for the Future,  to
 be a useful device to link a physical index of freshwater  quality with individuals' willingness  to pay. The
 water quality ladder links 5 physical measurements to aggregates such as "beatable," "game  fishable," and
 "swimmable" that are economically meaningful to a larger population of individuals.

                Given the significance of the water quality ladder as an index because of its link to existing
 economic studies of willingness to pay, it is useful to extend its application to national data.  One approach is
 to compute  the index for specific locations; on a limited scale this was done by Smith and Desvousges4 for 43
 sites in the Monongehela River Basin.  In the spirit of Dawes' work on the usefulness of linear indices in the
 face of uncertainty,6 it  is possible to take the data reported by the states to EPA regarding  fishable and
 swimmable waters and transform it into data consistent  with the water quality ladder.

                In 1988, 40 states, 2 river basins, the District of Columbia  and Puerto Rico reported
 assessments from 1986 and 1987 for over 400,000 stream miles as to whether the miles achieved fishable and
 swimmable characteristics.7  The EPA reports for each state the assessed miles  that meet the fishable goal,
 the swimmable goal, and those that do not meet the goals.   The states providing reports assessed 45% of the
 total river and stream miles with slightly under half assessed using chemical and biological data and the
 remainder assessed using mathematical models, professional judgement, citizen  complaints,  and other

                A variety of assumptions are necessary to link the EPA data with the water quality ladder.
 The key assumptions address: (1) the representativeness of the assessed water, (2) divergences between the
 miles assessed for the fishable and swimmable goals,  (3) consistency between water  quality ladder rankings
 and the data, and (4) the valuation on the water quality ladder assigned to the three  ordinal categories
 provided by the EPA.  These assumptions are discussed by Farrow and Lyon.2

                What  is significant in the current context is the basic result:  even if streams and rivers are
 assumed to have the worst water  quality within each category (i.e., if the water is fishable, it is the worst
 quality water that is fishable; if it is swimmable,  it  is the worst quality water that is swimmable, etc.) the
 national average water quality is between fishable and swimmable. Using a less stringent assumption,
 national average water quality is above swimmable quality and only Virginia and the  District of Columbia
 among reporting units  would have had average water quality below fishable. What these results emphasized
 even more clearly in a  longer analysis is the variation in water quality within and across states.  This leads to
 the following:
This section is based on Farrow and Lyon.2

CA more limited data set is reported for lakes and bodies of salt water.  The lake water quality is indicated as
exceeding stream and river quality and is not investigated here. As for bodies of salt water, the water quality
ladder  is not designed for salt water applications.


                                                                                            Session 7

                Recommendation 1: Economic incentives should be geographically focused
                and should be zero in some areas.


                Rather than reinventing the wheel, it is useful to look at existing water-related legislation for
potential applications of economic incentives.  Both the Clean Water Act and the Oil Pollution Act of 1990
provide a structure for assessing and collecting natural resource damage costs. To date, these provisions have
been used for discrete events, such as the Exxon Valdez spill, or historical, long-term point sources such as
those in New Bedford Harbor or near Los Angeles, California.  The damage costs collected are to be used
for the recovery and restoration of the water boilies. A potential extension of the natural resource damage
framework could apply to ongoing sources of pollution in highly polluted waters.

                In highly polluted waters, those unable to achieve water quality standards specified in
Section 303 of the existing Clean Water Act, there is an expectation that natural resource damages exist and
that they are  caused by pollution from many sources.  These damages may include lost recreation values and
increased costs to other water users such  as industry and municipal water plants.

                A market-oriented approach to achieving water quality standards in highly polluted
waterways could specify an  option for states to assess and collect natural resource damage costs from classes
of polluters.  Both judicial and administrative approaches are discussed in the sections to follow. Parallel to
existing legislation, the damage costs collected could be targeted for cleanup and recovery  efforts. In
particular, they could be earmarked for existing state revolving funds that support investments in water
pollution control and for non-point pollution control programs such as the Conservation Reserve Program in
the Department of Agriculture.  The collection of damage costs can be assigned to municipal water
authorities, and state or county governments.

3.1             Existing Authority and Identification of Highly Polluted Waters

                The Clean Water Act (Section 311), the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA, Seclion 107) and the Oil Pollution Act of 1990 (Section 1002) all
contain provisions that, in general, specify that the federal and state governments may: (1) assess liability for
damages to resources for which they are trustees for the public, (2) recover clean-up, restoration, and
damage costs prior to restoration  from responsible parties.

                The existing legislation is targeted at oil spills, or large sources of hazardous substances.
Regulations that implement the Clean Water Act specify approximately 150 haizardous chemicals and
minimum reportable quantities for spills of these hazardous substances. Among the listed hazardous
substances  are numerous forms of ammonia (the basis for most nitrogen fertilizers) and phosphorus. These
substances  and their chemical transformations are important causes of failing to attain water quality
standards, as  are various other identified hazardous substances.  Clearly, however, not all,  nor even most,
water emissions are linked to hazardous substances.

                The identification of highly polluted waters is based on the anticipated failure of a water
body to achieve a water quality standard even after all technological standards are implemented (Section 303,
CWA).  In this paper, natural resource damages are either assumed to be zero for waters that meet water
quality standards, or else such waters are assumed to already achieve  an economically efficient balancing of
natural resource damages with the costs of controlling such damages. In contrast, achieving the water quality
standard in highly polluted  waters can only be achieved by exceeding regulated technological requirements or
by bringing new sources into the water management system.

                Determining the  cause and source of  natural resource damages in highly polluted waters
provides a  comprehensive approach for all causes of failure to meet the water quality standards.  Such
damages may result from a variety of pollutant loadings, and may also result  from low stream flows as a


                                                                                            Session 7
 result of large-scale consumption uses of water.  EPA in a number of publications8'9 has discussed the
 aggregate causes and sources of impairment.

 3.2             Natural Resource Damages

                The cause of pollution can be translated, with greater or lesser accuracy, into economic
 damages associated with that pollution.  Research indicates that recreational benefits are the largest single
 category of benefits from water quality improvements.'  However, many of the methods used to estimate
 natural resource damages are particularly debatable when applied to one-time spills in areas that  are
 unfamiliar to the public. The ability to assess natural resource damages for a localized area and for common
 uses is thought to be substantially better than in cases such as the Exxon Valdez.

                However, substantial duplication of effort and controversy would undoubtedly surround each
 analysis of natural resource damages.  The federal government could provide information to the states by
 convening a natural resource damages assessment commission to evaluate the "typical" costs for natural
 resource damages and the local characteristics that would be expected to change the typical cost.  Depending
 on how the Clean Water Act would be modified, the Commission could set a cost schedule to be
 implemented by the states.  Such a commission would follow the model of the Federal Sentencing
 Commission, which set guidelines for calculating uniform federal criminal sentences derived from an
 algorithm incorporating many variables,  and the recent review of Medicare and Medicaid practice that
 established standardized fees. Such a national commission  can play the important roles of reducing research
 and transaction costs, and providing a predictable outcome  for polluters and water users.

 33             Collection of Fees

                Several mechanisms may be used to collect fees other than lengthy and time consuming
 watershed-wide litigation as might be possible under the existing Clean Water Act.  These alternative
 mechanisms may include:  (1) an add-on item to state taxes based on the quantity of pollutants released as
 determined in total maximum daily load analyses (TMDL)  conducted by the states  under existing Section 303
 of the Clean Water Act; (2)  deposit/refund policies for  those inputs used in  a non-dissipative manner such as
 motor oil; (3) (with less economic justification) a damage cost placed on the consumption of inputs such as
 nitrogen  fertilizers and the hazardous chemicals already specified in 40 CFR 116 if outputs are so hard to
 measure  that an input proxy is needed; or (4) state-imposed water consumption fees payable to municipal
 water authorities, or to county or state authorities based on water withdrawal from surface or ground water.
 While these costs may have a small effect (in the correct direction) on polluting behavior, attainment of
 water quality standards is likely to be possible only by using the fees for restoration and recovery as currently
 directed in the statute.

 3.4             Distribution of Funds

                Existing legislation relating to natural resource damages specifies that the damages
 recovered are to be used for cleanup, restoration, and recovery. Applying that principle to damage costs
 under the proposed system could go a long way toward  financing capital expenditures on water quality
 improvement. Such financing has been identified as an  important limiting factor to improvements in water
quality.  In particular, damage costs  collected by a state  under these statutes could be directed to two existing
programs, the State Revolving Fund for construction grants and the Conservation Reserve Program of the
Department of Agriculture.

                A 1988 "needs" assessment  for municipal water quality improvements funded by the State
Revolving Funds identified $84 billion in nationwide capital improvement, including $16 billion for
investments related to combined sewer overflows.10  To  date these funds are not  allocated for operating or

                                                                                            Session 7

                The Conservation Reserve Program of the Department of Agriculture is intended to reduce
sedimentation by subsidizing the removal of highly credible land from production and the planting of various
soil stabilizing plants.  An option has been investigated by the Department of Agriculture to also target
environmentally sensitive areas. Improvements in water quality account for approximately 40% of the
comprehensive benefits that have been estimated for the program with the present value of benefits ranging
from a low of $18 per acre in the Northern Plains to a high of $389 per acre in the Delta region." The
average land rental paid by the Conservation Reserve Program to remove highly credible land from
production is less than $50. The Conservation Reserve Program could be partially funded from natural
resource damage costs.  The program would  provide a local means of implementing improvements in non-
point pollution prevention and control.

               A statutory and a technical basis exists for assigning damages  due to some causes of water
pollution. The assessment and collection of these damages on a broader scale  than previously considered
provides one market-based approach to water pollution control.  The damage costs collected could be a
funding mechanism for existing state revolving funds which invest in water pollution control.  However,
separate litigation is currently needed to recover damages  based on a natural, resource damage  assessment.
This situation could be changed by Recommendation 2:

                Recommendation 2: That explicit statutory linkage between ongoing
               pollution and natural resource damages be developed and that a
               Presidential Commission be convened to  establish plausible resource
               damages from pollution in highly polluted waters.


               An existing section  of the Cle,in Water Act can be read as setting the ceiling quantity for
the implementation of tradeable allowances.  The allowance approach should be viewed as an alternative to
the resource damage approach of the previous section. While the resource  damage approach could address
economic efficiency issues, the tradeable allowance approach is  essentially limited to improving the cost-
effectiveness of achieving a given level of pollution control.

               While most  of the Clean Water Act is devoted to technology-based approaches to improving
water quality, one existing section, Section  303, is devoted  to water quality standards. Under Section 303,
states set standards for water bodies and deter mine the maximum pollutant loads for those waters
categorized as highly polluted. Where economic costs of meeting water quality standards are too great,
individual states may redefine their water quality standard.

               Section 303  provides the majority of guidance necessary to provide for tradeable allowances
in water pollution for the very areas that are most likely to benefit from the ability to trade.  Indeed, such
trade-offs are made implicitly in the current management  of the program.

               Several case  studies exist in  the literature regarding trading among sources of  water
pollution. The typical success story  is Dillon Reservoir, the typical failure, Fox River.  A short  description
follows of these cases and a case involving trading between point sources and agricultural sources  in the
Wicpmico watershed.

               •       Dillon Reservoir: In the Dillon R.eservoir near Denver, Colorado, the EPA funded
                       a special study to evaluate the comparative cost of point and nonpoint source
                       controls. It was reported that about 2 pounds of phosphorus could be removed
                       through urban nonpoint source controls for every one pound removed from sewage
                       treatment plants at  51% less cost than  upgrading sewage treatment plants.

                                                                                             Session 7
                •       Upper Wicomico River watershed, Maryland: it is estimated that agricultural best
                        management practices were capable of reducing total phosphorus loads by 25% at
                        83% less cost than upgrading a sewage treatment plant to remove the same amount
                        of phosphorus.

                •       Fox River:  Trading was allowed in this heavily polluted area but is perceived to
                        have failed. Some of the stated reasons for failure are a lack of clear authority to
                        conduct such trades, the bureaucratic review of trades, and the lack of a bank to
                        store load reduction credits.

 To date,  I know of no study of cost effectiveness on a national scope that exists that would complement
 these and other case studies by providing insights on the national level.

                Discussions of these cases usually bypass  the existing mechanism  that identifies highly
 polluted water bodies and determines the  maximum daily  load from point, nonpoint and background sources
 that is allowable in order to achieve the state-determined water quality objective.  The remainder of this
 paper focuses on the existing mechanism as specified in Section 303(d) of the Clean Water Act.

                Section  303(d) requires that states identify and prioritize "water quality limited" segments.
 These segments are the most highly polluted water bodies and are not expected to meet state-defined water
 quality standards, even after full compliance with technology-based effluent limitations.  These highly polluted
 areas (in one or more pollutants) are the most likely areas to have economic benefits associated with
 improvements in water quality and so provide a target area for market-based approaches.

                For these water quality limited areas, states are required to establish an aggregate pollution
 ceiling, called "total maximum daily loads" (TMDL), that would achieve a water quality, as opposed to a
 technological, standard.  In establishing TMDLs, statutory guidance is that point, nonpoint and background
 sources are to be distinguished.  Section 319 of the Clean  Water Act specifies the  development of a state
 management plan for control of nonpoint  sources. Taken together, reductions in permitted discharges and
 the implementation of the nonpoint source plan are to achieve the TMDL level.

 4.1             The Potential for Trading in TMDL  Defined Areas

                Section  303(d) offers an opportunity to introduce a cost-minimizing program of marketable
 load allowances to achieve water quality standards in a comprehensive manner without  departing radically
 from the existing system. Since a correctly prepared TMDL presently specifies the maximum allowable
 discharges for all sources of contaminants, it should be possible to rewrite permits in a divisible format  and
 allow exchanges to be made with monitored reductions from permitted or unpermitted sources. The
 exchanges could thus occur among point sources or between point and nonpoint sources.

                The ability to trade load allowances may  not only reduce  costs, it may be the only
 technically feasible method of achieving the  targeted level  of water quality.  Regarding cost savings, studies
 have found that control costs for biochemical oxygen demand (BOD) under the traditional regulatory
 approach are 20 to 300% greater than a least-cost  approach.  Regarding water quality,  the exchanges would
 take place within the constraints of the TMDL so that water quality would be expected to improve. Also
 importantly, tradeable allowances would provide long-run  incentives for innovation since dischargers could
sell their pollutant reductions.

                While marketable load allowances may help  achieve water quality standards in some areas,
in other areas it may be economically inefficient to do so.  Two existing mechanisms in Section 303 and the
regulations that implement that section help integrate  economic considerations. Section 303(d)  requires water
quality limited segments to be prioritized by the states. This would direct  market based approaches toward
the largest perceived pollution problems with the greatest  potential benefits from emissions reductions.

                                                                                            Session 7
Furthermore, existing EPA regulations state that rionattainment of water quality standards is acceptable (by
redefining the water quality standard) when achievement of the TMDL would result in "widespread economic
and social impact." This suggests that water quality limited segments for which the incremental costs of
pollution abatement exceed the incremental benefits could be exempted from compliance. Provisions do
exist to review periodically such a finding.

4.2             Existing Water Quality Limited Segments and TMDLs

                A 1989 GAO report, focusing on EPA's Region X (the Northwestern states plus Alaska)
found that those states  had identified 602 water quality limited segments  as of mid-1988.  Only one TMDL
had been set at that time.  At the same time, Region IX states (California, Nevada and Arizona) had
identified 77 water quality  limited segments and developed 33 TMDLs.  Region V states (six upper mid-west
states) had identified 227 water-quality limited segments and developed 70 TMDLs by the end of 1987.
Recent conversations with  the EPA Region II office indicate that in New York, TMDLs have been identified
for all water basins that are water quality limited (about 17 water basins). Essentially all surface waters are
water quality limited  in New Jersey, and approximately 10 TMDLs have been set

                This information on TMDLs, water quality limited segments, total and assessed river miles,
and total and assessed lake acres is presented in Table 1. Care should be taken to note that the data are
merely indicative and represent a collage of information from several different  sources in the years 1987 to
1989.  There also appears to be  some variability across the states in  the degree of detail supporting TMDL
determination  and the allocation of the  TMDL between point, nonpoint, and background sources.

                                              Table 1

                       Water Quality Information for Selected Regions

Region II
(NY only)
Region V
Region IX
(CA, AZ only)
Region X
(OR, WA only)
Total Mites
Lakes Water Quality
Total Acres
Assessed Limited Segments TMDL
750,000 17
3,201,980 227
1,077,330 77
666,500 602
Sources:  GAO12; EPA8

               A separate source of prioritized areas is based on Section 304(1) Long Lists to identify water
bodies where water quality standards are violated for any pollutant for any reason.  While only a one-time
requirement, it provides information very similar to the periodic reporting requirements under Section
303(d).  The "water body tracking system" of the EPA is compiling this data and has found almost 18,000
impaired water bodies on the 304(1) Long Lists.  EPA has estimated that nutrient load trading could be
considered on over one thousand of these water bodies.

                                                                                            Session 7
 43             Issues for Further Consideration

                1.      While states have some experience with TMDLs, a comprehensive evaluation of the
                        program would be an important step to determining the nationally targeted
                        application of load trading.  Particular attention should be paid to the extent that
                        existing modeling procedures imply 1:1 trading among all sources.

                2.      Monitoring and banking:  Institutions should be considered to monitor compliance,
                        particularly for nonpoint sources, and who could bank load allowances.  One
                        possible mechanism for nonpoint sources is the Agricultural Stabilization and
                        Conservation Service (ASCS) which, through the Conservation Reserve Program, is
                        already subsidizing management practices that reduce water pollution.  The ASCS
                        has offices in most regions throughout the country.

                3.      States or individuals must have the authority to enforce contracts relating to load
                        allowances. Section 319 of the CWA established a framework for states to develop
                        state nonpoint source management programs which may include a variety of
                        regulatory, voluntary, and cost-sharing components.  Requirements in these state
                        programs are not federally enforceable nor does EPA require that state programs
                        be enforceable at the state level.

                4.      Consideration should be given to restrictions and opportunities for trading across
                        classes of pollutants as many effluents contain a set of pollutants.

                Section 303(d) of the CWA has  been implemented to only a limited degree.  Instead,  most
 water pollution control efforts have been directed at the technology-based controls of the CWA.  These and
 other CWA requirements have mandated timeframes which give them a greater emphasis than TMDL
 requirements. However, a strong policy emphasis on the 303(d) requirements may lead to a comprehensive
 approach to identifying and resolving water pollution problems regardless of the sources of pollution. The
 TMDL process provides EPA  and the states with a listing of key water pollutants, the source of the
 pollutants, information on the  amount of pollutants that need to be reduced, options between  point and/or
 nonpoint approaches, and costs to clean up.  Recommendation 3 results.

                Recommendation 3: A technical review should be conducted of the
                implementation of the 303(d) program. Vague  language in the existing
                Clean Water Act should be clarified to establish the desirability of defining
                and trading among different types of load allocations in highly polluted

5.0             CONCLUSION

                Economic incentives do not operate  in a vacuum independent of actual water quality.  Nor
must economic incentives be viewed as an  entirely new element of Clean Water Act legislation.  Existing
EPA information can be used  to geographically target those areas where it may be economically efficient to
improve water quality. Existing legislation, with relatively minor modifications, could be adapted to either a
natural  resource damages approach to improving water quality or to a trading allowance institution in areas
of highly polluted waters.

6.0             REFERENCES

1-               Freeman, M. "Water Pollution Policy," Public Policies for Environmental Protection.
                Resources for the Future. 1990.

                                                                                          Session 7
2.             Farrow, S. and R. Lyon.  "A Watei Quality Index for Fishable and Swimmable Water,"
               Working Paper 92-44.  H. John Heinz III School of Public Policy and Management,
               Carnegie Mellon University, Pittsburgh, Pennsylvania.

3.             Carson, R.T. and R.C. Mitchell. "rrhe Value of Clean Water: The Public's Willingness to
               Pay for Boatable, Fishable and Swimmable Water Quality," U.C. San Diego. May 1991.

4.             Smith, V.K. and W.H.  Desvouges.  Measuring Water Quality Benefits. Kluwer-Nijhoff
               Publishing, Boston.  1986.

5.             Mitchell, R. C. and R. T. Carson.  Using Surveys to Value the Benefits for Public Goods:
               The Contingent Valuation Method  Resources for the Future.  Washington, D.C.  1989.

6.             Dawes, R. M.  Rational Choice in an Uncertain World.  Harcourt, Brace and Jovanovich,
               San Diego. 1988.

7.             U.S. Environmental  Protection Agency.  National Water Quality Inventory:  1988 Report to
               Congress.  EPA 440-4-90-003. April, 1990.

8.             U.S. Environmental  Protection Agency.  National Water Quality Inventory. 1988 Report to
               Congress.  EPA 440-4-90-003. Apiil 1990.

9.             U.S. Environmental  Protection Agency.  "Comparing the Relative Costs of Water Quality
               Improvements:  The Economics of Point/Nonpoint Source Trading,"  Unnumbered working
               paper, EPA Water Program. 1991.

10.             U.S. Environmental  Protection Agency.  1988 Needs Survey:  Report to Congress.  Office of
               Municipal Pollution  Control. EPA 430/90-89-001.  1989.

11.             Ribaudo, M., et. al.  "Natural Resources and Users Benefit from the Conservation  Reserve
               Program," Ag. Econ. Rpt. 627. USDA, Economic Research Service. January, 1990.

12.             Governmental Accounting Office.  "More EPA Action Needed to Improve the Quality of
               Heavily Polluted Waters," RCED-89-98. 1989.

                                                                                            Session 7
            Are Permits and Charges the Last Word in  Water Pollution?

                                         Ray Squitieri, Ph.D.
                                       Office of Economic Policy
                                            U.S.  Treasury"

                Market-based alternatives to conventional environmental regulation have now moved out of
 the economics journals and into the policy debates. The sulfur-trading program in the 1990 Clean Air Act
 Amendments, the lead-trading plan in the lead phaseout rules for gasoline,  and emissions-offset provisions in
 air-quality regulations of various states all testify to the growing understanding and acceptance of economic
 incentives, and to their increasing attractiveness to policymakers.  The OECD council in January 1991 urged
 member countries to "make greater and more consistent use of economic instruments in managing the
 environment." Several environmental groups have joined in endorsing market-based solutions, most
 prominently the  Environmental Defense Fund and even in some instances more traditional environmental
 groups like the Sierra Club.

                Discussions of specific market-based strategies have been limited to two basic options:
 effluent changes, which put a price on each unit of emissions, and transferable discharge permits of the sort
 featured in the 1990 Clean Air Act sulfur-trading program, which allow sources to trade the right to emit a
 set quantity of pollutant. Along with economic instruments, economists recommend greater use of cost-
 benefit analysis.

                Overlooked in this enthusiastic response, however, is a third and much older approach, also
 based on economic  incentives: the common law tradition of private property rights.

                For centuries, well-defined property rights have protected environmental amenities. A
 farmer enjoys the right not to have his field set ablaze.  A landowner enjoys the right not to have trash
 dumped on his land, and may enjoy the right to clean water in the fishing stream on his land.  In our own
 time, the Nature Conservancy buys tracts of land it feels have environmental value. With the organization's
 own resources at stake, economic incentives encourage good stewardship (air emissions allowances or
 effluent fees are in  fact a sort of property right to the common airshed; they allow the holder of the permit
 or the payer of the  fee the right to emit a certain quantity of pollutant).

                Beginning in the  mid-19th  century, however, in an attempt to  encourage commerce, U.S.
 courts began to  move away from reliance on property rights, and toward a utilitarian balancing of costs and
 benefits.  This shift  accelerated after World War II, as the public demanded greater government attention to
 environmental issues.  Rather than reviving common law protections, various state and local governments,
 and ultimately the federal government, sought to protect the environment by a far reaching expansion of
 their regulatory  authority,  and ironically by  a concurrent weakening of property rights.

                It is the aim of this paper to reexamine the common law tradition of enforceable property
 rights, and to compare this approach with effluent fees and transferable discharge permits. The paper
 suggests first steps toward implementing a  private property approach, and discusses how this approach could
 be applied to water  pollution.
'The views presented are those of the author and do not represent the official position of the U.S. Treasury.


                                                                                            Session 7


                Property rights for water resources have existed for hundreds of yeans in many societies.
Indians along the Columbia River established rights to fishing sites long before the arrival of Europeans.
Enforceable rights to coastal fisheries have existed for several centuries in England and for perhaps 2,000
years in Japan.'

                Northeastern U.S. lobster fisheries have long relied on enforcement of traditional property
rights by individual fishermen.  American authorities have recognized private rights to oyster beds since the
early 1800s. In Washington state, oyster beds may now be privately owned, and Maryland has now
established rights to oyster seed beds in the Chesapeake Bay.2 Shellfish are particularly sensitive to water
pollution; allowing private ownership of shellfish beds promises significant benefits to water quality over the
relevant bay or estuary.

                Under English Common Law, the property rights specifically accorded to landowners on
riverbanks (riparian rights) include transferable angling rights. Thus, hotels and resorts lease angling rights
to a stream for the use of their guests.  By limiting access to streams, enforceable angling rights help to
protect fish and wildlife.3

                Just as important, riparian rights include the right to legal action against those interfering
with the "quiet enjoyment" of the river,  including polluters. In England, the Angler's Cooperative Association
(ACA), formed in 1948, immediately began to exercise property rights against polluters, most notably in the
Pride of Derby case. The ACA has now represented local clubs in over 1,500 cases, demonstrating the
efficacy of private enforcement actions under the Common Law.4 (U.S. courts have sometimes allowed
similar claims.  In a 1913 New York case, a farmer sued an  upstream paper mill for polluting the water. The
court shut down the mill, ruling that under the  Common Law, the farmer had a right to clean water. A 1907
case in Georgia and a 1921 Supreme Court case between  New York and New Jersey treated similar claims.5)

                In the U.S., however, the general direction  has been away from a reliance on private rights
and toward the utilitarian balancing of costs and benefits.  Early locomotives, for example, emitted sparks
that sometimes ignited fields near the tracks. Under the common law, the railroads had generally been held
responsible for damages.6  In the mid-19th century, however, American courts, in  an attempt to promote
commerce, began to move away from this reliance on private property toward a focus on the "common
good," attempting to balance the benefits  of development against the harm to private landowners. Several
important cases shifted the balance toward the  railroads.  Similarly, to promote commerce along the major
rivers, courts successively weakened traditional  riparian rights.

                Accompanying this shift was the increasing popularity of the doctrine of "public trust," by
which the government, not individual citizens, held property rights over unclaimed natural resources in trust
for the common good.  By the early 20th  century, the federal government was using the public trust
argument—and expectations of a timber famine—to place most remaining forests under political management.
The timber famine never materialized, but the forests have remained in political hands.

                This shift from private property to public trust and utilitarian calculus  continues to  occur.
In a series of cases in the 1980s, courts further weakened riparian claims in the western U.S.  In a 1984 case,
the Montana Supreme Court eliminated landowners' riparian rights to restrict access in any way7.


                Pigou's doctrine of market failure, first widely circulated in the 1920s,  conveniently fit the
notion of a utilitarian balancing of costs and benefits by the state.8 While markets efficiently allocate most
goods, environmental amenities were said to be different. Pollution results from the failure of producers  to
pay the full social costs of the resources they use, with the result that they produce too much pollution. The
market fails for two reasons.  First, property rights cannot be defined with sufficient precision (water, it has


                                                                                             Session 7

 been asserted, must be treated as "common property1 because the resource itself moves about').  Second,
 negotiations leading to mutually agreeable outcomes among all affected parties are not feasible.

                The  conclusion was obvious:  private markets would not address pollution and "common
 pool" resources (the problem of "externalities").  The market would fail.  Thus Robert Stavins, a
 contemporary environmental economist asks rhetorically: "Does anyone really believe that acid rain can  be
 efficiently controlled by assigning property rights for U.S. airsheds and then effecting negotiations among all
 affected parties?"10

                Wise government officials, acting for the common good and not from self-interest, would
 intervene in the market and thus solve the problem of pollution. But what form should this intervention
 take?  The economic  literature is unanimous in condemnation of the command-and-control approach."  For
 an efficient command-and-control solution, the regulators would have to know the marginal cost and benefit
 schedules for each source.  As regulators will not have this  information,  they must instead choose a second-
 best solution, such as setting ambient quality standards, or a third-best solution, such as setting a uniform
 ceiling on emissions, or requiring a uniform percentage reduction in emissions.  While these rules meet none
 of the economist's tests for efficiency, they may meet the all-important political requirement of fairness.

                Pigou and most economists who followed proposed a different approach.  To allocate a
 scarce resource in the absence of property rights, government should simulate a market, with effluent fees  or
 transferable discharge permits substituting for  prices.  To quote Stavins again: "Economic incentive
 mechanisms avoid the impracticalities of the pure private property  approach, while retaining the merits of
 decentralized market-driven policies."12

                Unfortunately, this plan requires calculation of marginal environmental benefits, which
 governments have so  far been unwilling to do. Thus, in the few instances in which a market-like approach
 has been tried, economists have recommended the approach of "efficiency without optimality,"13 beginning
 with a political decision about the total amount of effluent to be allowed, with discharge permits  issued for
 that amount. The Fox River (Wisconsin) experiment used this approach,14 as did the sulfur-dioxide-trading
 provisions of the 1990 Clean Air Act Amendments.15


                Among the problems with the economist's solution are  first,  the political considerations will
 still set the level of discharges (under a private property approach,  on the other hand, no central authority
 need be involved).  The 1990 Clean Air Act Amendments set as a goal cutting sulfur emissions by 10 million
 tons annually. As Hahn notes, the target "was not based on scientific or economic grounds.  It was selected
 because it was viewed as 'creditable'—that is, it was acceptable to Congress, the environmental community,
 and our Canadian neighbors."'*

                Second, and more generally, the process will inevitably become politicized, and in the
 process tend to destroy wealth.  A firm  or citizen may enhance  its position by creating new wealth, or by
 laying claim to someone else's existing wealth. Examples of "transfer-seeking," or "rent-seeking" include
 lobbying for restrictions on potential new entrants, or encouraging  regulations that harm one's competitor.
 Transfer-seeking tends to destroy wealth, not merely redistribute it, because the very pursuit of someone
 else's wealth requires  lawyers, lobbyists, and other resources.  Political management of a resource tends  to
 reduce wealth creation and increase transfer-seeking.  There is no reason to believe that transfer-seeking will
 stop because economists being to write the rules.1"
^Economists who argue for greater use of charges and permits are probably correct, however, that making
the process more transparent would reduce the problem of hiding the size and incidence of control costs.
Some of traditional special-interest opposition to simulated markets probably stems from the fear of public
reaction if the costs of the current system were made visible.

                                                                                             Session  7

                Other political forces will continue to distort decisions.  Politically preferred polluters such
 as state and local governments will continue to be held to less stringent standards and looser cleanup
 schedules. Priorities will continue to be set badly or not at all (e.g., Superfund, or the many "zero exposure"
 standards).  And science will play a role only if it supports political decisions already made.0

                Economists generally fail to recognize that the charge-and-permits approach has already
 been tried in another context. In the  1930s, recognizing the difficulty of operating an economy in the
 absence of prices, Oskar Lange and other socialist economists proposed that the state continue to set output
 targets, but then simulate a  market by a system of computed prices and tradeable production quotas.17 In
 this way, Lange and his colleagues hoped to achieve many of the  efficiencies of market economy.

                The free-market economist Friedrich H.iyek  countered by arguing thai:  "market socialism"
 would fail for two reasons.  First, as discussed above, political maneuvering and transfer-seeking will
 undermine attempts at efficiency. Second, the planning agency will not be able to get the information
 needed to set prices and quantities.18  In retrospect, Hayek's argument seems particularly compelling now in
 the wake of the obvious failure of centrally planned economists worldwide.

                Unfortunately, simulated markets for environmental amenities (the charges-and-permits
 approach) are merely market socialism in another context.  Hayek's arguments against Lange apply just as
 well to effluent fees and permits as a remedy for pollution.  Just  as market socialism improved upon pure
 socialism, simulated markets for  pollution improve  upon current command-and-control regulations/1  But
 problems unanticipated by mainstream economists of the time ultimately doomed market socialism  in
 Yugoslavia and everywhere else it was tried. Simulated markets may encounter similar  problems in the
 environmental bureaucracies of the OECD."

                The "market-failure" explanation rests on the neoclassical economic  model of perfect
 completion.  Absent from this model are  information costs, negotiation, contracts, property rights, and even
 markets. Hayek instead had reached his  insights by focusing on exactly these elements conveniently omitted
 from  the standard model. Coase later pursued a related line of thinking with his view of the economy as a
 set of voluntary institutional structures adopted to facilitate  the attainment of individual  goals.20 Buchanan
 and other of the Public Choice School have extended Hayek's criticism of market socialism and related
 policies, focusing on transfer-seeking (also called rent-seeking).2'  Even neoclassical economists turned during
 the 1970s to questions of incomplete or costly information.

                Many economists fail to  understand that private  property rights themselves effectively
 address many environmental problems. For "common pool" resources, the discipline of  the market
 encourages good stewardship.  Political control of resources, on the other hand, weakens the incentives for
 stewardship by removing the decisionmaker from the consequences of his decisions.
The half-billion dollar NAPAP study evidently had little effect on Congressional decisions on the Acid Rain
provisions of the Clean Air Act Amendments of 1990, wilh or without tradeable sulfur emissions rights.

dln defense of simulated markets, it must be repeated that these proposals promise a greater improvement
over traditional command-and-control regulations.  For example, there is good reason to be encouraged by
the program now being designed at the South Coast Air Quality Management District in Los Angeles, for
example, prompted by the Draconian penalties threatened by the Clean Air Act Amendments of 1990. The
sulfur trading program written into the same act promises to save consumers roughly a billion dollars a year
hi compliance  costs, although only a handful of trades have yet taken place. Yet 15 years after  these ideas
first gained wide currency in the public policy debate, examples of successfully implemented programs remain
rate (see, e.g., R. Hahn and G. Hester, "Where Did All the Markets Go?  An Analysis of EPA's Air
Emissions Trading Program," Yale Journal on Regulation. Vol. 6, pp. 109-53.  1989.


                                                                                             Session 7

                Further, the protection afforded by property rights is self-initiating:  as a resource becomes
 more valuable, the value to identifying and defending property rights increases as well.  It is sometimes
 believed that pollution was not a problem before the industrial revolution with its accompanying increase in
 population density, and that after these developments, private property rights no longer addressed the
 problem of pollution.  In fact, property rights to a resource need not be defined until the resource becomes
 valuable.22 With increasing wealth and increasing population, greater attempts are made to assert and defend
 property rights, including the rights to clean water and other environmental amenities.  For example, when
 rangeland could be claimed merely by filling a form (i.e., when its price was close to zero), settlers found it
 not worth their while to spend valuable time and money enclosing the range, or establishing firm legal rights
 to their claims.  Similarly, clean water in the Chesapeake Bay is far more valuable now than it was 50 years
 ago; this rising value alone will encourage the definition and enforcement of private rights.

                Third, the existence of property rights facilitates negotiation.  The  absence of property rights
 makes negotiation difficult and extreme solutions the rule.  In economist's jargon, a Pareto improvement
 makes at least  one person better off while making no one worse off. A potential Pareto improvement could
 potentially make at least one person better off without making anyone else worse off, perhaps by
 compensation from the winners to the losers. In a  politicized system—as distinct from a system based  on
 property rights—most potential Pareto improvements are never realized because no  mechanism exists by
 which the gainers could compensate the losers.

                Thus, the  Sierra Club announced it would fight to the bitter end against opening the Arctic
 National Wildlife Refuge (ANWR) to oil exploration; no mechanism exists by which the oil companies could
 compensate those  who might enjoy the ANWR environment for their perceived loss. By contrast, the
 Audubon Society has allowed limited drilling in the Rainey Wildlife Refuge which it owns, in  exchange for
 royalty payments that allow it to extend its environmental mission.23  Simulated markets for the environment
 would not remove this obstacle; they would leave no way for the affected parties to  negotiate  directly and
 make trades.


                In many cases, private property rights already provide the right incentives to  conserve
 resources (timber, ocean stocks of fish), or to avoid harmful discharges  (angling rights to streams). In other
 cases, government action can encourage proper environmental management  by recognizing, defining, or
 enforcing private property rights. When private  property rights cannot be  defined or enforced, the
 government can create regulatory tools (emission charges and permits) designed to  work as much as possible
 like a market.

                The private property approach applies most clearly in cases where  the property right is easy
 to define, as with timber.  In these cases, the resource is immobile,  ownership can be clearly established, and
 detection of violations is relatively easy.

                Water presents a more difficult problem than timber because it moves around, making
 property rights more difficult to define. Further, the large number of affected parties makes  negotiation
 more difficult.  (For the same reasons, water is a more difficult problem for the charges-and-permits
 approach or for the command-and-control approach.)  On the other hand, water generally stays within its
 banks, unlike air, and point-source violators can  often be identified.  This makes it  a potential candidate for
 the property rights approach.  Protection of land- and water-dwelling wildlife also falls into this category of
 intermediate difficulty, as does trash and other solid waste.

                Yet more  difficult is air, because of the problems  in defining property rights, and because of
the problems of negotiations among affected parties.

                Environmental  organizations already address many of their  goals through private ownership.
Perhaps best known, the Nature Conservancy buys tracts it feels have environmental value. With the


                                                                                             Session 7

 organization's own"resources at stake, incentives encourage good stewardship.  The Nature Conservancy has
 even traded one parcel of land for another that is felt offered more benefit; in one case, it traded beachfront
 land in the Bahamas for forest land in Wisconsin—suggesting a careful balancing of all costs and benefits of
 the sort rarely found in ordinary rulemaking.

                In many instances, private ownership can reduce pressures on wildlife—at the expense of
 private interests rather than the taxpayer.  In the U.S.. private  zoos and game parks have been so successful
 at breeding large cats—all of which are endangered—that they have attempted to ship excess young lions back
 to Africa.

                Conservation groups have used property ownership to protect offshore marine life as well.
 In Scotland, the Atlantic Salmon Conservation Trust has bought netting rights.  In Iceland, private interests
 have indicated interest in buying rights to  the Greenland and Faroe fisheries and shutting them down.24 A
 small California company devised profitable methods for raising abalone without harming their major
 predator, the endangered sea otter (unfortunately, zealous state regulators in effect shut down the company;
 it has now relocated to Hawaii). Private sea farming accounts for a growing share of the salmon catch  in
 Maine and Oregon, although cumbersome regulations and uncertainty about property rights continues to
 hamper U.S. mariculture. The industry is larger, more stable,  and more profitable in Scotland and Norway,
 fostered by a long tradition of private rights to fisheries.

                Private sanctuaries have preserved, endangered, or threatened species of birds.  Peregrine
 falcons, once endangered, have made a dramatic resurgence because of the efforts of the private Peregrine
 Fund.  The organization breeds falcons in captivity then reintroduces them into the wild.  The private Hawk
 Mountain Sanctuary Association in Pennsylvania first stabilized and has now greatly expanded the population
 of hawks and other birds of prey. The private,  nonprofit Ducks Unlimited maintains 4  million acres of
 wetlands as habitat for waterfowl, fish, and mammals.0

                Further progress in designing private property solutions will come as the parties involved in
 both sides gain experience with the approach.  With only a dozen or so professionals in the world working to
 devise private property solutions for environmental management (as against tens of thousands working on
 conventional approaches), it should come  as no surprise that most analysis has focused  on the conventional

                One promising area of technical innovation that will encourage private property solutions
 concerns detection of violations (these innovations could also aid enforcement of effluent charges, permits, or
 traditional command-and-control rules). Tracers (odorants, coloring agents, isotopes) could be used to
 identify sources of pollution.  Nations might adopt a national fingerprinting system to mark the nation and
 even the firm discharging pollutants.  It  should be noted that tracers are already in Limited use in other
 contexts. By using radioisotopes to label power plant emissions, researchers identified sources contributing
 to impaired visibility at the Grand Canyon.  As part of the international anti-terrorist campaign, most nations
 already label high explosives made within  their borders.25  Similarly, tracers of various sorts could identify
 sources of discharges into rivers and lakes.

                Governments can also encourage private firms and citizens to pursue the property rights
 approach by removing  obstacles caused by existing government policies.  Market reforms could reduce
 environmental problems  stemming from existing anti-maker policies.  For example, 30% of all delivered
 water in the West comes from federal projects, which charge on average only 15% of the true cost for  this
 water.  Besides wasting labor and capital,  the subsidies, have brought marginal farmland into production, and
 increased the toxic runoff from agricultural chemicals/*
"These and other examples of the private property approach to species conservation can be found in R.J.
Smith, "Private Solutions to Conservation Problems," in Tyle Cowen, ed., Public Goods and Market Failures:
A Critical Examination.  New Brunswick, NJ. Transaction Publishers),  pp. 341-360, 1992.


                                                                                           Session 7

                Second, states could reverse the century-long trend toward weakening riparian rights, and
 could encourage fishing clubs to seek title to fishing rights in rivers, lakes, and bays.  Stroup has suggested
 other steps by which states could strengthen property rights, sometimes by limited interventions. States could
 reaffirm common law through statutes in the relevant areas. They could require branding of potential
 pollutants. They could reclaim regulatory responsibility previously ceded to the federal government. They
 could ensure financial responsibility by allowing insurance and bonding.27  All these suggestions have
 application to water quality.

                "Why is there litter in the public park, but no litter in my back garden?" asked economist
 Joan Robinson many years ago. Federal and state governments should remember the advantages of private
 property as a path to environmental management, including water quality. In the coming debates over the
 future of water regulation, stronger rights of private ownership may offer advantages not found in the
 conventional economist's approach of simulated markers.

 5.0             REFERENCES

 1.              Cordell, J. et. al.  A  Sea of Small Boats.  Cultural  Survival, Cambridge, MA. Chp. 5. 1989.

 2.              Jeffreys, K. Who Should Own the Ocean? Competitive Enterprise Institute, mimeo.  1992
                Anderson T.L., and D.R. Leal.  Free Market Environmentalism. Pacific Institute for Public
                Policy, San Francisco,  p. 112.  1991.

 3.              For these and other  examples, see Anderson and Leal.  p. 112.

 4.              Jeffreys.

 5.              Meiners, R.  (Quoted in P. Brimelow and L. Spencer).  "Should We Abolish the EPA?"
                Forbes, pp. 432-443. September 14, 1992.

 6.              Horowitz, MJ. The Transformation of American  Law 1869-1960.  Harvard University
                Press, Cambridge. 1977.

 7.              Anderson and Leal.  p. 113.

 8.              See A.C. Pigou.   The Economics of Welfare.  MacMillan, London, 4th ed. 1932, for the
                classical statement, and PA. Samuelson, "The Pure Theory of Public Expenditure," Review
                of Economics and Statistics 36, November 1954, pp. 378-89, for the elegancy canonical
                formulation, although economists have been unable to identify even one pure public good of
                the type Samuelson described. Coase  has even cast doubt on whether a  lighthouse—the
                standard textbook example—qualifies as a public good ("The Lighthouse in Economics,"
                Journal of Law and Economics. 17, October 1974, pp, 357-76). T. Tietenberg.
                Environmental and Natural Resource Economics.  2nd ed., Glenview, 111.: Scott Forseman
                1988, lays out the economist's case to a wider  audience.

9.              Milliman, J.W.  "Can Water Pollution Be Efficient?"  Cato Journal.  Vol. 2, No. 1. Spring,

 10.              Stavins, R., ed.  Project 88:  Harnessing Market Forces to Protect Our Environment:
                Initiatives for the New President.  Washington D.C.  December 1988.

11.              Milliman, p. 177.

12.              Stavins.

                                                                                          Session 7

 13.            BaumoL, WJ., and W.E. Gates.  The Theory of Environmental Policy. 2nd ed.  Cambridge
               University Press, Cambridge, UK.  1988.

 14.            O'Niel, W., et. al. "Transferrable Discharge Permits and Economic Efficiency:  The Fox
               River," Journal of Environmental Economics and Management. Vol. 10, No. 94, pp. 346-55.
               December 1983.

 15.            Council of Economic Advisors, Economic Report of the President 1990.  Chp. 5.

 16.            Hahn, R J.  "The Politics and Relij^on of Clean Air," Regulation,  p. 26.  Winter 1990.

 17.            Lange, O., and F.M. Taylor.  "On the Economic Theory of Socialism," Studies in Socialist
               Economics.  University of Minnesota Press, Minneapolis.  1938.

 18.            Hayek, FA. "On the Impossibility of Socialist Calculation," The Essence of Hayek. Hoover
               Institution Press, Stanford, CA.  1984.

 19.            Smith, F.L. "A Free Market Environmental Program," Cato Journal. Winter 1992.

20.            Coase, R J. "The Problem of SocizJ Cost," Journal of Law and Economics.  1992.

21.            Buchanan, J.M. "Rent Seeking and Profit Seeking," Toward a Theory of the Rent-Seeking
               Society. Texas A&M Press College Station TX.  1980;
               See also many related arguments by Richard Posner, e.g., "Theories  of Economic
               Regulations,"  Bell Journal of Economics.  Vol.  5, pp. 335-58. Autumn 1974.

22.            Yandle, B.  The Political Limits of Environmental Regulation:  Tracking the Unicorn.
               Quorum Books, New York. 1989.

23.            Smith, F.L. p. 465.

24.            Jeffreys.

25.            Suggestions and examples from F.L. Smith, "Controlling the Environmental  Threat to the
               Global Liberal Order," quoted in Anderson and Leal.  p. 166.

26.            Willey, Z. Environmental Defense Fund letter, p. 7.  March 1987. quoted in Anderson and
               Leal.  p. 103.

27.            Stroup, R.L.  "Chemophobia and Activist Environmental Antidotes:  Is the Cure More
               Deadly than the Disease?" Economics and the Environment: A Reconciliation.  Fraser
               Institute, Vancouver, B.C.  p. 207-209.  1989.
               Milliman, J.W. "Water and Law and Private Decision-Making:  A Critique," Journal of Law
               and Economics.  Vol. 2. October 1958. Discusses at some length private property
               alternatives to water supply. Some of his suggestions also have application to water quality.

                                                                                            Session 7
                        Implementing Market-Based Instruments
                                For Clean Water in America
                                             Zach Willey
                                          Senior Economist
                                     Environmental Defense Fund

                American water quality policy does not prohibit the use of market-based instruments.
Without explicit Congressional authorization of such instruments, however, many opportunities for both
economic and water quality-related gains will not be realized.  The Clean Water Act and an array of other
federal statutes must contain clear language ordering the active design and implementation of markets  for
discharge permits, federal water rights, and other instruments affecting water quality.

                There is an array of difficult technical, institutional, and legal issues to be resolved in
implementing these markets. While these  issues are often cited as reasons why market-based systems would
not work, they are not insurmountable.  Congress can order the Environmental Protection Agency and
related agencies, with public consultation, to resolve them.  The alternative—continuing the existing
underfunded reliance on state and federal  command-based water programs, public subsidies,  and litigation—is
increasingly unproductive and ineffective.  The  EPA and other responsible federal agencies need a market-
based mandate to achieve water quality goals in the 1990s and beyond.

                The first  step toward making such a mandate politically feasible is probably  underway
already—declining federal  funding will require local and regional entities to underwrite water quality
improvements and protection themselves.  The environmental gains, cost savings, and innovation associated
with market-based systems should, therefore, become attractive to many current skeptics of shifts from
command- to market-based approaches. Whether or not this will manifest itself in the political milieu  of the
next Congress, or in a subsequent one, will be determined by economic and environmental conditions in
America's river basin communities during the next few years.

1.0             INTRODUCTION

                As America embarks upon its third decade under federal clean water legislation, the
weaknesses of existing water quality policies have become evident.  The basic problem is that achieving the
many economic benefits of improved water quality and related environmental values requires substantial
changes in water use throughout the country.  But this will not happen until water quality targets are linked
to water uses, and major funding is directed toward financing changes in these  uses. With prospects of
substantial government funding fading each year, market-based instruments to achieve water  quality goals
offer the only alternative which can provide economic incentives to control water pollution, finance clean
water programs, and reduce  regulatory burdens on  both government agencies and water-using industries.

                The future of water quality policy lies in two major areas where changes from past policies
are imperative. First,  it is time to adopt goals or targets which are based on actual performance  in terms of
aquatic ecosystem functions and human health. Performance goals for water quality policy is not a new
concept. In 1972, Congress had general performance goals in mind with its setting of "fishable and
swimmable" at 1985 targets for the nation's waterways. Failure to achieve these goals is a reflection more of
the failure to implement specific objectives which reflect these goals than on the feasibility of the goals. A
key component of this specificity is the defining of what water-using entities' rights are to use aquatic
ecosystems both for supplies of fresh  water and for assimilation and dispersion of polluted discharges.  And

                                                                                            Session 7

once defined, monitoring and enforcement of the terms of these rights—tasks which have been notoriously
neglected in the past—must become priorities.

               Second, we need to develop and encourage businesslike means of achieving these objectives.
This means clarifying the rules, and maximizing the flexibility, for how and what changes in water use occur.
Let science,  together with the political process, determine sound and acceptable objectives, and the water-
using industries decide how to operate within the constraints presented by water quality objectives.  Create
markets for water use and pollution discharge rights, and finance environmental trust funds for acquisitions
and revolving funds for loans  from  water use and pollution  discharge fees. The reauthorization of the Clean
Water Act, in order to be effective, will need to explicitly authorize and require the establishment of explicit
water quality and environmental goals for each water body  in which significant deterioration is occurring.  To
actually reach these goals, the Act will also need to require the use of market-based incentives.


               Should government set prices for water resources, or should markets for these resources
determine their economic value? Given the array of government agencies and government-chartered
monopolies and monopsonies which continue to set prices for water supplies and pollution discharges, the
opportunities to let markets set prices may be limited.  In considering the use of economic incentives to
achieve clean water and other environmental goals, however, the ability of existing institutional arrangements
to perform must be considered.  The key policy issue is whether government actions should concentrate on
clarifying the goals themselves, and making them operational through systems of water use and discharge
allowances, or  on the administering of prices to use waiter resources.

               The current system features administrated price-setting along with large uncertainties
concerning water use allowances. This price administration, which occurs at federal, state, and water district
and utility levels, continues  to feature some, albeit declining, taxpayer subsidies which further distort use
incentives. Water depleting and degrading activities are currently subsidized directly by government spending
programs and indirectly by deductions, allowances, and credits. Further, most water supply and pollution
discharge prices are set by government agencies or by state-chartered monopolies such as water districts.
Such agencies, which often control  water storage and delivery facilities, set prices according to average
costs—a "cost-plus" ratemaking essentially allows the agency to recover  its fixed and variable costs and avoid
"excess revenues," which are frequently disallowed by state laws. The discrepancy of prices derived from
these procedures from those which a market would signal is compounded in the case of federally developed
irrigation water supplies.  These reclamation contract prices omit the interest  costs of the debt incurred to
construct the water supply facilities. In addition, it is still common for some water supply entities, such as
irrigation districts, to bill for service based on some criterion other than quantity of water consumed. Flat
rate and acreage-served assessments are examples.  Many sewage treatment and other pollution discharging
entities have also received public subsidies in the past which have allowed their rates to be correspondingly
lower.  Most pollution discharge entities bill then- customers on a nonquantity basis, usually a flat service fee
set by customer class.  No effects on quantities of water use or pollution discharge result from such
nonquantity-based administered prices.

               Attempts to  make administered water prices and fees reduce water quality degradation
would require  an array of reforms. Overcoming the difficult technical  and political obstacles to marginal
cost-based pricing would  be imperative.  Extensive oversight of the ratemaking of waiter agencies and
monopolies, as is the practice in electric utility regulation, would be necessary. Public subsidies would not be
permitted in the determination of prices, since the resulting reduction in prices encourages water use and
pollution. All  pricing  would be  based on quantity of use, requiring metering and/or monitoring of both
water supplies and effluent  discharges.

               Of critical  importance is the uncertainty of use response to fees—the "price elasticity of
demand" for both water supplies and pollution discharges may be "inelastic," so that fee increases will not

                                                                                             Session 7
 yield proportional reductions in use of discharges.  Price elasticity estimates for water uses in the United
 States are displayed in Table 1.

                                              Table  1-
                        Price Elasticity of Demand for Water Estimates:
                                  Average for the United States
Water Use/Season
                Equivalent estimates for pollution discharges are not widely available in part because most
 existing discharges are neither priced nor metered (quantitatively or qualitatively). The presumption that
 discharges would be inelastic with respect to discharge fees has two implications for clean water policy.  First,
 attempts to use administered fees or discharge prices as incentives to reduce discharges would probably
 require increases in the levels of these fees which would not be politically acceptable. Second, on the other
 hand, the probable unresponsiveness of discharges to fee level increases is countered by the relative certainty
 of the ability to generate revenues from discharge fees.  This is discussed in more detail in the section on
 financing an environmental trust fund below.

                Government-administered pricing is an issue for a number of commodities, the production
                                                                of which depend heavily on water
^	,—.—_	s^         resources as an input and as a means of
                                                                disposal. Agricultural commodity price
                                                                supports, leases  of timber rights on
                                                                public lands, permits to graze livestock
                                                                on public lands, and shipping, flood
                                                                control, and hydroelectric production
                                                                from facilities constructed and/or
                                                                operated in part by public funds are
                                                                examples. These kinds of programs tend
                                                                to inflate net projects above those that
                                                                would occur under market conditions for
                                                                products and inputs.  Therefore, they
                                                                encourage overproduction and
                                                                consequent overuse and depletion of
                                                                water supplies and quality. Removal of
                                                                subsidies together with the introduction
                                                                of market instruments to price the right
                                                                to use these resources would help  to
Watar Rights/Contract*
Water Pollution Pem*»
Hydropower Contracts
Power Tranwntatan Accae*
Timber RlghtVLaaaa*
Hah Harveat Quota
Grazing FUghts/Laaaaa
Inland Shipping FUgfits
Rood Control Entitlements
Land Development Right*
NO '*
NO *
NO »
NO *»
NO '#
. RMOUC* ACOCK — Carry (MM
                            Figure 1
                                                               reduce water pollution.  The extent of
                                                               the reform agenda necessary to do this
is indicated in the accompanying Figure 1, which examines existing pricing and tradeability among key water
and related natural resources in the Pacific Northwest.  An equivalent inventory of natural resource pricing
"Consensus Estimates for U.S.," Table VII-7, p. 137, in Planning and Management Consultants, Ltd., The
Regional Urban Water Management Plan for the Metropolitan Water District of Southern California. Los
Angeles. November 1990.

                                                                                           Session 7
policies for other regions of the United States would reveal the same situation in general since federal
policies govern the allocation of many of these resources.
               The necessary condition that loading ceilings be established which are specific to individual
pollutants and basin segments requires the setting of performance criteria based on beneficial uses.
Procedures to set "total maximum daily loads" (TMDl^s) for non-attainment water  sources exist. However,
TMDLs have rarely been set, usually in response to ciisis water pollution problems or to Litigation. In order
to achieve performance goals in terms  of water  quality and related ecosystem functioning, such loading
ceilings will need to be established on a broad basis. TMDLs are the sum of waste loads from all
sources—point and nonpoint—and establish the supply of discharge allowances for each pollutant in each basin
or river segment.

               The establishment of pollutant loading ceilings is within existing authorities under the Clean
Water Act to avoid impairment  of other water uses. Section 303(d) authorized EPA to establish guidelines
for setting TMDLs in water quality-limited water bodies.1 TMDLs are intended to make water body-specific
environmental goals operational by defining these goals in terms of pollutant loading; Limits. Their
establishment is necessary regardless of whether or not economic incentives are applied to achieve them.
Similarly, allocation of TMDLs among a water body's pollution sources  is necessary with or without
economic incentives. However,  waste load allocations may need to be structured somewhat differently
depending upon whether or not  trading waste load shares are allowed.  For those dischargers which may be
purchasing shares,  and therefore increasing loadings at particular discharge points (in exchange for reduced
loadings at other (seller) points), the possibility of local and third party  effects will  need to be considered.
The existing processes embedded in many state water laws which require third party  reviews of proposed
water rights transfers provide valuable  experience for clean water policies incorporating possible trading of
pollutant discharge allowances.  The variety of experience among states  with alternative waste load allocation
methods is also important in assessing  how best to design allowances for tradeable loading shares  according
to local assimilative capacity limits.2
 Clarifying who is allowed to discharge what and where by setting TMDLs and allocating
	•—	^       discharge allowances creates the
                                                       possibility of achieving the
                                                       environmental goals underlying
                                                       TMDLs with tradeable
                                                       discharge allowances, more
                                                       commonly referred to as
                                                       tradeable discharge permits
                                                       (TOP). A system of TDPs
                                                       would not only reduce the
                                                       burden of price administration
                                                       from government, but it would
                                                       also create an incentive among
                                                       dischargers to assure that
                                  Non Point            compliance with the terms of
                                  Sources              discharge permits is occurring.

                                                                       The existing
                                                       NPDES point source permitting
                                                       system lias adopted technology-
                                                       based treatment standards for
  0     2/4      6     3
Point   'Discharge Reductions
                               Figure 2

                                                                                            Session 7
 "traditional" pollutants such as BOD, suspended solids, and biologicals. But the performance of these
 standards, featuring "best available technology" (BAT), in improving water quality and beneficial uses has not
 been linked directly to permit issuance or renewal. TDPs, which require loading ceilings based on ecosystem
 performance criteria, would provide greater certainty of environmental performance for less money.  Because
 permits or allowances would have value not only for regulatory compliance purposes but also in TDP
 markets, incentives to reduce loadings and sell freed up allowances would exist. Each discharging entity is
 free to reduce loads in a least-cost manner, and will do so to the extent that the cost of such reductions are
 less than the cost of buying discharge permits.  The cost  curves for discharge reductions in Figure 2
 demonstrate cost differentials among dischargers which are likely to be present in many water bodies.

                The NPDES permit system provides a starting point from which the benefits of TDPs can
 be developed. While over 85% of industrial point sources are in compliance with their permit conditions and
 90%  of municipal point sources have installed secondary or greater treatment,  there continues to be heavy
 pollution loading and frequent violations of ambient water quality standards in many basins.  The problem is
 not that the point source dischargers have not made significant improvements in the quality of their
 discharged effluent. Instead,  the problem is that there continues to be substantial growth in the volume of
 loadings from municipal and industrial sources in many of the nation's watersheds which will continue to
 place heavier demands on treatment facilities and  consequent loadings. In some basins, tertiary treatment is
 necessary to accommodate additional urban and industrial discharges.

                TDPs have been proposed by Congressional leaders, and water quality control programs
                                                                      based  on economic incentives
/-	•                         ^\       and some trading have been
                                                                      utilized in Europe. A number
                                                                      of studies of trading potentials
                                                                      among point sources have been
                                                                      undertaken in recent years in
                                                                      the U.S. All indicate significant
                                                                      cost savings to achieve loading
                                                                      limitations.3  Extensive pilot
                                                                      studies and projects involving
                                                                      potential trading between point
                                                                      and nonpoint sources of water
                                                                      pollution have been
                                                                      implemented in the Great Lakes
                                                                      Basin, Tennessee, and Colorado.
                                                                      While these studies have
                                                                      concentrated on nutrient and
                                                                      biological oxygen demand
                                                                      (although one focused on oil
                                                                      and grease and another lead),
Number of Water Bodies
        I Nutrtoto ODOfgwfc/DOr] Mtufc
\S OVQrm* CHiMtt Alt Ml Airvnoni •How Alt
• Sit    ~ Smp Sodd 2: Organic*
CD cnkxtn* III! PM0CMM 3 Tcrtu

                                                                there is a variety of other
                                                                trading possibilities as indicated
                                                                by the array of pollutants
                                                                contributing to non-attainment
as shown in Figure 3.  Indeed, the variety of pollutants in conjunction with the variety of sources contributors
to non-attainment among industrial and municipal point sources and nonpoint sources.4
               Nonpoint sources discharge substantial pollutant loadings from vast tracts of land containing
diverse and dispersed nonpoint sources in agriculture, livestock, forestry, mining, septic tanks, atmospheric
deposition, and urban storm runoff.  But these discharges have yet to be regulated by permitting or other

                                                                                            Session 7

systems which codify the terms under which they discharge. Nutrients, trace elements, salinity, pesticides,
hydrocarbons, acidity, and heavy metals are significant pollutants for particular types of NPSs and regions.
During the past 15 years, the federal government has expended considerable financial resources to identify
and subsidize the implementation of various types of best management practices in some NPS industries.
While uncertainty continues as to how much water quality improvement results from the implementation of
BMPs  in site-specific situations, it is the lack of credible systems of financing and  enforcing that
implementation that is preventing major new,  cost-effective gains in reductions in  NPS pollutant loading.

                It has long been recognized that issuance of individual discharge  permits to the NPSs is not
feasible given their large numbers and diversity. Nevertheless, in order to control the NPSs in a way that is
compatible with the existing NPDES system for point sources, some system is required.  Larger geographical
units would have  to be the recipients of individual permits. The need to create institutions which could
govern NPS areas with respect to water pollution has been recognized for some time.  There are several
types of organizations that manage water and  water-related resources which might be adapted to the  NPS
governance task.  Irrigation and drainage districts, soil conservation districts, resource conservation districts,
urban storm districts, and  land and water trusts are examples. Internal allocation of discharge rights within
these units could  then proceed in a  variety of  ways.  Governance of these units, based on  their charter and
the preferences of landowners and other discharging entities, would determine how to implement the terms
of the permits.

               Section 319(a)(4) of the 1987 amendments to the  Clean Water Act states that nonpoint
source pollutant management should "to the maximum extent practicable develop  programs on a watershed-
by-watershed basis."  The Act does not specify what  type of implementation program is necessary—this is the
state's  responsibility. A watershed basis, which involves multiple sources of pollutants, holds the possibility of
pollutant trading programs.  Trading NPS allowances requires a legally binding system, probably in the form
of discharge permits.  While NPS permitting is not required under the existing provisions of the Clean Water
Act, several states have begun to experiment with programs which are aimed at permitting discharges from
NPS sectors.  Florida, Pennsylvania, Nebraska, and Maryland have programs which have used the "back door"
to NPS permitting.  For example, the South Florida  Water Management District was authorized by the
state's  legislature  to control agricultural runoff through permit systems for consumptive use and for surface
storage of water.  Since both have water quality implications, the District has incorporated water quality
concerns into the terms and conditions of those permits. In Pennsylvania, state laws on erosion control and
clean streams have been applied to  require conservation plans for agricultural and forestry operations which
demonstrate how sedimentation will be controlled. In Nebraska, where fertilizer contamination of
groundwater is a major problem, seasonal prohibitions of fertilizer applications in some areas of high
percolation and subsurface nitrite concentrations  have been applied.

               These programs can be viewed as experiments in  NPS permitting.  Other states and regions
are struggling with the same problem—the need to develop accountability among NPSs stemming from the
growing evidence of consequent damages to downbasin water uses and values.  Without such accountability,
any serious policy of control of NPS pollution is difficult to envision.  Certainly obtaining the contractual
assurances needed to implement voluntary trading of pollutant loading rights among dischargers will  continue
to be practically impossible. Indeed, loading discharge compliances, reduction credits, or offsets—whether for
regulatory or market-based uses—must be defined, monitored, and enforced if any system  of NPS control is
to produce real results.

               Opportunities for trade among NPSs reiterates the need for accountability. For example, in
California's San Joaquin River Basin, selenium loading from  irrigation drainage poses bioaccumulation risks
to fish  and wildlife.  In 1985, waterfowl populations at Kesterson Wildlife Refuge, which received irrigation
drainage, experienced reduced reproduction rates and birth deformities.  In order to implement a loading
ceiling on selenium in the  San Joaquin River,  associated wetlands, and downstream estuarine systems, NPS
selenium loadings units must be identified and accountability assigned.  While there are some potentials for
NPSs, particularly in downstream refinery operations, to participate in selenium discharge trades, most of the

                                                                                           Session 7
opportunities may be among the NPSs themselves. That is, variations in farming and irrigation practices
within the San Joaquin River Basin contain opportunities for some irrigated areas to invest in others to
develop lower cost selenium reduction credits. But such transactions would not be possible unless water
quality regulators have some sort of loading rights established and allocated among the NPSs. Institutions,
such as drainage districts, to represent NPS areas will have to be formed.

               Another important opportunity for the trading of loading rights exists among discharges into
POTWs. Nondomestic wastewater from industrial sources often contains toxins which can interrupt POTW
operations (typically not designed to treat many toxins, which can kill biological agents used in municipal
sludge treatment).  In addition, contamination of sludge  as well as receiving waters can result from these
toxic discharges. In order to address these problems, nearly 1,500 POTWs have pretreatment programs that
regulate about 30,000 significant industrial users (SIUs).  Each program issues loading rights to SIUs, usually
in the form of a permit, as well as monitor, inspect, and enforce. TDPs are possible where a number of
SIUs are linked to a  POTW.  Of particular interest here is the potential to increase funding for toxic source
reduction programs and facilities among the SIUs.
               Tradeability of pollution loading rights creates new opportunities associated with reduced
quantitative use of water.  For example, a key BMP for reduction of irrigation-induced loads is the reduction
in amounts of water applied.  Similarly, water conserving measures in municipal and industrial water uses
have pollution load reducing impacts.  Whether from more efficient use of water through installation of
water conservation hardware for irrigation, industrial, and home uses; improvement of irrigation  management
practices, changes in cropping patterns, or outright removal of some lands from irrigated production; or
adoption of arid designs for urban landscaping, reduced water diversions tend to yield reduced loads for
many pollutants. Thus, various types of projects and programs designed to reduce water use would be
obvious candidates for financing from trades in loading rights.

               Complementary, and in some regions more powerful, economic incentives for reduction of
pollutant loadings are possible if water supplies freed up  as a result have significant resell or market value.
Important policy experiments are now underway in many western states to create, facilitate, and  regulate
markets for quantitative rights to use water resources.  Indeed, as water supply constraints develop in states
east of the Mississippi, some of these states are examining the potentials  and problems of water  markets in
the West.  Relevant local, state, and federal water laws must be considered.
        TRANSACTION VOLUMES -1990-1991

             MUNICIPAL  157
                                OTHER 16
                              PUBLIC TRUST 22
   By Typ« o» Buy*
              AGRICULTURAL 53
                                               The prior appropriations doctrine
                                underlying water rights in state laws is based on
                                usufructuary principles. The emergence of limited water
                                markets in the western U.S. during the past decade has
                                been due to the simultaneous occurrence of (1)
                                substantial supplies of water rights being applied to low-
                                valued uses in agriculture,  and (2) growing urban and
                                environmental demands resulting from the region's
                                demographic and economic growth.  Arbitrage
                                potentials—the difference between prices for irrigation
                                water and those for municipal and industrial uses—are
                                substantial in many regions, often exceeding an order of
                                magnitude.  Such arbitrage potentials exist for
                                environmental purchasers as well, though typically with
                    Figure 4

                                                                                              Session 7
 lower margins.  Figure 4b shows the volume of water marketing transactions in recent years in the western
 U.S. by buyer classification.

                Water market prices often provide considerable latitude for water users such as irrigators to
 invest in improved systems and practices, which in turn would have NFS load-reducing results.  At the same
 time, the costs of many water conservation practices and systems exceed water prices, which are most often
 administered by government agencies or by water districts or utilities to meet revenue requirements, not to
 induce efficient use. While there are frequently olher reasons (such as agricultural yield improvements) for
 improving water use practices, in many cases the value of conserved water in reduced water costs does not
 cover the costs of investments in water conservation. Income from water sales and leases by  holders of water
 use rights could be coupled with financing from NFS load reduction credits to underwrite many additional
 improvements in water use systems. Figure 5 lists the  types of water market transactions which have been
 occurring in the western states.

                But the evolution of water markets faces formidable legal uncertainties and political barriers
 in many states.  Ambiguous definitions of "beneficial and reasonable use" of water in state laws have
 generally not been clarified by regulation to facilitate orderly trading.  Basin-wide adjudications are underway
 in many regions, and trading in many regions, and trading in the midst of these legal uncertainties can be
 risky. Further ambiguities about
 who holds the rights to trade
 water— end-users such  as irrigators,
 or intermediaries such as water
 districts— can make it unclear to
 potential buyers who the seller
 would be. These uncertainties are
 being heightened by an array of
 possibly conflicting claims based on
 the public trust doctrine, Indian
 water rights, and third party claims,
 including possible "area-of-origin"
 environmental, economic, and
 community effects. Groundwater
pumping from common property
(unadjudicated)  aquifers is also a
problem in some water market
                Figure 6 lists the
most common types of institutional                                Figure 5
barriers being encountered in
western states' attempts to both facilitate and to regulate water markets. These problems have slowed the
development of water markets.  Since state water laws were not originally intended to support transfers, most
states are engaged in expensive and time-consuming reforms and litigation to define the rule within which
water markets will operate.  The information in Figures 7 and 8C demonstrate the level of legislative and
court action in recent years related to water rights definitions and transferability. Federal reclamation water
supply projects are  also slowly being reformed to allow transfers of water contracts.  A process to certify the
""Compiled from data published in R.T. Smith and R. Vaughan, Water Strategist. Stratceon, Inc., Claremont,
California, various issues. 1987-1992.

"Compiled from data published in R.T. Smith and R. Vaughan, Water Strategist. Stratceon, Inc., Claremont,
California, various issues. 1987-1992.

                            Figure 6
regard to control and allocation of pollution discharge allowances.
                                                                                  Session 7
NFS pollution reduction benefits
of such transfers would
undoubtedly broaden the
incentives to participate in water

              The experience
of the western states with water
markets has important
implications for implementation
of TDPs.  Much of the current
conflict stems from a lack of
clarity in defining water rights;
poor measurement and
monitoring, and enforcement of
the terms of these rights; and
administered pricing systems
which undervalued the
increasingly scarce resource.
Federal clean water legislation
should avoid, or at least
mitigate, these pitfalls with
                            TOTAL NUMBER OF BILLS — 1988-1991
                                                            m WATER RIGHTS
                                                            M WATER TRANSFERS
                                                            W PUBLIC TRUST
                                                            a WATER QUALITY
                                                            = GROUNDWATER
                                                            • CONSERVATION
                                            INTRODUCED/NOT ENACTED

                                                                                           Session 7
               AND POLLUTION FEES
                                            WATER-RELATED LEGISLATION: WESTERN U.S.A.
                                                    TOTAL NUMBER OF BILLS — 1988-1991
                                                                              M\ Federal Issues
                                                                              W Fees & Assessments
                                                                              m Local Powers
                                                                              [H Liabilities
                                                                              S Water Rights
               Reform of water use and pollution discharge pricing, along with implementation of markets
for water rights and TDPs, would provide powerful incentives for conservation and pollution discharge
reduction in both the public and private sectors.  Arbitrage opportunities among holders of water rights and
discharge permits would ensure that
substantial financial resources would
be unlocked to implement water
quality improvements. However,
there would continue to be cases in
which further environmental
improvement and restoration may
be productive. Acquisitions of both
water quantity rights as well as
further reductions in pollution loads
may be necessary to achieve clean
water and environmental goals
within many river basins. With
public funding for all programs on
the decline, substantive legislative
appropriations for such acquisitions
may not be forthcoming. For
example, the 1987 Clean Water Act
Amendments substantially increased
water quality-related responsibilities
for state and federal agencies, but            ~
corresponding funding has  not
materialized. Funding in the FY93                               Figure 8
environmental budget continues to
fall far short of what would be necessary to meet these agency responsibilities. Alternative funding sources
will be needed to supplement the financing generated by water rights and TDP markets.

               The most  efficient and equitable means of generating this funding is through user-based
financing.  The  simple principle  is that those who use water resources should pay.  There are two general
groups of users—those who use water at the expense of the environment, and those who use water as an
environmental resource.  The schematic in Figure 9 illustrates how these user fees would interface with a
trust fund, which hi turn could be applied to cured acquisitions of rights to use water resources—both
quantitatively and qualitatively--to meet clean wai:er and environmental  goals.

               The first group is relatively easy to identify—it includes all water-using and polluting
industries, including municipal utilities serving residences.  Since these users divert, consume, and pollute, an
environmental surcharge or fee for  their use could generate revenues.  There are  already a variety of fees in
26 states, including for water use permits, waste  disposal, underground storage,  and other uses.  In addition,
Section 204(b)(l) of the Clean Water Act requires the development of user  charge systems with the option
of recovering operation and maintenance costs as wastewater treatment facilities.  Further amendments to
the Act could expand user charge systems to receiver costs of water quality degradation and of environmental
protection and restoration.

               The design of a fee schedule  for these users would not be as simple as the overreaching
principle.  For water quantity, most regulatory authority rests in state water  law, although federal water
agencies could implement fees for their water supply contractors—included would be reclamation contractors
as "direct" users, and inland shipping, hydroelectric, grazing, timber, mining, and agricultural commodities
producers as "indirect" users.  Most water diversion and consumption, however, is governed by state laws and

                                                                                        Session 7
                          FINANCING WATER ACQUISITIONS
Consumptive Uses:
Municipal/Industrial *
User Fees
V +r^^^

Trust Fund ^

, Offsets/ ^

Habitat/Species Diversity
Hydroelectric/C02 Offset
J Benefit-Based
^^-""""l User Fees

^ ,„_. 	 A 	

W 	 i—

                    Water Market
                          Environmental Water
                          Use Targets
                                             Figure 9

imposition of fees on such uses would require state actions.  On the other hand, fees for pollution discharges
could be implemented under the Clean Water Act in all states, under individual state laws, or combinations
of both.5  In the never ending federal-state sparring on funding of federal water quality and other
environmental programs, federal demands for state cost-sharing could be answered at least in part by
revenues generated from such water diversion, consumption, and pollution discharge fees.
                       WATER POU.I/TION
                        DISCHARGE FEES
   20      30
                             Figure 10
               Such fees
would be sized to a basin-wide
or regional revenue target for
environmental acquisitions. The
graph in Figure 10 demonstrates
the uncertainties of response to
such fees with regard to both
discharge reductions and
revenues generated from fees.
As noted earlier, "inelastic"
responses are expected, making
it difficult to use fees as a
means of actually reducing
discharges.  On the other hand,
this situation reduces the
uncertainty of revenue
generation associated with any
fee schedule which might be
imposed.  To the extent that
discharge levels respond to fee
increases, revenue shortfalls can
be expected when compared to
those associated with lower

                                                                                            Session 7

responses of discharge levels. This situation works in favor of viable environmental trust fund programs,
since revenue needs fall in some proportion to reductions in discharges.  The actual specification of fee
characteristics would depend upon several factors. To be rational, fees would vary according to the water
quality degradation and other environmental damages associated with the use.  For water quantity, amount,
timing, and location of diversion and consumption, along with the water quality and other environmental
consequences of that use, would be the key factors. For water quality, these same considerations would need
to be applied to significant discharges of individual pollutants.  Mass loading and effects on beneficial uses
within receiving waters would need to be  considered in discharge fee specifications as well. There are
substantial measurement requirements to incorporate  these kinds of factors into fee design.  As noted above,
many consumption uses as well as pollution discharges are not now measured either for volumes or quality.
Therefore, substantial measurement and monitoring improvements will be necessary.  In the interim, fees
based on customer classes may be the most practical means of implementation since they would not require
as much user-specific information.

                The other group of water users are those associated with environmental and recreational
values.  These uses require water quantity and quality to maintain aquatic ecosystems and associated
beneficial uses. Establishment of fees for these groups is a very different matter from that for the
consumptive use and polluting users.  Instead  of damages to the resource, benefits from its protection is the
key. This is a more difficult undertaking  in large part because environmental and recreational users tend to
be harder to identify and measure. A portion, particularly recreational users such as boaters,  fishers,  and
campers, are already charged for their use through day-use fees, licenses, and  other instruments. A water
quality or environmental protection fee could be included.  But many users do not access water sources
through organized charge systems, allowing the so-called "free-rider" problem (some beneficiaries do not pay)
to continue. "Non-market" valuation  studies and surveys are increasingly being undertaken to  estimate
benefits to such users, including those who do not directly use the resource but value its existence anyway.
This type of research might be useful in helping to design a user fee system for these "non-captured"
environmental and recreational users.

                The setting of such fees should be based as much as possible on technical criteria. But it  is
also an inherently political process in which all stakeholders—water using and polluting industries,
environmental and water quality interests, and local, state, and federal agencies—will seek minimum fees and
maximum benefits. Regardless of how the pie gets sliced, environmental trust  funds can be created to
manage and disperse these revenues for water quality and environmental improvement projects. Priority
systems will be needed, and trade-offs among  potential projects will need to be addressed in some fashion.
Both technical and political factors will be important, but competitive bidding  procedures should be
fundamental to disposition of these funds. In  addition, a portion of fee revenues may be applied to the
endowment of revolving loan funds which can  leverage additional water quality and environmental
investments. Finally, the use of a private  entity to manage such a trust fund has been proposed,6 and
deserves serious consideration.

                LEAST COST

               There are a number of sections in the Clean Water Act which should be revised to pursue
the achievement of environmental and water quality goals within a framework of flexibility, innovation, and
least cost.  Section 101, which declares goals and  policy, could be revised to state that  CWA policy is  to
achieve actual environmental performance by setting clear pollution loading and water quality goals by basin,
sub-basin, and river segment, where appropriate.  It could also be revised to reflect a policy promoting the
use of economic incentives as the preferred implementing instrument,  and endorsing TDPs as the preferred
economic instrument. Since identifications of  basins which are in non-attainment status have been made in
reports completed under Sections 304, 305, 319, and 320, basins can be specified for designation of TMDLs.
Such designations ought to be required, along with reasonable timetables, under  Section 303 and other
appropriate sections.  States should have the authority and responsibility to establish these TMDLs, and
multi-state  forums, possibly commissions, should be authorized where  interstate basins are involved.


                                                                                            Session 7

                These revisions should be accompanied by others concerning the use of fees and TDPs.
 Section 516 should require that EPA report to Congress periodically on its progress in implementing
 economic incentives, and on headway toward establishing TMDLs for non-attainment water bodies.  Section
 317 should be amended to require analysis of discharge and, to the degree that conflicts with state water laws
 can be avoided, water depletion and use fees along with general user fees to fund CWA programs.  Included
 here, or elsewhere if more appropriate, should be the study, design, and authorization of a trust fund for fee-
 based revenues to be managed, preferably by a private entity such as that mentioned above.  Section 319
 should also be amended to require that states use economic incentives, including fees and  TDPs, in
 implementing their NPS programs as a condition of federal cost-sharing for such programs.

                Several additional factors should be incorporated into the reauthorized CWA.
 Implementation authorities should continue to rest with the states, subject to timeliness criteria.  Authorities
 for NPS control implementation should be locally based, with the establishment of appropriate local
 institutions by local stakeholders to be completed in a timely manner.  Internal governance of these  NPS
 institutions should be determined  by local preferences. The key requirement of these institutions would be
 that they be based on hydrologic boundaries to the extent possible so that NPS drainage areas are
 represented, and that their charters authorize  them to implement the terms and conditions of the pollution
 discharge permit(s) issued to them by the state, or by EPA.

               As noted above, there are a number of other  resource uses which impact water quality
 which are the subject of federal legislation and administration. In some western states, the Reclamation Act
 and associated projects have substantial impacts on water quality and environmental resources.  While the
 Department of Interior issued a policy document in 1987 which was generally supportive of voluntary
 transfers and marketing of federal water contracts, actual implementation by regional Bureau of Reclamation
 offices has been slow. As a result, a number of Congressional initiatives have introduced water marketing
 and environmental mitigation into the operations on a project-by-project basis.  Voluntary marketing of
 federal natural resources introduces price as a means of rationing use. Accordingly, market-based reforms of
 relevant federal statutes governing not only federal water contracts but also grazing, timber, hydropower,
 shipping, and flood control should be undertaken.

 9.0             REFERENCES

 1.             U.S. Environmental Protection Agency.  Guidelines for Water Quality-Based Decisions:
               The TMPL Process.  April 1991.

 2.             Industrial Economics, Inc.  The Benefits and Feasibility of Effluent Trading Between Point
               Sources:  An Analysis in Support of Clean Water Act Reauthorization. Draft Prepared for
               the U.S. Environmental Protection Agency. May 1992.

 3.             Industrial Economics, Inc.  op cit. Exhibit 2-1. 1992.

 4.             U.S. Environmental Protection Agency.  Water Body System.  January 1992. Contains data
               on water bodies assessed having more than one  NPDES permittee, non-attainment sources
               included industrial point sources in 246 water bodies, municipal point sources in 322 water
               bodies; and  "other," primarily nonpoint sources in 364 water bodies.

5.             Copeland, C.  Funding Water Quality Programs: Revenues from a National Clean Water
               Investment Corporation. Congressional Research Service.  July 10, 1992.

6.             Copeland. op cit. 1992.

                                                         Session 8
              Wednesday,  October 21, 1992
         Session 8:  Clean Water: Worth the Cost?
                    SESSION SUMMARY
MODERATOR: Martha G. Prothro
Robert W. Adler— The Economic Value of Clean Water

Kenneth W. Chilton— Clean Water's Muddied Future

David Gibbons—Paper Unavailable

James P. Joyce—Local Government Perspective on Clean Water and the
American  Economy

Paul Portney—Paper Unavailable

                                                                                          Session 8
                          The Economic Value of Clean Water

                                         Robert W. Adler
                                          Senior Attorney
                               Natural Resources Defense Council, Inc.

                                        Marni J. Finkelstein
                                         Research Assistant
                               Natural Resources Defense Council, Inc.

               This paper will identify some of the key economic benefits of clean water and health aquatic
ecosystems in the United States. Benefits will include the value of commercial and recreational fisheries,
hunting and other water-based recreation, and wetlands.  The paper will also identify some existing economic
losses due to water pollution and lost or degraded aquatic habitat.  Losses will include declining or
contaminated seafood supplies, flooding and erosion, and drinking water contamination. Finally, the paper
will discuss the economic losses due to the contamination of potentially valuable renewable resources, such as
reclaimed wastewater and sewage sludge.


               On June 17, 1972, five burglars broke into Democratic Party Headquarters at the Watergate
Hotel overlooking the Potomac River.  Watergate later became the symbol of a serious pollution of the
American political process.  But outside the windows of the hotel the water of the Potomac was equally
polluted. In 1965, President Johnson condemned the quality of the Potomac  as part of his pledge of "Clean
Water by 1975," and in 1969 a conference in Washington declared the river to be "a severe threat to anyone
who comes in contact with it."

               At the time, U.S. politics were dominated by the debate over American military involvement
in Vietnam. But slowly America realized that while it intentionally spread chemical poisons on the rice
paddies of Vietnam, it was unwittingly polluting its air and water at home with equally dangerous chemicals.
The modern war against air pollution began in 1970 with the passage of the Clean Air Act. But the battle
against water pollution was still in the 19th Century, with an obscure law called the Rivers and Harbors Act
of 1899  as its principal, badly outdated weapon.

               Nixon ushered in the new decade by reminding the nation that ". .. . the 1970s absolutely
must be the years when America pays its debt to the past by reclaiming the purity of its air, its waters, and
our living environment.  It is literally now or never."  The statement gave hope that the federal government
would begin to take the war against water pollution seriously.

               More visible political events, however, overtook President Nixon's promise and commitment
to the environment.  While the nation continued to debate the morality and the wisdom of the Vietnam war,
an ever-present subtheme was the cost of the war to the American economy  and the federal budget, and its
impact on pressing domestic problems.  Could America fight communism in  Vietnam and still afford to fight
poverty  and pollution at  home?

                                                                                             Session 8
                irwas precisely this economic tradeoff that led President Nixon to veto the Clean Water Act
just ten months later.  Nixon's veto message reiterated his rhetorical pledge to address water pollution, but
rejected Congress' solutions on economic grounds:

                I am also concerned ... that we attack pollution in a way that does not ignore other very real
                threats to the quality of life, such as spiraling prices and increasingly onerous taxes.
                Legislation which would continue our efforts to raise  water quality, but which would do so
                through extreme and needless overspending, does not serve the public interest. There is a
                much better way to get this job done.1

It took Congress only one day to override Nixon's veto, by overwhelming margins in both Houses.2 And
some members of Congress openly criticized Nixon's decision to pay for bombs over water pollution control.3
In the U.S. Senate the most eloquent response came from Senator Ed Muskie of Maine, who had led the
fight for a more serious national water pollution control effort:

                Can we afford clean water?  Can we afford rivers and lakes and streams and oceans which
                continue to make possible life on this planet?  Can we afford life itself? Those questions
                were never asked as we destroyed the waters of our Nation, and they deserve no answers as
                we finally move to restore and renew them.  These questions answer  themselves. And those
                who say that raising the amounts of money called for in this legislation may require higher
                taxes, or that spending this much money may contribute to inflation simply do not
                understand . . . this crisis.4

                But even more than during the 1970s, the 1990s are a time of limited economic as well  as
environmental  resources.  This decade brings a time of relative military security, but in the face of a
staggering federal deficit.  Once again, the question is raised:  "Can we afford clean water?"

                A number of values  are at stake if the goals of the Clean Water Act are not met.  Some of
these values are practical, such as our basic needs for safe water and ample seafood supplies, and the desire
to avoid  getting sick from swimming in polluted waters. Others combine ethical and spiritual values, such as
our moral responsibility to protect aquatic species from the ravages of human development, and the
intangible benefits of sitting by a pristine lake or a free-flowing river, seeing or just feeling the  presence  and
diversity of the life that inhabits these resources.

                Because so much of the worth of clean water and healthy aquatic ecosystems transcends
economic values, this question cannot be answered fully or definitively. No matter how hard economists try
to "value" clean water,  they will always miss much. This is not a criticism of economists or economics. It
simply reflects  that the units of economic value, that is, money, do not match up fully with the  units of
environmental value, just as the number of canvases in the Louvre—or the market price of those works—do
not convey the  spiritual and intellectual value locked into those paintings.  Since the Clean Water Act was
passed, for example, ten species of fish have become extinct.  How do we measure the value of those losses?

                Still, future debates over the Clean Water Act will continue to raise the issues  of cost and
economic benefits.  It is essential, therefore, to address the economics of clean water as well as is possible
given the limitations of economic valuation.  This issue can be evaluated from two opposite but related
perspectives.  From one angle, we can try to identify the economic value  of our existing aquatic resources.
From the other side, we can try to get a sense of how much our economy has suffered from past destruction
of these resources.  Either way, past investments in  clean water programs have reaped considerable benefits,
and future investments are more than justified.*
alt is not the intent of this paper to suggest a formal "cost-benefit" analysis. Even if we believed such a test
were justified, it would be far beyond the scope of this analysis.


                                                                                             Session 8

1.1             Commercial Fisheries

                More and more people are turning to fish and shellfish, a major source of protein. From
1972 to 1990, annual U.S. seafood consumption jumped from 12.5 to 15.5 pounds of fish per person.5 And a
recent projection by the U.S. Department of Agriculture indicated that by the turn of the century, this
consumption rate could increase to 17.2 pound; per person. If correct, supplies of edible seafood products
will need to increase by 18 to 31% by the year 2000 to meet the demand.6

                A major and growing U.S. industry supports this demand. In recent years the United States
has ranked about 6th among major fishing nations, behind the [former] USSR, China, Japan, Peru, and
Chile.  The following table shows trends in how many pounds of fish have been caught each year between
1976 and 1990 and the dockside economic value of each catch.

                Besides providing food, commercial fisheries also provide employment for hundreds of
thousands of people per year.  In 1988 alone, 353,703 people were employed through commercial fisheries
(fishing, processing, wholesaling)—a major increase from the 230,387 people employed in 1972.  And, as fish
consumption rises, so will the employment rate. Protecting clean water is essential to protecting these jobs.

12             Recreational Fishing and Hunting

                Recreational fishing is the premiere outdoor recreational activity in the United States. Over
the past thirty years, there has been a steady increase in the number of participants in fishing activities. In
1985, one in four Americans 16 years and older fished for pleasure (46.4 million total:  about 40 million in
freshwater; 14 million in saltwater; some in both).  They took over 870 million fishing trips and spent a total
of 977 million  days on the water (734 million freshwater trips and 136 million saltwater trips.)8

                As a result, recreational fishing supports a major U.S. industry. Total expenditures for
recreational fishing in 1985 were $28.12 billion dollars (freshwater fishers spent $19.4 billion; saltwater fishers
spent $7.2 billion; $1.5 million unknown).  Of these expenditures, $13.3 was spent on trip-related expense
such as food, lodging, and transportation, while $13.6 billion was spent on equipment and $1.3 billion on
other  expenses such as fishing magazines, licenses, and membership dues.9

                Shellfishing is also a popular water-based sport.  In  1985, an estimated four million people
(2% of the U.S.  population) aged 16 or  older participated in recreational shellfishing. The number of days
spent shellfishing was 28 million. Fifty percent of sheUfishers live in  the  South and account for 59% of all
shellfishing days.10  SheUfishers estimated that they spent $2.3 billion to participate in the sport: $1.1 billion
on trip-related expenses such as food,  lodging,  and transportation, $1.2 billion on equipment, and $63 million
on other expenses."

                Another common water-based sport is waterfowl hunting. According to the 1985 National
Survey of Fishing, Hunting, and Wildlife Associated Recreation conducted by the Department of Interior, 5
million hunters took 38.5 million hunting trips and spent 41.7 million days hunting waterfowl. Expenditures
for waterfowl hunting totaled over $783  million.

                The 1985 survey also shows that all forms of water-based hunting and fishing in the United
States are on the rise, by comparing similar national surveys from 1955-1985. According to these findings,
the total number of fishers and waterfowl hunters increased dramatically over the 30-year period, resulting in
a major rise in expenditures made to participate in these sports. The following table illustrates this increase
by comparing data from 1970 and 1985.

                                                                                              Session 8
                                           U.S. Landings7
Lbs. of Fish Landed
9.7 billion
8.5 billion
7.2 billion
6.9 billion
6.6 billion
6.3 billion
6.4 billion
6.4 billion
6.4 billion
6.0 billion
6.5 billion
6.3 billion
incomplete data
5.2 billion
5.4 billion
Economic Value
$3.6 billion
$3.2 billion
$3.5 billion
$3.1 billion
$2.8 billion
$2.3 billion
$2.4 billion
$2.4 billion
$2.4 billion
$2.4 billion
$2.2 billion
$2.2 billion
incomplete data
$1.5 billion
$1.4 billion
on the rise:13
                Other evidence confirms these trends, indicating that the economic value of clean water is
                •       Visitors to national seashores and lakeshores jumped from 18 million in 1981 to
                        over 23 million in 1988.

                •       Fishing and boating on other federal lands rose dramatically from 1982 to 1989.

                •       Total fishing licenses increased (from 31 to almost 37 million) from 1970 to 1988, as
                        did the cost of those licenses.

                •       The value of recreational boats in the United States almost doubled from 1970 to
                        1989,  with total expenditures on recreational boating rising by a factor of five.

                •       Sales  of fishing tackle rose from $540 million in 1980 to almost $740 million in

                These trends are expected to continue.  By the turn of the century about 84 million
Americans are expected to participate in recreational  fishing.14  And according to some estimates, the
available living aquatic resources in the  United States are limited and not expected to satisfy demands for
quality recreational fishing by the year 2000.1S

                                                                                           Session 8
                      Comparison of Major Findings - 1970 and 198512

Total Fishers
Waterfowl Hunters
Fishing expenditures
Hunting expenditures
Days spent fishing
Days spent hunting
33.2 million
2.9.4 million
9.5 million
2.9 million
$5.0 billion
$244.5 million
7()6.2 million
25.1 million
45.3 million
39.1 million
12.9 million
3.2 million
$28.6 billion
$783.3 million
1.1 billion
25.9 million
13             Other Water-Based Recreation and Intangible Values

               Measuring actual expenditures is only one way to establish the value of clean water to
people.  Aesthetics, nature and the opportunity to view wildlife are other ways to value the importance of
keeping our waters pristine.  From swimming to boating to sunbathing, spending time in or near the water is
a favorite way for people to spend leisure time.  Measured by the number of trips away from home, our
most popular outdoor activities include swimming outdoors (461 million trips per year), warmwater fishing
(239 million trips per year), and motor boating (220 million trips per year).1"

               A broad array of activities are enjoyed near the waterfront.  In 1985, 14.8 million  people
visited lakes or streams,  8.4 million people went to marshes or wetlands, and 5.7 million went to the ocean.'7
While at these sites, the  majority of people enjoyed feeding, photographing, and observing birds and
mammals.  Others enjoyed observing and feeding fish, amphibians and reptiles, shellfish and marine
mammals.  Other recreational activities include water-skiing, walking along the shore, kayaking, canoeing,
rafting, surfing, sunbathing, and picnicking.

               Many of these activities, of course, do contribute to the economy directly in  the form of
equipment  purchase, travel expenditures, and activity fees. However, it is difficult to place a value on the
pleasure of spending a sweltering summer day in or near a cool, clean body of water, or on the satisfaction
of seeing wildlife in their natural habitat.  It is even harder to place a  price tag on the assurance that these
resources will be left for our children as well.

               Some economists are beginnijig to assess economic values to intangible environmental
benefits through techniques such as contingent valuation surveys.  These surveys generally describe a
hypothetical market in which a public good may be purchased and asks participants how much they would be
willing to pay for an increase in the level of this public good.

               A 1991  contingent valuation study conducted by Resources For the  Future, for example,
asked a  national sample  of Americans to value a set of water quality improvements.18  In  this study,
respondents were asked  to give a monetary value to minimum  levels of beatable, fishable, and swimmable
water.  Those who gave  useable answers were willing to pay an average of $ 106 per year for beatable water
quality, plus $80 for fishable minimum water quality, and an additional $89 more to reach a national
minimum of swimmable water quality. Altogeilher, people, on the average were willing to pay $275 per year
to ensure clean water."

                                                                                             Session 8
                Based on these answers, it was estimated that the economic benefits of achieving the
 national swimmable water quality goal for non-boatable water was $29.2 billion per year in 1990. However, a
 range of $24 to $43 billion dollars per year was considered reasonable.20 When the results of this study were
 aggregated with other similar surveys and adjusted to correct for the number of current households and the
 Consumer Price Index, the estimated value of clean water became $46.7 billion.  Clearly, the public places a
 large economic "value" on even the intangible benefits of our aquatic resources.
                Because their importance has been hotly debated in recent years, it is particularly important
to underscore the economic, as well as environmental, values of wetlands. While some may view wetlands as
just swamps or even eyesores, they are actually rich areas that support an abundance of wildlife and provide
services that may be worth billions of dollars in economic benefits.  For example, an estimated 50 million
people spend nearly $10 billion annually to observe and photograph wetland-dependent birds.

                Wetlands also sustain much of the country's seafood.  In the Southeast, 96% of the
commercial catch and over 50% of the recreational catch is dependent on estuarine and other coastal
wetlands.  Commercial fishing harvests from wetlands are worth $10 billion per year.21  And estimates of the
value of coastal wetlands to commercial and recreational fisheries range from about $2,200/acre on the
Pacific coast to almost $10,000/acre along parts of the Florida coastline.22 Wetlands also provide  habitats for
valued mammals such as muskrats, beavers, and minks.  Muskrat pelts alone are worth over $70 million

                A 1981 case study in New England illustrates the economic importance of wetlands. The
wetlands used in this study were comprised of 8,535 acres in the Charles River Basin, Suffolk, Norfolk, and
Middlesex Counties, Massachusetts.  The economic benefits measured were flood control, increases in land
value, pollution reduction, water supply, recreation and aesthetics, preservation and research,  vicarious
consumption and option demand, and undiscovered benefits.

                In valuing flood control, the Corps of Engineers estimated that  wetlands provide 75% of the
natural water storage.  Accordingly, the loss of wetlands  used in this case study would produce an annual
flood damage of almost $18 million, or about $2000 per  acre (1978 dollars). The following table shows the
annual property loss for each percentage of lost wetlands:

                   Annual Property Losses Due to Wetlands Storage Loss23
                          (for 8,535 wetlands acres in Charles  River Basin, MA)
10% loss
20% loss
30% loss
40% loss
Annual Property Loss
                Wetlands also provide a wealth of recreational opportunity.  The recreational value of the
wetlands used in this case study were measured by activities such as small game hunting, waterfowl hunting,
trout fishing, warm water fishing, and nature study.  It was determined that one acre of wetland in the study
areas was worth $187.74 per year.  This figure was reached by calculating the days of use/acre/year, the
expenditures/user/year, the pay lost/user/year, willingness-to-pay/user/year, and days of activity/user year.

                                                                                            Session 8

                A-second analysis of the recreational value of wetlands determined the price at which
people would sell their rights to recreate in wetlands (a variation on contingent valuation).  The total price
for this analysis was $3,366 per acre. When this figure was capitalized at 8.75%, it yielded a value (1977) for
recreation of $56,100 per acre.24

                The following is a breakdown of the economic benefits of one acre of Charles River
wetland: flood prevention ($33,370), local amenity ($150 - $480), nutrient reduction ($16,960), water supply
($100,730), recreation ($2,145 - $38,469).  Therefore, the total worth of just one acre was estimated at
$153,000 - $190,009.25  Not bad for "just a swamp."


2.1             Degradation

                The flip side of the value of clean water is the economic losses that occur when water
resources are degraded.  Loss of natural and economic resources occur in a number of ways: pollution
causes drinking water and seafood supplies to be closed or restricted,  or increases treatment costs for
drinking water; water and seafood contamination causes human illnesses, with attendant  medical costs or lost
productivity of the work force, not to mention human suffering; flooding and  erosion devalues property;
habitat destruction and chemical pollution decreases valuable recreational opportunities.  Less obvious but
equally important from an economic perspective are the loss of valuable renewable resources, such as
reusable water and sewage sludge, when these resources are contaminated by toxic pollutants. As with the
value of clean water and aquatic resources, too little work has been done to quantify the value of these
economic losses.  Some information is available, however, to underscore the tremendous current and
potential future economic losses we face if we do not protect our aquatic resources.

22             Lost or Degraded Economic Resources

                Seafood Losses Due to Pollution

                The most obvious and immediate economic losses due to water pollution and lost or
degraded aquatic habitat occurs when commercial fisheries decline or are closed due to contamination.  A
large number of major commercial fisheries have already been lost, or are declining severely. While  little
information is available  to quantify these losses directly, one study exemplifies the severity of the loss.

                The economic value of shellfish resources to the four states of New York,  Rhode Island,
Massachusetts, and Connecticut is considerable. However, over 75%  of Connecticut's bays, harbors,  and
estuaries are restricted to shellfishing; 25,000 acres in southern Massachusetts are similarly  restricted; and the
harbor of New Bedford has been declared a Superfund site because of pollution by PCBs.

                Shellfishing restrictions due to pollution cause detrimental effects on revenues in these
states. In 1990, the ex-vessel value of commercial landings in these states exceeded $72  million.  Using a
conservative economic multiplier of 4.5, indirect revenues could approximate  $325 million.   The estimated
annual value assigned to the potential harvest of shellfish from prohibited areas (areas closed due to
pollution or other unsafe conditions) is approximately $36 million.2* If these  shellfish  resources could be
utilized, the value of commercial landings would be increased by about 50%,  and total indirect revenues
might be as high as $487 million.


                Flood management and erosion control are other economic  burdens  that could be avoided
with proper investment in and protection of aquatic resources.  Flooding is the most costly  natural hazard in
the United States, causing a greater loss of life and more property damage than all other natural disasters

                                                                                            Session 8
 combined. In 1991, the Federal Emergency Management Agency (FEMA) estimated that there were about
 four million acres of floodprone land in the United States.27

                Flooding causes approximately $3 billion in damages a year, and the loss of an average of
 191 lives (which of course cannot be measured by economic value).28  These statistics were the same or were
 exceeded for each five-year period since 1970.  Moreover, they greatly exceed those for the 50 years
 preceding 1970. The rise in damages and deaths due to flooding may be partly attributed to the continuing
 loss of wetlands.  "Studies in Wisconsin, for example, showed that watersheds consisting of 30% or more of
 wetland had 60 to 80% lower floodpeaks than watersheds with little or no wetland."29

                Together with flooding, erosion is another serious condition that affects the country's
 shorelines. The Army Corps of Engineers determined that there are 574,000 miles of stream banks with
 erosion problems, with 142,100 miles seriously affected. About 78% of ah1 stream bank erosion takes place
 west of the main stem  of the Mississippi River.30 In addition to  natural habitat destruction, streambank
 erosion causes millions of dollars in economic damages annually:

          Streambank Erosion - Average Annual  Damages in  Thousands of Dollars
                                [Source:  U.S. Army Corps  of Engineers]
Pacific Northwest
Upper Mississippi
Rio Grande
Lower Mississippi
Tennessee Valley
Ohio Valley
New England
Great Basin
Colorado Basin
Missouri Basin
Arkansas- White-Red
Texas Gulf
South Atlantic Gulf
Middle Atlantic
Great Lakes


TOTAL $294,600,000
                Erosion is especially serious for ocean-front property. Beach erosion in the New York to
Washington corridor averages 2-3 feet per year.31  In 1986, North Carolina predicted that 750 ocean-front
structures insured at approximately $50 million would be lost to erosion hi the next 10 years; 5,000 structures
over the next 60 years; with 4,200 structures at immediate risk in event of a major coastal storm.

                Drinking Water

                Eliminating drinking water contaminants is important to protect  public health.  But it can
also reduce overall costs of supplying safe drinking water—costs that are borne by public water supply users
rather than by those who polluted the water in the first place (although in some cases these groups overlap).

                The presence  of contaminants in public drinking water supplies results  in increased
treatment costs.  Of course, some costs will always be necessary to ensure a safe drinking water supply,
especially  since drinking water  contaminants occur even in relatively natural water supplies. But the presence
of pesticides and other artificial organic chemicals, and other pollutants introduced by human activities,
results in the need to add expensive new treatment technologies at drinking water supplies around the

                                                                                           Session 8
country.  There is no national study available to quantify these costs, and to evaluate how much money could
be saved by protecting drinking water supplies in the first place. But available information suggests that
preventing pollution of drinking water supplies is a sound economic as well as public health investment.

               One EPA study, for example, indicates that about 50 million people in the United States live
in areas most vulnerable to pesticide contamination of groundwater.  According to this study, estimated
remedial costs of $250 to $750 per household per year can be avoided by protecting the water supply. These
costs may total as much  as $100 million to $150 million per year. In addition, people who live in areas
subject to drinking water contamination are willing to pay as much as $50 per household per year for
programs that evaluate ground water problems and identify efforts to resolve  them. The total amount
generated from this type of program could equal a:; much as $1.0 billion per year from households at risk
from pesticide contamination.32

               Similar  results are apparent for major city drinking  water systems, where supplies often
come from  surface waters. The  estimated costs of filtering the New  York City water supply ranges from $1.5
to 5 billion  for construction, with operating costs of $300 million/year.  If activated carbon is used to filter
toxic contaminants, construction costs double and operating costs triple, up to $10 billion in construction
costs and $900 million/year in operating costs."

               Some data are available to characterize drinking water treatment costs on a national scale.
The following table, for example, shows the estimated annual  costs for implementing amendments to the Safe
Drinking Water Act:34

             Estimated Annual Costs to Water Systems for  Implementing  1986
                         Amendments to the  Safe Drinking Water Act
                                      (1986 dollars in  millions)
Volatile Organic Chemicals
Total Coliforms
Synthetic Organic
Inorganic Chemicals
Lead/Copper Corrosion
Number of
Systems Affected
Annualized Capital/
O&M Costs
Average Annual
Monitoring Cost
Compliance Cost

                                                                                              Session 8
                Loss of Potentially Reusable Resources

                The contamination of domestic sewage by toxic pollutants from industrial, household, and
 other sources is part of a cascade of problems that causes pollution of air, land and water. And by
 contaminating these potentially valuable materials, we lose renewable resources that could be used to fertilize
 and irrigate crops, forests and other lands. The pattern looks like this:

                1.       Our failure to reduce or eliminate the release of toxic chemicals into our public
                        sewers causes contamination of air (through evaporation of volatile organic
                        chemicals), sewage effluent, and sewage sludge;

                2.       We discharge sewage effluent into our rivers, lakes and  coastal waters, causing
                        serious water pollution problems;

                3.       We treat sewage sludge as  a waste to be burned in incinerators (causing more air
                        pollution) or to be dumped in landfills (polluting ground or surface water);

                4.       Instead of using the valuable water and  soil nutrients in sewage effluent and sludge,
                        we drill for oil and manufacture chemical fertilizers, and build massive new dams
                        and other water projects, all of which causes  even more environmental harm.

                Steps to eliminate this contamination of our sewage systems thus could reduce
 environmental impacts while freeing up valuable materials that would lower water supply and fertilizer  costs
 around the country. While it is difficult to assess a precise national value on these materials, information
 suggests that we are currently losing a tremendous economic resource.

                Wastewater Reuse

                In 1985, approximately 31 billion gallons of sewage  wastewater were discharged to surface
 water every day.35  Put in perspective, this amounts to over 11 trillion gallons a year, or more than a third of
 total annual U.S. water withdrawals.  Much of this wastewater can be reused productively, if it  is reclaimed
 properly and if it is sufficiently free of toxic contaminants.  Properly  reclaimed wastewater can be put to uses
 such as groundwater recharge, industrial use, irrigation, recreational  lakes,  or direct municipal reuse.3*

                One author suggested five important reasons to  use properly reclaimed wastewater.37  First,
 we can reduce or eliminate the costs of building additional water supply, collection, storage, and transport
 systems. Second, we can reduce or eliminate  the serious environmental harm from building these  additional
 systems. "Such systems replace free-running rivers and dams with fluctuating reservoirs, and can change
 significantly the basin areas  from which water is exported and into which it is imported."38  Third, the reuse
 of wastewater helps to conserve scarce water resources.  Fourth,  wastewater reuse can reduce the  rate  of
 groundwater depletion for areas that obtain their water from wells.  And fifth, we can  protect water
 resources from pollution by reducing total sewage discharges.

                In addition to these reasons,  wastewater discharges  are rich in nitrogen, phosphorus, and
 other nutrients needed to grow various crops.  Replacing these nutrients uses scarce oil resources  that  we
 convert at petrochemical factories into chemical fertilizers.39  Moreover, sewage reuse can be better for
 agriculture because nutrients are  released more slowly and continuously, rather than in a  single large dose, as
is the case with chemical fertilizers, much of which runs  off into local surface and ground waters.  In test
plots in India and Thailand, rice,  wheat and cotton yields were considerably higher using reused wastewater
than in similar plots that used well  water and  commercial fertilizer.40

                Some wastewater is reused in this country, rather than dumped in surface waters.  There are
over a thousand wastewater reuse projects in the United States in which water is reused for irrigation,

                                                                                            Session 8

 industrial cooling and processing and groundwater recharge.  Los Angeles and Orange Counties, California,
 for example, reuse about 70 million gallons of water a clay for irrigation, cooling water, and groundwater
 recharge, about 15% of the area's current wastewater volume. But despite these efforts, only about a fifth of
 1% of water use in this country is met by reclaimed water. By comparison, reclaimed water met 4% of
 Israel's water needs in 1980, and is expected to reach 16% by the year 2000.

                To make better use of reclaimed wastewater, however, we need to answer two critical
 questions:  First, what reclamation (treatment) levels are necessary to protect human health and the
 environment?  And second, is wastewater reuse cost effective relative to new water supplies or water
 conservation (i.e., what are the economic benefits of wastewater  reuse?).

                To answer the first question, it is important  to note that different uses of water carry
 different potential for human exposure—from uses that have little or no human contact (like industrial cooling
 water) to direct human consumption.  One author41 suggested that depending on the  category of reuse,
 wastewater may be treated at the primary, secondary, tertiary, or advanced level.1"

                Clearly wastewater reuse is controversial, and two opposing stands have been taken on the
 health risks associated with reused wastewater.  One view is that reclaimed water is similar to the water
 supplies of many large American cities and thus poses no greater health risks.  The other is that potable
 water should be taken from the best possible source:

               There is legitimate concern for fail-safe disinfection technology when reclaimed water is to
               be used for purposes involving close human  contact where inhalation or ingestion are
               possible.  This is of considerable concern because the majority of waterborne diseases
               reported can be traced  to water treatment plant failure.42

 But use of reclaimed wastewater that does not include direct  human ingestion  over a long period of time
 seems to pose few if any direct health risks.

               This view is accepted by public opinion surveys. The weighted mean of seven studies
 performed in 1988 to test the percentage of opposition for different uses of reclaimed water43 showed that
 the majority of respondents were opposed only to the uses where contact is very likely. Thus, reclaimed
 water should start to be used for those purposes where risks  are low and public opinion is high.

               The second key question is whether wastewater reclamation and reuse is cost effective, that
 is, whether the added treatment and distribution costs  necessary to make use of reclaimed water exceed the
 cost of other water sources (new supplies or water efficiency). For the reuse of wastewater to be cost
 effective, and therefore, considered an economic benefit, it must allow users enough savings over fresh  water,
 in the long run, to compensate for any extra costs incurred by its use. Some studies have shown that
 wastewater reclamation and reuse can provide significant  economic benefits.44

               Distribution and treatment costs (including energy costs), of course, are unique to each
 situation.  For example, the cost estimate for groundwater spreading is low because there is little equipment
 involved.  On the  other hand, groundwater injection involves  using pumps and additional equipment which
brings its distribution cost to the moderate level. A wide  range  of variables must be  considered in evaluating
 the economics of particular treatment  and reuse options.
""Primary treatment is the removal of suspended solids to designated levels. Secondary is the reduction, by
activated sludge process, of the biological and chemical oxygen demand of wastewater to regulation levels.
Tertiary is the specific treatment process of coagulation, clarification, and filtration to improve the
effectiveness of disinfection. And advanced treatment includes reverse osmosis to lower the dissolved solids
and activated carbon to absorb organic compounds.


                                                                                             Session 8
                Because of these variables, it is difficult to place a national price tag on the value of
 reclaimed water. But consider that even if savings were only a penny a gallon over alternative sources of
 water and fertilizer, the potential economic value of the 11 trillion gallons of wastewater a year we waste by
 dumping it into our surface waters would be an astonishing $11 billion a year!  And this does not even take
 into account the economic and environmental harm caused by existing sewage pollution. Clearly, by investing
 in better pollution controls so we can reuse  rather  than release sewage wastewater, society can  save on both
 the economic and environmental costs of providing water and fertilizers, as well as the ongoing
 environmental costs of water pollution from sewage releases into our surface waters.

                Sludge ("Biosolids")  Reuse

                Sewage sludge, or "biosolids," is another sewage by-product that is not being used to  its full
 potential, in part due to contamination by toxic pollutants.  As with wastewater, contamination  of sewage
 sludge leads  to a related pattern of economic and environmental problems:  We burn this sludge in
 incinerators or dump it in landfills, causing air or water pollution; and we throw away valuable  nutrients and
 soil conditioners, which must be replaced by artificial fertilizers  made from limited petroleum resources.

                Sewage sludge is the solid,  semi-solid, and liquid residues removed from wastewater  during
 treatment.  Sludge is mostly made up of water, organic matter, and nutrients such as  nitrogen,  phosphorus,
 zinc, calcium, and magnesium.  With inadequate pretreatment and sewage treatment, however,  it may also
 contain bacteria and toxic and other pollutants.

                Because nutrients make sludge a valuable economic resource, thousands of municipalities
 are recycling sludge for agricultural and other uses. It has been used successfully in the production of food,
 feed, horticultural crops, sod production, turf maintenance, reclamation of mined lands, and forest
 production.  For example, in 1988, all sludge from  Washington,  D.C. was used on land.  Over one-third  was
 used on 7,000 agricultural acres in Virginia,  and around 30,000 tons were applied in Maryland.

                However, on a national basis, less than 40% of all sewage sludge is used beneficially. Most
 of it is discharged Into water bodies, incinerated, or landfilled.  By the year 2000, that the amount of sludge
 that could have been used beneficially will quadruple.

                Sludge is full of nutrients required for plant growth, including nitrogen (N), phosphorus (P),
 potassium (K), calcium (Ca), and magnesium (Mg), as well as trace elements which in small quantities are
 beneficial to  plant growth.  In all, sludge typically contains $50 to $60 worth of nitrogen, phosphorus,  trace
 nutrients, and organic matter per ton.45  Some heavy metals and other contaminants,  of course, can pose
 human  health and environmental risks if present in sufficiently high quantities, underscoring the need for
 adequate sludge quality standards and pretreatment requirements.

                These nutrients provide benefits to agriculture  in the form of fertilizer. A 1985 study
 showed that cotton lint yields were comparable to commercial fertilizer when sludge was used at rates of 20
 to 80 mg/ha.  At the high application rate of 466 mg/ha of solids, grain and fodder yields were the same as
 with commercial fertilizer.  Also, sludge application on corn yielded similar results as with commercial
 fertilizer. However, there was a three-fold increase in snap bean yields grown using sludge rather than
 commercial fertilizer.46

                A 1991 study on sludge conducted at the University of Florida Institute of Food and
Agricultural Sciences demonstrated the  successful use of municipal wastes, including sewage sludge, to grow
vegetables and tropical crops.  Processed Municipal Wastes (PMW) include processed sludge, yard trash,
newsprint, and food wastes. For this study, three different PMWs were evaluated.  The first was Daorganite
(processed from sewage sludge by Metro-Dade County).  The second was Compost (sewage sludge mixed
with yard trash and garbage).  And the third was Agrisoil (composted solid waste). The results were as

                                                                                              Session 8

                Tomato—Yields of large, marketable, and total fruits were higher when sludge was placed in
                the trenches and either 3 t/a or 6 t/a was incorporated. And, after flowering, tomato plants
                with 5 and 10 t/a of Daorganite had enhanced growth compared to untreated plants,
                especially hi flooded areas of the field.

                Squash—Low rates  of processed municipal wastes resulted hi higher squash yields.

                Areca Palms—Plants were potted with 0, 15, 30, and 45% sludge or compost. After nearly a
                year, plants showed elevated growth in height, width, circumference, and growth index in
                15% Daorganite sludge; in 15, 30, and 45% compost; and a combination of 15% and 30%

                Papayas—Sludge and compost applications increased the number of medium-sized fruit, but
                the total number of all fruit.  Sludge applied at 1.5 t/a and compost applied at 1.5 to 3 t/a
                increased medium and total fruit numbers compared to untreated plants.

                Sludge also has a beneficial effect on soil. Studies have shown that sludge and sludge-based
compost decrease the bulk density of soils, rendering a better environment for plant root growth.47  It also
increases soil aggregation which provides less potential for erosion. One study showed that as a result of
applying sludge, runoff and sedimentation rates were reduced.48

                Water retention and hydraulic conductivity increase with sludge application.  This allows
plants better access to water, especially during dry periods or stress.

                Sludge is not just beneficial for agricultural uses.  It is also being used increasingly in
forestry to revegetate and stabilize forests that have been  damaged by harvesting, fires, landslides,  etc.
Sludge helps to shorten wood production cycles by speeding up tree growth.  The  use of sludge as a forest
fertilizer results in height and diameter increases from two- to ten-fold in various tree species.4' Also, trees
grow twice as fast on soil that has  been fertilized with sludge.

                Other cost-effective uses for sludge are to revegetate areas destroyed by mining, dredging
and construction, and to fertilize highway medians and cover landfills.  In a strip-mined area  in Illinois,
reclamation using sludge cost $3,660 an acre, compared with a range of $3,395 to $6,290 per acre for other

                As with water, the total national economic value of sewage sludge is difficult to ascertain
because of the many variables in sludge quality, transportation costs, etc. But based on current prices of
sludge products, the market value of the sewage sludge currently being burned or  landiilled is substantial.
Heat-dried,  high nitrogen content sludge with a consistent nutrient value is being sold from $90.00 to $190.00
per ton  in bulk. Less consistent nutrient content and more odorous products are being sold from  $20.00 to
$60.00 per ton in bulk.  Lower nitrogen sludges are selling for about $4.00 to $16.00 per ton hi bulk and after
alkaline stabilization for  $2.00 to $10.00 per ton in bulk.  In smaller quantities,  sludge products sell from
around $5.00 to $16.00 per 40 pound bag, equal to $250.00 to $800.00 per ton.50

                Clearly, additional investment in clean water programs designed to reduce levels of toxics in
sewage sludge,  making them usable for fertilizer and soil  conditioner for a range of applications, could yield
substantial environmental as well as economic benefits.


                Finally,  by not investing in clean water, we are also losing access to potential jobs.  Different
sources  indicate that investment of $1 billion in water and wastewater infrastructure will generate  between
6,400 and 15,600 jobs directly involved in project completion.  Estimates of indirect effects could be as large
as 13,600 jobs per billion dollars invested.  Total effects, including direct, indirect, and induced have been


                                                                                             Session 8
 estimated at 34,200 to 57,400 jobs per billion dollars invested. And, the estimated $8.3 billion (1991 dollars)
 shortfall in funds for water and wastewater capital for the period 1993-2000 could represent 2,865,900 to
 4,810,000 job-years of employment.51

 23             Case Study - The Chesapeake Bay

                In 1987, the Chesapeake Bay was estimated to be worth $678 billion to the economies of
 Maryland and Virginia.52 This figure was the sum of two parts.  The first was the value of the annual
 incomes generated by bay activities which could not take place without the Bay.  The second was the land
 premiums that people were willing to pay for waterfront, waterview, or water access homes.

                It was estimated that the  1987 annual impacts from commercial fishing, activities for the
 ports, ship and boat building, ship repair, and Bay-related tourism was $632 billion. The average annual land
 premiums for waterfront, waterview, or water access land around the bay was $46.1 billion.53

                The  annual value of commercial fishing in the Chesapeake Bay region was $520 million
 (1987 dollars). This was the total for the actual dockside value of the fish plus the processing value that
 includes businesses that prepare fresh or frozen fish and other seafood for shipment.54  The $520 million is
 subject  to annual fluctuations.

                Diseases to oysters, reproduction problems with rockfish, weather, and other changing
 conditions affect annual yields of harvest.  Time, nature, and the health of the Bay each will determine the
 fortunes of commercial fishing in the Chesapeake Bay.55

                Tourism accounted for $8,3% million. Recreational activities included boating, fishing,
 hunting, sightseeing, and regional cuisine.  Recreational fishing is mostly done for fin-fishing; however,
 crabbing and oystering are  also popular activities. Each of these activities depend heavily  on the
 environmental health  of the Bay.

                Hunting also depends on  the condition of the bay. Waterfowl hunting  is  a popular Bay
 activity.  The expansion of ducks and geese partly depends on the preservation of natural waterfowl refuges
 along the Bay.

                The site value premium for Bay residences was $46.2 billion. People will pay higher prices
 to live on or near the Bay.  If the Bay were to  vanish, premiums would go way down. Also, if the beauty of
 the Bay were to be affected by pollution, then it would also adversely affect the land premiums.  Premiums
 for Bay-area properties are different depending on the neighborhood and size of the lot. However, realtors
 assess premiums of $35,000-$50,000 for waterfront, waterview, and water access locations.

 3.0            CONCLUSION

                In Earth in the  Balance. Senator Al Gore quoted Oscar Wilde:   "A cynic is one who knows
 the price of everything and the value of nothing."  It is easy to dwell on the costs  of clean  water, while
 forgetting the tremendous value  of aquatic resources to our economy.  We share  a large stake in the
 protection of our rivers, lakes  and coastal waters, and  must be willing to make the investments necessary to
 preserve them.

 4.0             REFERENCES

 1.               Congressional Research Service.  "A Legislative History of the Water Pollution Control Act
                Amendments of 1972," p.  137.

2.               M. pp. 109-112. The Senate vote was 52 Yeas,  12 Nays, 36 not voting.  Id. pp. 135-36.  The
                House vote was 247 Yeas, 23 Nays, 160 not voting.


                                                                                            Session 8

3.              1$. p. 134. In supporting the override of Nixon's veto, Representative Williams noted:  "This
                year Mr. Nixon has undertaken the highest level of bombing of the war.  It is estimated that
                the  bombing of Indochina this year will cost over $3 billion . . . Many of us in Congress
                seriously question these expenditures .  . .  But very few—at last count only 11 in both Houses
                of Congress—oppose the idea of restructuring and realistically funding a water pollution
                control program."

4.              Id. p. 164.

5.              National Oceanic and Atmospheric Administration. Our Living Oceans.  The First Annual
                Report on the Status of U.S. Living Marine Resources.  November 1991.

6.              Sampson, R.N., and D. Hair.  Natural Resources for the 21st Century. American Forestry
                Association, Island Press, at 236.  1990.

7.              National Oceanic and Atmospheric Administration.  National Marine Fisheries Service.
                Fisheries of the United States. 1976-1990.

8.              U.S. Fish and Wildlife Service. "1985 National Survey of Fishing, Hunting, and Wildlife
                Associated Recreation," p. 14. November  1988.

9.              Id. p. 18.

10.             U.S. Fish and Wildlife Service. Recreational Shellfishing in the United States.  (Addendum
                to "1985 National Survey of Fishing, Hunting, and Wildlife Associated Recreation," p. 2.)
                January 1991.

11.             jd. p. 11.

12.             jd. p. 150.

13.             U.S. Department of Commerce. Statistical Abstracts of the United States,  (llth ed.).
                pp. 228, 230, 235, 237,  239. 1991.

14.             Sampson, R.N., and D. Hair.  Natural Resources for the 21st Century. American Forestry
                Association, Island Press, p. 207.  1990.

15.             W. p. 205.

16.             W. p. 261.

17.             U.S. Fish and Wildlife Service. "1985 National Survey of Fishing, Hunting, and Wildlife
                Associated Recreation," p. 44. November  1988.

18.             Carson, R.T. and R.C. Mitchell. The Value of Clean Water: The  Public's Willingness to
                Pay for Boatable. Fishablc. and Swimmable Water.  July 1991.

19.             Id. p. 12.

20.             W. p. 26.

21.             U.S. Environmental Protection Agency. America's Wetlands: Our  Vital Link Between Land
                and Water, p. 5.  February 1988.

                                                                                         Session 8
22.            Bell, F.W.  "Application of Wetland Valuation Theory to Florida Fisheries," In NOAA,
               Estuaries of the United States. Vital Statistics of a National Resource Base. October 1990.

23.            Thibodeau, F.R. and B.D. Ostro.  "An Economic Analysis of Wetland Protection," Journal
               of Environmental Management. Academic Press Inc. London.  Vol. 12, p. 22. 1981.

24.            W. p. 26.

25.            W. p. 27.

26.            The Sounds Conservancy, Inc. Perspective on Shellfisheries in Southern New England, p. 8.
               The breakdown by state is as follows:  Massachusetts - $17 million, Rhode Island - $2.5-5.5
               million, Connecticut - $12 million, and New York $2-4 million.

27.            Natural Hazards Research and Applications Information Center.  Floodplain Management
               in the U.S.:  An Assessment Report. Volume 1 - Summary Report.  University of Colorado
               at Boulder.  Federal Interagency Floodplain Management Task Force, p. 8.  1992.

28.            Environmental Defense Fund and World Wildlife Fund.  How Wet is a Wetland?  The
               Impacts of the Proposed Revisions to the Federal Wetlands Delineation Manual. January

29.            Id. p. 37.

30.            Id. pp. 18-19.

31.            National Research Council.  Managing Coastal Erosion.  Committee on Coastal Erosion
               Zone Management, Water Science and Technology Board. National Academy Press, p. 37.

32.            U.S. Environmental Protection Agency. Pesticides and Groundwater Strategy:  A Survey of
               Potential Impacts. Economic Analysis Branch, Biological and Economic Analysis Division.
               p. 6.  1991.

33.            Gordon, D.K. and R.F. Kennedy Jr. The Legend of City Water:  Recommendations for
               Rescuing the New York City Water Supply. The Hudson Riverkeeper Fund.  p. 30.
               September 1991.

34.            U.S. General Accounting Office. Drinking Water: Compliance Problems Undermine EPA
               Program as New Challenges Emerge.  A Report to the Chairman, Environment, Energy,
               and Natural Resources Subcommittee, Committee on Government Operations, House of
               Representatives.  GAO/RCED-90-127, p. 53.  1990.

35.            Van der Leeden, T., and Todd.  The Water Encyclopedia. Lewis Publishers, p. 541. 1990.

36.            W. p. 97.

37.            Id. p. 95.

38.            Bruvold, W.H., B.H. Olson, and M. Rigby.  "Public Policy for the Use of  Reclaimed Water,"
               Environmental Management. Vol. 5, No. 2. 1991.

                                                                                            Session 8
39.             Postel. Conserving Water: The Untapped Alternative. Worldwatch Paper 67, 1985.
                According to one estimate, it would take 53 million barrels of oil to replace with petroleum-
                based fertilizers the amount of nutrients disposed of annually in U.S. wastewater.

40.             Lowe. "Down the Tubes,"  Worldwatch.  March-April 1989.

41.             W. p. 97.

42.             W. p. 98.

43.             Bruvold, W.H.  "Public Opinion on Water Reuse Options," Journal Water Pollution Control
                Federation. January 1988.

44.            Jd. p. 101. The author explained:

                For example, the cost of treating water to the level appropriate for park irrigation is
                currently  approximately $.55 per 3,785 liters [1981] (1,000 gallons). The cost of disinfected
                secondary effluent, the federal minimum, is currently $.32 per 3,785 liters. The marginal
                cost of water treated to a level appropriate for park irrigation is therefore $.23 per 3,785
                liters.  Orchard irrigation water, for which secondary treatment is sufficient, has a marginal
                treatment cost of $.00 per 3,785 liters because $.32 minus $.32 equals $.00 when secondary
                treatment is mandatory. The marginal cost of $.00 could stimulate construction of needed
                distribution facilities since the actual cost of the water to the grower might be very low in
                this case.

45.             U.S. Environmental Protection Agency.  EPA's  Policy Promoting the Beneficial Use of
                Sewage Sludge and the New Proposed Technical Sludge Regulations.  Office of Municipal
                Pollution  Control, p. 1. June 1989.

46.            Id. pp. 9-10.

47.             Kladivko, E J. and D. Nelson. "Changes in Soil Properties From Application of Anaerobic
                Sludge." J. Water Pollut. Control Fed.  Vol. 51,  p. 325.  1979
                Epstein, E., et al., "Effects of Sewage Sludge and Sludge Compost Applied to Soil on Some
                Soil Physical and Chemical Properties," J. Env. Quality.  Vol. 5, p. 422.  1976.

48.             Kelling, KA. et al., "Effects of Waslewater Sludge on Soil Moisture Relationships and
                Surface Runoff." J. Env. Qual. Vol. 49, p. 1698. 1977.

49.             U.S. Environmental Protection Agency, EPA's Policy Promoting the Beneficial Use of
                Sewage Sludge and the New Proposed Technical Sludge  Regulations.  Office of Municipal
                Pollution  Control, p. 7. June 1989.

50.             U.S. Environmental Protection Agency. Fact Sheet.  "Data on  Sludge Biosolids Product

51.             Apogee Research, Inc.  "America's Environmental Infrastructure: A Water  and Wastewater
                Investment Study," December 1990.

                                                                                      Session 8
52.            Maryland Department of Economic and Employment Development.  Economic Importance
              of the Chesapeake Bay.  Office of Research, Maryland Department of Economic and
              Employment Development, p. 1. March 1989.

53.            Id.

54.            Jd. p. 4.

55.            Id.

                                                                                            Session 8
                              Clean  Water's Muddied Future

                                   Kenneth Chilton and James Lis"
                                           Deputy Director
                              Center for the Study of American Business
                                        Washington University

                Determining the current quality of U.S. water sources is problematic at present.  EPA's
most recent water-quality assessment, reflecting data collected by the states in 1988 and 1989, is largely
encouraging.  Health and ecological effects of polluted water have not been adequately studied, however,
making comparison of costs and benefits of clean water policy incomplete, at best.

                Point sources have decreased their effluents substantially since 1970. Pollutants from
agricultural and urban runoff (nonpoint sources) have increased and, in some cases, have more than offset
industrial and POTW improvements.  According to the; EPA,  agricultural and urban runoff pose the same
amount of risk to human health, and more risk to the environment, than does point source pollution.

                Technology to control nonpoint source pollution is available and, in general, is relatively low
cost.  Implementing nonpoint programs will not necessarily be easy,  however. Farmers and municipalities
lack the "deep pockets" of private industry; thus, following a "polluter pays" principle may be politically
difficult in these situations.

                Water-quality science must improve before Congress can responsibly enact added
restrictions on industrial dischargers.  Even without added requirements, future costs of water-pollution
abatement will be huge—nearly $650 billion over the next ten  years,  At present, the objectives of the Clean
Water Act are clear but needed policy changes, if any, are murky.

1.0             INTRODUCTION

                Proposals to reauthorize and revise ths nation's primary statute to protect water resources
surfaced in the 102nd Congress but failed to reach the Senate or House floor for final consideration. It
appears likely that the 103rd Congress will try once agztin to amend  the Clean Water Act of 1972.

                The sheer magnitude of costs associated with improving water quality calls for a critical
analysis of the future direction of water-resource legislation.  In addition to costs, Congress must not
overlook several other key issues.  First, benefits to public health and the environment from further
abatement initiatives are currently ill-defined.  Second, the relative significance of pollution from nonpoint
sources—agricultural, urban, and forest runoff—compared to pollution from point sources—emissions from
industries and publicly owned treatment works (POTWs)—must be considered. Finally, the effectiveness  of
recent EPA programs resulting from the 1987 amendments to the Clean Water Act cannot be evaluated for
several more years. The following discussion considers these  issues  and also offers some practical
recommendations for future water  pollution control policies.
"Kenneth Chilton is Deputy Director of the Center for the Study of American Business (CSBA) at
Washington University in St. Louis.  James Lis is the Arthur and Jeanne Ansehl Fellow at the CSBA.


                                                                                             Session 8
1.1             The Price of Clean Water

                Improving the quality of America's water has been, and will continue to be, an extremely
expensive process. In a 1990 report, EPA estimates the cost for water pollution cleanup efforts at nearly
$620 billion (in 1992 dollars) for the period of 1972-1990 (see figure).  These expenditures account for over
40% of total U.S. pollution abatement expenditures since 1970.'

                Investments will need to steadily increase to reach nationwide attainment of national
fishable/swimmable goals, drinking-water-quality goals, and municipal secondary treatment requirements by
the year 2000. The figure shows that EPA estimates expenditures totalling nearly $680 billion  (in 1992
dollars) for the period 1991-2000—more than the total amount spent in the previous nineteen years

                These expenditure estimates would be significantly higher if groundwater protection, an
issue of growing concern and rising cost, was included.  In its 1990 study, however, EPA includes most
expenses incurred for groundwater protection under other categories, including the  Resource Conservation
and Recovery Act, Superfund,  and the Federal Insecticide, Fungicide and Rodenticide Act.

                Beyond revealing the high costs of water pollution abatement efforts, the EPA report shows
that the agency's resources have been focused on point source discharges (the significance of which will be
discussed in more detail later). Indeed, costs associated with controlling point sources account for over 90%
of abatement outlays. These expenditures have been mostly for publicly owned treatment works and
industrial direct  discharge and effluent pretreatment controls.1  A good deal of future capital expenditures
will go toward meeting drinking water regulations and constructing additional municipal wastewater
treatment faculties.

12             Gauging Water Quality

                What improvements in water quality have these expenditures produced?  Surprisingly, the
answer is unclear. One major reason for this ambiguity is that knowledge  of past and present water  quality
is deficient.

                Measuring water quality is far from a straightforward matter.  States, rather than the U.S.
Environmental Protection Agency (EPA),  are responsible for monitoring surface water  quality.  State
agencies gather and analyze data and submit their results to EPA.  Monitoring'methods, analytical
techniques, and comprehensiveness of reporting vary from state to state.2 Thus, collecting uniform and
complete national water quality data is problematic.

                Recognizing that varying  state monitoring approaches and the lack of comprehensive data
limit the quality  of aggregated data, EPA has issued guidelines to encourage the use of consistent
procedures. As  unproved monitoring techniques and better methods of analysis are developed and deployed,
the scope and accuracy of water quality  data will improve.  Until this occurs, however, the nation's
policymakers must be aware of the limitations of the available information on water quality.

13             Water Quality Trends

                As a result of low quality historical data, much of the evidence of progress in cleaning up
America's water resources is anecdotal.  In the 1970s, pollutants  spewing out of discharge pipes  could be
seen and smelled.  Today, many rivers and lakes have fully  recovered from these past abuses.

                In New York, for example, the tributaries  of Lake Erie were plagued by discharges  from
municipal treatment facilities and food processing facilities.  Fish populations were  choked out as a result of
low levels of dissolved oxygen  (a measure  of the concentration of oxygen in water). Today, recreation and

                                                                                           Session 8
 tourism are increasing due to recovering populations of coho and Chinook salmon, steelhead trout, and
 smallmouth bass.3
        1972  1974  1976  1978  1980   1982   1984  1986  1988  1990  1992  1994   1996  1998  2000
                     Point Sources
Nonpoint Sources |    | Drinking Water
Source: Calculated from data in Environmental Investments:  The Cost of a Clean Environment.
Washington, D.C.: U.S. Environmental Protection Agency, pp. 4-22 and 4-23.  November 1990.

               In the 1950s and 1960s, manufacturing and steel production flourished along the shoreline of
the Cuyahoga River in Cleveland, Ohio. Severely polluted with oil and chemicals, this river actually caught
fire in  1969. The  Cuyahoga has since recovered and, while still no babbling brook, the river is now
surrounded by thriving restaurants and hotels.

               According to EPA, every state can cite similar specific cases of water-quality improvements.
Knowledge of overall water quality  betterment, however, remains limited.

               Historically, state efforts have been diirected towards controlling conventional pollutants such
as total suspended solids (TSS) and biological oxygen demand (BOD). Industrial direct discharges of TSS
and BOD  have decreased dramatically in the last 20 years, far more than many people appreciate.  Between
1973 and 1987, 96% of TSS and 93% of BOD discharges to water were eliminated.  Widely applied control
technology and treatment techniques, as well as industrial process changes, are responsible for decreased
industrial waste discharge. However, these declines also occurred in part because companies have increased
discharges of BOD substances and TSS into municipal treatment plants—so-called indirect discharges.4

               Municipal treatment plant discharges of TSS and BOD material increased significantly from
1960 to 1973. Due to  construction of primary and secondary treatment works, however, these discharges

                                                                                              Session 8
 decreased significantly from 1973 to 1980.  For the 1980-1988 period, the discharges increased once again but
 still remained below 1973 levels—BOD, 20%, and TSS, 30% below.4

                Sewage treatment service has improved dramatically since the first Earth Day in 1970. The
 number of people receiving service by a combination of primary and secondary sewage treatment rose from
 85 million in 1972 to  176 million in 1988.5

                Although point source discharges have unproved, conventional water pollutants from
 nonpoint sources have been steadily increasing.  In some cases, EPA reports that nonpoint source pollution
 has "more than offset" improvements in point source discharges of conventional pollutants.4

                EPA has only recently begun focusing on nonconventional pollutants such as toxic
 substances and heavy metals and has expressed concern that these pollutants may be more significant than
 TSS and BOD.  However,  the states' water quality data for toxic chemicals and heavy metals, when they exist
 at all, are limited to recent years.  Thus, EPA has been unable to establish trends in toxic pollution.

                EPA does provide a "snapshot" analysis of the degree of conventional and nonconventional
 pollution in its 1990 National Water Quality Inventory (released in 1992).2  The agency's findings are largely
 encouraging.  This information says very little about adverse human health and ecological effects resulting
 from polluted water, however.

                According to EPA, knowledge of the link between water  quality and human health is
 "limited." The agency states that some toxic pollutants that appear in water resources  and in fish and
 shellfish tissue have been "linked to human health problems such as cancer, kidney ailments, neurological
 disorders, and birth defects." But uncertainty abounds over the relationship between the amount and
 duration of  exposure to these toxic chemicals and resulting health effects in humans.2

                The benefits from cleaner water are by no means limited to avoidance of human health
 effects.   Increased recreational and commercial activities also result from improved water quality.  Although
 these benefits may be large and must not be discounted, few states report on such information. Even fewer
 states are currently able  to attach value to increases in economic activities, making it virtually impossible to
 accurately compare the costs and benefits of further clean-up efforts.2

 1.4             Focusing on Nonpoint Source Pollution

                Acknowledging that nonpoint source pollution currently is the greatest threat to the quality
 of America's waterways is a critical first step towards improving the nation's water resources. EPA's most
 recent water quality inventory  shows that for bodies of water not meeting  quality goals, agricultural runoff is
 a significant source of pollution in 60% of rivers, 57% of lakes, and 18% of estuaries.  Urban runoff
 contributes to water quality problems for 11, 28, and 30% of the impaired rivers, lakes, and estuaries,
 respectively.  In comparison, point sources contribute a  nominal percentage of pollutants that impair the
 nation's rivers and lakes. Only in estuaries are point sources a significant  source of pollution:  municipal
 sewage treatment plants  significantly pollute 35% of assessed square miles.2

                EPA's analysis of public health risk (such as it is) shows that nonpoint and point source
 pollution pose an equivalent level of risk. Nonpoint sources, however, pose substantially more ecological risk
 than do point sources. Nevertheless, EPA's staffing and expenditures overwhelmingly  reflect the agency's
 need to comply with statutory mandates that focus on point source pollution.1  Recall that 90% of all water
 quality investments have  been associated with point sources.

                Nonpoint source controls (a.k.a. "best management practices") are,  in general, lower cost
 and lower tech than controls for point sources.  Installing porous pavement and constructing structural
barriers and detention areas to retain rain runoff are examples of urban nonpoint controls.  Most best

                                                                                             Session 8

management practices, however, are appropriately targeted for agriculture (croplands, pasture lands, and
livestock facilities).  Reduced tillage, crop rotation, windbreaks, winter cover crops, and buffer strips between
farmland and bodies of water are all used to reduce runoff of sediments and nutrients. Although costly to
construct, concrete pits for manure storage  can further reduce runoff pollution.  Changes in the amount,
timing, and frequency of fertilizer and pesticide applications can improve the purity of runoff as well.
Developing more efficient irrigation methods can also enhance water quality.

                Implementing these controls, in some cases, is in the economic interest of the farmer.
Excessive fertilizer, pesticide, and water use drive up farming expenses. Also,  soil that is washed away
constitutes a  loss of future crop yields.  Farmers themselves are concerned about chemical use:
approximately half of some 800 U.S. farmers polled in 1990 by Jefferson Davis Associates stated that they
were concerned about the effects of agri-chemical use on their own health.6

                Some agricultural nonpoint controls may not be in the self-interest of farmers, however, or
may require a high initial investment and a  long pay-back period. For instance, low till techniques that
require specialized equipment and construction of a manure storage area for a small farm may cost as much
as $30,000.7

                Similarly, municipalities do not h.ive excess revenues to apply to urban runoff and combined
sewage and stormwater system problems. Thus, following the "polluter pays" principal may be
administratively and politically difficult  for agricultural and urban runoff. In these instances, federal, state,
and local officials may find it necessary to establish a trading regime between point and nonpoint sources to
reduce costs to industry, while paying for agricultural and urbam projects.  (EPA is currently encouraging the
development  of such strategies.)

                The fundamental problem  with applying these methods is that nonpoint  source pollution by
its very nature is site specific.  Natural  factors such as the amount or regularity of rainfall and the physical
features of a  watershed—contour of the landscape or the ground's absorbability—directly  affect the severity of
runoff pollution.  Also the use of land and proximity to water differ greatly for each farm and urban area. In
its 1990 water quality inventory, EPA cites several examples of successful nonpoiint strategies, stressing,
however, the  diversity among these programs.2

                Beyond site-specific considerations, best management practices involve the politically
sensitive issues of land use and land management  that, until recently, were almost exclusively the province of
state and local governments.  Both the  site-specific nature of the problem and land use concerns suggest that
detailed national solutions are impractical.

1.5             Federal Role

                The federal role in controlling nonpoint pollutants should include primarily oversight
activities and sharing of information. The U.S. EFA should stick to offering teclinological assistance by
disseminating information about successful  management practices.

                Consistent with a federal role of information provider, in 1989, EPA initiated its five-year
"National Nonpoint Source Agenda." Under this initiative, the agency has begun providing information  on
possible solutions and developing better tools for scientific assessment and analysis.  EPA is also attempting
to improve coordination with the U.S. Department of Agriculture and the National Oceanic and Atmospheric
Administration to control nonpoint pollution.  A 1990 General Accounting Office (GAO) report evaluating
EPA's commitment to abating nonpoint source pollution suggests that the agency may have difficulty meeting
the goals of its five-year agenda.8

                Oddly enough, in fiscal year 1992, EPA proposed to decrease funding for its nonpoint
source program by 50%.  Congress subsequently restored 1992 funding to approximately the same level as
the previous year.  Again for fiscal year 1993 EPA has requested only half of the funding levels appropriated


                                                                                             Session 8
in fiscal year 1992.  In response of its reduced requests in both years, the agency commented: "It is
inappropriate for the federal government to involve itself too heavily in localized land-management practices.
The GAO report states, however, that funding limits proposed for EPA's nonpoint program may severely
limit the agency's ability to meet its own responsibilities under its five year agenda.9

                GAO explains further that the resource constraints EPA is facing, "have been exacerbated .  . .
by funding priorities that over emphasize controlling point source pollution at the expense  of nonpoint source
pollution."9  According to GAO, the degree of water pollution cleanup in the United States could be
enhanced by shifting some  of the resources now devoted to point discharges to nonpoint discharges.10
Indeed, refocusing water quality policy should dramatically improve water quality and help preserve the
nation's resources for other worthwhile  purposes—environmental and otherwise.

1.6             Legislative Initiatives Ignore Progress  and Problem

                During the 102nd Congress, neither the House nor the Senate were able to pass revisions to
the Clean Water Act.  As the  103rd Congress convenes  in January, clean water will once again be a
legislative priority.  The question is,  "Will Congress view the Water Pollution Prevention and Control Act of
1991 (S.  1081)—the leading legislative proposal  in the 102nd Congress—as the base from which to start or will
they take a fresh look at the real issues affecting continued water quality improvement?" Hopefully, the
103rd Congress will start with a clean slate. S.  1081 ignored the relative significance of nonpoint source
pollution, favoring tighter restrictions on point source polluters.  The legislation also disregarded actions
taken by EPA since 1987 that, in many  cases, will require several years before their effectiveness can be

1.7             Recent Initiatives

                Congress  amended the Clean Water Act in 1987, including the first significant legislative
effort to control nonpoint source pollution.  Earlier statutes focused on  planning and problem identification
for these sources.  Now, states are not only required to  identify waters that are adversely affected by
nonpoint pollution,  but must identify specific sources of pollutants and develop "Best Management  Practices"
(BMP) that control and reduce nonpoint pollution. According to EPA all states now have EPA-approved
assessments and management  programs.

                In order to pay for the nonpoint control provisions, Congress authorized $400 million to
supplement state funding efforts.  Appropriations of the $400 million have been limited, totaling $142.4
million through fiscal year  1992.* EPA  is currently in the process of awarding the $52.5 million appropriated
in 1992 to the states.

                Water pollution resulting from stormwater drew more attention in the 1987 amendments.
Municipalities with  populations of 100,000 or more, and over 100,000 private sector sources—petroleum
refineries, chemical manufacturers, and wood preservers, for example—are required under "phase I"
requirements to obtain discharge permits for stormwater runoff. Gasoline stations, dry cleaners, large
parking lots, and golf courses could be regulated under  phase  II permitting provisions.

                Although  both phases of permitting are in their infancy, the stormwater program has pi oven
to be controversial, and for good reason: implementing an NPDES permit for a community of 250,000 costs
$500,000 on average." Also, command-and-control permitting limits the flexibility of EPA, state agencies,
and municipalities to solve  stormwater-runoff problems  through alternative, possibly more cost-effective,
policy strategies.  On the positive side, EPA and state agencies' emphasis on "general permits" has alleviated
some of the administrative  burden of stormwater discharge regulation.

                The  1987  amendments further addressed the  control of toxic water pollutants.  Under the
Toxic Control Program, states were required to list waters that are impaired by toxic pollutants. States  must
also  identify the source and amount  of toxic pollutants and develop an individual control strategy for each


                                                                                             Session 8

responsible point source discharger.  EPA reports that as of March 1991, 529 bodies of water had been
identified as being impaired primarily by discharges of toxic pollutants.  States listed 686 point sources as
responsible for the impairment of these waters. Nationally, approximately 76% of the required individual
control strategies were in place as of October 1990.2

                Further, each state must evaluate the amount of toxic discharge municipal treatment
facilities  contribute.  Municipal facilities that do discharge toxins must develop their own control strategy to
reduce or eliminate toxic discharges.

                The 1987 amendments to the Clean Water Act also addressed the financing of the municipal
wastewater treatment construction program. Congress decided to decentralize funding practices further than
any prior effort, phasing out federal grants for construction.  In doing so, however, Congress chose to
capitalize state revolving loan funds with $18 billion in seed money over nine years.  States are required to
supplement the federal contributions with a 20% match.

                Using these funds,  states can lend money to local governments at low interest rates for
water quality improvement projects.  Loans are paid back over 20 years, replenishing the fund. As of March
1991, all  fifty states had developed statutory and administrative frameworks for their revolving funds.12  The
creation  of the revolving funds has allowed states to help localities finance the construction of wastewater
treatment plants. States also have more discretion than ever before in that they can use these funds to
control pollution from nonpoint sources and to protect estuaries as well as constructing municipal waste
treatment plants.

                States estimate, however, that funding provided through the revolving loan program will fall
over two-thirds short of meeting their construction needs for publicly owned  wastewater treatment facilities
by the end of this decade.  This leaves unfunded an estimated $60 billion of the more than $83 billion  the
nation will need to spend by 2008 to meet the waslewater requirements under the Clean Water Act.13

1.8             Misguided Legislation

                Two particularly onerous themes ran through S. 1081.  First, this proposed law ignored
relative risk- and cost-effectiveness considerations, requiring strict pollution prevention measures for point
source dischargers instead. Basically,  this provision would have introduced more command-and-control
regulation on point sources.

                Regrettably, this theme of the Senate's  bill is reminiscent of the  landmark 1972 Act,
reemphasizing the goal of eliminating  wastewater discharges from point sources.  S. 1081 actually stated that
EPA would have to "eliminate the discharge of pollutants to navigable water if the Administrator finds that
such elimination is technologically and economically achievable."14 S. 1081 would have also promoted a
zero-discharge goal through strict pollution prevention measures.

                Pollution prevention  involves reducing the volume or toxicity of wastewater through source
reduction and recycling. These pollution methods .are appealing, holding the promise of reducing waste and
promoting efficient use of resources.  The laws of chemistry and physics, however,  make the task of
prevention more difficult.  Elimination of all wastes is technically impossible.

                In most cases, economic constraints demand a level  of pollution abatement short of
prevention.  In general,  for every additional degree of effluent purity  achieved, incremental (or marginal)
abatement costs increase.

                For example,  in 1970 it cost a beet sugar plant less than $1  a pound to reduce BOD
(biological oxygen demanding substances) up to 30%. But it cost an  additional $20 a pound to reduce BOD

                                                                                             Session 8

 by 31 to 65%.  The average cost of eliminating a pound of BOD soared to $60 in order to go from a 65% to
 a 95% control level.13

                Similarly, it cost the pulp and paper industry $3 billion between 1970 and 1978 to achieve a
 95% reduction in its water effluents. To reach 98% by 1984—a reduction goal proposed by EPA  at that
 time—the industry would have had to spend $4.8 billion more, a 160% increase in cost.16

                While incremental costs increase as effluent controls tighten, incremental benefits, in
 general, decrease. After the low-cost, highly effective measures have been applied, each dollar spent on
 abatement produces smaller and smaller benefits.

                Potentially, the Senate bill would have forced point sources further along the path of
 increasing costs and decreasing benefits.  The EPA would have had to revise all effluent guidelines to "rely
 upon and require, to the maximum extent practicable, toxic use  and waste-reduction measures and practices
 including changes in production processes."14  In effect, EPA would be forced to establish federal  standards
 for production processes and inputs. Such approaches work at cross purposes to the most successful
 techniques for preventing pollution—allowing people closest to the production process to discover less
 polluting operations.

                Manufacturing processes are numerous and extremely complex.  To mandate process
 changes and input restrictions, EPA would need extensive knowledge of the intricacies of each industry
 regulated.  The Chemical Manufacturers Association contends that the proposed change in effluent
 guidelines would replace "industrial manufacturing decision-making with EPA decision-making."  Process
 changes and input decisions are better left to knowledgeable people closest to the operation—the  firm's own

                The second troublesome theme in the Senate's bill was "toxic use reduction" (TUR)—one of
 the new buzzwords for many environmental groups.  TUR involves minimizing or, as in this case, eliminating
 the use of toxic chemicals in the production process.  This approach to controlling toxic chemicals is much
 more heavy-handed that pollution prevention.  The Senate's bill would have banned the discharge of seven
 chemicals including benzidine and mercury.  Subsequent additions to the list would have to meet  the vague
 and  undefined criteria of being "as toxic as" the listed chemicals. These prohibitions would not have
 considered whether water use or human and ecological health is even affected by discharges of trace amounts
 of these chemicals.

                During hearings on this bill, industry rightly asserted that such bans would impose huge
 costs on the economy, as companies are forced to change manufacturing processes.

                Some constructive provisions did surface in the Senate's bill. For example, S. 1081 would
 have affirmed Congress' promise, made  in 1987, to capitalize the state revolving fund at $18 billion.
 Congress would have authorized $15.3 billion over the fiscal years 1993-1998.u Congress also would have
 authorized $80 million annually through 1998 for research relating to the "cause, source, effects, extent,
 prevention, detection, and correction of water pollution."14 Improved water quality science would benefit
 policymakers at every level of government. If these funds were  used effectively, policymakers would be able
 to measure and compare the costs and benefits, and success or failure, of varying policy alternatives.

 1.9             Market-Based Solutions

                In a time when most local and state governments are struggling to balance budgets and
provide essential services and the federal government is trillions of dollars in debt, funding future water
quality improvement programs will be troublesome.  On the other hand, the  nation's financial constraints
make market-oriented policies more attractive.

                                                                                             Session 8

                Effluent fees and marketable permits can allow dischargers more discretion and provide
incentives to prevent the discharge of pollutants.  Dischargers are encouraged to avoid the cost of polluting
by investing in research and development to improve control technologies.  For many years economists have
argued that relying more heavily on market-based approaches would be more cost-effective than the current
reliance on inflexible standards.

2.0             CONCLUSION

                The fundamental objective of the Clean Water Act should be to  provide Americans with the
desired level of water quality for the least cost. The public desires uncontaminated fish, clean drinking
water, and virus-free and bacteria-free swimming waters.  The protection of natural ecosystems is also an
important objective.

                Developing water  quality policy  to ensure these societal demands, however, is presently an
arduous task.  During the debates on the 1990 Clean Air Act reauthorization, air  quality data were abundant
and emission control requirements could be linked to specific air quality improvements.  Such is not the case
for water quality.  Current and accurate data are not available. Also, health  and  ecological effects of
polluted water are less understood  than are the effects of polluted air.

                Knowledge of the  effectiveness of the Clean Water Act Amendments of 1987 is also
unknown and may not emerge for several years.  Natural systems take time to respond to changes in human
activities and EPA and the  states are only beginning to implement comprehensive programs to control
agricultural and  urban runoff.

                Controlling nonpoint source pollution is difficult, however.  Solutions are site specific and
often farmers and municipalities do not have the  economic incentives or the financial resources to pay for
best  management practices.  Following  the polluter pays principle, therefore, may be administratively and
politically difficult in these situations.

                States and municipalities need to make a greater effort to find innovative ways to help fund
nonpoint source control programs.   Alternative solutions such as effluent fees or permit trading show
promise, but their application has been limited to date. EPA, though, is emerging as a strong proponent of
innovative and cost-effective market-oriented solutions.

                The most significant financing option for states is the use of existing environmental revolving
funds. Municipalities, however, are inundated with wastewater treatment needs, and federal funds will likely
fall short of investment requirements. Indeed, financing current water-quality programs will be one of the
greatest upcoming challenges for EPA and  the states.

                Water quality and health effects data must improve before Congress can responsibly impose
added restrictions on industrial dischargers.  Of course, better science will not necessarily provide an
objective answer to the question of what level of water quality is the "correct" level.  At present, even
rudimentary analysis of this question is frustrated by  the paucity of reliable information.

                Considering that, even without added requirements, future costs of water pollution
abatement will be huge, major changes in the Cle,in Water Act are premature. In other words, it is time for
Congress to "take aim before it opens fire."

3.0             REFERENCES

1.               Carlin, A.  Environmental Investment: The Cost of a Clean Environment. A Summary.
                EPA-230-12-90-084. pp. 2-2, 2-3, 3-3.  December 1990.

                                                                                         Session 8
2.             LhS. Environmental Protection Agency. Office of Water.  National Water Quality Inventory:
               1990 Report to Congress. EPA 503/9-92/006.  pp. xxi-xxvi, 8-9, 24-25, 54-55, 85, 86, 140,
               149, 163-170.  April 1992.

3.             U.S. Environmental Protection Agency. Office of Water. National Water Quality
               Inventory: 1988 Report to Congress.  EPA 440-4-90-003.  p. 182.  April 1990.

4.             U.S. EPA.  Environmental Investment: The Cost of a Clean Environment. Washington
               D.C.  EPA 230-11-90-083. pp. 10-5, 10-6, 10-7.  November  1990.

5.             Wilcher, L.S.  "Looking Forward in the Office of Water," EPA Journal.  Vol. 16, p. 60.
               November/December 1990.

6.             Kilman, S.  "Seeds of Change," Wall Street Journal, p. Al.  May 30, 1990.

7.             Stanfield, R.L. "Saving the Chesapeake," National Journal,  p. 1339.  May 21, 1988,

8.             U.S. Environmental Protection Agency. Nonpoint Source: Agenda for the Future.  EPA
               PB90-141003. January 1989.

9.             U.S. General Accounting Office. Water Pollution: EPA Budget Needs to Place Greater
               Emphasis on Controlling Nonpoint Source Pollution. Testimony, Committee on
               Governmental Affairs, U.S. Senate GAO/T-RCED-92-46. pp. 6, 7, 8, 9.  April 7,  1992.

10.             U.S. General Accounting Office. Water Pollution:  Greater EPA Leadership Needed to
               Reduce Nonpoint Source Pollution. GAO/RCED-91-10. pp. 53-54. October  1990.

11.             Priede, N.  "Stormwater Management Through User Fees." American City and Country.
               p. 41. October 1990.

12.             U.S. General Accounting Office. Water Pollution: State Programs in Developing State
               Revolving Loan Fund Programs. GAO/RCED-91-87.  pp.  1 and 2.  March 1991.

13.             U.S. General Accounting Office. Water Pollution: State Revolving Funds Insufficient to
               Meet Wastewater Treatment Needs.  GAO/RCED-92-35. pp.  27-31. January 1992.

14.             Congressional Record. U.S. Senate,  pp. 5906, 5908, 5909, 5926.  May 15, 1990.

15.             Environmental Quality: Second Annual Report of the Council on Environmental Quality.
               GPO, Washington,  D.C.  pp. 118 and 119.  August 1971.

16.             Weidenbaum, M.L. Business. Government, and the Public. Sec. Ed., Englewood  Cliffs, N.J.
               Prentice-Hall, Inc.  p. 354.  1981.

17.             Chemical Manufacturers Association.  Written Statement to Congress regarding Clean
               Water Act Reauthorization and S.1081. Washington, D.C., p. 5.  July 9, 1991.

                                                                                          Session 8

                            Local Government Perspective on
                        Clean Water and the American Economy

                                        James P. Joyce, P.E
                                    Department of Public Utilities
                                       City of Columbus, Ohio


To meet Clean Water Act requirements, Columbus, Ohio spent $200 million (its largest capital project ever)
in 1988 and is continuing to invest large sums to comply with legislative mandates. Local government
revenues have not increased to match expenses arid sewer ratepayers have been increasingly resistive to rate
increases that have averaged 10 to 12% each year to pay for the improvements, many of which are required
by environmental mandates.

Understandably,  city leaders were shocked to  discover that they had only just scratched the surface of
complying with costly federal environmental mandates (e.g., CWA, SDWA, CAA, CERCLA, SARA, FIFRA,
AHERA, RCRA).  It seemed that no one had adequately examined the overall financial or social impact on
individual communities, communities that are  having enough trouble funding traditional services.

This paper  will address legislative credibility issues and future costs identified for Columbus and eight other
Ohio cities.  It will discuss recommendations for improving allocating scarce resources more effectively at the
local level before a backlash by voters develops against costly environmental regulations that often appear

1.0             INTRODUCTION

                I join with you on this panel  today as the Director of the Department  of Public Utilities of a
viable,  progressive, midwestern city—the 16th largest city in the country.  Columbus, Ohio, has made a
herculean effort to comply with the many environmental mandates that have come out  of Washington. We
brought to bear every community resource to  comply with the July 1, 1988, Clean Water Act and invested
over $200 million in this one venture alone. This investment, I might add, did not provide any increased
wastewater  treatment capacity, but only modified the two existing  secondary wastewater treatment plants to
advanced secondary treatment in order to meet new water quality standards. The resulting improvement to
water quality has been significant. The state environmental protection agency recently  announced that the
Scioto  River,  which receives the discharge from both of our wastewater treatment plants, has  shown a
tremendous improvement in water quality. We in local government are very proud of this fact—there was a
need for improvement and our investment reaped significant returns in terms of improvement to the water
quality. I am not sure,  however, that the citizens, or at least a majority, appreciate the work we have
accomplished. They are very aware, however, of the rate increases that have been required to support this
effort.  Over the  past few years, our sewer rates have increased 10 to 12% each year. A few years ago, one-
third of our sewer revenue went to pay for servicing the debt, now more than 60% of the budget goes to
service the debt.  The cost to the  rate payer does aot include the total cost to the community when
considering the efforts required of local industry to comply with pretreatment regulations. Now we find it
increasingly difficult to go back to the citizens to ask for more money to properly maintain the investment we
have built and also to have the additional resources necessary to replace other parts  of an aging

               Over the past few years,  and more recently at a seemingly increasing rate, City Council has
been asked to pass legislation  dealing with various environmental  compliance issues and to appropriate
monies to support their associated costs.  In the past, most environmental legislation before City Council was


                                                                                            Session 8

dealing primarily with the Clean Water Act, but now matters such as asbestos abatement, cleanup of
hazardous materials at the city garage, and underground storage tank regulation compliance, begin to appear
regularly on the Council's agenda.  In response to Council and Administration inquiries, a city-wide
committee was created in February 1991, comprised of representatives from the major departments in city
government and chaired by the representative of the Columbus City Health Department. The Health
Department has the responsibility for managing compliance with most of the environmental regulations other
than those dealing with safe water and solid waste.  The Health Department  was seeing more and more of
its limited resources, that, in the past were used for direct human health matters, being commandeered by
such programs as CERCLA, SARA, FIFRA, AHERA, RCRA, as well as underground storage tank and
PCB regulations. Traditional community health programs such as health education, rabies  control, and
occupational safety and health have had to be reduced.

                Heretofore, no one had looked at the cost of these regulations in total as to the economic
impact on the  community.   Previously, each section of city government had only looked at its share. The
results of the study were overwhelming.  The Committee identified over one  billion dollars (in 1991 dollars)
in costs which  will be incurred by the City to achieve compliance with environmental regulations over the
next 10 years.  With an expected average inflation factor of 4% per year, the actual cost will be over $1.3
billion. A perspective on the magnitude of these costs can be gained by realizing that the entire Columbus
City budget for 1991 was $591 million.  Identified environmental compliance  costs in 1991 were $62 million
or about  11%  of the total budget.  It is expected that the City will increase  its expenditures  on environmental
compliance from this $62 million level in 1991 to $107 million in 1995.

                The rapidly growing cost of maintaining or achieving compliance with all environmental
mandates will  put new and increasing pressure on the City's strained finances.  It will mean that fewer funds
will be available to provide  other City services and that City leaders will have fewer choices and less freedom
in budgeting.

                Columbus's scrutiny of the cost of environmental mandates caught the interest of
communities across the country.  Officials in Anchorage, Alaska; San Diego,  California; Phoenix, Arizona;
and Lewiston,  Maine, contacted us with stories similar to ours—stories showing the overwhelming burdened
of state and federal environmental mandates.

                In cooperation  with the Ohio Municipal League, nine Ohio cities, representing small,
medium,  and large communities, including two metropolitan districts, formed a committee  to look at the cost
of environmental mandates  on a broader base throughout Ohio. These cities, representing about one-third
of the households in Ohio, were asked to calculate costs associated with 14 specific environmental regulations
or general environmental issues.  These included:

                •       Asbestos Hazard Emergency Response Act of 1986;

                •       Clean Water Act;

                •       Clean Air Act;

                •       Federal River and Harbors Act;

                •       Federal Insecticide, Fungicide, and Rodenticide Act;

                •       Resource Conservation and Recovery Act;

                •       Safe  Drinking Water Act;

                •       Occupational Safety and Health Act;

                                                                                           Session 8

                •       Toxic Substances Control Act;

                •       Tide III of the Superfund Amendment and Reauthorization Act; and

                •       Other regulations concerning infectious waste, solid waste disposal, explosive gas
                       monitoring, and underground storage tanks.

                Only direct costs resulting from these mandates were considered, including debt service for
financing of capital project construction.  The nine participating cities identified $2,855,409,587 in costs
associated with these 14 environmental mandates.  This total reflects costs to be incurred during the period
1992 through 2001, and represents 1992 constant dollars for the 10-year time frame. The costs are greatly
understated because only five cities felt confident in assigning costs to all 14 mandates.  Even with limited
reporting, it is evident that the cost of compliance, $2,855,409,587 in 1992 dollars, is substantial and that, in
actuality, the total cost for  environmental compliance is likely to be significantly greater.

                Although  the report seemed to focus, on the costs of regulatory compliance, the overall goal
of the committee was to look at ways to achieve  more effective, efficient, and cost-effective environmental
legislation. It is extremely important that a community's limited resources be utilized to achieve the
maximum environmental benefit for its citizens.  To achieve this goal, we believe that four basic principles
must be considered when regulation or future legislation is developed. These are:


                It is absolutely imperative that sound science be the basis for environmental legislation and
that science is diligently  applied  as regulations  are developed to fulfill legislative mandates.  We are at the
bottom of the money barrel so we better be sure that we are attacking "real" environmental  risks that are
scientifically proven and  not just perceived risks that we have often chased in the past and I am sure we are
still chasing.  We are running out of resources  chasing shadows. Columbus is taking the initiative to become
more aware of scientific  aspects  of proposed legislation and regulations by establishing an Environmental
Science Advisory Committee that will consist of a distinguished body of engineers, scientists, educators, and
other professionals who  are all recognized in their field.  It is planned that this committee will evaluate the
accuracy and scientific basis of costs and financing projections of environmental mandates, and also evaluate
the accuracy and scientific basis  of environmental projections and health information.


                Under current federal and state environmental policy, all communities are  treated equally
and all mandates are applied uniformly across  all mediums of land,  air, and water.  With this practice, local
communities are forced to  allocate limited resources to whatever initiatives are mandated by the federal
government even though the most serious environmental risk to a community is not addressed. Discussion
needs to occur with local communities that allows for a process to first identify the appropriate
environmental risks, and then allows the local community the opportunity to meet with the state agency and,
where appropriate, U.S.  EPA, to establish a workable time frame to obtain compliance in a realistic manner
that targets the  most severe environmental risk first.

                                                                                       Session 8


               Current environmental mandates treat all communities the same regardless of local
conditions.  This practice has led to certain  environmental control policies that are not defensible for specific
local communities.  Examples include the requirement in the Safe Drinking Water Act that dictates testing
annually for the pesticide DBCP in Ohio, which has not been used for 15 years, and, even when it was used,
the primary use was on pineapples in Hawaii. We must remember that this is a big country with a vast
range of topographic, geologic, and climatic differences. But still we are forced to apply the same
stormwater mandates in the arid Southwest  as are applied in the eastern part of the country. There has to
be a recognition of the differences between  regions of the country, and a process that permits flexibility in
solving environmental problems. I firmly believe that local communities are committed to a cleaner
environment, but attempting to apply "across the board" solutions to local environmental problems  results in
a waste of local resources which could otherwise be utilized in a far more efficient manner.


               Legislation enacted at  the federal  and state level and the subsequent rulemaking, has a
tremendous impact on local government. This is particularly true with respect to environmental legislation.
Environmental and business organizations have been very effective in forming coalitions with interested
parties to influence public policy.  The interest of these groups might not be in the best interest of good
public policy, and sometimes lack the common sense input of the  local government representative who will
have to implement these new legislative initiatives.  For example, strict environmental regulations not based
on science, could literally drive a company looking  for a new site to virgin agricultural land away from the
city, rather than attempting to locate in a vacant urban industrial area.  This leads to the erosion of the local
tax base and contributes to urban decay leading to  a  host of social problems. I ask, is this good  policy?  I
think not!

           OTHER (0.7%)-


   CLEAN AIR (1.7%)
                            SOLID WASTE/RCRA (6.7%)
                                                      Session 8
                             CLEAN WATER (74.8%)
   $02.5 -

8  $1,
B <->

          CLEAN AIR   SOWA
                         OTHER   SW/RCRA    CWA

                                                           Session 8
                I OX • 4% M\ 7%

                                                                                    Luncheon Address
                                    Luncheon Address
                                         F. Henry Habicht, II
                                        Deputy Administrator
                                 U.S. Environmental Protection Agency
                                     (transcribed from audio tape)

                This is, needless to say, an important conference and an important group, and I think I'll be
 relatively brief and see if anybody has any questions left for what Bill Reilly and I see in terms of how all this
 fits with our agenda.

                What's important, and I  hope it came through over the last couple of days for those of you
 who haven't worked directly with this team, that they have spent a lot of time over the last two years in a
 very busy office.  Like all of us in the Agency, I'd like to characterize it as being open for business during
 renovations.  We have a lot of basic, traditional, important work that we have to do, that we have to get out.

                And we don't have enough time or people to do it, but we're also changing the way we do
 business and that takes time and effort.  The water office spent a lot of time over the last two years
 reviewing the whole picture of the water plan as they call it, and what should the strategic direction of the
 program be.  And I think obviously this conference is the result of those efforts.  This is very exciting stuff.
 That's why I'm glad to be here.

                I also think it's important to bridge the cultures of the environmental policy community and
 the economists.  There is a story that some of you have heard.  One of the problems with this gap is that this
 gulf or this gap hasn't been bridged in the past. It is the story of a bank robber who successfully robbed a
 bank in the Northeast and got away single handedly with $1 million.

                Federal agents chased him across the country and they finally cornered him in a small town
 in the  Southwest. And when they cornered the guy, he didn't have the money. He didn't speak English. He
 spoke  an arcane foreign language that no one understood.

                They finally found one person who could serve as a translator and he proceeded to
 interrogate this guy for hours, working on him and working on him,  and he refused to talk.  Finally the agent
 pulled out his revolver and put it to the prisoner's head and said to the translator, "Now you tell him in his
 language that if he doesn't tell me where  the money is right now, I'm going to pull the trigger."

                So the translator translates it for him. The guy broke into a  sweat, and he said in his own
 language, "All right, all right, I'll tell you.  I buried the money under the oak tree in the town square." The
 agent said, "Well, what  did he say?" The  translator said, "He said he's not afraid to die."

                There  are communications problems in a whole area of disciplines, and I know you
 discussed what is really one of the standard stump issues in the campaign now, which is, is there a dichotomy
 or a tension between environmental protection and jobs,  environment and  economy. And I guess my thesis
 and the thing that I think we need to come away with, and I'm sure you will, and I'll just give you a few
 things to think about that might pull together some of the discussions you had over the  last few days, is that
we don't have the ability to answer that question.

                I think most of us who are both optimists and been around the field enough to know how
important environmental protection is  in terms of preserving resources, in terms of the compatability of
improving productivity and reducing waste and pollution, believe that there is not an inherent tension


                                                                                   Luncheon Address

between the two, that properly conceived environmental programs are actually helpful to the economy, both
in the near term and especially in the long term.

               But we don't have the ability to prove it. We haven't advanced our discipline far enough to
be able to really make that case, develop data to show it, although we are doing. We are beginning to do
that and that's what this conference is all about.  And what I want to get into is what I think we need to do
over the next few years to really make that happen and be able to show that.

               I hope most of us here believe that there is not a fundamental incompatibility, and that our
society has organized itself around a very sound approach to development in a way that is totally consistent
with technological advances and growth and jobs and everything else that you all care about, including
keeping a good quality of life in this country and around the world, so I think that's what this is all about.

               So I will try to give you a few thoughts at the risk of being repetitive. The only way I
couldn't be repetitive is if I talked about stratospheric ozone. But you may have covered that too.

               Anyway there is hope.  There is another good campaign story about the importance of hope.
President Truman was on his whistle stop campaigning tour and he stopped in a town.  While he was talking
to the citizens and  shaking hands, one guy told him, "President  Truman, I just wanted to come  up to you and
tell you that I'm going to  make sure to vote in this election. The reason I'm voting is so I can vote against
you. I think you're an idiot, and even if a horse was running against you,  I'd vote for the horse." And
Truman said, "Thank you very much." And he: turned to his aide and he said, "Put that man down as

               Hope springs eternal, and that's what this is all about.  I really think that the major thrust of
our agenda, and those of you who work at EPA—and I see a number of our stars here—have heard some of
this before, but I want to  put into context where economics fits into the overall generic strategic thrust that
we have all been pushing  at EPA.

               The key thing is the importance that we institutionalize economic sophistication in
everything we do at EPA.  We build bridges through the economic community. And those of you outside of
EPA and for those of you who are economists inside of EPA, that's  part of the dismal science.  Those of you
who lie awake at night hoping to see how it will work in practice, can work in theory, will work to advance
resource economics and environmental economics as a discipline, as something we encourage students to get
into, and we can weave into everything we do at EPA, for our overall agenda.

               And I think a lot of us say, well we've been doing a lot of economics relative to these issues.
We've been doing all kinds of economic analyses. But I think it's fan- to say that as I have interacted with
economists, and I'm not an economist, I have a little knowledge, which is a dangerous thing, that the
economic discourse about the environment has either been at almost an irrelevant level of distraction in
theory or at a myopic level of specificity that has left us unable to weave together important principles of
economic discipline and what we do. So that's what the agenda is all about.

               At EPA, I hope not an excessive number of themes that I've tried to keep repeating over
and over again at the Agency at the broadest Level, the things that we try to do at the Agency to simply keep
doing better and better as an institution have been to focus on two of what  [ think of as shortcomings
institutionally at EPA over the years, which I have mentioned many  times.

               The first one is that we have been too compartmentalized.  We have taken too much of an
ad hoc stove pipe approach to our work because of the way the statutes are written and all the other reasons
that you are familiar with. We all know it's a problem, but if we are going to get through it, we have to
focus on it as a problem.

                                                                                    Luncheon Address
                If has to be a major priority to the Agency to come to grips with and to address once and
 for all, and that obviously involves Congress—even within the water program and its compartmentalization. I
 think the watershed approach is a major breakthrough in our ability to function in protecting both water
 resources,  but also environment.

                The second shortcoming is that, again, probably more than anything else, things have been
 so busy because there has been a great mistrust in environmental protection. We have been too insular.  We
 haven't built a lot  of relationships. We haven't engaged state office holders and constituent groups early in
 the processes.  We've kind of wanted to know sort of where we wanted to come before we engaged people.
 That has changed. That is not something that is truly the case now. But that's been improved a lot.  Our
 agenda is focused  on building partnerships and bridges, listening to people, and to looking at the
 environment without being compartmentalized.

                The water office has helped the Agency in building our foundation on science,  setting risk-
 based priorities and trying to separate the important long-term risks from the less significant. And
 organizing our activities coherently such as around watersheds, around the geographic area above the Great
 Lakes, or the Chesapeake Bay.  These are critical components of the new direction  of the agency, a strategic
 risk-based  integrated approach.

                The second major element is pollution prevention which, once we've set the priorities,  is the
 approach of choice.  It's obviously the choice to prevent as much as we can. The important element that I
 keep talking about is prevention, which is inherently an approach which can go toward market-based kinds of
 approaches to a few self-interested firms and also a few voluntary approaches.

                And then, finally, using principles or adapting principles in total quality management to help
 implement these programs.  I won't belabor  that. I'd be happy to respond to questions.  You've heard  me
 talk about  it before.  It's obviously not just taking over Japanese theories and trying to apply them to the
 EPA, but it's taking those principles and applying them to a government agency with a very important

                So that's why it's so important in order to achieve any of those goals and it's going to take a
 lot of time to do it, through pushing cluster groups and geographic and watershed approaches.  We have to
 invest more in science.  We have  to invest more  in  economics. Well, as we move on from what we've
 learned here, let me just offer three areas, which I  hope you heard in one form or another, as I think of
 economics  at the Agency, that I think are important to take what we've learned here and try to
 institutionalize it as much as we can.

                The first is to use the science of economics to value resources more effectively. I just
 learned today that the water office, for reasons that are totally understandable, has not been involved in the
 regulatory impact analysis for the corrective action  rule under RCRA,  which I hope is going to  be breaking
 new ground, if you will pardon the expression, in valuing groundwater  resources and getting away from
 simply arguing benefits of the groundwater protection rule based on avoidance, which we know has gotten us
 into a hole.

                There's more to  it than that, and we haven't done a good job of being able to  quantify what
 the other economic benefits are so we can make healthy decisions. So we are continuing to improve our
 ability to value resources, so we can set priorities, so that we understand better what the benefits are.

                I  think I would agree that not everything we do in the environmental field and every reason
 for doing it is reducible to dollars and cents. Obviously there are fundamental value choices that are
 involved, trying to  transcend whether there is an  equation between cost and benefits.

                But the gulf is so wide now because there is a perception that is often a massive gulf
between cost of reducing pollution and preventing it and the benefits, as I'm sure has been discussed quite a


                                                                                    Luncheon Address

bit over the last few days. I think we can go a long way to closing that gulf and understanding the choices
we make much better by really working on a value.  And I think the resource economics field is worth it.
Many of the things our people have done—and the SAB economics committee is doing—I think it  really has
hope of advancing the ball in this area.

                But we all have to invest in that.  And I do think that if a watershed approach can help us
to be able to quantify and characterize in terms that people can understand these benefits.  I know in reading
some of the economic literature on resource economics, we have  a  long way to go in terms of

                It's kind of like that interrogator in the foreign language.  I have read environmental
resources referred to by economists as social overhead capital with  quantifiable service flows and hedonistic
values. Well, that's going to grab your average person on the street about why we're protecting Lake
Superior, but it's a start.

                But nonetheless, we are at least beginning to get a conference focusing on what does it
mean to address this issue. And I do think watershed approaches is, again, the way to organize our thinking
on it. So that's the first point. Just improve general valuation. Bring resource economics into the valuation
of national income accounts around the world. Ttiis is certainly something that is a gain worldwide and we
can take the lead on that as a group evaluation.

                The second area is to  better understand and capitalize on the incentives that operate on
individual firm and marketplace. And we're doing that as well. It helps  to be disciplined and  rigorous and
institutionalize, to focus on the firm, what motivates the behavior of the individual firm, whether it's a farm
or a manufacturing entity or a gas station or whatever it happens to be.  I want to flag this as a very
important part of why we've done what we think we've done over the last few years.

                The relationship between total quality and firms' decisions to reduce waste because there
are economic benefits or energy efficiency, or water use efficiency if water resources were priced reflecting
their real value for cost, there would be clear economic firm-related interests to reducing energy use,
reducing water use, or reducing waste  and so forth.  You have all seen plenty of data about that, and that
keeps getting better and better.

                And that's why I think new approaches that we have been pushing through voluntary
programs, such as designed to the environment, which is a systematic way of looking at the environmental,
economic, and basic product quality impacts of different approaches to manufacturing. I  have been making a
choice based on optimizing environmental impacts, costs, and product quality.  It's the wave of the future.

                I think how we do it is not necessarily going to lend itself to traditional regulatory
approaches, in a few weeks we'll be having a demonstration by the  dry cleaning industry of a wet  cleaning, a
nonsolvent, a nonperc approach to dry cleaning clothes. We don't know if it will work. We don't know if it
might create more problems than it solves, but the point is that a designed to the environment approach  may
work with that industry, with the printing industry, with the computer work station.  I just met with them
yesterday and they are actually gung ho about trying to design to  the environment every product that the
computer business industry manufactures.  What they told me is not only did they see long-term cost
structure benefits to it, but they also see that it's being driven by their customers. Their customers are
demanding to know that a company is doing everything they can possibly do to reduce their waste and to
think about the life-cycle  impact of their products.

                So these are all basic, self-interested kind of motivations that can be appealed to. We need
to get them the information so that they can make the right choices. Make sure the consumers are
informed.  The TRI is obviously a powerful tool to do that.  And to advance the science of life-cycle analysis
and designed to the environment so we can really make progress in this area of just understanding the  self-
interest of the firm.


                                                                                   Luncheon Address
                And then the third element is where do we go with economics into the Agency.  Again,
 there are many more, but these are the three that I think are particularly important.  It flows from the first
 two, once you have an understanding so that you can set priorities and basically gauge whether the regulation
 is worth it in terms of overall social and economic costs and benefits.

                And second, look at what self-interest and motivated firms will do. You need to work on
 building a market.  You need to look at working on the entire marketplace and seeing  how we can advance
 the most environmentally sound behavior through the marketplace.

                And Mark and his team and Martha and others have really been pushing the envelope with
 EOF and others on point/nonpoint source trading.  I certainly won't get into that.  I know you've had a lot
 of discussion about it. But I do want to mention how important BUI and I think this is. Market-based
 approaches are by no means the province of the Clean Air Act at all.

                There is a lot of skepticism on whether those work. Whether you can trust accounting
 systems that will grow up around trading systems. But we believe that they can work.  We're learning.
 Certainly no one would have said five years ago  that the Chicago Board and Trade, with the EPA's delicate
 deed, would set a market in smog futures, but that has happened.

                And certainly in Southern California, people would have been doubtful that you could set up
 a  marketplace involving more than 2,000 firms trading in very complex kinds of pollution in an airshed, but
 we find that program in California is by no means over the hump, but it's a growing force and we can learn
 from that.

                And I think some of the lessons—certainly not all—can help us.  I  know that our team has
 identified, I guess over 800 possible candidates for point/nonpoint source trading activities. We've been
 involved in the Cherry Creek project in Colorado and Tarp Pamlico in North Carolina. There are some
 opportunities to  use what we've  learned, to engage the  agricultural community, a lot more in California and
 elsewhere, and we're committed to work on that. And certainly point/nonpoint kind of pretreatment trading
 is  very much a possibility.

                Again, the thrust here  is simply that once we have developed some sophistication about how
 to measure and how to value things, our horizons just open up dramatically in terms of what we can do, in
 terms of using the marketplace not as a replacement for traditional regulations.  There will always be a need
 for that, but as a supplement to expand all the tools we have to work with.

                I just mentioned two other areas that don't neatly fit into my three-point  construct I just
 went through,  but certainly are important.  I know you talked about one is the world market—and there is
 always debate  about whether strong environmental regulations create jobs or have some marketplace benefit.

                The export market is so substantial and so robust that we have to be sure that we are aware
 of it, we capitalize on it, and to the extent appropriate after we've made sure we have met environmental
 goals, make sure that those markets are as available to our people as possible.

                Certainly in the area of harmonization we want to be ahead of the curve. Basic trade policy
 is  going to change forever after the GAIT agreement and what's going to be going on  in GATT that will
 lead to harmonization; we can be leading thinkers as the world comes more together on how we can make
 sure environments can is an important factor in trade but are not an unfair trade barrier.

                So again, through the economics and the science of value economics, number one.  Number
 two, we can find ways to appeal to the self-interest of firms by understanding what makes  them tick, and
wiring ourselves to work,  capitalizing on that as long as we can. And third, use what we've learned in  those
two areas to build marketplaces for reducing pollution. Obviously we have to have data.  We have to have

                                                                                    Luncheon Address
reliable information that we can count on. But I don't think there is any doubt that the environment will be
protected more quickly and more effectively if we can harness that kind of information.

                Again,  my personal view is that the only way to achieve this is for us to really address what
we've been doing in watersheds, and understanding of watersheds—more impact activities around watersheds
to give us a chance to really focus on nonpoint sources and how they relate to point sources and so forth in
developing strategy.

                I'm sorry I didn't get to hear Dave Gibbons talk about trading as a major regulatory
program for agriculture.  Certainly where you stand does depend on where you sit.  But, anyway, all those
ideas are worth looking  at. So my point is that we all have to invest in this new way of thinking and acting.
Substantively, in terms of our professional discipline, in terms of our money for research, and politically,
because any change is threatening, we have to be able to stand up and say this is the way we have to go, and
make sure that it happens. So that's what is critically important.

                I was at a conference with Paul Pourtney in Colorado a couple of months ago. Dick
Celeste, the governor of Ohio, told a story.  He was a very young politician running for his first statewide
office and he was out in rural Ohio. He was driving very quickly from one event to the next and he got to a
fork in the road, and sign said Smithville this way six miles, and then going in the other direction it said,
Smithville this way six miles.

                He was totally confused. And there was an old guy standing nearby and he said, "Excuse
me, I'm Dick Celeste, I'm running for governor.  By the  way, this sign says that Smithville is both ways at the
fork in the road.  Does it make any difference which one I take?"  And the old guy just looked at him,  "Not
to me it don't."

                I think  the fact that we in the environmental field and the economics field  have not only
spoken plain English, but the fact that a lot of people may not  care as much about these issues in terms of
approaches as they should. I think if we work on translating this into plain English and engaging  the public
on these choices, economics will have a major role and be a lot more important in the future of
environmental programs.

                Shortly after I started at EPA, I talked about the Joel Barker film that a lot of you had
seen. He talked about the Swiss watch industry.  It's a true story. Up until the sixties, the Swiss watch
industry had about 70% share of the world's market for wristwatches, and everything was going great.  They
were employing thousands of people. And then, within eight years, the market share dropped from almost
70% down to about 12% of the world market for wristwatches.  And the reason for that is the quartz
movement.  Most of us have quartz watches now.  What I had  never known before was that quartz
movement was invented in the laboratories at the Swiss watch industry. The scientists in the Swiss watch
industry went to the senior leadership to demonstrate the idea. They said it was ridiculous.  It doesn't  have
the springs and the jewels that has made us so successful all these years. The rest is history.  Now the
Japanese and a few others picked up on it and as I said, it's an important lesson.

                I think  what the water program and you here have come upon is. the quartz movement of
environmental protection, but it won't necessarily sell to  our leadership unless you go back  and sell it and
make sure they don't pass it by and miss the opportunity. It's really the future of environmental protection
that will help once and for all solve this economy/environment dialectic we have going.

                So, again, I thank the team here at EPA for putting this conference together.  I thank you
all for coming, and we look forward to  working with you. Thanks very much.

                                                                                     Closing Remarks
                                     Closing Remarks
                                           Martha Prothro
                                    Deputy Assistant Administrator
                                           Office of Water
                                   Environmental Protection Agency
                                     (transcribed from audio tape)
                LaJuana is very busy trying to accomplish some of the few remaining very high priorities for
 the rest of this year; she wasn't able to join us now.  She has asked me to say a couple of things.

                I wanted to share with you the story about who an economist really is, what economists do.
 An economist can look at the rumpled sheet and tell us whether it was done for love or money.  I couldn't
 help thinking about this during the last panel, because Bob Adler was clearly saying they do it for love, and a
 lot of other people related it to the money.

                But it occurred to me that really most of our panelists throughout this conference have kind
 of accepted the idea that we do it for love. But how we do it has something to do with money. And one of
 the good things that came out  of this conference was that it kind of leads you inexorably—an economist can
 make you do this; I know, I've got some on my staff—it kind of leads you to well, wait a minute now, are you
 really attacking the real problem? Or is there a problem out there that's bigger than the one you are dealing
 with and you're not facing it?

                And I think that is one of the reasons we ended up today talking so much about nonpoint
 sources.  And I can tell that was something that all of you were sort of captured by too, because I could tell
 by your questions that were sent up to the speakers,  that you're all wondering, not just should we, but how
 are we going to do this?

                It's  so clear, now that we've all talked about it, that that's something that we need to deal
 with.  It's true that the Office of Water hasn't done enough in the past in terms of economic analysis hi
 allowing a consideration of cost/benefit and that sort of thing to drive our  program. We used to be much
 more focused on it than we have been recently.  And I think that this conference has really shown a lot of us
 how important it will be for the future, for us to stick to this and to rigorously analyze what we're doing in
 our programs and what our options for the future are.

                One of the things that LaJuana did  want me to pass on, and I'm sorry that Dave Gibbons
 isn't here, because I  told her what he said today.  She admitted that she asked him to be provocative, which
 he certainly was.  But she also was a little surprised by what he said,  after  all these years that she has dealt
with him.  She was glad he got out of his rut about not doing anything with nonpoint sources.  So I guess we
 all feel like he implied that EPA didn't want  to do anything about nonpoint sources. We think we have been
doing things with nonpoint sources, that we've come  a long way and that we have a lot further to go.  But I
wanted to reassure everyone that we are on that track.

                We  were talking at the table about whether or not a coalition of industry and industry
consultants, plus environmental groups might actually lead to a regulatory program for nonpoint sources in
the re-authorization of the Clean Water Act. And my personal view is that's not going to be enough.

                That a firm still occupies a special status in our society and to have a  regulatory program,
that's sort of treating agriculture as another SIC-code is unlikely for our program. But I think we are


                                                                                      Closing Remarks

moving in slowly and inexorably, as I say, into the nonpoint source area. All states now have provisions in
nonpoint source programs that allow them to issue orders to farmers who are causing water quality problems
and they are required to clean up those problems.

               This is not a permit program.  It is not an effluent guidelines program.  But it's something
that we've got out there and most of the agricultural folks that we talk to support this kind of an approach.
Now we haven't fully implemented it.  We haven't given a tool to the state's that meets localities' needs to
really make this work.  But I know certain family history that, under the right circumstances, even farmers
can support some kind of regulation.

               My father's family comes from Arkansas, actually a little town in Arkansas named Prothro
Junction.  And I always have to point out to people that it was named Prothro Junction not because  we were
the most distinguished  family, but because we were the most numerous family.

               But I think the key thing the farmer cares about is not having to do  paperwork and making
sure that whatever it was they are required to do, reflected their own values. And in this case, they had blue
laws and farmers weren't allowed to plow on Sundays.  My grandfather, who had a third-grade education,
was the justice of the peace, and he  sent many  a farmer to jail for  a day or two, all for plowing on Sunday,
because the other farmers would ride by and they would see these guys out there plowing, and they would go
and make a citizen's arrest and bring them to the justice of the peace.

               Sometimes they'd pay a fine and, if they didn't have any money, they might spend the night
locked up in the back shed or something.  But  that was something—we would probably never do anything like
today, but in those days, that reflected their values.  They supported that. The community was together on

               I think we have  the farmers on our side; as far as valuing clean water, and can we find a way
to do it without the paperwork, I don't know.  That's a real challenge for EPA.

               Everything is economics, I think.  That is, I don't know how else to sum up this meeting.
Everything kind of leads us to the question of what our values are  as well,  not just the price, but the values.
But I like the fact that  economists now tell us that things go in cycles so that we don't feel like we're running
around in circles.  I'd rather go around in a cycle than  around in a circle.

               Well, I want to thank all of our speakers, many of whom have left, unfortunately. I certainly
enjoyed and benefitted greatly from  the conference and I hope that you have too.  I think we ought to do
this type of thing more often and I would like to stay in touch with the people we've  met here. We've got a
lot of insight, a lot of valuable information. And  we want to hear from you as well.  I hope you'll look at the
proceedings and send us your ideas and stay in touch on these issues.

               And again, I want to recognize Mark Luttner who has really been a key person in
organizing this. Thanks, Mark, from all of us for a fine conference.



                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Dr. Charles Abdalla
Resources for the Future
1616 P St., NW
Washington, DC  20036
FAX (202)939-3460
Mr. Robert Adler
Senior Attorney
Natural Resources Defense Council
1350 New York Ave., NW
Washington, DC  20005
FAX (202)783-5917
Mr. Daniel Alesch
Green Bay Metro Sewerage
P.O. Box 19015
Green Bay, WI  54307
FAX (414)432-4302
Mr. Gi Ali
Crystal Station
Arlington, DC
Dr. Jihad Alsadek
401 M St., SW
Washington, DC  20460
FAX (703)308-8151
Dr. Robert Anderson
Research Manager
American Petroleum Inst.
1220 L St., NW
Washington, DC  20005
FAX (202)682-8408
Mr. Rodges Ankrah
401 M St., SW,
Washington, DC  20460
FAX (202)260-2300
Mr. Robert April
401 M St., S.W.
Washington, DC
Dr. Nishkam Argarwal, Ph.D.
401 M St.,  SW  (TS-779)
Washington, DC  20460
Ms. Marilyn Arnold
Program Associate
Environment & Energy Study  Inst.
122 C St., NW, Suite 700
Washington, DC  20001
FAX (202)628-1825

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Mr. David Aschauer
Bates College
Dept. of Economics
Libbey Forum
Lewiston, ME  04240
FAX (207)786-6123
                Ms.  Elise Bacon
                Proj.  Mgr.,  Water Res. Economics
                Apogee Research,  Inc.
                4350 East West Hwy.,  Suite 600
                Bethesda, MD  20814
                FAX (301)654-9355
Mr. Gary Ballard
401 M St., SW  (MC-OS311)
Washington, DC  20460
FAX (202)260-0284
                Mr.  Fred Bank
                Federal Highway Administration
                400  7th St.,SW
                Washington, DC  20590
                FAX  (202)366-3409
Mr. Michael Barden
Division Director
Maine Dept. of Envir.
State House Station,
Augusta, ME  04333
FAX (207)287-2826
Mr. Robert Barles
Chf., State Prog. & Plcy. Ins. Br,
Ground Water Div.
401 M St., SW
Washington, DC  20460
FAX  (202)260-0732
Mr. Allen Basala
Research Triangle Park, NC
FAX (919)541-0237
                Mr. Patrick Bastek
                Chemical Engineer
       27711    U.S. EPA
                401 M St., SW  (WH-552)
                Washington, DC  20460
                FAX (202)260-7185
Mr. John Becker
2243 N.Trenton St.
Arlington, VA207  22207
                Mr. Rick Belzer
                New Exec. Office Bldg., RM-3019
                725 17th St., MW
                Washington, DC  20503
                FAX (202)395-5167

                   Clean Water and the American Economy
                           October 19 - 21,  1992
                          Final Participant  List
Mr. D. Randall Benn
Attorney Advisor
401 M St., SW  (WH-556)
Washington, DC  20460
FAX (202)260-5711
Mr. Ronald Bergman
Envir. Prot. Specialist
U.S. EPA, Ground Water Prot.
401 M St., SW (WH-550G)
Washington, DC  20460
FAX (202)260-0732
Dr. John Bergstrom
Assoc. Professor
University of Georgia
Dept. of Agric. Economics
Room 208, Conner Hall
Athens, GA  30602
FAX (706)542-0739
Mr. Jeremy Bernstein
Environmental Policy Alert
1225 Jefferson Davis Hwy.
Arlington, VA  22202
FAX (703)685-2606
Mr. Raymond Beurket, Jr.
Dir. of Federal Programs
American Public Works Assn.
1301 Pennsylvania Ave., NW
Suite 501
Washington, DC  20016
FAX (202)737-9153
Mr. Subhash Bhagwat
Head, Miner. Econ. & Strat. Ping.
Illinois State Geological Survey
615 E. Peabody Dr.
Champaign, IL  61820
FAX  (217)244-7004
Mr. Jeffrey Bigler
Fisheries Biologist
401 M St. SW
Washington, DC  20460
Ms. Lynne Blake-Hedges
401 M St., SW
Washington, DC  20460
FAX (202)260-0981
Mr. Thomas Bonenberger
Washington Representative
1615 M St., NW, Suite 200
Washington, DC  20036
FAX (202)857-5329
Mr. Nicolaas Bouwes
401 M St., SW
Washington, DC  20460

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Mr. Lawrence Boyer
Rutgers University
Dept. of Economics
New Jersey Hall
New Brunswick, NJ  08903
FAX (908)932-7416
              Mr.  Donald Brady
              Chief,  Watershed Mgmt.  Sec.
              U.S.  EPA,  OW,  OWOW
              401  M St.,  SW,  (WH-553)
              Washington,  DC  20460
              FAX  (202)260-7024
Ms. Elaine Brenner
401 M St., S.W.
Washington, DC  20460
FAX (202)260-1827
              Mr.  Stephen Elugbee
              Environmental Scientist
              U.S.  EPA,  OW
              401  M St.,  SW
              Washington, DC  20460
              FAX  (202)260-1460
Mr. Arden Calvert
Pesticides Coordinator
U.S. EPA, Pesticides & Groundwater
401 M St., SW  (HZ-501-C)
Washington, DC  20460
FAX (703)305-6244
              Ms.  Sheila Canavan
              U.S.  House of Representatives
              Subcomm.  on Env.,  Energy & Nat. Res.
              B-371-B Rayburn HOB
              Washington, DC  20515
              FAX (202)225-2392
Dr. Alan Carlin
Sr. Operations Research Analyst
401 M St.,  SW (PM-221)
Washington, DC  20460
FAX (202)260-6408
              Mr.  David Chambers
              Program Advisor
              U.S. EPA, OW
              401  M St.,  SW
              Washington, DC  20460
              FAX  (202)260-5711
Mr. Robert Chapman
Vice President
CH2M Hill
6060 S. Willow Dr.
Greenwood Village, CO
FAX  (303)290-6566
Mr. Mark Charles
Chief, Pretreatment Enforcement
401 M St., SW   (EN-33B)
Washington, DC  20460
FAX (202)260-5282

                   Clean Water and the American Economy
                           October 19 - 21,  1992
                          Final Participant  List
Mr. Kenneth Chilton
Deputy Director
Ctr. for Study of American Business
Washington University
1 Brookings Dr., Campus Box  1208
St. Louis, MO  63130-4899
FAX (314)935-5688
Mr. David Clarke
Managing Editor
Inside EPA Weekly Report
1225 Jefferson Davis Hwy
Arlington, VA  22202
FAX (703)685-2606
Mr. William Cleary
Chemical Engineer
401 M St., SW   (WH-552)
Washington, DC  20460
FAX (202)2607185
Dr. James Cliatt, III, Ph.D.
Policy Analyst
401 M St., S.W.  (OS240)
Washington, DC  20460
FAX (202)260-3847
Ms. Rhea Cohen
Acting Chief
Policy and Analysis Section
401 M St., S.W.   (OS240)
Washington, DC  20460
FAX (202)260-3647
Mr. Keith Cole
Minority Counsel
U.S. House, Energy & Commerce Comm.
Room 2322, Raburn House Off. Bldg.
Washington, DC  20515
Mr. James Conlon
Dir., Drinking Water Stndrds Div.
401 M St. SW
Washington, DC  20460
FAX (202)260-4383
Ms. Sarah Connick
Staff Officer
National Research Council
2101 Constitution Ave., NW, HA462
Washington, DC  20418
FAX  (202)334-1961
Mr. David Conover
Fed. Affairs Dir.
CH2M Hill
655 15th St., NW   #444
Washington, DC  20005
FAX (202)783-8410
Mr. Kenneth Cook
Vice President for Policy
Center for Resource Economics
1718 Connecticut Ave., NW
Washington, DC  20009
FAX (202)232-2592

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Ms. Kim Cook
Chemical Engineer
Radian Corporation
2455 Horsepen Rd., Suite 250
Herndon, VA  22071
FAX (703)713-1512
Mr. Michael Cook
Off. of WW Enfor. & Compliance
401 M St.,  SW  (WH-546)
Washington, DC  20460
FAX (202)260-1040
Mr. Peter Cook
Dpty. Dir., OGWDW
401 M St.,  SW
Washington, DC  20460
FAX  (202)260-4383
Ms.  Linda Cooper
Conference Coordinator
Radian Corporation
3200 Chapel Hill Rd./Nelson Hwy.
Research Triangle Park, NC  27709
FAX (919)541-9013
Ms. Claudia Copeland
Specialist in Environmental Policy
Congressional Research Service
Washington, DC  20540
FAX (202)707-3342
Mr. Simon Cordery
Sr. Envir. Policy Analyst
Advanced Aquatic Tech. Assoc.,  inc.
1155 Connecticut Ave., NW, ste.  300
Washington, DC  20036
FAX (202)296-7533
Dr. Robert Costanza
President, Soc. for Ecological Econ,
Chesapeake Biological Laboratory
P.O. Box 38
Solomons, MD  20688
FAX (410)326-7023
Dr. Maureen Cropper
Resources for the Future
1616 P St., NW
Washington, DC  20036
Dr. Steve Crutchfield
USDA, Economic Research Service
1301 New York Ave., NW, Room 438
Washington, DC  20005
Mr. Wendell Cunningham
Dir., Water Mgmt.  Div.
U.S. EPA, Region  IV
Atlanta, GA

                   Clean Water and the American Economy
                           October 19 -  21,  1992
                          Final Participant  List
Ms. Randi Currier
Envir. Analyst
Abt Associates
55 Wheeler St.
Cambridge, MA  02138
FAX (617)349-2660
Ms. Lynn Curry
Envir. Scientist
7600 Leesburg Pike
Falls Church, VA  22043
FAX (703)734-2549
Ms. Anne Dantonio
Research Assistant
401 M St., S.W.   (PM-221)
Washington, DC  20460
FAX (202)260-5732
Ms. Vivian Daub
Envir. Prot. Specialist
U.S. EPA, Office of Water
401 M St.,SW, (WH-556)
Washington, DC  20460
FAX (202)260-5711
Dr. Tudor Davies
Office of Science & Technology
401 M St., SW   (WH-551)
Washington, DC  20460
FAX (202)260-5394
Mr. David Davis
Deputy Director
Wetlands, Oceans, & Watersheds
401 M St., SW  (WH-556-F)
Washington, DC  20460
FAX (202)260-6294
Ms. Susan Day
Envir. Analyst
Abt Associates
55 Wheeler St.
Cambridge, MA  02138
FAX (617)349-2660
Mr. Donald DeMeuse
Chairman & CEO
Fort Howard Corp.
P.O. BOX 19130
Green Bay, WI  54307-9130
FAX (414)435-3703
Mr. Michael Deane
401 M St., SW  (WH-547)
Washington, DC  20460
FAX (202)260-0116
Dr. Leland Deck
Abt Assoc., Inc.
Suite 500, Hampden Square
4800 Montgomery Ln.
Bethesda, MD  20814
FAX (301)652-3618

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Mr. Richard Deringer
Policy Analyst
U.S. Bureau of Mines
810 7th St., N.W.
Washington, DC
FAX (202)219-2490
Mr. Matt Didier
U.S. EPA, Region V
Ground Water Protection Branch
77 W. Jackson Blvd.   (5WG-16J)
Chicago, IL  60604
FAX  (312)886-7804
Dr. Terry Dinan
Congressional Budget Office
Ford House Office Bldg., Room 495
2nd & D St., SW
Washington, DC  20515
FAX (202)226-4017
                     Ms.  Amy Doll
                     Policy Analyst
                     Apogee Research
                     4350 East-West Hwy.,  Suite 600
                     Bethesda,  MD  20814
                     FAX (301)654-9355
Mr. Gerry Dorfman
National Utility Contractors Assoc,
4301 N. Fairfax Dr., Suite 360
Arlington, VA  22203
FAX (703)358-9307
                     Ms. Donna Downing
                     Envir. & Energy Study Inst.
                     122 C. St.,  NW  #700
                     Washington,  DC  20001
                     FAX (202)628-1825
Mr. Brendan Doyle
Special Assistant
401 M St.,  SW  (PM-219)
Washington, DC  20009
FAX (202)260-0275
                     Ms. Elizabeth Drye
                     Spec.  Asst. to Asst. Administrator
                     U.S. EPA, OPPE
                     401 M St.,  SW  (PM-219)
                     Washington, DC  20460
                     FAX (202)260-0275
Mr. Mitchell Dubensky
Mgr.,  Timberlands & Water Quality
American Paper Institute
1250 Connecticut Ave., NW
Washington, DC  20036
FAX (202)463-2423
                     Mr. William Dunsmoor
                     Dir.,  Finance & Administration
                     Green Bay Metro Sewerage
                     P.O. Box 19015
                     Green Bay, WI  54307
                     FAX (414)432-4302

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Ms. Sharon Dyer
Spec. Asst.
U.S. House of Representatives
Energy & Commerce Comm.
2323 Rayburn HOB
Washington, DC  20515
FAX (202)205-2899
                  Mr. Roger Eckert
                  Dept. of Commerce, NOAA
                  1825 Connecticut Ave.,  N.W.
                  Suite 603
                  Washington, DC  20235
                  FAX  (202)606-43-71
Mr. James Elder
Off. of Ground Wtr. & Drinking Wtr.
401 M St., SW
Washington, DC  20460
FAX (202)260-4383
                  Mr. Steven Elstein
                  Asst. Dir.,  Water Quality Issues
                  U.S. General Accounting Office
                  441 G St., NW
                  Attn. TechWorld, Suite 200
                  Washington,  DC  20548
                  FAX  (202)336-6501
Mr. Jim Epstein
Equinox Intern'1
1764 Wilcox Lane
Silver Spring, MD
FAX (301)381-0843
Mr. Daniel Esty
Dep. Asst. Administrator
401 M St., SW  (PM-219)
Washington, DC  20460
FAX (202)260-0275
Mr. Frank Evans
Freelance Writer
222 N. Piedmont St. #1
Arlington, VA  22203
FAX (702)533-4440
                  Dr. Scott Farrow
                  Associate Professor
                  Carnegie-Mellon Univ.
                  The Heinz School
                  Pittsburgh, PA  15213
                  FAX (412)268-7036
Mr. Carlos Fetterolf
Great Lakes Fishery Comm.
2100 Commonwealth Blvd., Suite
Ann Arbor, MI  48105
FAX (313)668-2531
                  Mr. Lee Ficks, Jr.
                  Program Analyst, Wetlands Div.
            209   U.S. EPA
                  401 M St., SW   (A-104F)
                  Washington, DC  20460
                  FAX (202)260-8000

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Ms. Ann Fisher
Sr. Research Associate
Pennsylvania State Univ.
Dept. of Agric. Econ. & Rural Soc.
University Park, PA  16802
FAX (814)865-3746
Mr. Michael Fisher
Sr. Economist
Abt Associates
55 Wheeler St.
Cambridge, MA  02138
FAX (617)349-2660
Ms. Erin Flanagan
Envir. Prot. Spec.
401 M St.,  SW  (WH-550G)
Washington, DC  20460
FAX (202)260-0732
Mr. Scott Fogarty
Admin. Asst.
Nat'l Small Flows Clearinghouse
466 High St.
Morgantown, WV  26506
FAX (304)293-3161
Ms. Sherry Fontaine
Assistant Coordinator
Radian Corporation
3200 Chapel Hill Rd./Nelson Hwy.
Research Triangle Park, NC  27709
FAX (919)541-9013
Mr. Alan Fox
Assoc. Asst. Administrator
401 M St., SW, (WH-556)
Washington, DC  20460
FAX (202)260-5711
Mr. Kenneth Frederick
Sr. Fellow
Resources for the Future
1616 P St.,  NW
Washington,  DC  20036
FAX (202)939-3460
Ms. Helen Freeman
Asst. to Dir., Water Qual.  Prog.
American Paper Institute   (API)
1250 Connecticut Ave., NW,  Ste.  210
Washington, DC  20036
FAX  (202)463-2423
Mr. Charles Gauvin
Executive Director
Trout Unlimited
800 Follin Lane, Suite 250
Vienna, VA  22180
Ms. Donna Gehlhaart
Legislative Representative
Minnesota Power
30 W. Superior St.
Duluth, MN  55802
FAX (218)723-3923

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                           Final Participant List
Mr. David Gibbons
EOP Group
1725 DeSalles St., NW,
Washington, DC  20036
FAX (202)833-8945
              Ms. JoAnn Gilbert
              Radian Corporation
              3200 Chapel Hill Rd/Nelson Hwy.
Suite 802     P.O. Box 13000
              Research Triangle Park, NC  27709
              FAX (919)541-9013
Ms. Susan Gilbertson
U.S. EPA, Region V Water Division
77 W. Jackson St.
Chicago, IL  60604
FAX (312)886-0957
              Dr. Marilyn Ginsberg
              U.S. EPA,
              Office of Ground Water Protection
              401 M St., SW  (WH-550G)
              Washington, DC  20460
Mr. Stephen Glasser
USDA Forest Service
201 14th St., SW
Washington, DC  20250
              Mr. Jonathan Gledhill
              Policy Analyst
              New Exec. Office Bldg., RM-3019
              725 17th St.,  NW
              Washington, DC  20503
              FAX (202)395-5167
Mr. James Goodrich
Executive Director
San Gabriel Basin Water
Quality Authority
425 E. Huntington Dr.
Monrovia, CA  91016
FAX  (818)305-1506
              Mr. Don Gray
              Sr. Fellow, Water Program Director
              Environment & Energy Study Inst.
              122 C St., NW, Suite 700
              Washington, DC  20001
              FAX  (202)628-1825
Dr. Ken Green
Sr. Scientist
Vigyan Inc.
5203 Leesburg Pike, Suite 900
Falls Church, VA  22041
              Mr. Charles Gregg Jr.
              The Nature Conservancy
              1815 N. Lynn St.
              Arlington, VA  22209
              FAX (703)841-1283

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Mr. Tom Grome
Program Manager
Radian Corporation
2455 Horsepen Rd., Suite 250
Herndon, VA  22071
FAX (703)713-1512
Mr. Ben Grunewald
Groundwater Protection Council
827 NW 63rd St.
Oklahoma City, OK  73116
Ms. Karen Guglielmone
Environmental Eng.
Tetra Tech, Inc.
10306 Eaton PI., Suite 340
Fairfax, VA  22030
FAX (703)385-6007
Mr. F. Henry Habicht II
Deputy Administrator
401 M St.,  SW  (A-101)
Washington, DC  20460
Mr. John Haederle
State Groundwater Coordinator
U.S. EPA, Region I
J.F.K. Federal Bldg.
Boston, MA  02203
FAX (617)565-4940
Mr. James Hanlon
Deputy Director
401 M St. SW
Washington, DC  20460
FAX (202)260-5394
Mr. Eric Harmon
Vice President
HRS Water Consultants, Inc.
200 Union Blvd., Suite 200
Lakewood, CO  80228
FAX (303)989-9425
Mr. John Hart
19015 Amarillo Dr.
Germantown, MD  20874
Ms. Meg Harvey
Envir. Scientist
U.S. Nuclear Regulatory Comm.
Div. of Low Level Waste Mgmt.
Washington, DC  20555
FAX (202)504-2260
Mr. Reid Harvey
Project Manager
ICF Inc.
9300 Lee Hwy.
Fairfax, VA  22031
FAX (703)934-9740

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Ms. Judith Hecht
Environmental Protection Spec.
401 M St., SW (WH-556)
Washington, DC  20460
FAX (202)260-5711
Mr. James Hepp
Sr. Federal Affairs Representative
Minnesota Power
30 W. Superior St.
Duluth, MN  55802
FAX  (218)723-3923
Ms. Pamela Herman
Spec. Asst. to Asst. Administrator
401 M St., SW  (PM-219)
Washington, DC  20460
FAX (202)260-0275
Mr. Bill Hillman
Dir. of Government Relations
National Utility Contractors Assoc,
4301 N. Fairfax Dr.,  Suite 360
Arlington, VA  22203
FAX (703)358-9307
Dr. Marjorie Holland
Dir., Public Affairs
The Ecological Society of America
2010 Massachusetts Ave., NW
Suite 420
Washington, DC  20036
Mr. John Hosemann
Chief Economist
American Farm Bureau Federation
225 Touhy Ave.
Park Ridge, IL  60068
FAX (312)399-5896
Dr. Richard Howarth
Staff Scientist
Lawrence Berkeley Laboratories
Energy & Environment Div.
Berkeley, CA  94720
FAX (202)260-4320
Dr. Richard Howes
Policy Analyst
401 M St., S.W.  (MC-05-240)
Washington, DC   20460
FAX (202)260-3847
Ms. Stephanie Hulina
401 M St. SW
Washington, DC  20460
FAX (202)260-5394
Mr. David Ingersoll
Environmental Specialist
U.S. International Trade Commission
500 E St., SW
Washington, DC  20436
FAX (202)205-3161

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Ms. Joan Jackson
Legislative Asst.
Congressional Office
2235 Rayburn Building
Washington, DC  20515
FAX (202)225-6195
          Ms.  Debra Jacobson
          U.S. House of Representatives
          Subconun.  on Oversight & Investig.
          Comm. on Energy & Commerce
          Washington, DC
Mr. Paul Jehn
Assoc. Director
Idaho Water Resources Res.
800 Park Blvd., Suite 200
Boise, ID  83712
FAX (208)364-4046
          Mr.  Charles Job
          Branch Chief,  Grnd.  Wtr. Prot. Div.
Inst.      U.S. EPA
          Off. of Ground Wtr.  & Drinking Wtr.
          401  M St.,  SW, (WH-550G)
          Washington, DC  20460
          FAX  (202)260-0732
Mr. Paul Johnson
U.S. EPA, Region V
Ground Water Protection Branch
77 W. Jackson Blvd.  (5WG-16J)
Chicago, IL  60604
FAX (312)886-7804
          Mr.  Ted Johnson
          U.S. EPA, OW, OST
          401 M St.,  SW
          Washington, DC  20460
          FAX (202)260-5394
Mr. Henley Jones
Radian Corporation
2455 Horsepen Rd., Suite 250
Herndon, VA  22071
FAX (703)713-1512
          Mr. J. R. Jones
          U.S. Geological Survey
          Bldg. 20, MS-914
          Denver Federal Center
          Lakewood, CO  80439
          FAX  (303)236-4954
Mr. Howard Jongedyk
Research Hydraulic Engineer
Fed. Hwy. Admin.
6302 Georgetown Pike
McClean, VA  22111
FAX (703)285-2379
          Mr. James Joyce, P.E.
          Dept. of Public Utilities
          City of Columbus
          910 Dublin Rd.
          Columbus, OH  43215
          FAX  (614)645-3801

                   Clean Water and the American Economy
                           October 19 - 21,  1992
                          Final Participant  List
Dr. Richard Kashmanian
Sr. Economist
401 M St., SW
Washington, DC  20460
FAX (202)252-7884
Ms. Eileen Kaufman
Dir.,  Strategic Planning
NYC Dept. of Envir. Protection
59-17  Junction Blvd.
Corona, NY  11368
FAX (718)595-3557
Ms. Mary Jo Kealy
Senior Economist
401 M St., SW, PM-221
Washington, DC  20460
FAX (202)260-5732
Ms. Ann Kimbro
Sr. Environmental Engr.
Science Applications Intern'1. Corp,
P.O. Box 250
Oak Ridge, TN  37831
FAX (615)482-7257
Mr. Robert King
Water Resources Spec.
Carroll County Government
225 N. Center St.
Westminster, MD  21157
FAX (410)848-0003
Mr. Ken Kirk
Executive Director
Assn. of Metro. Sewerage Agencies
1000 Connecticut Ave., NW
Suite 1006
Washington, DC  20036
FAX (202)833-4657
Mr. Kenton Kirkpatrick  P.E.
Dpty. Dir., Water Mgmt. Div.
U.S. EPA, Region VI
1445 Ross Ave., Suite 1200
Dallas, TX  75202-2733
FAX (214)655-6490
Ms. Laura Klein
Environmental Engineer
Designers & Planners
2611 Jefferson Davis Hwy.
Arlington, VA  22202
FAX (703)418-2251
Ste. 3000
Ms. Jane Knecht
Executive Asst.
Barbara Gauntlett Foundation
1825 I St., NW, Suite 400
Washington, DC  20006
Mr. Bruce Kobelski
Section Chief, UIC Branch
401 M St.,  SW  (WH-547)
Washington, DC  20460
FAX (202)260-4383

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Mr. Barry Korb
Branch Chief, Reg. Innovations
401 M St. SW
Washington, DC  20460
FAX (202)252-0174
Mr. Gregory Kosarin
General Accounting Office
800 K St., N.W., Suite 200
Washington, DC  20001
FAX (202)336-6501
Mr. Stephen Kroner
Envir. Scientist
401 M St.,  SW
Washington, DC  20460
Mr. Fred Krupp
Executive Director
Environmental Defense Fund
257 Park Ave. South
New York, NY  10010
Dr. Peter Kuch
Chief, Agric. Policy Branch
401 M St.,  SW, (PM-221)
Washington, DC  20460
FAX (202)260-2300
Dr. Arnold Kuzmack
Sr. Science Advisor
401 M St., SW   (WH-551)
Rm. E737
Washington, DC  20460
FAX (202)260-5394
Ms. Gretchen Lachrite
Asst. Account Exec.
Madison Public Affairs Group
2033 M St., NW, Suite 900
Washington, DC  20036
FAX  (202)785-0892
Mr. John Lehman
Dep.Dir., OWW Enfor. & Compl,
401 M St., SW,  (WH-546)
Washington, DC  20460
FAX (202)260-1040
Mr. Ben Lesser
Special Assistant
401 M St.,  SW   (WH-556)
Washington, DC  20460
FAX (202)260-5711
Mr. David Letson
1301 New York Ave., NW,
Washington, DC  20005
FAX  (202)219-0477
Room 438

                   Clean Water and the American Economy
                           October 19 - 21,  1992
                          Final Participant  List
Mr. Fred Leutner
Dpty. Dir., OST/SASD
401 M St., SW
Washington, DC  20460
FAX (202)260-9830
Dr. Erik Lichtenberg
Univ. of Maryland
Dept. of Agric. Economics
Room 2104, Symons Hall
College Park, MD  20742-5535
Mr. William Lorenz
William T. Lorenz & Co.
85 Warren St.
Concord, NH  03301
FAX (603)225-2946
Mr. John Love
Apogee Research Inc.
4350 East-West Hwy., Suite 600
Bethesda, MD  20814
FAX (301)654-5355
Mr. Lyn Luben
401 M St., SW   (OS-311)
Washington, DC  20460
FAX (202)260-0284
Mr. Randy Lutter
New Exec. Office Bldg., RM-3019
725 17th St., NW
Washington, DC  20503
FAX (202)395-5167
Mr. Mark Luttner
Spec. Asst. to Asst. Admin.
401 M St., SW  (WH-556)
Washington, DC  20460
FAX  (202)260-5711
Mr. Douglas MacDonald
Executive Director
Massachusetts Water Resources Auth.
100 First Ave.
Charlestown Navy Yard
Boston, MA  02129
Mr. Charles Malloch
Dir., Regulatory Mgmt.
Monsanto Co.
Environment, Health & Safety Dept,
800 N. Lindbergh Blvd.
St. Louis, MO  63167
FAX  (314)694-8957
Mr. Andrew Manale
Sr. Program Analyst
401 M St., SW, PM-221
Washington, DC  20460
FAX (202)382-2300

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Dr. Suzanne Marcy
401 M St.,  SW  (WH-586)
Washington, DC  20460
FAX (202)260-5394
Mr. Richard Marks, M.S.
Govt. Relations Representative
The National Fisheries Inst.
1525 Wilson Blvd., Suite 500
Arlington, VA  22209
FAX  (703)524-4619
Ms. Jane Marshall
Hydrologist, CPG 7003
401 M St., SW  (WH-550G)
Washington, DC  20460
Ms. Linda Martin
401 M St., SW  (MC-OS311)
Washington, DC  20460
FAX (202)260-0284
Ms. Amy Marx
Policy Analyst
New Exec. Office Bldg., RM-3019
725 17th St., NW
Washington, DC  20503
FAX (202)395-5167
Ms. Margie Masley
Radian Corporation
2455 Horsepen Rd., Suite 250
Herndon, VA  22071
FAX (703)713-1512
Ms. Kristy Mathews
Research Economist
Research Triangle Inst.
3040 Cornwallis Rd., Hobbs Bldg.
Research Triangle Park, NC  27709
FAX  (919)541-5945
Mr. William McCleese
USDA Forest Service
201 14th St., SW
3rd Floor, South Wing
Washington, DC  20250
FAX (202)205-1096
Mr. James McFarland
Wade Miller Assoc.
1911 N. Fort Myer Dr.
Arlington, VA  22209
FAX (703)524-1453
Mr. Albert McGartland
Dir., Econ. Analysis &  Innov.
401 M St., S.W.   (PM-226,  Rm-3220M)
Washington, DC   20460
FAX  (202)260-5132

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Mr. James McNabb
Chief, Extramural Act. & Eval.
Robert S. Kerr Envir. Res. Lab.
P.O. Box 1198
Ada, OK  74820
FAX (405)332-8800
      Mr. R.  Gregory Michaels
Br.    Sr. Economist
      Abt Asssociates, Inc.
      4800 Montgomery Lane, Suite 600
      Bethesda,  MD  20814-5341
      FAX (301)652-3618
Mr. David Miller
Director, Public Sector Div.
Wade Miller Associates, Inc.
1911 N. Fort Myer Drive
Arlington, VA  22209
FAX (703)524-1453
      Mr. Matthew Mitchell
      Policy Analyst
      New Exec. Office Bldg.,  RM-3019
      725 17th St.,  NW
      Washington, DC  20503
      FAX (202)395-5167
Ms. Liliana Morales
Environmental Engineer
CM2H Hill
625 Herndon Pkwy.
Herndon, VA  22070
      Mr. Ronald Morgan
      General Accounting Office
      800 K St., N.W., Suite 200
      Washington, DC  20001
      FAX (202)336-6501
Mr. Richard Morgenstern
Acting Asst. Administrator
401 M St.,  SW, PM-219
Washington, DC  20460
      Dr. Glenn Morris
      Sr. Research Economist
      Research Triangle Inst.
      3040 Cornwallis Rd.
      Research Triangle Park, NC
      FAX (919)541-5945
Ms. Deborah Neiter
Envir. Research Asst.
Tetra Tech Inc.
Eaton Place, Suite 340
Fairfax, VA
FAX (703)385-6007
      Mr. Thomas Nicholson
      Sr. Hydrogeologist
      U.S. Nuclear Regulatory Comm.
      Washington, DC  20555

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Ms.  Anne Northup
State Representative
Kentucky General Assembly
3340 Lexington Rd.
Louisville, KY  40206
Mr. Robert O'Conner
Assoc. Prof. Policies & Science
Pennsylvania State Univ.
107 Bullones Bldg.
University Park,, PA  16802
Ms. Maureen O'Neill
Acting Director
401 M St.,  SW (WH-556)
Washington, DC  20460
FAX (202)260-5711
Mr. John Oliver
Fischer & Porter Co.
Mr. Eric Oltman
Radian Corporation
2455 Horsepen Rd., Suite 250
Herndon, VA  22071
FAX (703)713-1512
Mr. Norm Oslik
401 M St., SW
Washington, DC
FAX (202)260-0284
Mr. William Painter
Chief, Water Policy Branch
401 M St.,  SW
Washington, DC  20460
FAX (202)260-2300
Mr. Daniel Palmer
Office of Enforcement
401 M St., S.W.   (LE-134W)
Washington, DC  20460
FAX (202)260-4201
Mr. W. Jeffrey Pardue
Mgr.,  Environmental Programs
Florida Power Corp.
3201 34th St., South
St. Petersburg, FL  33733
FAX (813)866-4926
Mr. Neil Patel
Branch Chief
401 M St., S.W.   (WH-552)
Washington, DC  20460
FAX (202)260-5394

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Ms. Jody Perkins
Policy Analyst
1220 L St., N.W.
Washington, DC  20005
FAX (202)682-8408
Ms. Laura Phillips
401 M St.,  SW
Washington, DC  20460
Mr. Spencer Phillips
Council on Environmental Quality
722 Jackson Place, NW
Washington, DC  20503
FAX (202)395-3744
Mr. Tejbir Phool
Project Manager
Wade Miller Assoc.
1911 N. Fort Myer Dr.
Arlington, VA  22209
FAX (703)524-1453
Ms. Lisa Pittelkau
U.S. General Acctg. Office
800 K St., NW, Suite 200
Washington, DC  20001
FAX (202)336-6501
Mr. Mahesh Podar
401 M St. SW
Washington, DC  20460
FAX (202)260-5394
Ms. Lynne Pollock
Sr. Evaluator
U.S. General Acctg. Office/Envir.
800 K St., NW, Suite 200
Washington, DC  20001
FAX (703)336-6501
Ms. Barbara Polo
Professional Staff
U.S. House of Representatives
Merchant Marine & Fisheries Comm.
545 House Annex Two
Washington, DC  20515
FAX (202)226-0283
Ms.  Lyn Poorman
Ground Water Prot. Coordinator
Maryland Dept. of Environment/HSWMA
2500 Broening Hwy.
Baltimore, MD  21224
FAX (410)631-3321
Mr. Paul Portney
Vice President
Resources for the Future
1616 P St., NW
Washington, DC  20036
FAX  (202)939-3460

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Mr. Jimmie Powell
U.S. Senate
Committee on Envir. &
Washington, DC  20510
Public Works
Mr. Myron Price
Regulatory Analyst
American Petrolelum Institute
1220 L St.,  NW
Washington,  DC  20001
FAX  (202)682-8031
Ms.  Martha Prothro
Dep. Asst. Administrator
401 M St., SW, (WH-556)
Washington, DC  20460
FAX (202)260-5711
               Ms. Cynthia Puskar
               Dir.,  Water Policy Staff
               U.S. EPA, OW
               401 M St., S.W.  (WH-556)
               Washington, DC  20460
               FAX (202)260-5711
Mr. Mark Ralston
401 M St.,  SW
Washington, DC  20460
FAX (202)260-0284
               Ms. Jacqueline Rams
               Dir., Business Development
               AIG Consultants, Inc.
               1200 19th St., NW, Suite 605
               Washington, DC  20036
               FAX  (202)775-0137
Ms. Sara Rasmussen
401 M St., SW  (MC-OS311)
Washington, DC  20460
FAX (202)260-0284
               Ms. Donna Reed
               U.S. EPA
               401 M St., SW
               Washington, DC
Dr. Katherine Reichelderfer
Assoc. Administrator
USDA, Economic Research Service
1301 New York Ave., NW, Room 1226
Washington, DC  20005-4788
FAX  (202)219-0146
               Mr. Joseph Retzer
               Director, Clusters Staff
               U.S. EPA
               401 M St. SW
               Washington, DC  20460
               FAX (202)260-5478

                   Clean Water and the American  Economy
                           October 19 - 21,  1992
                          Final Participant  List
Mr. Jeff Riback
Sr. Attorney
Consildated Edison Co.
4 Irving Place
New York, NY  10003
FAX (212)260-8627
Mr. Marc Ribaudo
Agricultural Economist
1301 New York Ave., NW, Room
Washington, DC  20005-4788
FAX (202)219-0477
Ms. Lisa Robinson
Sr. Associate
Industrial Economics, Inc.
2067 Massachusettes Ave.
Cambridge, MA  02140
FAX (617)354-0463
Ms. Rosalina Rodriguez
Research Triangle Park, NC  27711
FAX (919)541-0237
Ms. Rhonda Roff
Natural Resources Defense Council
P.O. Box 534
Bedminster, NJ  07921
FAX (212)727-1773
Dr. Andrew Rosenberg
National Marine Fisheries Service
166 Water St.
Woods Hole, MA  12543
FAX (508)548-1158
Ms. Deborah Ross
401 M St., SW   (WH-556)
Washington, DC  20460
FAX (202)260-5711
Mr. Brian Rourke
Program Analyst
401 M St., SW   (WH-547)
Washington, DC  20460
Ms. Heather Ruth
Public Securities Assns.
40 Broad St., 12th Floor
New York, NY  10004
FAX (212)797-3895
Mr. David Sandalow
Office of General Counsel
401 M St., SW   (LE-132-W)
Washington, DC  20460
FAX (202)260-7702

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Ms. Rose Marie Sanders
Legis. Representative - Air & Water
Chemical Mfrs. Assn.
2501 M St., NW
Washington, DC  20037
FAX (202)887-1237
Mr. Dennis Sasseville
Assoc. Vice President
Environmental Science & Engrg., Inc.
Five Overlook Dr.
Amherst, NH  03031
FAX (603)672-2014
Ms. Penelope Schafer
Sr. Economist
Abt Associates, Inc.
55 Wheeler St.
Cambridge, MA  02138
FAX (617)349-2772
Ms. Susan Schulz
Environmental Scientist
26 Federal Plaza, Room 842
New York, NY  10278
FAX (212)264-2194
Dr. William Schulze
University of Colorado
Dept. of Economics
Box 257
Boulder, CO  80309
Ms. Ann Schwartz
American Soc. of Interior Designers
608 Massachusetts Ave., NE
Washington, DC  20002-6006
FAX (202)546-3240
Ms. Cleora Scott
Chief, Program Mgmt. Branch
401 M St.,  SW  (WH-547)
Washington, DC  20460
FAX (202)260-1827
Mr. Stephen Shapiro
Envir. Affairs Spec.
U.S. Dept. of Transportation
400 7th St., SW
Washington, DC  20590
Mr. Douglass Shaw
RCG/Hagler, Bailly, Inc.
P.O. Drawer 0
Boulder, CO  80306
Dr. David Shin Ph.D.
American Petroleum Institute
1220 L St. Northwest
Washington, DC  20005

                   Clean Water and the American Economy
                           October 19 - 21,  1992
                          Final Participant  List
Mr. John Simons
U.S. EPA, Groundwater Div.
401 M St., SW   (WH-550G)
Washington, DC  20460
FAX (202)260-0732
Mr. Nikos Singelis
Program Analyst
401 M St.,  SW
Washington, DC  20460
Mr. Alfred Slatin
Zimpro/Passavant Environmental
301 W. Military Rd.
Rothschild, WI  54474
FAX (715)355-3205
Mr. John Smegal
Sr. Assoc.
ICF Inc.
9300 Lee Hwy.
Fairfax, VA  22031-2511
FAX (703)934-9740
Mr. Benjamin Smith
Branch Chief
401 M St., S.W.
Washington, DC  20460
FAX (202)260-3762
Dr. Frank Smith
401 M St., SW  (OS-311)
Washington, DC  20460
Dr. Kerry Smith
North Carolina State Univ./REEP
Dept. of Economics
201 Patterson Hall, Box 8109
Raleigh, NC  27607
FAX (919)515-7873
Ms. Velma Smith
Dir.,  Ground Water Project
Friends of the Earth
218 D St., SE
Washington, DC  20003
Mr. Brett Snyder
U.S. EPA, Econ. Analysis & Research
401 M St.,  SW  (PM-221)
Washington, DC  20460
FAX (202)260-5732
Ms. Robin Snyder
Envir. Protection Specialist
401 M St., SW   (WH-550-G)
Washington, DC  20460
FAX (202)260-0732

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Mr. Randy Solomon
Regulatory/Legislative Spec.
Entergy Services, Inc.
P.O. Box 8082
425 W. Capitol
Little Rock, AR  72211
FAX  (501)377-3558
Mr. Debora Sparks
Amoco Corp.
Environment, Health & Safety Dept
200 E. Randolph Dr., MC 4905-A
Chicago, IL  60601
Mr. William Sproat
Sr. Scientist
Radian Corporation
2455 Horsepen Rd., Suite 250
Herndon, VA  22071
FAX (703)713-1512
Mr. W. Sprouse, Jr.
Virginia Power
5000 Dominion Blvd., WQD-1SE
Glen Allen, VA  2:3060
FAX (804)273-2964
Mr. Raymond Squitieri
Sr. Economist
U.S. Dept. of the Treasury
17th St. & Pennsylvania Ave., NW
Room 317
Washington, DC  20500
FAX (202)395-5630
Dr. Norman Starlesr
Water Resources EJranch
Executive Office of the President
Office of Mgmt. & Budget
725 17th St., NW, NEOB, Rm.  8026
Washington, DC  20503
FAX (202)395-4652
Mr. Raffael Stein
401 M St., SW  (WH-552)
Washington, DC  20460
FAX (202)260-5394
Mr. Will Stelle
General Counsel
Subcomm. on Fisheries, Wildlife
Conservation & the Environment
House Annex 2, Room  542
Washington, DC  20515
Mr. Nathaniel Stevens
Sea Grant Fellow, Wetlands Div.
401 M St. SW  (A-104F)
Washington, DC  20460
FAX (202)260-8000
Mr. Peter Stevens
U.S. Geological  Survey
MS 411 National  Center
12201 Sunrise Valley  Dr.
Reston, VA   22092
FAX  (703)648-5295

                   Clean Water  and the American  Economy
                           October 19 -  21,  1992
                           Final Participant  List
Mr. John Stierna
USDA/Soil Conservation Service
14th & Independence Ave., SW
Washington, DC  20250
FAX  (202)720-6473
Ms. Katie Stimmel
Bureau of National Affairs
1231 25th St.,  NW
Washington, DC  20008
FAX (202)452-4150
Mr. Andrew Stone
Program Director
American Ground Water Trust
RFD #1, Box 590
Crystal Lake Road
Gilmanton Iron Wks., NH   03837
FAX (603)364-2456
Dr. Martha Stout
Consulting Ecologist
2225 Washington Ave., #202
Silver Spring, MD  20910
Mr. Ivar Strand
Univ. of Maryland
Dept. of Agric. & Resource Econ.
College Park, MD  20742
FAX (301)314-9091
Mr. Eric Strassler
Sr. Policy Analyst
401 M St., S.W.  (WH-552)
Washington, DC  20460
FAX (202)260-7185
Mr. Ralph Sullivan
Advisor - Environment
1004 Loxford Ter.
Silver Spring, MD  20901
FAX (301)681-5284
Mr. John Sullivan, P.E.
Dpty. Exec. Dir.
American Water Works Assn.
1401 New York Ave., NW  #640
Washington, DC  20005
FAX  (202)628-2846
Ms. Irene Suzukida
Permits Division
401 M St., SW   (EH-336)
Washington, DC  20460
FAX (202)260-1460
Dr. Larry Swanson
Waste Management Inst.
State University of New York
Stony Brook, NY  11794-5000
FAX (516)632-8820

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Ms. Patricia Szarak
DRI/McGraw Hill
1200 G St.,  NW,
Washington,  DC
FAX (202)383-2005
Suite 1000
Ms. Gillian Thackray
Envir. Prot. Spec.
401 M St.,  SW
Washington, DC  20460
Mr. Christian Thieme
Bureau of Economic Analysis
1401 K St.,  NW, (BE-G2)
Washington,  DC  20230
FAX (202)523-4498
                     Mr. James Thompson
                     Mechanical Engineer
                     U.S. Army Eng. Strat. Studies Ctr.
                     Casey Bldg.,  #2503
                     Fort Belvoir, VA  22060-5583
                     FAX  (703)355-2503
Mr. Edgar Thornton
Spec. Asst. to Asst. Admin.
401 M St.,  SW  (PM-219)
Washington, DC  20460
FAX  (202)252-0275
                     Ms.  E.  Ramona Trovato
                     U.S. EPA, Ground Water Protection
                     401 M St., SW   (WH-550G)
                     Washington, DC  20460
                     FAX  (202)260-0732
Ms. Theresa Tuano
Aquatic Biologist
401 M St.,  SW  (WH-553)
Washington, DC  20460
FAX (202)260-7024
                     Dr. Lynne Tudor
                     U.S. EPA, OW, OST
                     401 M St.,  SW
                     Washington, DC  20460
                     FAX (202)260-5394
Mr. Donald Waite
Bureau of Land Management
Premier Bldg., Rm. 906
18th & C Sts. NW
Washington, DC  20240
FAX (202)653-9210
                     Mr. Tom Wall
                     U.S. EPA, OW
                     401 M St., SW   (WH-556)
                     Washington, DC  20460
                     FAX (202)260-5691

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Mr. Robert Weaver
Saul, Ewing, Remick & Saul
Suite 850 N Tower
Pennsylvania Ave., NW
Washington, DC  20004
FAX  (202)662-4343
Ms. Maya Weber
Associate Editor
Environmental Policy Alert
1225 Jefferson Davis Hwy
Arlington, VA  22207
FAX (703)685-2606
Dr. William Weisrock
Director - GW Management
Amoco Corporation
7201 E. 38th St.
Tulsa, OK  74145
FAX (918)660-4443
Ms. Patience Whitten
Policy Analyst
Council on Environmental Quality
722 Jackson Place, NW
Washington, DC  20006
FAX  (202)395-3874
Ms. Linda Wiesman
Budget Examiner
Exec. Office of the President
Off. of Mgmt. & Budget
New Executive Office Bldg.
Washington, DC  20503
FAX (202)395-5836
Ms. LaJuana Wilcher
Asst. Administrator
401 M St., SW  (WH-556)
Washington, DC  20460
FAX  (202)260-5711
Dr. Zach Willey
Environmental Defense Fund
Western Regional Office
5655 College Ave., Suite 304
Oakland, CA  94618
FAX (510)834-6358
Mr. Charles Wilson
Dir.,  Government Affairs
Fort Howard Corp.
1919 S. Broadway
Green Bay, WI  54304-3703
FAX (414)435-3603
Mr. Thomas Wilson
Sr. Policy Advisor
U.S. EPA, Region X
1200 6th Ave.
Seattle, WA  98101
FAX (206)553-0165
Dr. Hugh Wise
Envir. Scientist
401 M St., SW   (WH-552)
Washington, DC  20460
FAX (202)260-7185

                   Clean Water and the American Economy
                           October 19 - 21, 1992
                          Final Participant List
Dr. Jane Yager                       Mr. Everett Zillinger
Senior Economist                     Dir.,  Govt. Relations
Council on Environmental Quality     The Fertilizer Institute
722 Jackson PI., NW                  501 Second St., NE
Washington, DC  20503                Washington, DC  20002
(202)395-5750                        (202)675-8250
FAX (202)395-3744                    FAX (202)544-8123