United States
fcnvironmental Protection
Agency
Office of Water
Program Operations (WH-547)
Washington, D.C. 20460
December, 1978
Water
&EPA
Report to Congress
Industrial Cost Recovery
Volume I
Executive Summary
-------
DISTRIBUTION STATEMENT
To order this publication, "Report to Congress on Industrial Cost
Recovery Study, Volume I, Executive Summary" (MCD-52) from EPA,
write to:
General Services Administration (8FFS)
Centralized Mailing Lists Services
Building 41, Denver Federal Center
Denver, Colorado 80225
Please indicate the MCD number and title of publication. Copies
of Volumes I through VII of the Report may be purchased sep-
arately from:
National Technical Information Service
Springfield, Virginia 22151
-------
REPORT TO CONGRESS
ON
INDUSTRIAL COST RECOVERY STUDY
VOLUME I
EXECUTIVE SUMMARY
-------
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
JAN 2 5 1979
THE ADMINISTRATOR
Honorable Walter F. Mondale
President of the Senate
Washington, D.C. 20510
Dear Mr. President:
The Environmental Protection Agency (EPA) is pleased to submit
to the Congress its report on the study of the efficiency of, and
the need for, Industrial Cost Recovery (ICR). This study and its report
was directed by the Congress in section 75 of the Clean Water Act
of 1977 (Public Law 95-217). This study was conducted with the fullest
public participation achieved to date by EPA in any major study. A
broad spectrum of industrial, environmental, civic, and governmental
organizations were actively and voluntarily involved in the decision-
making process throughout the project.
Based on the data available, the study concludes that the ICR
provisions of section 204(b)(l) of the Federal Water Pollution Control
Act Amendments of 1972 (Public Law 92-500) are not effective in
accomplishing their legislative purposes. It should be realized that
the ICR Study took place early in the actual implementation of the ICR
program, and that there is only a limited quantity of actual data
available. However, the following trends were discernible:
o Changes in the tax laws have largely mooted the
question of the Construction Grants Program being
a subsidy to industries utilizing publicly-owned
treatment works.
o ICR has had only a minor impact upon water conservation,
when compared to the effects of proportionate user
charges. In most cases, ICR has had an insignificant
impact on industrial decision-making.
o ICR has been extremely difficult to manage for both
grantees and EPA, and will continue to be a resource
intensive activity, if ICR is continued. ICR tends
to be more of a managerial burden in small communities
than in large communities.
-------
-2-
o The exemption for industries with flows of 25,000
gallons or less per day makes the program somewhat
more manageable for grantees, but is inequitable
because many industries are exempted from ICR based
only on size.
o With the exception of small communities with very
large industrial flows, ICR produces little
discretionary revenue for most local governments,
particularly when revenues are compared with local
costs of administering ICR.
o ICR is a 30-year program after the construction is
completed. During this period, the industrial
payment recovered to the U.S. Treasury is estimated
to be $30 million per year.
o The user charge system is effective in accomplishing
the bulk of the aims of ICR, especially on inducing
waste reduction or water conservation.
Specific legislation is being considered for the legislative
package to Congress. I trust that the report proves fully satisfactory
to you and the Committee. If you have additional questions, please
contact me.
-------
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON. D.C. 20460
JAN 2 5 1979
THE ADMINISTRATOR
Honorable Thomas P. O'Neill, Jr.
Speaker of the House of Representatives
Washington, D.C. 20515
Dear Mr. Speaker:
The Environmental Protection Agency (EPA) is pleased to submit
to the Congress its report on the study of the efficiency of, and
the need for, Industrial Cost Recovery (ICR). This study and its report
was directed by the Congress in section 75 of the Clean Water Act
of 1977 (Public Law 95-217). This study was conducted with the fullest
public participation achieved to date by EPA in any major study. A
broad spectrum of industrial, environmental, civic, and governmental
organizations were actively and voluntarily involved in the decision-
making .process throughout the project.
Based on the data available, the study concludes that the ICR
provisions of section 204(b)(l) of the Federal Water Pollution Control
Act Amendments of 1972 (Public Law 92-500) are not effective in
accomplishing their legislative purposes. It should be realized that
the ICR Study took place early in the actual implementation of the ICR
program, and that there is only a limited quantity of actual data
available. However, the following trends were discernible:
o Changes in the tax laws have largely mooted the
question of the Construction Grants Program being
a subsidy to industries utilizing publicly-owned
treatment works.
o ICR has had only a minor impact upon water conservation,
when compared to the effects of proportionate user
charges. In most cases, ICR has had an insignificant
impact on industrial decision-making.
o ICR has been extremely difficult to manage for both
grantees and EPA, and will continue to be a resource
intensive activity, if ICR is continued. ICR tends
to be more of a managerial burden in small communities
than in large communities.
-------
-2-
o The exemption for industries with flows of 25,000
gallons or less per day makes the program somewhat
more manageable for grantees, but is inequitable
because many industries are exempted from ICR based
only on size.
o With the exception of small communities with very
large industrial flows, ICR produces little
discretionary revenue for most local governments,
particularly when revenues are compared with local
costs of administering ICR.
o ICR is a 30-year program after the construction is
completed. During this period, the industrial
payment recovered to the U.S. Treasury is estimated
to be $30 million per year.
o The user charge system is effective in accomplishing
the bulk of the aims of ICR, especially on inducing
waste reduction or water conservation.
Specific legislation is being considered for the legislative
package to Congress. I trust that the report proves fully satisfactory
to you and the Committee. If you have additional questions, please
contact me.
-------
TABLE OF CONTENTS
START WITH
VOLUME CHAPTER DESCRIPTION PAGE
I I EXECUTIVE SUMMARY
1. Summary 1-1
2. Project Methodology 1-8
3- Findings and Alternatives 1-12
4. Conclusion 1-27
II II DETAILED METHODOLOGY
1. Contractual Scope of Work II-1
2. Economic Analysis II-5
3. Survey Analysis 11-11
4. Cost Function Analysis 11-17
5. Financial Simulations 11-22
II III DETAILED FINDINGS AND ALTERNATIVES
1. General III-1
2. Impacts of ICR III-3
3. Simulation Analysis III-6
4. Summary of Findings 111-12
5. Alternatives to ICR 111-24
6. Case Studies 111-27
II IV DETAILED CONCLUSION IV-1
III V EXHIBITS V-1
IV VI TRANSCRIPTS OF PUBLIC MEETINGS
1. ICR Advisory Group (July 14, 1978)
2. ICR Advisory Group (August 31, 1978)
3. ICR Advisory Group (October 11, 1978)
4. ICR Advisory Group (November 29, 1978)
V VI TRANSCRIPTS OF PUBLIC MEETINGS
5. Regional Public Meeting - Boston
(October 24-25, 1978)
6. Regional Public Meeting - New York
(October 18, 1978)
7. Regional Public Meeting - Philadelphia
(October 20, 1978)
8. Regional Public Meeting - Atlanta
(October 26, 1978)
-------
VOLUME CHAPTER DESCRIPTION
VI VI TRANSCRIPTS OF PUBLIC MEETINGS
9. Regional Public Meeting - Chicago
(October 16-17. 1978)
10. Regional Public Meeting - Dallas
(October 16-17, 1978)
11. Regional Public Meeting - Kansas Civ/
'(October 18, 1978]
12. Regional Public Meeting - Denver
(October 19, 1978)
VII VI TRANSCRIPTS OF PUBLIC MEETINGS
13. Regional Public Meeting - San Francisco
(October 23-2H, 1978)
1H. Regional Public Meeting - Seattle
(October 25, 1978)
15. City Public Meeting - Fall River,
Massachusetts (August 21, 1978)
-------
I. EXECUTIVE SUMMARY
-------
I. EXECUTIVE SUMMARY
This document presents the U. S. Environmental Protection
Agency's final report to the Congress on its Industrial Cost
Recovery Study as directed by the Congress in Section 75 of
Public Law 95-217, the Clean Water Act of 1977. This provision
of the statute requires EPA to study the "efficiency of, and need
for" the repayment by industry of that portion of the EPA grant
used for construction of industrial capacity in publicly-owned
wastewater treatment systems, and requires EPA to report the
results of the study to the Congress by December 31, 1978.
The final report consists of seven volumes:
Volume I - Executive Summary (this volume)
Volume II - Detailed Methodology, Findings and
Conclusion
. Volume III - Exhibits
Volumes IV-VII - Transcripts of Public Meetings
1. Summary
EPA Instructed its contractor (Coopers & Lybrand) "to
examine with full public participation the efficiency of,
and need for, the Industrial Cost Recovery (ICR) provision of the
Federal Water Pollution Control Act." The first task was to com-
pile the issues to be addressed, and the questions to be asked.
The legislative history was reviewed relative to both the 1972
and 1977 Acts, P.L. 92-500 and 95-217 respectively. In parti-
cular, the questions raised by Congressman Roberts in the
1
-------
December 15, 1977 Congressional Record served as a point of
reference.
In order to foster early public participation, an ICR
Advisory Group was formed composed of approximately 40 indivi-
duals representing a broad cross-section of industrial, environ-
mental, civic, local government, and Congressional viewpoints.
Two survey questionnaires were developed, and were revised to
reflect the Advisory Group's comments. After clearance by the
Office of Management and the Budget, survey data was gathered
from 227 sanitary agencies and 394 industrial plants. Monthly
meetings of the ICR Advisory Group were held in Washington, and
the members kept their constituents informed of the study's pro-
gress.
It should be realized that the ICR Study mandated by Congress
took place early in the ICR program, and that there is only a
limited quantity of actual data. For that reason, the study team
examined the intent of ICR, and relied upon simulation to iden-
tify how industry should act rather than relying solely on
presently available data. The data gathered during the survey
was analyzed, and special studies were performed and evaluated
with respect to the legislative intent behind Industrial Cost
Recovery (ICR), which can be summarized in four ideas:
the maintenance of parity in sewage treatment costs
(Is sewage treatment less expensive for industries
using treatment works paid for in part by federal
funds than it is for industries treating their own
sewage?);
-------
capacity, or the design and construction of waste-
water treatment systems with adequate but not excess
capacity for future growth;
water conservation; and
self-sufficiency, as forty percent of ICR is retained
by the grantees, earmarked for future upgrading and
expansion of the wastewater treatment works.
It was also evident that Congress intended to foster indus-
trial participation in publicly owned treatment works (POTWs) and
the development of regional approaches to wastewater treatment
where feasible. The d-ata was also evaluated with respect to the
economic impact of ICR on industry and on grantees (sanitary
agencies). The findings and possible alternatives resulting from
the analyses were presented at ten public meetings conducted in
the ten federal Regional Cities, and public reaction and comments
were solicited.
It appears that ICR does not substantially satisfy any of the
four purposes set forth in the legislative history:
Parity. Changes in tax law and IRS regulations since
1972 have impaired the ability of (or need for) ICR
to serve as an equalizer in sewage treatment costs.
Based strictly on economic considerations, for medium
or large dischargers of compatible wastes, it appears
less expensive over time to build and operate their
own self-treatment facilities than it is to pay a
proportionate share of the operating costs and local
debt service of a public sewage treatment system.
Even without ICR, medium or large dischargers do not
have a significant cost advantage over those who do
not have access to a POTW. Small users generally are
situated in urban areas and have access to a POTW.
Small users generally choose to join a POTW because
of local ordinances relating to use of public sewers,
pollutions control laws requiring permits for dis-
charge, and more importantly to the small industry
the economics of their size and location. For
most industrial users of POTWs, ICR is a slight
-------
additional financial burden (about 10 to 1 5# of the
sewer user charge). Use of a POTW has a distinct
advantage in that an industry does not have to tie up
capital or bonding capability except for connection
and pretreatment facilities.
Capacity. It appears that ICR, as presently formu-
lated, does not impose sufficient costs to affect
decisions on sizing of POTWs. The average usage by
all users in the 227 facilities surveyed was 68$ of
design capacity.
Water Conservation. ICR is not credited with a role
in encouraging water conservation. The industrial
plants responding to our survey reported an average
reduction in water use of 29# (which could have an
impact on the amount of future capacity that should
be built), but attributed the reduction to increased
water rates and sewer user fees rather than ICR,
since ICR is a relatively small charge to industry
when compared with sewer user fees and water rates.
(ICR on the average is equal to about 1 0-1 5# of toal
sewage costs).
Self-Sufficiency. Total ICR revenues collected are
estimated to be an average of $60 million per year,
when all POTWs funded under the authorization of P.L.
92-500 and P.L. 95-217 are in place. Total ICR
retained by all the grantees (more than 5»000 in
number) would be an average of $24 million per year
(40# of $60 million). This amount would not make a
significant contribution toward the grantees' finan-
cial capability to meet the costs (when adjusted for
inflation in the ensuing recovery period), for future
expansion and upgrading of their wastewater treatment
works.
ICR has had little economic impact to date; total ICR col-
lections to date are less.than $2 million. Pew jurisdictions
have implemented ICR, and most of those who have implemented ICR
have suspended ICR collections (as permitted by law) until June
30, 1979- Exceptions to the insignificant impact of ICR are
those cases where there are seasonal users or where advanced
waste treatment (AWT) is required. In the case of seasonal
-------
users, total sewage costs for industry have increased by as much
as several times. In the case of AWT, the cost to industry is
much greater (by about 50#) per gallon as compared with secondary
treatment. The impact of ICR is generally not great (less than
15# of total sewage charges), with the exception of the two cases
previously mentioned.
The study team could identify only a few scattered instances
of plant closings due to increased sewage costs, and none attri-
butable solely to ICR. In every case, there were also other
factors such as plant age which affected the plant closing
decision.
ICR rates tend to be higher in older cities, particularly in
the northeast, and particularly in small to medium sized cities,
and in agricultural communities. The study team could not
measure any actual impact of ICR on small versus large
businesses, because very few industrial plants were willing to
disclose production or sales data. ICR to date has had no
significant impact on employment, plant closings, industrial
growth, import/export balance, or local tax bases.
The incremental cost to grantees to maintain and operate ICR
(that is, the "eliminatable cost" above and beyond user charge
costs) is small (averaging about $15,000 per grantee per year)
when compared to the total costs of sewage treatment (averaging
about $6.0 million per grantee per year). Average ICR revenues
-------
per grantee per year are approximately $101,000, of which
($40,400) is retained by the grantee for future expansion and
upgrading, and 10# ($10,100) is retained for discretionary use by
the grantee.
Recognizing that ICR was not functioning as intended, the
study team (working with the Advisory Group, EPA officials, and
public comments received) developed a series of sixteen
alternatives to ICR as it now exists. The alternatives were
formulated from a viewpoint of simplicity, practicality, and
acceptability. The alternatives were presented for public
comment and discussion at the ten public meetings conducted in
the EPA Regional Office cities.
Based on the data gathered, the analysis and evaluation of
the data, and in particular the comments received from the
public, the following conclusion is presented for immediate
consideration:
THE INDUSTRIAL COST RECOVERY PROVISIONS OF ;P.L. 92-500
HAVE NUT ACCOMPLISHED THEIR LEGISLATIVE PURPOSES.
This conclusion is the only conclusion submitted for
immediate Congressional consideration, and is also the only
conclusion clearly supported by. a consensus of the Advisory Group
and participating public. This conclusion should be considered
separately and independently from any other issues identified
during the course of the study. Note that this conclusion is
based on data from the existing P.L. 92-500 ICR
-------
systems, and does not reflect the rec.ent changes made by P.I.
95-217, which when implemented by a grantee, will exempt indus-
trial users discharging less than the equivalent of 25»000 gpd of
sanitary waste from ICR. While these changes may simplify the
administration of ICR, they will not enhance the accomplishment
of its legislative purposes.
Some of the other issues identified were related to the
intent of ICR and to the total cost of sewage treatment. These
issues are not all-inclusive, and may require future study, in
light of the passage of the Clean Water Act of 1977 (P.I. 95-217)
and its implementing Regulations. The following issues were
identified in the context of public review and comment of the
study: change the criteria for determining the amount of capa-
city eligible for federal grant support, to eliminate federal
support for speculative industrial capacity; require repayment of
local debt service on a proportional basis; and require each
grantee to establish a locally administered trust fund for
reconstruction or expansion of the treatment works, charging a
uniform national rate to all users.
A more.extensive .discussion of the.preceding appears in the
remainder of this volume, while a detailed discussion of the
study's methodology .findings, and conclusion appear in Volume
II, with supporting exhibits presented in Volume III.
Transcripts of public meetings conducted during the study appear
in Volumes IV - VII.
-------
2. Project Methodology
BPA's Contract 68-01-4801 included a Scope of Work (see
Exhibit V-1-1 in Volume III) which required its contractor,
Coopers & .Lybrand, to "examine with full public participation
the efficiency of, and need for, the Industrial Cost Recovery
provisions of the Federal Water Pollution Control Act." The
objective was to be met through work divided into three phases:
development of study methodology
collection of needed information
data analysis and report preparation
A brief recapitulation of the project methodology follows.
The first action taken by the study team was to review the
1972 and 1977 legislative history related to User Charge and
Industrial Cost Recovery to determine the objectives of ICR.
Stated briefly, there were four ideas contained in the
legislative history:
Parity, or the equalizing of the assumed economic
advantage (namely, less expensive sewage treatment
costs) for those industries using public-sewage
.systems, as opposed to those industries treating
their own sewage-and discharging it directly;
. Capacity, or the appropriate sizing of wastewater
treatment plants with adequate but not excess future
capacity. ICR was one of several tools available to
assure the proper planning of grant-funded wastewater
facilities;
Water Conservation; and
8
-------
Self-sufficiency, since 40$ of the ICR is retained by the
grantee for future expansion and upgrading of their waate-
water treatment works.
This "background material, including Congressman Roberts' nine
questions in the Congressional Record of December 15r 1977, and a
GAO letter report dated April 11, 1978 summarizing findings
related to ICR, served as the frame of reference for the plan of
study.
The initial step, in late May of this year, was for the con-
tractor to meet with EPA Regional Office and Headquarters person-
nel who were involved in ICR implementation and to develop a
tabulation of every piece of data that could be identified as
being useful in answering the specific questions already asked
about ICR (and some related to User Charges) as well as address-
ing more general issues that were involved. This list of data
elements was converted into two draft survey questionnaires
one for industry, and one for grantees. The draft questionnaires
were reviewed by the ICR Advisory Group and the Office of Manage-
.ment and Budget. These survey questionnaires appear as Exhibits
V-1-2 and V-1-3, in Volume III of this report.
After refining the questionnaires, a survey population was
identified, including:
Approximately 100 cities which were to have on-site
visits. These cities ranged in size from Ravenna,
Nebraska (population 561) to New York City and
Chicago. Eventually, approximately 120 cities were
-------
visited, some of them twice, if there was strong
local interest in the study. The standard procedure
was to attempt to meet first with the local agency
responsible for the wastewater treatment, then with
industrial people, then with civic or public groups
later in the day. Survey questionnaires were mailed
ahead of time to people who were to be interviewed,
so they would know the kinds of data being sought.
It was stressed that participation in the survey was
voluntary. In most cases, peopled mailed in com-
pleted questionnaires rather than meeting with the
study team personally.
A list of 200 additional cities for telephone surveys
was developed. The same questionnaires were used as
during on-site visits, and these questionnaires were
mailed in advance to the people who were to be
surveyed.
A group of five (later expanded to six) industries
was selected for detailed study. Although the study
was interested in industry generally, particular
interest was addressed to industries which met one or
more of these criteria:
- Labor intensive
- Low operating margin
High water use
Size of industry (number of establishments or
employees)
- Seasonality
- Extent of Pretreatment
The industries eventually selected for detailed study
were:
- Meat packing
- Dairy products
- Paper and allied products
Secondary 'metal products
- Canned and.frozen fruit-and vegetables
- Textiles
A list of selected establishments in those industries
(located in the cities which were to be visited or
telephoned.) was prepared, and survey forms mailed to
those establishments.
The entire data collection effort was accomplished in less than
seven weeks, using ten teams of consultants.
10
-------
The second step in the study, and equally as important"as the
first step, was the development of mechanisms for public parti-
cipation in the study. Grass roots involvement was desired, as
was an open study. An ICR Advisory Group of approximately forty
individuals, representing industrial, environmental, civic, local
government, and Congressional interests was formed, and the study
team relied on the Advisory Group to keep their local constitu-
encies involved in the study. Monthly meetings were held in
Washington, and transcripts of the meetings were mailed to anyone
requesting them. (See Exhibit V-1-5, Volume III, for membership
of the ICR Advisory Group, and Exhibit V-1-10, Volume III, for
comments on the draft report by the Advisory Group. A transcript
of Advisory Group comments appears in the November 29. 1978
transcript in Volume IV).
The third step in the project was to summarize and analyze
the data collected. Several computerized statistical analyses
were developed, and were subsequently refined. A previously
developed tax model was modified to reflect industrial sewage
treatment costs, to examine the parity issue. Preliminary con-
clusions were developed, .and possible alternatives to ICR as it
is presently constituted were formulated and presented for public
discussion and comment. Based' on the study's findings and con-
clusions, and reflecting public comment on the possible ICR
alternatives presented, the conclusion was developed.
11
-------
3- Findings and Alternatives
The study team received data from 227 grantees (that is,
sanitary districts or agencies). The most complete data was
obtained from grantees actually visited by Coopers & Lybrand,
which totalled 120. Less complete data was obtained from the 200
cities which were surveyed by telephone. The study team event-
ually received usable data from 107 grantees surveyed by
telephone. Industrial data, at plant level, was received from
594 industrial facilities.
a. Findings With Respect to Legislative Intent
The first issue addressed was the issue of parity, or the
assumed economic advantage (namely, less expensive sewage treat-
ment costs) for industries using POTWs, versus those industries
treating and discharging their own wastes.
The analysis indicates that for some medium or large
industries having compatible wastes it is less expensive
in the long run io self-treat than to pay User Charges
and local debt service"! '
The findings indicate that, .even'without considering ICR,
User Charges, or pretreatment costs, many industrial plants have
an incentive to self-treat, because of tax advantages which
include:
Accelerated depreciation (over a five year period)
for pollution control equipment;
Investment tax credits for capital expenditures, and
12
-------
The use of tax-free IDE's (industrial development
bonds) to finance self-treatment facilities.
Recently enacted tax law changes will make it even more
attractive to industries to self-treat, because of the increased
investment tax credits.
Few industrial plants in "the-surveyed municipalities are
seir-treating their wast-es -art -pres-ent"
There could be several reasons for this condition:
They are not geographically located on a receiving
body of water to which they can discharge their
treated sewage, and hence must use a POTtf; or
They don't want the administrative and operational
problems associated with self-treatment NPDES
permits, employment of sewage .plant operators, etc.;
or
User Charge and ICR have not been in effect long
"enough "to see their impact.
Industries don't want to make the independent capital
outlay or tie up bonding capability.
Some larger-industrial plants are* payrng-& modeat
fTemium to use a public sewer system If User -Charges -and
ocai debt service are compared'with -cost- of -self-
treatment.
It appears probable that the sum of. ICR costs, pretreatment
costs (as yet undefined), User Charges, and local debt service
over time, may lead some industries (particularly large indus-
trial users) to choose self-treatment. Where this choice was made
after the POTW had committed to include capacity for the indus-
try, the result could be POTWs that do not operate as designed,
13
-------
and higher sewage bills for those customers who remain in POTWs
(residential, commercial, industrial, and small industry).
The second legislative intent issue was that of POTW capa-
city, or the construction of wastewater treatment facilities with
adequate but not excess future capacity.
It appears that ICR, as presently formulated, does not
impose sufficient costs to affect decisions on sizing of
fQTWs.
POTWs are required to be built with enough capacity to serve
existing domestic, commercial and industrial users, and to pro-
vide sufficient reserve capacity for projected growth during the
20-year planning period. The Agency has determined, baaed on
analysis of the most cost-effective methods for construction of
wastewater treatment facilities, that reserve capacity for such
facilities normally should be approximately 20 to 40# of design
capacity, with higher reserve capacity in areas of unusually high
growth. Based on the survey of 227 wastewater treatment facili-
ties from which the study team obtained data, the average POTW
has about 32$ reserve capacity, which is within the 20-40$ range
normally essential for cost-effective design. .. The cases where.
reserve capacity is considerably greater than 32# could result
from high anticipated growth rates, slow schedules for hook-up of
existing installations to the sewers, or the other factors
including, in some cases, design of excess, capacity for indus-
trial or population growth which is desired but not fully
justified on the basis of cost-effectiveness planning require-
ments. ICR apparently imposes such a minimal cost burden that it
14
-------
has not been a factor in decisions on how much capacity should be
planned in POTWs. User charges and charges for local debt serv-
ice can be relatively high, however, during the time before
anticipated growth and new hook-ups utilize reserve capacity in
treatment plants and spread relatively fixed costs over a large
number of users. These high initial charges have possibly been a
factor in encouraging industrial water conservation. The higher
user charges and debt service costs could cause industry to
reduce flow even more than might be expected, and consequently,
cause even higher sewage treatment costs to other users.
Distribution of the initial costs of needed reserve capacity
among present users can be a major local issue.
Based on the industries surveyed, water consumption has
"dropped by an average of 29%, but the industries do not
attribute the reduction to ICR..
The industries surveyed attributed the water conservation to
higher water rates and to User Charges, not to ICR, because ICR,
as a percentage of water bill and User Charges, is not that
significant at this time. ICR averages, on an annual basis,
approximately 10-15/8 of total sewage costs for most industries.
The apparent .reduction in water usag-e by industry,, if continued,
could have an impact on the ainount of future-capacity required, in
wastewater treatment facilities.
Based on the best available .estimates, the .ICR revenue
retained by all grantees (over 5,000 in total) wouldTe
and average of $24 million per year, when all PQTWs
funded under the authorization of P.L. 92-500 and P.L.
95-217 are in place
15
-------
This amount, would not have any significant contribution
toward the granteess' financial capability to meet the cost (when
adjusted for inflation in the ensuing recovery period) for future
expansion and upgrading of the wastewater treatment works.
b. Findings With Respect to Economic Impact.
ICR is one of a number of federal actions in the water
quality area that have a potential economic impact on industry.
As these actions are often interrelated, it is difficult to
isolate the effect of any one action on industry.
The economic impact of ICR to date is mot-'S'lgnrfrca-ntyin
mos"t areas '
ICR has not been in effect for more than a year or two, and
most grantees have suspended ICR billings while the ICR
moratorium is in effect (thru June 30, 1979). Exceptions to the
insignificance of ICR are those cases where there are seasonal
users and/or advanced waste treatment (AWT). In the case of
seasonal users, total sewage costs for industries have increased
by a factor" of as much as several times. In. the cse of AWT, the
- _ . x
cost to industry is much greater, '(by about 50# per gallon) as
compared with secondary treatment.
The impact of ICR is generally not great (less than 1 5# of
total sewage charges) with the exception of the two cases
previously mentioned.
16
-------
The study team could find only a few scattered instances
of plant closings due to increased sewage costs, and
none attributable solely to ~
In every case, there were other factors such as plant age
which also affected the plant closing decision. The study team
was not able to identify any significant impact by ICR to date on
t
employment, plant closings, industrial growth, import/export
balance, or local tax bases.
ICR rates appear to be higher in older cities, partic-
ularly in the northeast, and particularly in small to
medium sized cities, and in agricultural communities.
Most older cities have a physical plant that requires some
rehabilitation, and construction costs tend to be higher in more
heavily populated areas; therefore, ICR rates are also higher in
older cities, since ICR rates are a function of construction
cost. The same situation frequently occurs in agricultural
communities, which construct wastewater treatment facilities
designed to handle seasonal peak loads, and which have unused
capacity for a significant portion of the year.
The study was not able to differentiate the impact of
"TUft on small versus large businesses, because very few
Tndustrial plants were willing to disclose production or
sales- data. : ! :
The industries receiving survey questionnaires were told that
participation in the survey was voluntary, and that all data sub-
mitted was potentially subject to public scrutiny under the
Freedom of Information Act. The study team told individual
17
-------
industries that it was not anticipated that data related to
specific industrial establishments would appear in the report.
Industries were also told that data they were reluctant to allow
competitors to obtain should not be provided to the study team.
An insufficient number of industries provided sales or production
data to allow any differentiation of ICR's impact on small versus
large industries.
ICR does not appear to be cost-effective in producing
HTscretionary revenue for local governments, at leasx in
most cities.
The incremental cost to grantees to maintain and operate ICR
(that is, the "eliminatable cost" above and beyond UC costs) is
small (averaging about $15,000 per grantee per year), when com-
pared to the total costs of sewage treatment, (averaging about
$6.0 million per grantee per year). However, average ICR
revenues per grantee per year are approximately $101,000, of
which only $10,100 is retained for discretionary use by the
grantee.
c. With Respect to Congressman Roberts' Questions
On December 15, 1977, Congressman Roberts inserted in the
Congressional Record nine questions related to User Charges and
Industrial Cost Recovery (see Exhibit V-1-4, Volume III). The
questions, and the study team's response to them, appear below.
18
-------
It should be noted that some of the questions require an exami-
nation of anticipated actions, an area that is difficult to
analyze.
QUESTION
First (A) Whether the Industrial Cost Recovery pro-
gram (ICR) discriminates against particular industries
or industrial plants in different locations,
(B) And do small town businesses pay more than
their urban counterparts?
(C) What is the combined impact on such indus-
tries of the user charge or ICR requirements?
FINDING
(A) ICR rates are different in different
locations, and are a function of the cost of a waste-
water treatment plants rate methodology, basis of
allocation, etc. Some industries (especially heavy
water users and/or strong dischargers) pay pro-
portionally more for ICR than other users.
(B) Unit ICR rates appear to be higher in
small treatment plants (less than 50 MG-D) than in large
treatment plants, and therefore ICR costs for similar
industries would be different.
(C) The combined impact of User Charge (UC)
and Industrial Recovery (ICR) is greatest on seasonal .
users (for ICR), on industries paying for AWT (for UC
and ICR) and in those cases where rates prior to UC/ICR
were low due to treatment levels or promotional (declin-
ing block) rate structures.
QUESTION
Second (A) Whether the ICR program and resultant user
charges cause some communities to charge much higher
costs for wastewater treatment than other communities in
the same geographical area? (Some communities have
indicated that disparities in ICR and user charges
affect employment opportunities.)
19
-------
(B) Whether a mechanism should be provided
whereby a community may lower its user and ICR charges
to a level that is competitive with other communities in
order to restore parity?
FINDING
(A) We have not been able to identify any
pattern of such cases, based on the data supplied to us
by EPA or grantees.
(B) If a community were to lower its UC rates
to be competitive with other nearby communities, a
source of funding would have to be identified to provide
for UC revenue, if the wastewater treatment plant is to
be self-sufficient for OM & R costs and to operate at
design levels of discharge. If ICR rates were lowered
the federal government would receive less revenue than
anticipated. Reduction of either UC or ICR rates would
require that legislative mechanisms be enacted.
QUESTION
Third Whether the ICR program drives industries
out of municipal systems, the extent and the community
impact?
FINDING
There have been only a few instances of
this happening to date, because very few communities
have implemented ICR. Based on tax law, and the assump-
tion that in the long run industry will choose the least
expensive sewage treatment option, ICR (particularly
when coupled with pretreatment) could encourage industry
to self-treat. This would result in proportional
increase in user charge costs and (possibly) in debt
service costs, for the remaining POTW customers.
QUESTION
Fourth (A) Whether the industries tying into
municipal systems pay more or less for pollution control
than direct dischargers?
FINDING
It appears that medium or large size
industries using a POTW could pay more (over time) for
wastewater treatment than do direct dischargers
20
-------
depending on the tax structure of the self-treatment
alternative.
QUESTION
Fifth - Whether the ICR program encourages conser-
vation, the extent and the economic or environmental
impact?
FINDING
ICR appears to have a role in encouraging
conservation of water, but is an insignificant
conservation factor to date, particularly relative to
User Charges and water costs.
QUESTION
Sixth Whether the ICR program encourages cost
effective solutions to water pollution problems?
FINDING
ICR appears to have had no noticeable
effect on cost effective solutions to water pollution.
QUESTION
Seventh How much revenue will this program produce
for local, State and Federal governments, and to what
use will or should these revenues be put?
FINDING
Based on assumed eventual EPA grants of
$45 billion, it appears that total ICR revenues will
amount to $1-2. .billion over 30 years. The split of
these revenues- would be: .
federal government $.5-1 «0 billion
to Treasury
state government none
local government
- for capital costs related to waste-
water and to offset ICR administra-
tive costs $.4-. 8 billion
21
-------
- for discretionary use $.1-.2
billion (100)
This is considerably less than the $4-5-
7.0 billion estimated in the 1972 legislative history.
Possible reasons for the reduction include:
liberalized definitions of "industry"
by local governments
self-treatment and/or pre-treatment
exclusion for dry industries
water conservation
the 25,000 gpd floor implemented by
P.L. 95-217
QUESTION
Eighth Determination of the administrative costs
of this program, additional billing costs imposed, costs
associated with the monitoring of industrial effluent
for the purpose of calculating the ICR changes,
ancillary benefits associated with the monitoring of
industrial effluent, procedures necessary to take
account of changes in the number of industries
discharging into municipal plants, and the impacts of
seasonal or other changes in the characteristics and
quantity of effluents discharged by individual
industries?
FINDING
The incremental costs of administering ICR
(assuming that a User Charge system will be maintained)
is relatively small, amounting to less than $20,000 per
grantee per year, based on the data provided to us.
QUESTION
Ninth Whether small industries should be exempt
from ICR? How should small be defined? Is there a
reasonable floor that can be established for ICR based
upon percentage flow?
22
-------
FINDINS
EPA has already excluded most industries
discharging less than 25,000 gallons per day from ICR.
We were unable to obtain sufficient data to reach a
specific finding or conclusion related to the question.
d. Other Findings
During the course of the project, the study team made several
findings which, although not directly related to the scope of
work, are still of interest.
ICR is not generally understood by grantees or by
industry"!
Industrial cost recovery regulations are complex and
difficult to understand. Almost universally, grantees hire
outside consultants to explain the ICR regulations' and design an
approvable system to be submitted to EPA to meet grant require-
ments. Many grantees appear to be developing ICR systems with
only a partial understanding of the legal or regulatory require-
ments. Both grantees and industrial users often fail to distin-
guish between User Charges and ICR, or between ICR and local debt
service.
Repeated efforts (both legislative and regulatory) have been
made to make ICR simpler and more cost-effective. These efforts
I
have been partially successful, but have resulted in a dilution
of the intent behind ICR. An example of this is the statutory
23
-------
exemption from ICR for all dischargers with less than the equi-
valent of 25,000 gallons per day of sanitary waste. In addition,
the Standard Industrial Classifications (SIC'a) chosen by EPA to
define industry exclude some large water users from ICR while
including others. Since ICR rates are a function of POTW cost,
disparities in ICR rates are inherent in the concept of ICR.
ICR is complicated to administer for both grantees and
for EPA, and will require complex control mechanisms to
assure integrity.
In order to administer ICR, considerable resources must be
allocated by EPA at Headquarters level and in the Regional
Offices, by the state agency responsible for water quality, and
by the grantee. Relatively few ICR systems have been implemented
because of the moratorium allowed by P.L. 95-217, and because
many POTWs funded by P.L. 92-500 grants have not gone on line.
To date, control procedures and mechanisms necessary to assure
that the ICR regulations are enforced consistently have not been
developed by EPA, and will have to be installed if ICR is
continued after June 30, 1979. This would be a resource- -
intensive undertaking at all levels. Control procedures will be
necessary to insure that grantees:
correctly classify industrial users.
calculate and charge the correct ICR amounts to
individual industrial users.
properly collect, account for, invest, and return ICR
revenues to the U. S. Treasury through EPA.
24
-------
EPA personnel, grantees, and industrial users all stressed
that the law and related regulations are complex, difficult to
understand, and hard to implement. In most cases, all groups
felt that the amount of revenue generated ($101,000 annual
average per grantee) did not justify the resources utilized.
Grantees -frequently-have -limi-text tnformation related to
the -fre termination ol' costs or txr customer--ctiaTact-er-*
istics
Many grantees have accounting and budgeting systems which are
unable to provide sound cost data needed for User Charge or ICR
rate-setting. Most grantees have customer data bases that appear
to be inadequate for the implementation of adequate monitoring
and enforcement programs or pretreatment programs. Regardless of
the decision on ICR, grantees will be required to upgrade their
information on industrial users for User Charges and for
pretreatment.
The adoption of UC/ICR revenue- systems 'has- caused a
S'hift in grantee revenue-sources
The study data indicates that, prior to adoption of UC/ICR
systems, an average of 55$ of grantee wastewater revenues came
from the residential sector, with 4*5$ coming from the non-
residential sector. Subsequent to adoption of UC/ICR systems,
this ratio was reversed.
Industries and gran-tees uniformly expre-ssed- cxm'cern over
th-e costs -of pretreatment
25
-------
Almost without exception, grantees expressed concern over the
impact that the enforcement of pretreatment requirements might
have on industrial participation in POTWs. Many industries
expressed an intention to reserve a final judgement on self-
treatment over User Charges and ICR.
e. Alternatives to Industrial Cost Recovery
Based on the study team's conclusion that ICR was not operat-
ing as intended, a series of 16 alternatives to ICR as presently
formulated were compiled, and presented for discussion and
comment at the ten public meetings held in the ten EPA Regional
office cities. (See Exhibit V-1-6, Volume III for the Alterna-
tives presented.)
The alternatives were developed by the Coopers & Lybrand
study team, by EPA Regional Office and Headquarters personnel,
and by the ICR Advisory Group. Each of the alternatives was
intended to address one or more of the following concepts which
surfaced during the course of the study.
reduce rate disparities
increase local discretion
simplify administration
limit excess capacity
X
. offer tax relief
encourage industrial participation in POTWs
26
-------
encourage water conservation
obtain additional data
At the time that the ICR Alternatives were presented, it was
stated that they were not ranked in any order of preference, that
they were not necessarily mutually exclusive, and that sugges-
tions for additional Alternatives or variations on Alternatives
would be welcome.
4- Conclusion
As a result of discussion and comments received on the ICR
Alternatives presented, the following conclusion is proposed for
s
immediate consideration:
THE INDUSTRIAL COST RECOVERY PROVISIONS OF P.L. 92-500 HAVE
NOT ACCOMPLISHED THEIR LEGISLATIVE PURPOSES.
ICR is not meeting the legislative or economic intent which
led to the enactment of ICR:
Changes in tax law and IRS regulations since 1972
have impaired the ability of (or need for) ICR to
serve as an equalizer in sewage treatment costs. For
medium or large dischargers of compatible wastes, it
appears less expensive over time to build and operate
their own self-treatment facilities than it is to pay
a proportionate share of the operating costs and
local debt service of a public sewage treatment
system.
ICR has not served to control design and construction
of excessive future capacity in wastewater treatment
facilities. The average usage in the 227 facilities
surveyed was 68# of design capacity.
ICR is not credited with a role in encouraging water
conservation. The industrial plants responding to
27
-------
the Coopers & Lybrand survey reported an average
reduction in water use of 29% (which could have an
impact on the amount of future capacity that should
be built), but attributed the reduction to increased
water rates and sewer user fees rather than ICR. ICR
is a relatively small charge to industry when com-
pared with sewer user fees and water rates (ICR on
the average is equal to about 10-15$ of total sewage
costs).
ICR is inherently cumbersome to administer, and it
does not seem probable that it can be further
improved or modified without eliminating its original
intent.
ICR is also found to have the following undesirable effects:
It is a set of burdensome, complex Federal laws and
regulations that are only marginally cost effective,
when comparing the administrative costs of ICR to the
ICR revenues collected.
It increases the administrative costs associated with
developing, implementing, and monitoring revenue
systems at the grantee, state, and EPA levels.
It increases total sewage costs to industry, adding.
It creates discrimination in sewage costs, both with
regard to type of business and size of business
charged.
On the other hand, ICR also has the following positive effect:
ICR will generate revenues to grantees and the U. S.
Treasury. Total ICR revenues over 30 years are
estimated to be between $1 and $2 billion. A few
municipalities have already included their portion of
the anticipated ICR revenue as income in their
operating budget plans.
During the course of the study, several other issues were
identified relative to the other aspects of ICR's intent (treat-
ment capacity and water conservation) and the total cost of
28
-------
sewage treatment. These issues may require further study, in
light of the passage of the Clean Water Act of 1977 (P.L. 95-217)
and its implementing Regulations. Mechanisms currently exist
which address the sizing and water conservation issues, and tax
changes have largely eliminated the issue of parity. The cost-
effectiveness guidelines published in the Federal Register
September 27, 1978 should limit future speculative industrial
capacity. Proportionate user charges and increased water rates
are credited by industrial users as having been the prime
motivators behind a 29# reduction in water use. Some of those
issues are: change the criteria for determining the amount of
capacity eligible for federal grant support and to eliminate
federal support for speculative industrial capacity. This should
encourage more precise sizing of wastewater treatment facilities;
require repayment of local debt service on a proportional basis,
at least related to flow. This would be an added incentive to
conserve water, and to plan further capacity more stringently;
and require each grantee to establish a locally administered
trust fund for reconstruction or expansion of the treatment
works, e.g. charging a uniform national rate to all users. This
would serve to reduce future demands for Federal grants for
reconstruction, and encourage water conservation.
29
------- |