United States
Environmental Protection
Office of Water
Program Operations (WH-547)
Washington DC 20460
                       May 1980
Report to Congress
Industrial Cost Recovery
Supplemental Analysis
and Recommendations


                          TABLE  OF CONTENTS
SECTION TITLE                                                   PAGE

Executive Summary                                                 i
Introduction                                                      1
Definitions                                                       2
ICR: Legislative History                                          3
ICR Objectives                                                    4
ICR Amendment Rejected                                            6
1977 Water Act Amendments                                         9
An Industry Subsidy                                              11
ICR: Financial Burden for Industry?                              12
Industrial Treatment Needs                                       18
ICR: Administrative Burden for Grantees?                          29
Conclusions and Recommendations                                   49

                           Executive Summary

     Congress in the 1972 Federal Water Pollution Control Act established
water pollution control requirements for both industry and municipalities.
A Federal grant program was established to provide municipalities with 75
percent of the capital costs for constructing or upgrading municipal sewage
treatment systems.  Congress did not establish a similar grant program for
industry.  Industry was encouraged to use municipal treatment systems, provided
half the Federal costs for constructing industrial capacity was returned by
industry to the Federal Government.  Congress directed municipal grantees to
collect 100 percent of Federal costs for constructing industrial treatment
capacity from their industrial users and retain 50 percent for treatment
system improvements.

     The industrial cost recovery (ICR) program was established by Congress primarily
to avoid providing some segments of industry with a Federal subsidy.  Congress
expected costs for meeting national pollution control objectives would be
internalized by businesses and treated as a normal operating expense.  The ICR
requirements recognized that industrial facilities would be provided with an
unsecured interest-free loan, repayable over a 30 year period, by recovering
costs from those industries that decided to use municipal treatment systems instead
of using limited capital to construct self-treatment systems.

     In 1977, Congress revised the nation's water pollution control program.  The
Clean Water Act Amendments slightly modified the ICR program.  Congress excluded
small industrial facilities discharging 25,000 gallons a day or less from cost
recovery requirements.  Congress recognized these small dischargers impose an
insignificant burden on municipal treatment systems.  Congress also approved
administrative changes expected to provide industry with an incentive to reduce
flows and pollutant discharges to public treatment systems.  A moratorium on
recovering funds from industry also was established, and Congress directed the
Environmental Protection Agency (EPA) to report on the need for and efficiency of the
ICR program.

     Based on a previous report to Congress and a supplemental analysis of the
ICR program, EPA concludes that the construction grants program provides a subsidy
to industrial users of municipal treatment systems.  The extent of the subsidy
cannot be accurately estimated, nor can benefits to industry be quantified on a
national basis.  Each case must be reviewed individually.  Conclusions must be
based on an analysis of industrial capitalization, waste characteristics, the age
of production facilities, and direct discharge treatment requirements.  One general
conclusion that can be made is industry receives an unsecured interest-free loan,
faces no obligation to repay construction costs if municipal treatment system
use is discontinued, and is relieved of direct costs for treatment system operation,
discharge permit compliance, and sludge disposal requirements.

     EPA also concludes that in some instances industry can construct self-
treatment facilities for less than it costs to use municipal treatment systems.
Although this is not true in all cases, in some areas of the country new indus-
trial facilities can be designed and constructed to minimize water use by
utilizing new manufacturing and treatment technology.  Self-treatment can be the
most cost-effective option for these industrial facilities.  EPA is convinced
that where self-treatment is cost-effective, industry, unless confined within
an urban area, will not use a municipal treatment system.

     EPA's ICR review shows the program is expensive to administer for some
grantees.  In those cases where a grantee has numerous small industrial dischargers,
more costs may be incurred by administering the program than are collected from
industry.  Although not universally true, this appears to be correct in some
cases.  ICR administrative costs may exceed the 50 percent share of ICR revenues
retained by grantees for treatment system improvements.  In other cases, however,
ICR returns significant revenues that are needed and utilized by grantees.

     EPA recommends Congress allow the ICR program to go into effect once the
current moratorium has expired.   Elimination of cost recovery requirements  would
be unfair to grantees in need of ICR revenues to finance treatment system improve-
ments, and elimination would be unfair to those businesses that have made the
financial commitment and constructed self-treatment facilities.  Elimination of
ICR would provide industry with a positive incentive to use municipal  pollution
abatement facilities, but in some cases self-treatment and utilization of cost-
effective industrial treatment technologies would result in a net savings to the
economy.  Industry should not be encouraged to utilize municipal treatment  facilitiesj
if self-treatment is most cost-effective.

     EPA also suggests modifications to the ICR program for consideration by
Congress which would make the revenue system more valuable and less burdensome
to grantees.

     1)  The agency, based on a sample of industrial  dischargers and grantees, has
determined the current 25,000 gallons per day flow exclusion may be increased
to 50,000 gallons per day without significantly decreasing amounts recovered
from industry.  The number of industrial  facilities paying into the system  would
be significantly reduced, thus minimizing paper-work and recordkeeping requirements
for grantees.

     2)  Congress also should consider exempting grantees from Federal  ICR
requirements  if a grantee can demonstrate the system is too expensive  to administer
and a local  program is in place that efficiently accomplishes the objectives
established by Congress.  An adequate system should recoup construction costs
from industry without shifting industry's costs to other users.

     3)  The  agency also suggests Congress consider providing grantees with
Federal funds  only to abate residential pollution.   Use of municipal  treatment
systems by industry should not be discouraged, but flexibility in the  construc-
tion grants  program would enable industry and grantees to negotiate joint treatment
needs and find private financing for industrial capacity.

      4)   EPA recommends that in all  instances where industrial  treatment  capacity
 is  constructed with Federal  funds, industry be required to sign a  binding contract
 with the grantee, specifying the length of time industry intends to  use the  municipal
 treatment system and establishing industry's obligation to pay  for capacity
 constructed for industrial  use.  This provision would guarantee grantees  have
 sufficient revenues to maintain and improve their treatment systems  in those
 instances where industry withdraws its use and leaves grantees  with  considerable
_fixed long term costs that otherwise must be passed on to other users.

      5)   Congress may also wish to consider the option of charging interest  --  at
 the prevailing rate paid on Federal  securities -- on "loans" provided  to  industry
 for treatment capacity.

     This  report  was  prepared  for  Congress  by  the  Environmental  Protection
Agency  (EPA) to supplement  the agency's previous "Report to Congress,  Industrial
Cost Recovery," submitted January  25,  1979, under  directive from Congress in
the 1977 Clean Water  Act Amendments.   The 1979 report arrays some of the issues
associated with industrial  cost  recovery  (ICR) requirements in EPA's sewage
treatment  construction  grants  program, but  it does not adequately explain whether
the existing ICR  program achieves  its  legislative  objectives and fails to provide
Congress with the background needed to determine if the moratorium on  ICR should
be ended or whether the program  should be abolished.

     EPA's 1979 ICR report, prepared by Coopers &  Lybrand under contract, was
based on an erroneous interpretation of what Congress expected to result from
establishment of  an ICR program  and therefore conclusions reached in that report
do not  provide an adequate  basis for making informed decisions.  Although Coopers &
Lybrand did review the  existing  ICR program, their analysis took place during the
Congressional moratorium on ICR  collections and was based on uncertain and incomplete

     The contractor was provided with  inadequate guidance by the agency.  As a
result, the comparison  of industrial and municipal  treatment costs failed to
reflect differing treatment requirements which would be imposed on self-treating
industrial discharges into  effluent limited streams.  Moreover, the contractor
failed  to  assess  to what degree  municipal treatment system costs, both fixed and
variable,  increase primarily to  accommodate industrial participants.    (The
absence of these  and  other  considerations results  in an unfair comparison of
treatment  costs.)

     EPA's contractor also  based its conclusion on an inadequate application of
basic economic and business investment principles.   The reluctance of corporations
reviewed by the contractor  to disclose production  and profit data and site specific
data on requirements  for self-treatment facilities impaired the contractor's ability
to accurately analyze costs for  self-treatment.  The contractor did not address
the issue  of costs for  retrofitting aging industrial facilities, nor did the
analysis address  the  issue  of changing technology which, when applied to new
industrial development  programs, can lead to lower production costs (including
treatment) for direct discharge  industrial facilities.

     Generally, the contractor's conclusions were  based on a sampling of approved
ICR programs.  The contractor was  unable in many cases to accurately distinguish
between ICR charges and user charges.  The contractor did not determine how these
production costs  are  treated in  corporate accounts, and how the charges actually
relate  to corporate profits.  The  contractor's attempt to determine how sewage
treatment costs affect  business  behavior did not recognize that Congress, when
writing environmental legislation, expected compliance costs would be  internalized
as a cost of production by  both  direct dischargers and users of municipal treat-
ment facilities.  The contractor's economic analysis treated these costs as a
tax, and assumed  the  tax is applied directly to corporate profits.  EPA disagrees
with this assumption  and other assumptions used as the basis for the contractor's

     The agency's contractor also  based its conclusions on the assumption that
ICR was established to  create parity in costs for  compliance with water pollution

control requirements between industrial users of publicly owned treatment works
(POTWs) and industrial  facilities using corporately-owned treatment systems.  In^
fact, this assumption does not appear supportable.   EPA's review of the legislative
history leading to enactment of the ICR program indicates that ICR was established
to assure the Federal Government did not subsidize  water pollution control programs
for one class of industrial  facility—users of POTWs--while requiring corporate
capital outlays from self-treating industrial facilities.  This conclusion, based
on a review of the appropriate legislative history, forms the basis by which EPA
judges the effectiveness of the ICR program and provides the background used to
formulate the agency's  conclusions and recommendations to Congress.


     In this report EPA relies on terminology and sewage treatment
construction grant program requirements that are subject to different
interpretations.   Program terminology and requirements as used in this
report are defined as follows:

Parity:        The quality or state of being equal.  Parity is a comparative
               indicator generally regarded to mean equalization of costs.
               In the national water pollution control program, parity is
               achieved if abatement requirements for each class of industrial
               discharger are equal.   Water pollution control  is but one of
               many production costs faced by businesses.  Parity in abatement
               program  costs among various industrial  dischargers depends on
               direct capital  costs and indirect costs to businesses, including
               investment opportunities forgone and alternative corporate
               capitalization and investment programs.

Subsidy:        A grant  or gift of money such as a grant by a government
               to a private  person or company to assist in accomplishing an
               enterprise deemed advantageous to the public.

Cash Flow:     A measure of  corporate worth that consists of net income
               after taxes plus certain noncash charges against income
               (as allowances for depreciation).

Debt:          An obligation.   For investment purposes an indicator of
               profitability as measured by corporate debt/equity ratios
               related  to cash flow.   Corporate debt can be spread over
               the long term (30 years) or short term, generally one year
               or less.

     Based on its review of the existing ICR proaram, EPA concludes that
ICR, as intended by Congress, is a viable program if allowed to go into
place.  The ICR program could be modified to more effectively accomplish
the purposes originally set by Congress or changed  to accomplish different
objectives.  In this report the agency has included a number of options for
consideration by Congress.

     This supplemental  report, like the report prepared by the agency's
ICR contractor, is based on a review of existing information on the develop-
ment of municipal ICR  systems.  Projections of the  amount of ICR collections
are only  estimates.  Until the ICR program is put into place there
is no way to determine the actual industrial use of municipal treatment
facilities.  The moratorium, and uncertainty regarding the future of ICR,
has left  corporate planners with an unknown production cost factor which'
must be identified before a business decision on how to treat wastes and

finance ongoing operations  can  be made.  Until  the fate of  ICR is decided,
corporations will  be unable to  determine whether they will  have to pay
construction costs for capacity in a  POTW and therefore will be unable to
compare the full  stream of  cost and benefits associated with using a municipal
treatment system  with alternative opportunity costs associated with using
limited corporate capital and bonding capacity  for constructing self-treatment

     The primary  issues addressed in  this supplemental report are:

     o    Why did Congress  establish  the ICR program in the 1972 Federal
          Water Pollution Control Act, and was  Congressional intent
          modified by the 1977  Clean  Water Act  Amendments?

     o    Does the current  ICR  program accomplish the purposes expressed
          by Congress, and  is there reason to eliminate or modify ICR

     o    Would changes in  the  ICR provisions assist in establishing
          efficient and responsible revenue programs at the local
          level that provide adequate assurance the pollution control
          objectives set forth  in the Clean Water Act are met and
          municipalities remain, over the long  term, in compliance
          with national pollution control requirements?

                            ICR:  Legislative History

     The 1972 Federal Water Pollution Control Act imposes substantial
technology-based  pollution  control requirements on both industry and
municipalities.   A Federal  grant program was established to assist muni-
cipalities in constructing  new  or upgraded treatment facilities, but
Congress expected industry  would internalize pollution control as a normal
operations cost and finance compliance programs through corporate debt vehicles
and profits generated by production processes that cause water pollution.

     Congress, in the Water Act, provided industry with an option for
complying with national water pollution control requirements:  self-
treatment of their waste streams or use of a municipal treatment system.
Congress mandated that all  industry,  regardless of whether compliance
programs are based on use of a  municipal treatment facility or self-
treatment facilities, must  comply with requirements for controlling
conventional and  toxic pollutants, but Congress left the business decision
on how to treat waste up to industry.

     Although Congress adopted  changes to the tax code to minimize the economic
impact of a major national  pollution  control effort for self-treating industrial
facilities, industrial use  of municipal facilities was encouraged to minimize
overall costs to  the economy and the  monitoring burden associated with numerous
industrial treatment facilities.  Congress said, however, in those instances
where industry decides to use a municipal treatment system, industry would have
to repay the Federal Government  for treatment capacity provided by a grantee
under EPA's sewage treatment construction grants program.   In other words, Congress
made it clear that the Federal  expenditure for  assisting municipalities to come
into compliance with the Act was not  to unwittingly serve as a subsidy to industrial

     The repayment requirement established by Congress, known as ICR, is
authorized by Section 204(b)(l)(B) of the 1972 Federal Water Pollution
Control Act.  Municipalities using Federal funds to construct, expand,
or upgrade a POTW are required to develop an ICR program designed to recover
that portion of the Federal grant used to construct treatment capacity for
industrial use.  The ICR provision requires industrial users of POTWs to repay,
generally over a 30 year period, their proportionate share of treatment system
construction costs.

     ICR is, in effect, a long term, interest-free Federal loan program
that finances industrial compliance with water pollution control requirements.
Industries, without contractual obligation, are required to repay the Federal
Government for treatment capacity requested for an industrial production facility.
Municipalities are required to establish an ICR charge for each significant
industrial source using the POTW, collect ICR payments yearly, and pay the
U.S. Treasury 50 percent of the amount collected.   Congress specified that half
of the ICR payments should be retained by local  governments to defray ICR
administrative costs and to provide revenues for improving municipal treatment

                            ICR Objectives

     Congress, in 1972, clearly identified two primary objectives expected
to be served by establishment of the ICR program.   First,  ICR would impose
a construction cost on industrial facilities that  chose to use a POTW.
Although the municipal  construction grants program would provide unsecured interest-
free loans to industry for compliance with water pollution control  requirements,
ICR payments assured the Federal Government would  not be entirely subsidizing
compliance for those industrial facilities that chose to use municipal  treatment
systems instead of constructing corporately owned  treatment facilities.   Congress
reasoned ICR would make compliance costs more equitable among all industrial
facilities—both self-treaters and users of municipal treatment systems—
because without the ICR charge, industrial users of POTWs  would have lower
total production costs than their direct discharge counterparts.  Without ICR, users
of POTWs would enjoy an investment capital advantage, and  therefore a competitive
advantage, over their competitors that use a portion of their debt capacity
and internally generated capital for self-treatment facilities.  The absence of
a treatment system construction cost liability would enhance the cash flow of users
of municipal treatment facilities and enable them  to direct limited working capital
and bonding capacity toward investments in productive capacity.  Competitors
constructing their own treatment systems would not have this process-investment
option, and Congress concluded it would be unfair  to give  a waste treatment cost
advantage to one class of industry and not another.

     The second objective expected to be served by ICR was the establish-
ment of a revenue system.  Congress expected ICR collections would be
adequate to repay the Federal  Government for financing industrial partici-
pation in local sewage treatment systems, but total reimbursement by
grantees was not considered of prime importance.  In establishing the ICR
program, Congress required that only 50 percent of the amount collected
yearly from each industrial user of municipal treatment systems should
be returned to the Federal Government.  The remaining 50 percent should be
retained by grantees and used to offset ICR administrative costs and help
finance treatment system expansion or reconstruction.

     The legislative history  leading to enactment of the 1972 Federal
Water Pollution Control Act directly supports the objectives outlined
above for the ICR program.  For example, the House of Representatives
report (HR 92-111) accompanying that chamber's version of the 1972 Water
Act (HR-11896) sets forth the following rationale in support of ICR:

     "In connection with industrial users of publicly owned systems,
     the Committee desired to establish within the user .charge system
     an arrangement whereby industrial users would pay charges sufficient
     to bear their fair portion of all costs including the share of
     Federal contributions for capital construction attributable to that
     part of the cost  of constructed facilities attributable to use by
     industrial sources.  It  is the Committee's view that it is
     inappropriate in  a large Federal  grant program providing a high
     percentage of construction funds  to subsidize industrial users
     from funds provided by the taxpayers at large.*  Accordingly, the
     bill imposes an obligation on the part of publicly owned systems
     to incorporate into their user charge schedule a component to
     recover, without  interest, that portion of the total Federal
     grant to the community for construction purposes attributable to
     industrial users.  The committee  recognizes that there will be
     some administrative difficulties  involved in establishing classes
     of industrial users and  has  left  to the local system the obligation
     to set  up an effective and equitable system, subject to the aoproval
     of the  Administrator, inasmuch as the establishment of such a system
     is a precondition to Federal  grants."  (Leg. Hist., p. 788).

     In the  Senate Report accompaning  S.2770 (S. Rep. No. 92-4141), the
 Senate  in terms quite  similar to  those of the House said the following:

     "The committee devoted a great deal of attention to the difficult
     issue posed  by the discharge of industrial pollutants into publicly
     owned treatment  systems.  There is much to be said for encouraging
     industrial use of public facilities.  Each industrial discharge into
     a  public system  is one less  outfall that must be monitored, and in
     many cases the economics of  scale that characterize public treatment
     works would  permit a net capital  saving to the economy as a whole,
     assuming that the alternative to  industrial use of public facilities
     is the  on-site treatment by  industry of its own wastes.

     "The bill would  deal with industrial pollutants in this way:
     each industrial  user of  a public  system would pay a charge that would
     include not  only  that share  of operating and maintenance costs
     allocable to such user but which  would also be sufficient to recover
     that portion of  the  Federal  share of the capital cost of the facility
     allocable to such user.  That portion of the Federal share of the
     capital  cost allocable to each  industrial user would be returned to
     the  Federal  treasury.
   *  underscoring  added

      "The  committee  believes  that  this approach  to  the  issue  of industrial
      use of  public facilities appeared to the committee  to  be the  most
      reasonable  and  equitable one  that can be devised.   Any scheme that^
      did not provide for  full recovery of the Federal share of capital
      costs allocable to industrial users would clearly constitute  a federal
      subsidy of  private industry and, more particularly, of those  facilities
      and industries  producing wastes that are compatible with  public  treatment
      systems.  Any other  approach would discriminate unfairly  against those
      industries  which for whatever reason, were unable to utilize  public

      "It may be  that  Congress will, at some future time, determine  that some
      form of Federal  financial assistance to industry in meeting pollution
      control  costs—whether through tax relief, loans, or grants is appropriate.
      The committee does not prejudge the propriety or need  for  such assistance.
      But the committee does conclude that subsidy of private  industry through
      the waste treatment  grants program would be haphazard  and  inappropriate."*
      (Leg. Hist., p.  1446-1447).

      The primary objective of the ICR program expressed in  both the House and
Senate Reports is not to  subsidize industrial  treatment costs. The Congress clean
considered the issue of equitable treatment of those supplying the funds for the
Federal grants program—the taxpayers at large,  both residential and  industrial—a
those benefiting from the grants program in the residential  and industrial sectors
of the economy.  But to allow private industry to have wastewater treatment withou
capital expenditure was considered by both Congressional  bodies to be unfair and
unreasonable.  Congress, as a whole,  was  not willing in 1972 to subsidize private
industry treatment costs.   The Senate also felt any'approach other than the
proposed ICR program would discriminate against those industries who did not
discharge into municipal treatment systems and instead,  for a  variety of reasons,
used corporate capital to construct self-treatment facilities.

                            ICR Amendment  Rejected
     While there was  no serious  question  raised  about section  204(b)(l)(B)
during the Senate debates, the House  with  language nearly identical to
the bill  which passed, considered but rejected an amendment  to strike
section 204(b)(l)(B)  from the bill.

     During the House debate, Congressman  McDonald from  Michigan prior
to offering his amendment  said of section  204(b)(1)(B):   "I  felt it is a
grave inequity for the bill  to single out  industry as the only user also
responsible for capital  costs."   (Leg.  Hist.,  p.  406).   The  next day
Congressman McDonald  offered an  amendment  to  strike  section  204(b)(l)(B)
from the  House bill.   In support of his amendment he said:

     "While I am a firm believer in the concept  of user  charge for the
     purpose  of maintenance  and  operation,  I  feel  it is  a grave inequity
     for  the  bill to  single  out  industry as  the  one  user  also  responsible  for
     the  capital  costs.  This  inequity will  surely be destructive as far as
     development  of  hoped  for regional concepts  in water  pollution control  is
   underscoring  added

     "Revenue must be generated from users on a proportionate basis
     that will take care of the maintenance, operation, and expansion.
     To charge industry a fee beyond that of user charges, however, is
     unfair.   Businesses, like individuals, are taxpayers and deserve
     the benefit from Federal grant programs as do other taxpayers.  It
     is clearly unjust and inequitable to require reimbursement from
     industry while not requiring reimbursement from other users.

     "What is necessary today to correct our water pollution problem is
     a massive, cooperative effort on the part of every individual  and
     corporate entity.  Any legislation which has as its intent a  solution
     to this highly complex problem must assign the responsibility equally
     between those who are creating the problem.

     "If this bill is to be just either we make all users pay part of the investment
     costs, or we release all users from such charges."  (Leg.  Hist., p.  557-558).

     There was considerable debate on this amendment, but it  was  defeated
soundly by a vote of 336-66.  Some significant passages from the statements
of those House members who opposed the amendment serve to outline  why the
amendment was defeated.

     Congresswoman Abzug, who prior to the amendment had spoken in support
of the House bill (Leg. Hist., p. 371), said of the amendment:

     "...as I understand it, the gentleman objects to the industrial  user"
     being charged their fair portion of construction costs.  I oppose  the
     amendment because the fact is in a large Federal grant program which
     has a high percentage of construction funds, that it would be unfair
     to expect the taxpayer to subsidize the industrial user.  I am quite
     surprised at the gentlemen's amendment, because the fact is the industrial
     user is being given the opportunity to participate in a municipal  plant
     based on a user charge schedule and on the users proportional  share  of
     financing construction costs without interest rates.  If the  industrial
     user would have to construct his own plant he would have to find the money
     and then pay interest, and large interest rates, and he would find it could not
     be done on an economic scale that would make it cheaper.  Mr.  Chairman,
     I oppose the amendment.  As a member of the committee I can tell you that
     I thought we should include interest charges to industrial users,  but the
     committee in^its wisdom overruled me."  (leg. Hist., p. 560).

     Congressman Seiberling said:

     "I must say when I read the gentleman's "colleague" letter on this it
     had a certain appeal because it implied industrial users were going  to
     be charged twice.  However, users would be charged for maintenance and
     operation of treatment facilities but not for amortization of capital costs.
     This strikes me as being an unsound principle...
     Industrial polluters should not be placed in a position to require that
     local  taxpayers subsidize a part of the capital cost of eliminating  the
     pollution generated by industry as the price for obtaining Federal
     assistance under this section."  (Leg. Hist., p. 560).

     Congressman Grover believed industry should pay its fair share.
He said:

     "In establishing this user charge system, our desire is that
     industrial users pay a fair portion of costs, including capital
     costs, attributable to their use of waste treatment facilities.
     This is a Federal grant program.  The Federal Government is
     providing a major percentage of construction costs.  It is certainly not
     intended that a construction subsidy by the taxpayers be made to industrial
     users."  (Leg. Hist., p.  565).

     Congressman Wright added  a different perspective to the debate
when he stated:

     "Mr. Chairman, I can both appreciate and understand the appre-
     hensions expressed by the sponsors of this amendment.  We have
     to strike a balance between the demands of ecology and the
     demands of the economy.  But I  really believe the provisions
     contained in the House bill would not do the violence that they

     "It seems clear to me that we provide only that which the majority
     of the people desire, and that  is if an industrial polluter imposes
     by reason of his discharge a certain burden upon the municipal
     treatment plant that he pay a fair share of the cost, a share that
     would have some relation  to the volume of discharge that he puts
     into that plant."  (Leg.  Hist., p. 567-568).

     Section 204(b) was amended during conference, but the revision dealt
with a grantee's use of funds  collected from industrial users and set
forth Congress' intent to use  ICR as a revenue program providing grantees
with funds for future treatment system expansion and reconstruction.
(Leg. Hist., p. 295).

     The revenue system objective for ICR was agreed to by House and Senate
conferees participating in the Water Act conference.  The conference
report explains (Leg. Hist., p. 295) the ICR provision agreed to in 1972:

     "...is basically the same as the Senate bill as revised by the
     House amendment with the  following changes:

          (1) The requirement  that users pay for the cost of future
     expansion of waste treatment services has been stricken.

          (2) The requirement  that revenues derived from payment of cost
     by industrial users be retained by the grantee for use for operation,
     maintenance, expansion, and construction of publicly-owned treatment
     works has been stricken and in  place of it there has been substituted
     a requirement that the grantee  shall retain an amount of the revenues
     derived from payment of cost by industrial users, to the extent
     costs are attributable to the Federal share of the project costs,
     equal  to (A) the amount of the  non-Federal cost of the project,

     paid by the grantee plus  (B) the amount,, necessary for future expansion
     and reconstruction of the project, except that such amount shall
     not exceed 50 per centum of such revenues from such orojects.  All
     revenues not retained by the grantee are to be deposited in the Treasury
     as miscellaneous receipts.  That portion of the revenues retained by the
     grantee attributable to clause  (B) together with any interest thereon
     must be used solely for expansion and reconstruction."

                       1977 Water Act Amendments

     In 1977 Congress amended the Federal Water Pollution Control Act, approving
several significant changes to the municipal sewage treatment construction grants
program and establishing a moratorium on collection of ICR payments.  The mora-
torium itself had minimum impact in  terms of halting returns to the U.S. Treasury
because few treatment systems required to have ICR programs in place had completed
construction and were actually collecting ICR payments.

     Generally, in 1977 Congress clarified legislation governing the ICR and
user charge requirements.  Congress  again stated that all users of municipal
treatment systems should pay their proportionate share of costs for operation
and maintenance.  Congress elaborated on the "proportionality" provision by
establishing general guidelines for  user charge rates wherein both residential
and industrial users should be assessed user fees that take into account the
volume, or flow, sent to the treatment system and the quality or strength
of wastes.  Congress established that each class of users should pay fees
based on the treatment demand its wastes impose on a treatment system.  Pre-
treatment requirements were clarified to assure industrial discharges do not
impose special treatment or sludge disposal requirements on a municipality.

     In 1977 Congress approved three significant amendments to the ICR program in
addition to establishing a moratorium on ICR collections.  Prior to conference on
the 1977 amendments, some grantees reported that administering the ICR program
was too costly because of the large  number of industrial facilities using municipal
treatment systems.  The grantees suggested that Congress reduce the administrative
burden by exempting some industrial  dischargers from the ICR program, and an agree-
ment was reached by the Congressional conference committee.

     First, Congress modified the ICR requirements to exempt from payback require-
ments those industrial facilities discharging less than 25,000 gallons per day of
wastes having strength equivalent to domestic wastes.  Although Congress expressed
uncertainty concerning the adequency of the exemption, conferees generally agreed
the 25,000 gallon per day "equivalent sanitary waste" exemption would exclude
a large number of small, sometimes marginal firms, that individually do not
significantly contribute to increases in treatment system design requirements
or construction costs but collectively might constitute a major administrative
burden for grantees.

     The other two significant changes to the ICR program approved by Congress in
1977 were intended to provide administrative flexibility to grantees and an
incentive for industry.  Congress expected these changes to result in water
conservation and less industrial demand for municipal treatment capacity.

     Congress recognized that ICR posed administrative burdens for regional
municipal treatment agencies that have multiplant systems with geographically
dispersed industrial participants.  The problem expressed by municipalities
was that in instances where a single plant needed improvements, ICR imposed costs
on industrial users of that one plant but not on industrial users of other plants
within the same system.  Plant-by-plant applications of ICR within a multiplant
system were considered unfair in instances where only a single plant within a
system was being upgraded, because all industrial users of the system were provided
with treatment services.  The pi ant-by-plant application of ICR would result in
higher cost for some users of a multiplant system, simply because of their location
within the system.  Moreover, establishing an ICR rate for each plant upgraded
within a multiplant system required the establishment of separate accounts for
each treatment plant.  The second amendment eased the administrative burden by
permitting grantees to establish one ICR rate applicable to all industrial users
within a multiplant system.  In this way industrial  users would pay their share
of costs for improvements that benefit the treatment system.

     The final significant change to the ICR program approved by Congress
in 1977 encouraged industrial users of municipal treatment facilities to
adopt process changes that would reduce water consumption and waste
discharges.   Incentives for water conservation were stressed in several
amendments to the Water Act, and Congress expected that encouraging water
conservation through the ICR program would lessen water use and lessen demand by
industry for municipal treatment capacity.  The change agreed to by Congress
permitted municipalities to reduce ICR charges to a specific industrial  discharger
if the discharger adopts a permanent process change that results in reduced flows
or pollutant loadings sent to the municipal  treatment system.

     Congress in 1977 also established the first of two moratoria on the collection
of ICR payments from industry.   Although Congress specified that grantees should
continue to develop ICR systems during this  moratorium, EPA was told to review the
ICR program, determine the need for and efficiency of existing ICR requirements,
and report back to Congress.  Congress directed EPA to include recommendations
in the agency's report for improving the ICR program if the agency determined
changes were needed.

     Congress estabished the moratorium on ICR collections for several
reasons.  Grantees reported that administering the ICR program was burden-
some, and some said their administrative costs would, over the 30 year pay-
back period, exceed their 50 percent share of the ICR revenues collected
from industry.  Industry also objected to the ICR program, maintaining ICR
constitutes "double taxation" and unfairly singles out industry as the
sole user of municipal treatment systems required to repay the Federal
Government for sewage treatment construction grants.  Industry also alleged
that ICR does not result in treatment cost parity because the combined effect
of ICR, user charges, and future pretreatment requirements make it more
expensive for an industry to use a municipal treatment facility than it would be
to construct and use corporately owned treatment facilities.

                          An  Industry Subsidy

     In some instances use of a municipal facility is essential if a firm
is to continue operating.  For example, marginal firms often cannot borrow
money in the capital markets  (e.g., banks, insurance companies, bonds, stock)
for non-productive  investments, nor do they, in general, have enough internally
generated funds to  build self-treatment plants.  Even if investors'were willing
to invest in marginally profitable enterprises, interest rates would be prohibi-
tively high.  In addition, firms with little or no room for expansion are compelled
to use municipal treatment facilities.  This is an obvious condition of many urban
plants which must be near supplies, labor, and markets.

     The sewage treatment construction grants program subsidizes profitable firms
also (particularly  smaller firms with low tax rates), allowing them to enjoy cash
flow benefits that  would be lost if they had to construct self-treatment facilities,
Imposition of ICR does not impair the financial viability of these firms; rather,
the use of municipal treatment facilities without ICR gives these profitable firms
an advantage over their competitors that construct direct discharge facilities.
These financially viable firms thus are having one step in their manufacturing
process subsidized  by residential taxpayers who, unlike investors, receive little
or no benefit in return.

     EPA's review of the ICR  program also shows the existing ICR requirements
could effectively negate most of the subsidy now provided to some segments of
industry, if the moratorium were lifted.

     Currently, because of the moratorium on ICR collections, municipalities are
uncertain whether Congress will eliminate ICR requirements or modify the program.
Many municipalities are not developing ICR programs, and many industrial  facilities
are postponing decisions whether they will use municipal treatment systems or
construct corporately owned treatment facilities.

     Industries now are able  to calculate their costs for constructing and
operating their own treatment facilities.  This is a pi ant-by-plant business
decision based on specific cash-flow and process-related considerations.   The
major variables in  projecting the self-treatment costs are the cost of money
in the corporate bond market  and future production (or capacity) requirements.
Before an industry  decides to use a municipal facility, it must know what its costs
will be for ICR and user charges, determine what may be required to comply with
future direct or indirect discharge treatment and sludge disposal  programs, balance
those costs against self-treatment and sludge disposal costs, and select the
alternative that is more efficient and advantageous to the corporation.  Each
corporation will base its decision on the least total cost (on a net present value
basis) for complying with pollution control requirements and the most efficient
use of available capital.  The decision will depend on interest charges associated
with borrowing money, expectations concerning future interest rates, plans for
future production targets, and alternative investment opportunities.

     Even if ICR were put into place now, there is no way for the agency
to predict accurately how much revenue would be collected over the 30 year recovery
period.   Many corporations could decide to use municipal facilities while interest
rates on the corporate money and bond markets are high.  (The current prime rate

on money markets is about 18.7 percent.  Major bond offerings are being withdrawn
because of long term interest charges as high as 14 percent,  l^any firms could
decide to use municipal facilities until interest rates drop significantly; the
absence of contractual  requirements enables them to withdraw from a municipal
facility at any time with no obligation to pay for capacity constructed for their

                      ICR: Financial Burden For Industry?

     As illustrated in  the preceeding discussion of Congressional intent, one
of the major concerns of Congress in enacting ICR was to eliminate the presumed
subsidy that Federally  assisted treatment works could provide to industrial users.
Our examination of the  issue concludes that there is indeed a subsidy to industrial
users.  While perhaps not universally true, the subsidy is especially associated
with small or economically marginal industries which have difficulty with capital

     Industry has represented that the collective costs imposed by ICR,
user charges, and yet-to-be-established pretreatment requirements are
high, and in many instances exceed what it would cost to construct and
operate self-treatment  facilities.

     In some instances  it may cost industry less to construct and
operate self-treatment  facilities than it would cost to use a municipal
treatment system.  Each case, however, must be judged individually after
reviewing the POTW being considered and each individual corporation's
cash flow, investment potential, production facility, location, waste
stream, direct discharge requirements, and future investment program.

     Coopers & Lyhrand, the agency's ICR contractor, found that ICR
alone adds only about 15 percent to the average industrial user's wastewater
treatment bill.  EPA's  contractor concluded the ICR costs are not high, but
incrementally impose costs on industry that over 30 years may exceed incremental
self-treatment costs, especially when one considers corporate tax rates,
depreciation, the investment tax credits, and financial mechanisms related to
industrial pollution control investments.

     EPA has reviewed recent changes to the tax code, provisions governing
use of industrial development bonds, the municipal  and corporate bond
markets, and Coopers & Lybrand's analysis of corporate self-treatment
costs.  The agency has  concluded that Coopers gfTybrand overstated the
availability and significance of these corporate tax and financing
mechanisms and understated economic benefits associated with POTW use.

     The agency's sewage treatment construction grants program provides
industry with an interest-free "loan" for complying with water pollution
control requirements. Payments are required over a 30 year period, and
industrial users of POTW's are not obligated to repay the "loan" if they stop
using the municipal facility.  A corporation can declare bankruptcy, relocate,
or eventually construct self-treatment facilities without legal or financial
obligation to reimburse either the municipal treatment agency or the Federal
Government for constructing industrial waste treatment capacity.

     EPA agrees that in some instances a corporation can construct and
operate its own treatment facilities at less cost than it would incur by use
of a municipal treatment facility.  This varies a great deal, however, with the

individual industry, the age and treatment demand for specific production facilities,
and changes in technology and the cost and need for  investment capital.  Generally,
a corporation will construct treatment facilities designed to remove specific
pollutants.  Self-owned and operated facilities will be sized and designed to
accommodate predictable flows and pollutant concentrations.  There will be lower
energy and transmission costs for conveying waste to a on-site treatment system.
There will be fewer administrative costs and a smaller staff for a simple
industrial waste treatment system, depending on the  process waste stream.  Each
case, however, depends on the complexity of the POTW being considered and the
treatment demand that will be imposed by industry.

     An industry will decide whether to use a municipal treatment system or
to construct its own treatment facilities after thoroughly reviewing the net
present value of the costs associated with each option.  Central to the business
decision will be a cost-effectiveness review of the  production facility in
question  (its efficiency) and an analysis of alternative uses for current and
future capital.  A company will choose the option that costs least on a net present
value basis and which at the same time neither impairs its borrowing capacity
nor adversely affects its cash flow.  If debt capacity or cash flow concerns
are paramount, a company will use the municipal facility.

     Profits determine corporate success.  An efficient corporation is one that
gains a competitive edge by minimizing production costs and obtaining the maximum
benefit from available production options, capital, and financing.  ICR payments
(and user charges) are production costs, and so are  interest payments, depreciation,
and operating costs of a self-treatment facility*.  All are normal business expenses
charged against gross receipts.  Elimination of ICR, however, would significantly
lower production costs -- especially at antiquated production facilities -- for
users of municipal treatment systems.  There would be no corresponding reduction
in costs for self-treatment, and inequity would result.

     Corporations that own their own treatment systems must borrow construction
funds or use internally generated capital to pay for treatment system construction
costs.  Few corporations can or would use operating capital to construct pollution
abatement facilities, and those that can secure funds in the bond market face costs
which are not incurred by users of municipal treatment facilities.  Currently,
the prime rate on corporate money markets is about 18.7 percent.  Long term bond
issues are averaging 13 percent, while recent industrial development bond rates and
the average interest charge of general municipal issues is about 9 percent.  Most
corporations will pay a higher borrowing rate, provided money is available and
investors consider the corporation a good investment risk.

     Although costs for constructing self-treatment facilities may be less than
costs for constructing equivalent capacity in a municipal treatment system, a
comparision is not sound unless the true costs to a corporation for borrowing
investment capital are considered.  Coopers & Lybrand did not adequately address
this point.
 * Princinal payments are not deductible.  The investment tax credit typically
   occurs in the first vear, although a small firm may find itself carrying
   the cre'H + forward.


     The contractor concluded in those cases where industry finances the major
portion of its pollution control investment at a low interest rate, self treatment
may be less expensive than POTW use provided treatment requirements for industry
are equivalent to municipal secondary treatment requirements.  This conclusion
is sometimes true, but it can be validated only by plant-by-plant analysis.
The agency's sewage treatment construction grants program permits a corporation
to "borrow" funds with no obligation to repay, no interest charge, and no liability
in its financial statements.   These are significant production cost exclusions
which would ordinarily be reflected on a firm's books as profit liabilities.  A
self-treating industrial facility must carry outstanding bond and interest charges
against income on its books.   The cash liability may decrease the firm's attractive-
ness to investors.  A corporation that has a significant amount of nonproductive
debt in relation to income is not always an attractive stock investment opportunity.

     Many bond offerings cannot be marketed without tremendous cost to a
corporation, and every corporation has limited bonding capacity.   A
corporation with a large amount of outstanding debts in relation  to
income is not an attractive investment risk because one year of depressed
sales can result in loan liabilities exceeding income.  Unless additional
short term credit can be secured, the excess obligations can cause
insolvency.  In some instances a bond offering for pollution control
will preclude a future bond offering that could finance asset-related investment
in productive capacity because cash flow -- without additional short term
loans -- will not appear adequate to investors to meet outstanding bond
and loan obligations.

     Coopers and Lybrand's analysis of the ICR program assumed low interest charges
for corporate long term bond  offerings and also unlimited investment capital avail-
able to both profitable and marginally profitable firms.  The study also assumed
that every corporation faced  with water pollution control compliance costs is an
attractive investment risk, could utilize the full  investment tax credit, would
obtain considerable financial benefits from depreciation charges  against taxable
income, and would face few restrictions on use of rapid write-off provisions in
the tax code for pollution control  investments.  One other factor assumed in the
contractor's analysis is that all industrial facilities have the  option to finance
pollution control investments through private offerings or by using industrial
development bonds.  These are not necessarily valid assumptions.

     Precise analysis of the  impact of ICR and alternatives available
for financing corporately-owned treatment facilities could not be done
by the agency's contractor, primarily because industrial users of
municipal facilities reviewed during the initial  ICR study would  not
disclose data related to production processes or profits.  Even without
detailed data on individual firms,  however, there are valid conclusions
that can be made regarding availability of and use of industrial  develop-
ment bonds, rapid write-off,  depreciation, and the investment tax credit.

     Changes to the tax code  reduced the cash flow burden imposed on corporations
that finance pollution control investments, provided funds are available
and investors are willing to  invest.  If funds can be secured at a
reasonable interest rate, self-financing of pollution control hardware is
an attractive option for corporations that are not concerned about
the age of production facilities, discharge requirements, and incurring debt
unrelated to plant expansion.

     Corporations that  self-finance  pollution control  investments may
take an investment tax  credit, which results in an  income tax reduction.
The tax credit  is applicable, however,  only for investment  in "qualified
property" as defined  by the  Internal  Revenue Service.   Regulations
governing the investment tax credit  are complex and  include a restrictive
definition of "qualified property,"  place  limitations  on the amount of
income tax that may be  offset by  the tax credit, and place  restrictions
on carryover of tax credits.  Coopers & Lybrand assumed most corporations
would obtain a  significant  (10 percent)  tax credit,  that all pollution
abatement capital costs would be  defined as qualified  property, and that
sufficient income tax liability was  incurred so the  full tax credit
could be taken  in the first  year  the pollution control  investment was
made.  According to the Department of Treasury, roughly 40  percent of
industry's pollution  control investments would qualify  for  the full range
of investment tax incentives.

     Coopers &  Lybrand  also  assumed  the maximum benefit to  industry for
depreciation charges  against income  tax liability.   There are, however,
restrictions governing  depreciation  and rapid write-off for pollution
control investments.  Generally,  rapid  write-off is  applied to "retrofit"
expenditures and cannot be applied to pollution control investment needed
for new production facilities.  Coopers  &  Lybrand assumed maximum benefit to
industry in  its analysis of  rapid write-off provisions, although some limitations
in the use of depreciation were considered.

     One major  assumption in Coopers and Lybrand's  ICR review that the
agency disagrees with is the unlimited  availability  of industrial
development  bonds (IDBs). IDBs are commonly used by municipalities to assist
a resident industry.  These  bonds carry a  lower interest rate than most corporate
offerings because they  are tied to the  municipality's, and not the benefiting
industry's,  credit rating.   Although interest rates  can be significant for a
financially  distressed  municipality,  for most, interest charges are several
percentage points below the  most  credit-worthy corporate offerings.  Rates
are lower because the bonds  are issued  by  a public agency and investors do not
pay taxes on bond income.

     Although IDBs are  commonly used to  finance industrial pollution abatement
programs, their use is  restricted primarily to expenditures for retrofitting
older industrial facilities.  IDBs cannot  be used to finance process-related
improvements, and the abatement program to be financed must be certified as
necessary.   IDB offerings generally  must be approved by the residents of a
community or by their designated  representatives.   Every municipality, like all
corporations, has limited bonding capacity.  It is  suspect to conclude, during
a period when taxpayers are  calling  for fiscal constraints, that voters would
agree to bond offerings primarily benefiting industry when offerings expected
to provide civic improvements such as sewage treatment services and public
water supplies  are increasingly resisted.

     As pointed out earlier, the  option  to use a municipal  sewage treatment
system provides industry with the opportunity to divert limited working
capital  and bonding capacity to plant improvements and expansion.  This
investment opportunity  provides users of municipal  treatment systems
with an equity  advantage over their  product-related  direct discharge counterparts,
and is of itself an advantage subsidized by the Federal Government.

     Industry comments indicating that ICR, combined with pretreatment
and user charges, collectively impose costs in excess of those paid by
process-related self-treaters have merit, but ignore the stream of benefits
provided by use of a municipal treatment facility.

     Use of a municipal  facility is the only option available to marginal
firms, which are not attractive investment risks,  do not have adequate
working capital to construct self-treatment facilities,  and in many
instances would either be in noncompliance or have to discontinue
operations if capacity in a municipal  treatment facility was not
available.   POTW use is also attractive to corporate managers that_have not
decided whether or not to shut down a production facility that utilizes
antiquated production processes.

     Users of a municipal facility also have several  water pollution
control compliance advantages that are not shared  by those that construct
their own treatment facilities.

     The user of a municipal system is not concerned with treatment system
malfunctions and liability for National  Pollutant  Discharge Elimination
System (NPDES) permit violations.   Industrial  users of municipal  treatment
systems are relieved of the responsibility for training  treatment plant
operators, developing programs and purchasing facilities for sludge disposal,
complying with reporting and discharge monitoring  requirements, undertaking
NPDES renewal every five years, and modifying treatment  programs  to reflect
future pollution control requirements or stringent  water quality  standards.

     Users of a municipal treatment facility often  do pay more in
operation and maintenance costs than self-treaters, but  it is erroneous
to assume there are no salaries,  pensions, energy  costs, or other
administrative costs associated with self-treatment.   Nor is it valid
to assume industrial participation in a POTW does  not increase POTW
operating costs and manpower requirements above what would be required to
service residential users.

     Self-treatment requires land for constructing  a pollution abatement
system, and the industrial  facility must be located near a waterway that
can accept a waste discharge without showing water  quality deterioration.

     A corporation constructing self-treatment facilities must negotiate
terms and conditions for a NPDES  permit, or hire counsel to negotiate with
environmental agencies after consultation with an  in-house engineer or corporate

     A self-treating industrial facility also faces enforcement liability
amounting to $10,000 per day for  violations of NPDES permit effluent
limitations.  Regular monitoring  and compliance reports  must be completed
and filed with state environmental  agencies or with EPA.  In some
instances there are local permit  and reporting requirements.

     Although in the future there will be pretreatment reciuirements
imposed on industrial users of municipal treatment systems that discharge
toxic wastes, there are now restrictions on discharges of toxic materials
that must be met by self-treating industrial facilities.  A direct
discharger also must provide for safe disposal of process sludges in
accordance with provisions in the Resource Conservation and Recovery
Act (RCRA).  RCRA includes its own permit, monitoring, and reporting require-
ments, and they are coordinated with provisions in the Safe Drinking
Water Act to assure waste is disposed of properly and will not contaminate
groundwater supplies.  A direct discharger that incinerates instead of
employing land disposal for sludges must comply with the Clean Air Act
and applicable state implementation plans.  In nonattainment areas it is
difficult to obtain a permit for incineration unless emission offsets
can be secured.

     The cumulative burden posed by compliance with all environmental
regulations is substantial for a direct discharge facility and requires
a great deal of corporate financial, legal, and engineering resources.
A user of a municipal treatment system, however, currently must pay ICR
charges which are calculated upon only that portion of a treatment
system actually used by industry and constructed or upgraded through
EPA's construction grants program.  An industrial user of a municipal system
does pay user charges, but they are calculated based on the industrial
discharger's proportionate share of costs for operating the POTW.  Often
user charges are increased for all users of a POTW because of industrial
participation, especially in the case of a seasonal industry or a high volume
water user.  Industrial participation often requires the selection of treat-
ment technologies uneconomic for some communities.  Moreover, capacity
provided for seasonal users tends to increase fixed system costs which are
paid by all users year-round.

     Industrial users of municipal treatment systems do have to comply
with future pretreatment requirements.  Pretreatment requirements for
specific industrial categories have not yet been fully established by
the agency, and there is uncertainty concerning some of the removal
requirements that will be established.  In instances where a municipality
demonstrates its POTW effectively prevents toxic discharges from industrial
users from entering the waterways, pretreatment requirements and costs
for industry will not be excessive.  There will, however, be increased sludge
disposal costs borne by all users and opportunities for beneficial use or sale of
sludges will be lost.

                      Industrial Treatment Needs

     Coopers & Lybrand estimated that nationwide industry uses about 15 percent
of the treatment capacity funded through EPA's construction grants program.
This figure does not represent total, actual  industrial  use.  ICR is required
only for that portion of treatment capacity constructed  or upgraded by utiliza-
tion of Federal  funds granted under the authority of the Clean Water Act.  ICR
is not required  from any industrial user discharging 25,000 gallons per day or
less of equivalent sanitary wastes.  The flow exemption  is very broad.  Industry,
in practice, is  not charged for waste discharged from in-plant sanitary facilities.
Grantees discount 100 gallons per day, the residential  user flow design standard,
from industry's  total waste flow for each employee.   Some grantees also provide
industry with a  credit for the first 259000 gallons  of process waste discharged
to the municiparl facilities, and charge ICR only on  that portion of flow in
excess of 25,000 gallons per day.

     Flow by itself is not the most significant measure  of how process waste imposes
demands on municipal treatment facilities.  Conventional treatment systems
are designed for volume of flow, biochemical  oxygen  demand (BOD), and suspended
solids (SS) loadings.  A plant reaches capacity when loadings for any individual
pollutant reach  design limits.  Treatment systems are designed, and technologies
are selected, based on maximum flow and maximum loadings for each pollutant para-
meter.  An overload on any treatment process  will affect system performance and
compliance with  NPDES requirements.  Generally, plant design assumes each
individual residential user contributes 100 gallons  per  day flow, 0.17 pounds per
day BOD and 0.17 pounds per day SS.  Pollutant loadings  from industry can be
significantly higher.  For example, discharges from  a meat packing house
processing cattle that average 1100 pounds live weight per head will require
special design considerations in order to avoid a treatment system overload.  Wastes
from such a firm average, for example, 880 gallons per head flow (equivalent to
nearly 9 residential users), 8.8 pounds per head BOD (equivalent to 52 people),
and 8.8 pounds SS per head (equivalent to 52  people).  The flow exemption discussed
above excludes industries from ICR requirements that discharge wastes equivalent
to the treatment demand imposed on a municipal system by 250 residential users.

     EPA looked  closely at ICR in EPA's Region V, which  includes Ohio, Michigan,
Illinois, Indiana, Wisconsin and Minnesota.  There are large, small, and varied
categories of industry.  The agency's review  was undertaken to determine how
loadings are portioned among residential and  industrial  POTW users.  The agency
also wanted to determine how much ICR revenue would  be generated and whether
industrial participation necessitates selection of mechanical as opposed to
passive treatment technologies.  The following series of tables illustrates the
estimated amount of ICR revenues returned to  the Federal Government from the 6
states in Region V.  Total estimated ICR collections would be double the amount
indicated, assuming there is no additional industrial participation.  ICR
collections would be less if some industries  decide  to withdraw from the systems
reviewed.  Congress should note that these figures are not based on all grantees
within the region subject to ICR requirements.  These figures were obtained by
reviewing approved  ICR systems.  Many grantees have  not  submitted their ICR
systems for review.  Also, the data shown do  not reflect future industrial
participation as treatment systems now being  planned or  under construction come
on line.  The information shown is based on letters  of intent from industry to
participate in municipal treatment systems.

                                         TABLE 1  - REGION V
Annual ICR
To U.S.





896,119   79,972  26.3   191,021    28.9    383,994     42.9

                                                TABLE  2  -  ILLINOIS

Annual ICR
To U.S.

















Indianapol is
Ti pton
Annual ICR
To U.S.
311 ,275






                                                TABLE 4 - MICHIGAN

Eaton Rapids
Annual ICR
To U.S.






                                                TABLE 5  - MINNESOTA
Western Lake
Albert Lea
St. Charles
Annual ICR
To U.S.



34 63.19
25 11.67
28 14.88
15 0.52

% SS
65 24.38
54 12.88
59 1.87
23 0.33


                                                  TABLE 6 - OHIO

Annual ICR
To U.S.

















Black Creek
Annual ICR
To U.S.






     The figures in Table 1 are based on a review of approved  ICR programs  for
39 grantees in Illinois, 32 grantees in Indiana, 31 grantees in Michigan,  11
grantees in Minnesota, 27 grantees in Ohio, and 32 grantees in Wisconsin  (a total
of 172 ICR programs).   Total return to the Federal Government  is estimated  to be
$2,734,364 annually for 30 years if the ICR moratorium is lifted.

     The statewide aggregations show Minnesota alone has a fairly large
proportion (23.3 percent) of industrial flow, but industrial requirements for
other specific pollutant measures is significantly high in Minnesota  and  in
the other Region V states.

     The tables show that industrial process waste does place  treatment demands
on municipal  treatment systems.  The type of demand cannot be  generalized,
however, because each individual industrial process waste stream is different
and causes stress on different components within a treatment system.  One
generalization that can be made is that industrial process waste imposes
a significant demand on a municipal treatment system being constructed with
Clean Water Act funds, and the fact that an industrial discharger intends to use
a municipal treatment system requires special design considerations and treatment
system operation and maintenance programs that would not be required  in systems
designed only for domestic use.

     As mentioned earlier, in many instances the presence of an industrial  dis-
charger requires the selection of treatment technologies and construction of
conveyance systems that would not otherwise be used because they are  considered
too expensive or unnecessary for a treatment system designed only for residential
users.  The following examples illustrate this point.

     The City of Osceola, Iowa in 1972 completed construction  on a Federally
assisted sewage treatment project.  The city built a simple, non-aerated  lagoon
consisting of two ten-acre treatment cells.  The project was designed to  serve
residential users and was intended to complement an existing single stage tricklii
filter plant.  The lagoon, which cost the Federal Government $363,000, had  a desit
life of twenty years.   A lagoon system is a nonmechanical treatment process that
requires minimal operation and maintenance.

     EPA in 1972 conducted a final "close-out" inspection of the lagoon system.
At that time city officials informed agency inspectors that Jimmy Dean Pure
Pork Sausage was starting to build a local processing plant.   The city asked for
a new construction grant.  The desire to treat Jimmy Dean Pure Pork Sausage's
waste meant Osceola's new treatment system was underdesigned because  it was not
originally intended to accommodate process loadings from a major meat processing

     The city, as an interim measure, installed surface aerators in the lagoon
until a new plant could be built.  The city in 1975 obtained a $2,200,350  EPA
grant to build a new two-stage trickling filter plant designed for 1.31 million
gallons per day flow and 4308 pounds per day BOD.  Although the residential
design population is 3600 (residential BOD loading equals 612  pounds  per  day),
treatment components had to be designed and constructed to accommodate Jimmy Dean
Pure Pork Sausage's BOD loadings and flow.  In this case the BOD loadings  requiret
a system design that would, comparatively, accommodate the treatment  requirements
imposed by 25,341 residential users.  The BOD demand from an industrial user in
Osceola, Iowa required the city to construct a higher priced,  more complex  and
energy intensive treatment system than would otherwise have been the  case.  Higher
fixed operating costs associated with the mechnanical treatment process would  be
shared by all users.


     Special design considerations to accomodate  industrial flows are not
uncommon, especially in rural areas, in areas where  industry is not located near
the municipal facility, or  if industry intends to  locate in a small community.
Often small communities can use lagoon systems, which are not expensive to construct
and usually require little  operation and maintenance.  As in the case of Osceola,
the presence of a significant, year-round  industrial facility often requires that
a small community utilize and share costs  for a mechanical treatment system
instead of a lagoon.   Likewise, more costly design and operation considerations
often are required if  a significant seasonal user  intends to use the municipal
treatment system.

     Gibbon, Nebraska  recently built a rotating biological surface treatment
system instead of a lagoon  to accommodate  its 2200 residents and two industries,
Nebraska Turkey Growers Association and Gibbon Packing Company.  Total design
parameters for the treatment system are 1.14 million gallons per day (MGD) flow,
5875 pounds per day BOD, and 4840 pounds per day SS.  The system is currently
designed for a residential  population of 2200, but treatment capacity allocated
to the two industrial  users--0.77 MGD flow, 5100 pounds per day BOD, and 3900
pounds per day SS--constitutes roughly 75  percent  of the system's capacity, or
a treatment demand (BOD equivalent) equal  to that  required for 30,000 residential
users.  Nebraska Turkey Growers uses the system only six months each year, but
if adequate capacity had not been provided for the industry's waste, overloads
would result and the city would be liable  for enforcement action.  Nebraska
Turkey Growers alone required design capacities of 0.40 MGD, 1512 pounds per day
BOD, and 1200 pounds per day SS.  Without  the industrial demand, a system adequate
to serve Gibbon's residents alone probably would be a 42 acre nondischarging lagoon,
which would have cost  the Federal Government far less than the $1,903,000 grant
EPA awarded to Gibbon.

     The examples above are used to illustrate the fact that some communities
go to considerable expense  to provide treatment capacity for industrial  use,
and in many instances  more  sophisticated and costly systems must be selected by
a municipality because it will have a significant  industrial discharger.  Congress,
in advancing the concept of regionalized sewage treatment services, accepted the
fact that encouraging  industrial use of municipal  treatment facilities would
impose additional financial obligations on both the Federal  Treasury and on local
budgets.  Congress considered the additional costs, but reasoned that economies
of scale associated with providing sewage  treatment services, and reduced
monitoring requirements associated with having fewer self-treating industrial
facilities, justified  providing treatment  capacity for industry because total
costs to the economy would  be less than would be the case if each industrial
and municipal discharger constructed individual treatment systems.

     There are also other reasons for permitting industrial  use of municipal
treatment facilities.  Industry does pay income taxes and is entitled to
benefits provided by Federal, state, and local governments.   Industry also
provides employment and, to some degree, financial stability for a community.
For these reasons Congress  agreed to finance industrial participation in the
Federal sewage treatment construction grants program, but Congress expected
industry to repay the  Federal Government for sewage treatment "loans" in
addition to paying their proportionate share of ongoing operation and maintenance

     Although Congress expected industry would continue to use treatment capacity
funded through the agency's sewage treatment construction grants program, in some
instances industry decides to construct self-treatment facilities or relocate
to a community that has a treatment system which has not been constructed or
improved with funds authorized by the Clean Water Act.  Treatment systems funded
locally or through programs other than EPA's sewage treatment construction grants
program are not required to impose ICR requirements or establish proportional
user charge systems.

     As mentioned before, ICR imposes no contractual obligation on industry
to remain in a municipal treatment system.   Industry can, at any time, withdraw
from a municipal treatment system without legal  or financial obligation to
repay either the local community (unless a  local contract is in effect) or EPA
costs associated with constructing capacity for  the vacating industry's use.  After
a significant industrial facility leaves a  municipal treatment system, new excess
capacity often requires different and sometimes  costly operating procedures if
the plant is to remain in compliance with its NPDES permit.   These increased
operational costs must be absorbed by the local  community, which no longer receives
industrial user charges, debt payments for  local bond issues, or the discontinued
ICR payments.

     Industrial withdrawal from municipal treatment systems  is not uncommon.
Changes in corporate borrowing interest rates, production processes, treatment
requirements, user charges, business conditions, the availability of less
costly municipal treatment services, or any number of other  variables can and
do trigger industrial decisions to discontinue using a municipal system subject
to ICR requirements.   Often industrial withdrawal  imposes financial  hardship
on a community, especially small  communities that, for a variety of reasons,
built treatment systems that included a significant amount of capacity for
industrial use.

     The City of Anderson, Missouri is one  example of a small community now
using an oversized and overdesigned treatment system that, when planned, was
expected to serve one significant industrial discharger.  Until 1974 the City
of Anderson operated a simple, 23 acre non-aerated lagoon system.  The city's
sole industry, J & J Poultry, a turkey processor,  had additional treatment
needs and the city decided to construct facilities which would remove grease
and feathers from the poultry company's waste.  Anderson initiated a $658,000
project and commenced construction on a 2.7 acre aerated lagoon.  The new lagoon
system would have six 15-horsepower surface aerators and chlorination facilities.
It would be used in conjunction with the existing  lagoon and provide "pretreat-
ment" for the poultry company's waste, effectively removing  grease and feathers.

     After construction was completed Anderson had a mechanical system in
place which would treat its residential waste (0.090 MGD flow and" 223 pounds BOD
per day) and J & J Poultry's waste (0.35 MGD and 4146 pounds BOD per day).  The total
design loading for the system is 0.62 MGD,  4200  pounds BOD per day, and 2068 pounds
SS per day.  The system is on line now, but shortly after start-up J & J Poultry
withdrew and moved to another location, leaving  the city with overdesigned
facilities and a financial obligation, but  no users other than those adequately
served by the city's original treatment system.   The city would have continued
using its original treatment system without modification, but now it must daily
operate the new system to keep the mechanical aerators in functioning order.

               ICR:  Administrative Burden For Grantees?

     In establishing the construction grants program, Congress outlined
requirements for municipal financing of sewage treatment system operation
and maintenance costs.  Congress provided municipalities with wide latitude
in determining how user charges are developed, but said proportional costs
should be assessed to each user that reflect the treatment demand the user's
discharge imposes on the treatment system.

     Grantees were selected to administer the ICR system as they would be
responsible for on-going operation of newly constructed treatment facilities.
Congress provided that grantees could keep half of the ICR revenues collected,
and funds retained could be used to defray ICR administrative costs and assist
in funding treatment system improvements.  In 1977 Congress did not significantly
change the ICR program requirements.

     ICR collections returned to the Treasury so far amount to $559,536.
EPA estimates that about $500,000 in additional pre-moratorium ICR revenues
will be returned to the Treasury by grantees, and an additional $500,000 will
be returned from those grantees collecting during the moratorium.  Future ICR
collections cannot accurately be estimated while the moratorium is in place
because the extent of industrial POTW use is uncertain.

     EPA's contractor concluded that industry (as currently defined)
uses about 15 percent of municipal treatment capacity.  This conclusion
is based on an analysis of flow loadings, and does not attempt to measure
impact of pollutant loadings on individual treatment system components.
If one applies this percentage to the total estimated treatment needs as
calculated in the 1978 Meeds Survey -- $106 billion -- a simple extrapolation
puts industry's share of unfunded needs in excess of $15 billion.  Although
this figure is an exaggeration it does illustrate the magnitude of
industrial demand on the Federal sewage treatment construction grants
program.  Moreover, in the absence of ICR requirements, it is probably fair
to assume that industrial use of municipal treatment systems will progressively

     All grantees are required to develop ICR, user charge systems, and
sewer use ordinances.  In some instances, grantees are required to develop
pretreatment programs.  EPA provides grant assistance for developing
ICR, sewer use ordinances, user charge systems, and pretreatment programs.
Data on industrial waste streams that must be gathered by a grantee to
satisfy each of the above requirements is also needed to properly design
a municipal sewage treatment system, and information gathered by a grantee
to satisfy any one of the above program requirements should be utilized
to satisfy the other requirements.  In a properly designed grants management
system there should be little incremental cost for ICR data compilation.

     The major burden faced by a grantee in developing ICR, user charge,
sewer use ordinances, and pretreatment programs is identifying industrial
dischargers and determining their treatment needs.  Identifying which
industrial  facilities actually will use a POTW can be difficult because
industry often is unwilling to make a commitment to use a POTW until all

costs to industry are identified.   In most cases firm cost data are
unavailable until construction of the municipal  facility is completed.
In many instances, actual  costs to industry may be more than initial  estimates,
due to inflation which occurs during design and construction.   In some  cases
uncertainty associated with industrial  treatment needs causes  grantees  to over-
design as a hedge against  future discharge violations.

     Once industrial  users are identified, treatment needs must be
determined based on pollutant loadings.   Industry's pollutant  loading must be
determined for both ICR and user charges, and a characterization of industry's
waste stream is needed to  assure compliance with a grantee's sewer use  ordinance
and pretreatment program.   Gathering data on industrial waste  stream characteristics
is a difficult undertaking for most grantees.  The grantees must discuss
production plans, pollutant loadings, and special  treatment needs with
corporate plant managers.   Much of this  information historically has been
considered privileged by industry.

     The pollutant loading and flow information required to develop an
ICR system should be  collected by  a grantee regardless of whether ICR is
continued or abolished.  Information on  industrial  discharges  is essential
for proper plant design and operation,  and to determine if toxic pollutant
discharges will require special sludge  disposal  programs.   The only
incremental cost to a grantee for  developing an ICR system is  calculating
industry's ICR payment.  This is,  however, a relatively simple process
that requires determining  industry's share of the  Federal  sewage treatment
construction grant made to a grantee, based on industry's  treatment
demand for individual treatment processes.
     Intensive monitoring
sewer use ordinances, and
requirements.  Monitoring
program requirements, and
charge rates annually.
is not required for ICR.   ICR,  user charges, most
pretreatment programs,  all  include similar monitoring
is not conducted separately to  satisfy each of the
a monitoring program is necessary to calculate user
     Once in place, the annual  cost to a grantee for administering ICR
should be negligible.   The ICR charge itself for each industrial  user
is established when the treatment system comes on line,  and the major
yearly costs incurred  by a grantee are for billing,  collections,  and
account maintenance.  Some grantees have efficient,  computerized  billing
systems that dispatch  bills for user charges and ICR simultaneously.
There is little incremental cost for including the ICR element on bills
sent to industry.   Other grantees continue to employ manual  billing
systems.  In a manual  system there is little incremental  cost associated
with ICR, but the system itself may be very expensive for a large
grantee to operate due to manpower requirements.  Costs  to the grantee
will rise roughly in line with inflation, while ICR  revenues, which do not
include an interest charge or inflation adjustment,  remain constant.

     Management of ICR revenues has been identified  as a major incremental
cost by some grantees.  The Bergen County (New Jersey) Utilities  Authority, for
example, estimates about $3,000 is required yearly to administer ICR accounts
and have ICR revenues  managed by a private investment management firm.  Bergen

County estimates that costs incurred by the utilities authority for managing the
ICR program will increase  in line with inflation, and eventually costs for  ICR
account management and for billing  72 industrial users quarterly will exceed ICR
revenues retained by the grantee.   The authority estimates  ICR will cost $22,700
to administer when its treatment system is completed.  At that time the grantee
will collect $106,000 and  retain $53,000.  The grantee said that assuming an
eight percent inflation rate, expenses will exceed revenues by the year 2003,
and the net accumulated deficit at  the end of the recovery  period will be more
than $964,000.

     EPA is at  this time unable to  verify Bergen County's administrative cost
estimates.  Some grantees, however, recalculate ICR charges yearly to reflect
actual flow sent by an industrial user to the treatment facility.  This practice
is not required by EPA.  In all cases where contractual agreements do not exist,
we require adjustments only for substantial changes.  Congress specified ICR
charges should  be modified only when industrial users adopt permanent process
changes that reduce flows  or pollutant loadings sent to a POTW.

     Although ICR requirements are  uniform, grantees employ a variety of
techniques in administering their treatment system financing programs.
Segregation of  costs attributable to ICR alone could not be accomplished by
Coopers &  Lybrand.  The agency's contractor was unable to determine which
costs  in a grantee's revenue system were associated solely with ICR, and found
in many instances that ICR and user charge administrative costs are shared.

      Following  is a listing of various grantees with approved ICR systems.   The
examples presented show a  variety of grantees, all of which have different indus-
trial  waste loadings.  ICR is useful for some grantees, while others consider the
recovery requirements unnecessary.  Also included is a sample breakdown of ICR
administrative  costs.

               Incremental  Annual  Cost of Administering ICR

1.  No cost for industry monitoring (covered under user charge system)

2.  Fixed costs (regardless of number of industrial  users):

     a.   System accounting  (allocation of revenues,  bookkeeping,
         investment management, disbursement to U.S.  Treasury and
         to projects approved by the Regional  Administrator, calcula-
         tion of incremental  costs)                                   $2,700

     b.   Bank custodian fees                                              300

     c.   Annual audit                                                    600

3.  Variable cost (per industrial  user):

     a.   Extraction of data from user charge data  base, and calculation
         of annual  ICR charge                                         $   25

     b.   System accounting  (accounts receivable,  receipt and logging
         of payments, and follow-up on late payments)                  $   50

     c.   Records maintenance                                           $   25
                                                                      $  100

4.  Additional  cost per industrial  user if manual  (rather
    than computerized) system is used                                 $  100

                        Efficiency of ICR Revenue Systems
Name of
Western Lake Superior,
Albert Lea, MN
Sacramento, CA
Tempieton, MA
Passaic Valley, NO
Fall River, MA
Rockford,  IL
Bergen County, NJ
Ellsworth, WI
Los  Banos, CA
Viroque, WI
ICR Expenses
Number of
Industrial  Users
Average Flow per
Industrial  User
  0.67 MGD
  0.38 MGD
  0.31 MGD
  2.51 MGD
  0.18 MGD
  0.12 MGD
  0.20 MGD
  0.07 MGD
  0.12 MGD
  0.07 MGD
  0.015 MGD

     The "average" figures for ICR systems mask a wide  range  of specific
ICR situations which confront various grantees.  The following  eleven  grantees
have been selected as examples of these various situations.

A.  High-efficiency revenue systems (incremental  cost of collection  is
    less than 2% of ICR revenues):

     1.  Templeton, MA - a 3 M6D plant with one industrial  user which
         contributes 89% of the design flow, 98% of the design  BOD
         loading, and 99% of the design SS loading.

     2.  Passaic Valley Sewerage Commission, NJ - a  300 MGD plant, currently
         under construction, with 400 industrial  users  which  will  contribute
         24% of the design flow, 60% of the design BOD  loading, and  60%
         of the design SS loading.

     3.  Albert Lea, MN - a 12 MGD plant with eight  industrial  users which
         contribute 25% of the design flow, 54% of the  design BOD  loading,
         and 44% of the design SS loading.

B.  Average-efficiency revenue systems (incremental  cost of collection
    equals 5% to 21% of ICR revenues):

     4.  Bergen County Utilities Authority, NJ  -  a 75 MGD plant with 72 industrial
         users which contribute 7% of the design  flow,  13%  of the  design
         BOD loading, and 7% of the design SS loading.

     5.  Rockford, IL - a 60 MGD plant with 110 industrial  users which
         contribute 37% of the design flow, 17% of the  design BOD  loading,
         and 9% of the design SS loading.

C.  Low-efficiency revenue systems (incremental  cost of collection exceeds
    50% of ICR revenues):

     6.  Ellsworth, WI - a 0.7 MGD plant with one industrial  user  which contributes
         18% of the design flow, 27% of the design BOD  loading, and  none
         of the design SS loading.

     7.  Viroque, WI - a 0.5 MGD plant with one industrial  user whose
         high-strength waste contributes 3% of  the design flow, 20%  of the
         design BOD loading, and 18% of the design SS loading.

D.  Special situations:

     8.  Fall River, MA - a 31 MGD plant, currently  under construction, with
         27 industrial users which will contribute 11%  of the design flow,
         31% of the design BOD loading, and 14% of the  design SS loading.
         When the ICR system is implemented, it is expected to  impose  a
         heavy economic burden on a number of old, marginally profitable
         industrial users.

     9.   Sacramento, CA - a 136 MGD plant, currently under construction, with
         40 industrial users which will contribute 11% of the initial flow.
         The seasonal nature of the activities of the five large food
         processors which were expected to use this plant would result
         in very high ICR rates.  This makes self-treatment an attractive
         alternative, especially for those users which can use a low-cost
         land treatment system.  One user (Libby-McNeil-Libby), constituting
         16% of anticipated ICR revenues and 1% of anticipated user charge
         revenues, has already ceased operation, and the largest user
         (Campbell Soup), constituting 34% of anticipated ICR revenues and 5%
         of anticipated user charge revenues, is expected to construct its
         own land treatment facility prior to the start of operation of the
         new plant.

     10.  Los Banos, CA - a 2 MGD plant whose two remaining industrial
          users contribute 7% of the design flow, 7% of the design BOD
          loading, and 7% of the design SS loading.  The largest industrial
          user  (Beatrice Foods), which had contributed 24% of the design
          flow, 74% of the design BOD loading, and 44% of the design SS
          loading, has moved about 20 miles to Gustine, CA, which has an older
          plant which is not subject to the ICR requirement.

     11.  Western Lake Superior Sanitary District, MN - a 44 MGD plant
          whose largest industrial user testified against ICR at recent
          Congressional hearings.  It should be noted that this system
          is a  high-efficiency revenue system, with an incremental  cost
          of collection of about 0.5% of annual ICR revenues.

     The high-efficiency ICR systems generate a large amount of revenue in
relationship to the  incremental cost of collection.  Generally, these are
grantees whose  industrial users have an average flow in excess of 0.25 MGD,
although grantees with large revenue bases may fall below this figure and still
have a  high-efficiency ICR system.

     The average-efficiency ICR systems will initially generate a reasonable
amount  of revenue in relationship to the incremental  cost of collection.  However,
as the  incremental cost of collection rises due to inflation, while the ICR
revenues remain constant, the efficiency of these systems will gradually decrease,
and before the  end of the recovery period, the incremental  cost of collection
will exceed the grantee's 50% share of ICR revenues.   Since 50% of ICR revenues
must be paid to the U.S. Treasury, the user charge system must be used to finance
all incremental costs of collection which exceed the grantee's 50% share of ICR

     The low-efficiency ICR systems will generate no net revenue for the
grantee, since even the initial year's incremental expenses will exceed the grantee's
share of ICR revenues.  As the incremental administrative costs rise due to
inflation, the net deficit from the ICR system will increase each year.  Again,
since 50% of the ICR revenues must be paid to the U.S. Treasury, the user charge
system must be used to finance all incremental costs of collection which exceed
the grantee's 50% share of ICR revenues.

1.   Templeton, Massachusetts
     3 MGD advanced waste treatment plant
     $8,698,000 Federal  grant
     30 year recovery period
     1 industrial  user (Baldwinville Products Company)
     Industrial contribution: 2.51  MGD
                              89% of design flow
                              98% of design BOD loading
                              99% of design SS loading
     $258,000 annual  ICR revenue
     $3,800 initial incremental  cost of collection
     1.5% of revenues used for expenses
     2.9% of grantee's share used for expenses
     ICR rates:  5.2 cents per 1000 gallons
                 0.6 cents per pound of BOD
                 0.3 cents per pound of SS
This grantee is voluntarily continuing to collect ICR payments
during the moratorium period.

2.  Passaic Valley Sewerage Commission, New Jersey
     300 MGD secondary plant, scheduled completion 1981
     $394,000,000 Federal grant
     30 year recovery period
     400 industrial users
     Industrial contribution:  72 MGD  (0.18 MGD average per user)
                               24% of  design flow
                               60% of  design BOD loading
                               60% of  design SS loading
     $2,840,000 annual ICR revenue
     $43,600 initial  incremental cost  of collection
     1.5%  of revenues used for expenses
     3.1%  of grantee's share  used for  expenses
      ICR rates:   1.7  cents per 1000 gallons
                  1.0  cents per pound of BOD
                  0.1  cents per pound of SS

3.   Albert Lea, Minnesota
     12 MGD secondary plant
     $26,588,400 Federal  grant
     30 year recovery period
     8 industrial  users
     Industrial contribution:  3.08 MGD (0.38 MGD average per user)
                              25% of design flow
                              54% of design BOD loading
                              44% of design SS loading
     $532,960 annual  ICR revenue
     $5,200 initial  incremental  cost of collection
     1.0% of revenues used for expenses
     2.0% of grantee's share used for expenses
     ICR rates:  6.4  cents per 1000 gallons
                 2.4  cents per pound BOD
                 2.1  cents per pound SS
                15.0  cents per pound NhL-N
                19.5  cents minimum total charge per 1000 gallons

4.  Bergen County Utilities Authority, New Jersey

     75 MGD secondary plant

     $8,800,000  initial  Fede'/di  grant

     $44,000,000 subsequent Fedora I  grant

     two 30 year recovery  periods  (second recovery  period  starts  in
     the fourth year of  the first  recovery period)

     72 industrial users

     Industrial  contribution:   5,06  MGD  (average 0.07 MGD  per user)
                                7%  of design  flow
                                13% of design BOD loading
                                7%  of design  SS  loading

     $16,000  initial ICR revenue (increases  to  $106,000 in the fourth year of
     the recovery period;  decreases  to $90,000  after the thirtieth year)

     $18,000  initial incremental  cost of collection  (increases to $22,700 in
     the fourth  year of  the recovery period, assuming 8% inflation)

     112%  of  revenues used for  expenses  in first year
     21% of  revenues used  for expenses in fourth year

     225%  of  grantee's  share used  for expenses  in first year
     43% of  grantee's share used for expenses in fourth year

      ICR rates:   0.3 cents per  1000  gallons  (increases to  1.0 in fourth year)
                  0.1 cents per  pound BOD  (increases to 0.7 in fourth year)
                  1.1 cents per  pound SS  (increases  to 4.0  in fourth year)

 This is a  typical grantee,  I c;> $106,,000 annual ICR revenue and $18,000 initial
 administrative costs are almost exactly  equal to the average amounts of $101,000
 and  $15,000  found by Coopers and Lybrand.  At an 8% inflation rate, expenses
 would  exceed  total  ICR  revenues by the year  2003, and the  net accumulated deficit
 at the end of the ICR period would exceed $964,000.  At a  10% inflation rate,
 expenses would exceed total  ICR revenues by  the year 1998, and the net accumulated
 deficit at the end of the  ICR period would exceed $3,878,000.  Of course, regard-
 less of such  costs, the  U.S. Treasury would  receive its 50% share of annual ICR
 revenues,  which  in the  case of  Bergen County would  total fS,180,000 over the
 33 year recovery period,

 At an  8% inflation rate^ the incremental cost of collection would exceed the
 grantee's  50% share by  the year l':;94;, ti which  time the excess costs would have
 to be  financed  through  the user charge system.  At  a 10% inflation rate, incremen-
 tal costs  would  exceed  the grantee's 50% share  by the year 1991.

 It also should  be noted  that expenses will exceed total ICR revenues during the
 first  three years of the recovery  period, due to the lower amount being recovered.

5.   Rockford, Illinois

     60 MGD secondary plant

     $33,937,000 Federal  grant

     two 30 year recovery periods (second recovery period starts in the
     fourth year of the first recovery period)

     110 industrial users

     Industrial  contribution:  22.2 MGD (0.20 MGD average per user)
                               37% of design flow
                               17% of design BOD loading
                               9% of design SS  loading

     $1500 initial  ICR revenue (increases to $220,000 in the fourth year of
     the recovery period; decreases to $218,500 after the thirtieth year)

     $14,600 initial  incremental  cost of collection (increases to $18,400 in
     the fourth  year of the recovery period, assuming 8% inflation)

     973% of revenues used for expenses in first year
     8% of revenues used  for expenses in fourth year

     1947% of grantee's share used for expenses in first year
     17% of grantee's share used  for expenses in fourth year

     ICR rates:   0.00 cents per 1000 gallons (increases to 4.1 in fourth year)
                 0.00 cents per pound BOD (increases to 0.2 in fourth year)
                 0.02 cents per pound SS (increases to 0.9 in fourth year)

While the industrial  flow to this plant is substantial, only a small portion
of the facility  is  subject to the ICR requirement during the initial recovery
period.  As additional Federally  assisted facilities go into operation, the ICR
revenue will increase substantially.

6.  Ellsworth, Wisconsin

     0.7 MGD secondary plant

     $601,380 Federal grant

     30 year recovery period

     1 industrial user (a creamery)

     Industrial contribution:  0.12 MGD
                               18% of design flow
                               27% of design BOD loading
                               0% of design SS loading

     $7,196 annual ICR revenue

      $3,800 initial  incremental cost of collection

      53% of revenues used for expenses

      106%  of  grantee's share used for expenses

      ICR rates:   5.8 cents  per 1000 gallons
                  3.6 cents  per pound BOD
                  0.0 cents  per pound SS

7.   Viroque, Hi scons in

     0.5 MGD secondary plant

     $859,635 Federal  grant

     30 year recovery  period

     1  industrial  user (a cheese processor)

     Industrial  contribution:   0.015 MGD
                               3% of design  flow
                               20% of design BOD loading
                               18% of design SS  loading

     $3,522 annual  ICR revenue

     $3,800 initial  incremental  cost of collection

     108% of revenues  used for expenses

     216% of grantee's share used for expenses

     ICR rates:   6.5 cents per 1000 gallons
                 1.7 cents per pound BOD
                 1.8 cents per pound SS

Although the industrial  user discharges only 15,200  GPD, the high strength
of the discharge makes it equivalent to over 25,000  GPD of domestic sewage,
on the basis of  both BOD and SS.

8.  Fall River, Massachusetts

     31 MGD secondary plant, scheduled completion 1981

     $32,057,000 Federal grant

     30 year recovery period

     27 industrial users

     Industrial contribution:  3.34 MGD  (0.21 MGD average per user)
                               11% of design flow
                               31% of design BOD loading
                               14% of design SS loading

     $180,600  annual  ICR revenue

     $9,000  initial  incremental cost of  collection

     5.0%  of revenues used  for expenses

     10.0% of grantee's share used for expenses

      ICR rates:   4.2 cents  per 1000 gallons
                  1.3 cents  per pound BOD
                  4.3 cents  per pound SS

 Cost of development of  ICR  system:  $9,900  Federal  grant
                                     1,980  state grant
                                      1,320  local funds

 Fall River was selected as  an example  because many  local  industries  appear
 to be  only marginally profitable, and  the imposition  of  ICR can  be  expected
 to have a significant,  adverse  economic  impact.  Fall  River is an older,
 industrialized city.  Local industries  are  competing  against other  areas
 with lower utility costs,  lower  taxes  and lower transportation costs.
 Because of the substantial  upgrading  of  wastewater  treatment facilities  and
 the change from an ad valorem tax to  a  proportionate  user charge system,  perceived
 wastewater treatment costs  will  increase significantly.   The recurring statement
 from industries,  local  government,  and  trade groups has  been that wastewater
 treatment costs will be the final incremental  cost  that  will force  them  out
 of business in the Fall  River area,  thus seriously  harming  the local  economy.

9.  Sacramento Regional  County Sanitation District, California

     136 MGD secondary plant, scheduled completion 1981

     $303,000,000 Federal  grant (50% for treatment plant and 50% for

     30 year recovery period

     40 remaining industrial users (one closed;  one will self-treat)

     Industrial  contribution:  12.3 MGD (0=31  MGD average per user)
                               9% of design flow (was 19%)
                               31% of design BOD loading (was 51%)
                               17% of design SS  loading  (was 35%)

     $571,774 annual  ICR revenue (was $1,137,000)

     $7,600 initial  incremental  cost of collection

     1.3% of revenues used for expenses

     2.7% of grantee's share used for expenses

     ICR rates:   4.0 cents per 1000 gallons*
                 1.3 cents per pound BOD*
                 0.4 cents per pound SS*

This is a regional system which will replace 19  existing treatment
plants.  After the start of construction, two  of the largest potential
users reversed their earlier decision to use the new system.  The largest
potential user,  Campbell Soup, which would have  contributed 7% of the
design flow, 16% of the  design BOD loading, and  15% of the design SS
loading, has designed its own land treatment system.  Campbell  Soup has
not yet initiated construction of its land treatment system, but is
expected to do so unless the ICR requirement is  repealed.   The fifth
largest potential user,  Libby-McNeil-Libby, which would  have contributed
3% of the design flow, 5% of the design BOD, and 4% of the design SS,
has closed its food processing plant.  As a result, neither of these
potential users  will  be  required to make user  charge or  ICR payments,
despite the fact that $15,540,000 in Federal funds, $2,590,000 in state
funds, and $2,590,000 in local funds are being expended  to construct the
transmission and treatment capacity previously sought by these two
potential users.  The departure from the system  by Campbell Soup is expected
to result in a 6% increase in user charge rates  for the  remaining users,
and the closing  of Libby-McNeil-Libby is expected to result in a 1% increase

ICR revenue loss:  Campbell Soup        $   385,000
                   Libby-McNeil-Libby       130,000
                   Total per year           515,000
                   Total during recovery
                   period     "         $15,540,000
*actual rates will be much higher for seasonal  users, since costs are
allocated on maximum demand basis

10.  Los Banos, California

     2 MGD lagoon

     $1,498,000 Federal grant

     30 year recovery period

     2 remaining industrial users (one moved away)

     Industrial contribution:  0.14 MGD  (average 0.07 per user)
                               7% of design flow (was 31 SO
                               7% of design BOD loading (was 81%)
                               7% of design SS loading  (was 51%)

     $4,338 annual ICR revenue (was $22,523)

      $4,000 initial incremental cost of  collection

      92% of revenues  used  for expenses
      184% of  grantee's share used for expenses

      ICR rates:   8.2  cents per 1000 gallons*
                  0.2  cents per pound BOD*
                  0.4  cents per pound SS*

 Cost of development of ICR system:  $3,750  Federal  grant
                                        625  state grant
                                        625  local funds

 The departure of the largest industrial  user,  Beatrice  Foods,  which  contributed
 24% of the design flow,  74% of the  design  BOD  loading,  and  44% of the design
 SS loading, increased user charge rates for the  remaining users by 35%.

 ICR revenue loss:  Beatrice Foods  $  18,185
                    Total  per year    18,185
                    Total  during
                    recovery period  $595,550
 *actual  rates will  be much higher for seasonal  users, since costs are
 allocated on maximum demand basis

11.   Western Lake Superior Sanitary District,  Minnesota

     44 MGD secondary plant

     $79,900,000 Federal  grant

     30 year recovery period

     22 industrial  users

     Industrial  contribution:   14.7 MGD (0.67  MGD average per user)
                               34% of design flow
                               65% of design BOD loading
                               39% of design SS loading

     $1,153,714 annual  ICR revenue

     $5,800 initial  incremental  cost of collection

     0.5% of revenues used for expenses

     1.0% of grantee's  share used for expenses

     ICR rates:   8.2 cents per 1000 gallons
                 2.3 cents per pound BOD
                 1.3 cents per pound SS

This is a totally new regional system.   The largest industrial  user,  Potlatch,
which contributes 30% of  the design flow,  43%  of the design  BOD loading,  and
32% of the design SS loading,  is located 25 miles from the treatment  plant.
The combination of a totally new system and a  25 mile force  main results  in  an
unusually high ICR rate structure.  For its 13 MGD of wastewater, Potlatch
annually pays about $2  million in user charges and about $0.1  million in  local
debt service, and would pay about $1 million in ICR charges.   Thus, while Coopers
and Lybrand found that  the average industrial  user's ICR payment would equal
10-15% of the total  cost  of wastewater treatment services, Potlatch's ICR pay-
ment would exceed 30% of  its total cost of wastewater treatment services, or more
than double the nationwide average found by Coopers and Lybrand.

     ICR revenues to most grantees can provide a  significant  supplemental
fund for treatment system improvements.  The  income  can  be  used  to  replace
treatment components as they age, and retained ICR revenues can  be  used  to
replace system components that unexpectedly break down.

     Treatment system maintenance is a major  expense for grantees,  but one
which historically has been neglected.  Where industrial  flows constitute a
significant contribution to the municipal treatment  system, treatment system
deterioration may be accelerated.  Unless a grantee  has  an  aggressive and
well-financed program for replacing deteriorating equipment there eventually
will be treatment system malfunctions and water quality  violations.  Currently,
about 70 percent of the existing municipal treatment systems  are not performing
properly.  Some of these systems need construction grant assistance, but in many
cases poor operation, maintenance, and replacement programs are the cause of
inadequate performance.

     Faced with this specter of failing systems,  the agency is increasingly
concerned that the Federal Goverment will be  faced with  an  increasing level
of expectation from grantees for financial assistance for facility replacements
and upgradings.  The availability of dedicated ICR revenues could, in many
communities, help ameliorate this problem.  The prospect of a growing expectation
for Federal  funding assistance is not without precedence  in the area of Federally
assisted public works enterprises.

     Congress need only look at the Federal highway  program for comparison.
The highway program is similar to the sewage  treatment construction grants
program.  Both provided Federal grant assistance to  construct essential  public
facilities.   Once constructed, state or local governments assume responsibility
for ongoing operation, maintenance, and major rehabilitation or improvements.

     Although both programs started with similar objectives, the Department
of Transportation now is finding there are new demands on the Federal  Highway
Trust Fund.   The trust fund, which provides the Federal   share of highway
construction, is financed by a tax on gasoline.   The gasoline tax advanced the
concept of proportional user charges.  Gasoline users needed highways, which
justified the tax on gasoline as the basis for the trust fund.  The trust fund
would be used to build highways that benefitted gasoline users, and those using
the highways frequently consumed more gasoline and therefore paid an increased
proportion of taxes into the trust fund.

     States  and local agencies also rely on a gasoline tax for their share
of highway construction matching grants.  This revenue system effectively
raised income for all levels of government until  gasoline prices  rose  and con-
sumption declined.  Now during a period when  most new highway construction—the
original Federal objective in the highway program—is completed,  states and
local governments faced with on-going operation and maintenance of Federally
constructed  roads have declining revenues and are unable to afford road
maintenance.  State governments are returning to Congress seeking grant
assistance for maintenance.

     Congress, over the past few yearss has approved "emergency legislation"
that gives states "second grants" for maintaining roads previously constructed
with Federal grants.  One Department of Transportation official told EPA
recently that if Congress changes the definition of road improvements in the
highway program's authorizing legislation to include maintenance programs, the
Federal government will face a new multibillion dollar grant liability.

     EPA is concerned that if grantees do not develop sound and complete
revenue programs, demands will be placed on the sewage treatment construction
grants program for "second grants" that will be used to finance the rehabilita-
tion and expansion of treatment systems now being constructed.   The agency is
concerned that grantees are not now anticipating future capital requirements for
upgrading their treatment systems, and generally funds now are not being reserved
and managed for treatment system improvements and expansions.

     ICR requirements do force grantees to hold revenues generated by their
treatment systems, and retained income must be used for treatment system improve-
ments.  Although the user charge program includes requirements  for retaining
income adequate to cover treatment system replacement, the replacement guidelines
established by Congress require only that sufficient income be  retained to
pay for minor equipment replacement.  Many grantees currently  transfer yearly
budget surpluses generated by treatment systems into general  revenue accounts.
Once transferred, the funds are lost to the municipal  treatment agency and
are unavailable for treatment system improvements.   ICR revenues, unlike user
charges, cannot be transferred into general revenue accounts.   The revenues
returned to a grantee can be managed to offset inflationary losses that are
particularly severe because although administrative costs  to a  grantee may rise
over time, an industry's ICR payment is fixed.   The industrial  user repays
the Federal construction cost without interest.  Although  industry repays with
deflated dollars, sound ICR revenue management can  provide a grantee with a
sizable portion of income needed for future system  reconstruction and expansion.


     Based on our recent evaluation  of the  ICR provisions and the limited experience
with their application, EPA concludes that  ICR,  if effectively and uniformly
applied, will achieve the original intent of the Congress — partial elimination
of a subsidy to industries discharging into POTWs.   If, after consideration of
this report and the testimony of witnesses  from  both the industrial  sector and
the municipal treatment systems, Congress decides to sustain its original
objective, then the agency recommends that  the present moratorium be allowed
to expire on June 30 and that grantees begin collecting ICR revenues from
industrial users.

     This recommendation is based on several findings and conclusions.  First
among these is the fact that industrial users of publicly owned and financed
treatment systems do, indeed, enjoy  a subsidy—as compared to comparable industries
which treat and discharge their own  wastes.  The extent of this subsidy is difficult
to quantify and depends on a number  of factors such as location, type of discharge,
flow and loadings, sophistication of the waste treatment process, etc.  Nevertheless,
it is fair to assert that indirect dischargers are relieved of the financial burden
of raising capital for development and construction of facilities not directly
related to their primary function (production);  they are relieved of bearing the
market cost of money which their counterpart industry has to bear in the financial
market -- a difference at this time  of over 18 percent in the cost of investment
capital for lenders' most credit-worthy customers.  By virtue of sharing fixed
costs, many plants pay lower management, administrative, and legal costs than
they would pay if they built self-treatment facilities; they do not have to
directly operate or maintain the treatment system, monitor and report on discharge
performance, or acquire and comply with the direct discharge permit limitations.

     Another conclusion which the agency believes argues persuasively for the
maintenance of a system of dedicated revenues is an increasing apprehension about
the financial capacity of municipalities to make necessary operational improvements,
facility replacements, expansions, and upgradings in the absence of an earmarked pool
of revenues.  While ICR is not the total answer  to this problem, and while industry
should not bear more than its proportionate share of expansion and reconstruction
costs, the availability of ICR revenues, which in some areas will be substantial,
can provide an effective cushion against future  replacement costs and, perhaps just
as important, provide the precedent  for maintaining a "sinking fund" dedicated
for treatment system expansion and improvements.

     Currently, some grantees include a charge within their user charge systems for
future capital expenditures.  Generally, future  capital expenditures are defined
as treatment system minor equipment  replacement  and in some cases system expansion.
Expansion is one valid consideration in any sound sewage treatment system's financing
program.  In most instances, however, funds collected and reserved are held for
short term (5 year) capital improvement programs.  Most municipalities are not
doing the long range fiscal planning necessary to avoid future capital shortfalls
caused by treatment system malfunctions, NPDES noncompliance, and major system

     A grantee should be applying investment planning techniques in its wastewater
treatment program similar to those utilized by industry when it makes long range
capital needs projections for investors.   Sewage treatment systems should be viewed
as businesses that are capable of generating sufficient profit to maintain operati
and self-finance expansion.
     Most grantee revenue systems now in place, however, are designed only to
repay past obligations (local debt service) and pay, on a yearly basis, for
actual operation and maintenance expenses.   Few grantee revenue systems include
a managed account or charge for major system improvements that will  be required
in the future.  A grantee using a systematic enterprise approach to  financing
its treatment system will consider on-going performance properly.   The grantee also
will be able to identify needs for debt service on loans used to finance past
capital improvements as well as forecast future capital needs for plant expansion
and reconstruction.  User charges collected to operate the treatment system are
identified as well as ICR receipts.   Accounts are segregated; funds  collected
are dedicated; debt and income are managed  for specific purposes.

     Most grantees are not developing revenue programs that include  provisions
for forecasting long term capital needs and identify where financing will  come
from to cover those needs.  The absence of  this planning component assumes treatment
systems now being constructed will always be adequate to satisfy a grantee's
needs and will never require major expansion, improvement, or rehabilitation.  This
is not a valid assumption unless Congress intends to continue providing munici-
palities with sewage treatment construction grants after all  first-round grant
needs have been satisfied.  Given the magnitude of present unmet needs for basic
treatment facilities ($54 billion for just  Categories I, II,  and IV  B), EPA at
this time could not support expanding grant eligibility for a new  category of
sewage facility expansion and reconstruction.

     ICR is one component in the local  sewage treatment revenue programs that can
be relied on for income dedicated exclusively to treatment system  improvements.
Economic independence for local sewage treatment programs is  essential, and the
factors which must be considered by  municipal agencies include:

     1.  Expected life of existing facilities and capital  expenditures
         required for future upgrading, expansion, rehabilitation,
         reconstruction, and/or new  construction.

     2.  Expected future bonding capability.

     3.  Estimate of funds which will be available when funding is needed:

         a.  ICR retained amounts.

         b.  Replacement holdovers from user charges and existing  bond funds.

         c.  Income from general revenues.

         d.  Income funds from any other local  sources.

     4.  Projections of how much additional money will be needed considering
         all of the above factors.

     5.  Action to ensure that additional money will  be  available.   If the
         necessary debt capacity is not available, money from other  sources
         earmarked for future capital expenditures should be assessed.  Current
         sources include user charges for debt service and various methods of

     Congress did in 1972 consider requiring grantees to reserve funds for
future system replacement as a condition to award of  EPA construction grants.
The replacement provision was modified, however, to require small reserves
adequate to pay for yearly plant maintenance.  EPA would support an  amendment
to the ICR or user charge provision requiring long range treatment system
financial planning and the establishment, at the local level, of a sinking fund
dedicated to treatment system expansion, replacement, and improvements.  Such
a fund could be managed by a grantee to eliminate inflationary losses.

     If the Congress decides to retain ICR requirements, there are still
opportunities for reducing the administrative burden  imposed on grantees.   The
agency proposes that the Congress consider some of the following modifications:

     o  Currently, industrial users of municipal treatment systems dis-
        charging less than 25,000 gallons per day of equivalent sanitary
        wastes are exempted from ICR requirements.  This exemption, established
        by the 1977 Clean Water Act Amendments, effectively excludes most
        small industrial  facilities from ICR requirements.

        The flow exemption exclusion provides benefits to a number of small
        firms that in many instances are unable to afford or obtain financing
        for self-treatment facilities.   Many of these firms are "family
        businesses" in urban areas,  A significant number would be considered
        marginal according to standard profitability indicators and would
        probably cease operations if required to pay actual  costs for sewage
        treatment capacity.

        Data available to the agency indicates the flow exemption could be
        increased to 50,000 gallons per day of equivalent sanitary waste
        without significantly decreasing the total  amount of revenues collected
        by grantees and returned to the Treasury.   Available data indicates
        increasing the flow exemption to 50,000 gallons per day would exclude
        83 percent of industry now using municipal  treatment systems  from  ICR
        requirements while retaining 87 percent of the potential  ICR  revenues.
        The major disadvantage of this  option is that grantees  would  have  less
        incentive to.inventory industrial  users and  characterize  process waste
        streams.  This information is needed to protect plant  performance  and

        Based on a review of ICR systems in EPA Region V, however,  increasing
        the flow exemption could decrease billing  and other  administrative
        requirements for  grantees without significantly decreasing  ICR
        revenues.   Preliminary figures  taken from  Region  V to  illustrate
        various  flow exemptions are shown below.   The effect of  various flow
        exemptions is shown  as applied  to Region V  industries  participating in
        approved ICR systems.   The reductions estimated  to occur  in  Region V  are
        then applied to the  anticipated national Federal  share  of ICR revenues
        to determine the  reduction in ICR revenues  returned  to  the  Federal
        Treasury under various flow exemptions.


            Estimated 30-Year Federal  Share of ICR Payments

                     Region V         National  Estimate          National Estimate
                  No. of Users          Federal  Share             Per Year (1/2 Total
GPP Exclusion     (% Reduction)         (% Reduction)              ICR Collections)

     0              277 (0%)          $ 900 Mil   (0%)            $ 30 Mil
 2,500              169 (39%)         $ 891      (1%)            $ 30 Mil
 5,000              130 (53%)         $ 882      (2%)            $ 29 Mil
10,000              100 (64%)         $ 864      (4%)            $ 29 Mil
20,000               71 (74%)         $ 828      (8%)            $ 28 Mil
25,000               64 (77%)         $ 819      (9%)            $ 27 Mil
50,000               46 (83%)         $ 783      (13%)            $ 26 Mil

        The $900 million Federal  share of ICR payments  is
        only a rough estimate, based on a cumulative EPA grant
        amount of $45 billion.

     o  An additional modification of the ICR program advanced by the
        agency for consideration  is exempting those grantees from
        ICR program requirements  that can satisfactorily demonstrate
        ICR revenues are not needed in meeting long range obligations
        for treatment system improvement or rehabilitation.  In other
        words, if a grantee can show its existing funding mechanisms
        provide for future capital expenditures  and ICR insignificantly
        contributes to the grantee's funding program, ICR would not be

        An exempted grantee should be required to demonstrate elimination
        of ICR will not result in a disproportionate share of current and
        future treatment system costs being imposed on  residential users
        of the POTW.  Moreover, a grantee should show industry will be
        required to pay its share of treatment system construction costs.

        Industry's total share of postconstruction costs could be retained
        by the grantee or a portion of the payment could be returned to the
        Treasury if industry receives significant benefits from the sewage
        treatment construction grants program.   Each case would be judged
        individually, and at that time a determination  could be made regarding
        whether a grantee should  return a portion of the industry payments
        to the Federal Government.  All revenue collected from industry and
        retained by the grantee should be dedicated to  treatment system improve-
        ments, some of which would be tailored to industrial treatment needs.

        Data presented to the agency by some grantees indicate that in some
        instances ICR revenues retained by grantees will not significantly
        help in meeting future capital requirements for treatment system
        reconstruction.  This is  not true in cases where one or a few industrial
        dischargers use a significant portion of treatment capacity.  There
        are many grantees, especially small grantees, that reserve up to 90
        percent of treatment capacity for one or a few industrial users.  These

grantees  could  not  afford  to  operate  and  maintain  a  treatment system
if the  primary  industrial  user  withdrew from the  facility,  and without
a mechanism for recouping  construction costs from  these users a grantee
will be unable  to finance  system  improvements  without  imposing a signifi-
cant financial  burden on other  users.  It is the  agency's opinion that
ICR should be required of  any individual  industrial  user needing capacity
amounting to 10 percent or more based on  flow,  BOD,  or SS,  even if
that user discharges fewer than 50,000 gallons  per day (or  25,000
gallons if the  exemption is unchanged).   Similarly,  ICR should be required
when any  geographically concentrated  group  of  industrial users individually
do not exceed the established cost  recovery flow exemption  but collectively
require more than 20 percent  of a municipal  treatment  system's capacity.
ICR should'be required for major  industrial  parks  and  areas where indus-
trial acitivity is  concentrated and often in need  of specialized treat-
ment services.   ICR appears in  many cases unnecessary  to the  financial
viability of the treatment system in  cases  where any one industrial
discharger is allocated less  than 10  percent of capacity for  each system

Another option  offered by  EPA for consideration by Congress is  to
make ICR  a mandatory condition  for  grantees  seeking  Federal funds  for
industrial treatment capacity,  but  provide  grantees  with an option which
would enable them to avoid ICR  requirements  in  cases where industrial
capacity  financing  is not  sought from the Federal  Government.

EPA under this  option would award grants  adequate  for  domestic  treatment
capacity  and for industrial users meeting the established 25,000  or
50,000 gallon per day ICR  flow  exemption.   In new  treatment system
construction the grant amount would be determined  based on a model plant
designed  to serve a specified domestic population.   A  grantee would be
permited  to treat industrial  wastes, but  the grantee and the future
industrial users would be  required  to arrange private  financing to raise
funds for constructing capacity reserved  for industry's use.

Development of  a self-financing program would involve  a grantee,
industrial users, and the  grantee's bond  counsel and financial planners
in detailed negotiations during which funding mechanisms would be identi-
fied and  future  revenue requirements would  be determined.  Municipal
bonding tied to  revenues generated  by the treatment  system is the most
likely source of financing for  most grantees.   Bond  counsel, prior to
certifying the  municipal offering complies with the  Securities and
Exchange  Commission disclosure  requirements, would assure the grantee
and industrial  users develop  a  user charge  program that would generate
revenue sufficient  to cover debt payments, operation and maintenance,
and future treatment system improvements.

This option has  several advantages not found in the current ICR program.
Industrial users and grantees would have  an on-going financial interest
in the treatment system.   Industry, by virtue of its bond obligation,_
would not withdraw  from the treatment system without financial liability.
Both the grantee and industry would be concerned with treatment system
sizing, performance, management, and rehabilitation.

Another advantage provided by this option is it provides a strong
incentive to construct cost-effective treatment processes that are
sized and managed according to actual needs and include a minimum
of speculative treatment capacity.  Industry has no incentive to
accurately project its treatment needs under the existing ICR program.
Currently, industry estimates its needs but often uses less than is
constructed for its use.  In such cases ICR is charged only for
capacity actually used, and domestic users are required to make debt
payments on excess capacity.  Requiring industry to share in treatment
system financing will  encourage proper process selection and sizing
of treatment facilities and discourage industrial  withdrawal.

In all instances where a grantee and industry decide to utilize Federal
financing under conditions established in the ICR program, a shorter
recovery period and interest charges should be imposed and industrial
users should be required to sign a binding contract guaranteeing their
participation and obligation to pay for specified  treatment capacity.

Grantees and the Federal Government receive deflated dollars under the
existing ICR program.   ICR payments are not indexed for inflation and
no interest is charged on the "loan" provided to industry.   EPA suggests
a 5 or 10 year payback period because the time interval  is more closely
aligned with time frames used by corporate planners and long term financing
practices now being considered by the financial  community.   The interest
charge to industry should not exceed the prevailing rate paid  on Federal