EPA-600/5-74-031
November 1974
Socioeconomic Environmental Studies Series
Analysis of Cost Sharing Programs
For Pollution Abatement
of Municipal Wastewater
.SSR
\
111
(3
Office of Research and Development
U.S. Environmental Protection Agency
Washington, 0. C. 20460
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RESEARCH REPORTING SERIES
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EPA-600/5-7^-031
November
ANALYSIS OF COST SHARING PROGRAMS FOR
POLLUTION ABATEMENT OF MUNICIPAL WASTEWATER
By
Harold E. Marshall
Rosalie T. Ruegg
Building Economics Section
Institute for Applied Technology
National Bureau of Standards
Washington, B.C. 20234
Work Order Number EPA-IAG D4 H 374
Program Element No. 1BA030
,ROAP 21AXN09
Project Officer
Dr. Marshall Rose
Washington Environmental Research Center
Environmental Protection Agency
Washington, D.C. 20460
Prepared for
Office of Research and Development
U. S. Environmental Protection Agency
Washington, D.C. 20460
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CONTENTS
Page
Abstract iv
Figures v
Exhibits v
Tables vi
Acknowledgments vii
Sections
I Executive Summary 1
II Introduction 7
Purpose 7
Scope and Approach 8
General 9
Organization 15
III Description of Existing Cost-Sharing Programs and 19
Institutional Constraints
Construction Grant Program 19
Eligibility for Grants as Defined in 23
Legislation
Eligibility for Grants in Practice 26
Cost Sharing By Other Agencies 32
Institutional Constraints to Abatement 34
IV Theoretical Relationships 39
Selective Survey of the Literature 39
Derivation of Demand 43
ii
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CONTENTS-continued
Page
Conditions for Efficiency 48
Techniques 49
Scale 55
Characteristics of Equity 64
V Efficiency Implications of Existing and Alternative 70
Cost Sharing Programs
Techniques 70
Scale 81
VI Effects of User Fees on Cost Shares 90
Legislated User Fees 91
Alternative Interpretations 93
Interest Charges in User Fees 102
User Fee Implications 104
VII Summary, Findings, and Suggestions for Further 112
Research
Summary 112
Findings 114
Suggestions for Further Research 121
Appendix 123
Bibliography 135
iii
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ABSTRACT
This study evaluates existing cost-sharing programs for wastewater pollution
abatement as described in the Federal Water Pollution Control Act Amendments
of 1972, describes alternative cost-sharing programs that provide improve-
ments in terms of national efficiency and equity criteria as defined herein,
and suggests related areas for further research. Emphasis is on how Federal
cost sharing biases communities in favor of certain kinds of techniques.
The approach is to describe the current cost-sharing programs for both plant
and nonplant techniques; to examine cost-sharing, legal, and other institutional
biases against certain techniques; to analyze efficiency and equity effects
of alternative cost-sharing programs; and to describe the incentive effects
of cost sharing on nonfederal interests with respect to their choices among
abatement techniques. Findings of the study are that more efficient abate-
ment will result if the same percentage cost share applies to all plant
and nonplant techniques of abatement; the same percentage also applies to
all categories of cost (e.g., capital, land, operation and maintenance) for
a given technique; the same percentage applies to large and small communities;
institutional constraints on the selection of nonplant techniques are removed;
and if the program provides for Federal cost sharing of every abatement
technique that is technically viable.
This report was submitted in fulfillment of Program Element PE 1BA030 and
Work Order Number EPA-IAG D4 H 374 by the National Bureau of Standards,
Building Economics Section.
iv
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FIGURES
No. Page
1 Combined and Separate Municipal Sewer Systems 14
2 Alternative Approaches to Reduction of 16
Wastewater Pollution
3 Indifference Curves and Budget Constraints 45
4 Demand for Pollution Abatement 45
5 Demand for Pollution Abatement, With and 47
Without Enforcement
6 Insufficient Demand for Pollution Abatement 48
7 Cost Share for Efficient Technique(s) 54
8 Cost Share for Efficient Scale 60
9 Average Cost and Efficient Scale of Pollution 62
Abatement
10 Efficient Scale with Regional Abatement 65
EXHIBITS
1 Alternative Techniques for Abating Wastewater 13
Pollution
2 Allowable and Unallowable Project Costs Under
the Construction Grant Program 28
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TABLES
No. Page
1 Cost of Some Alternative Techniques for 11
Meeting the Dissolved Oxygen Objective
of 4 PPM in the Potomac Estuary
2 Eligibility for EPA Construction Grants of 30
Alternative Techniques, by Cost Cateogry
3 Grants by EPA and Other Federal Agencies as a 31
Share of Eligible and Total Project Costs as of
December 31, 1972
4 Maximum Federal Cost Shares for Sewer Facilities 33
Provided by HUD, FHA, and EDA
5 Impact on Local Project Cost of Different Cost- 71
Sharing Rules: An Illustration
6 Impact on Choice of Techniques of a Cost-Sharing 75
Rule Which Does Not Apply Equally to All
Categories of Cost .
7 Determination of a Cost-Sharing Constraint to 79
Reduce Potential Bias in Selection of Abatement
Techniques
8 Federal and Nonfederal Expenditure Requirements 85
of Alternative Cost-Sharing Rules Viewed
Historically
9 Illustration of a Grantee's Costs for a 101
Hypothetical Abatement Project With and
Without Retention of User Fees
10 Application of Pollution Abatement Techniques 123
To Major Problems of Municipal Waste Treatment
Systems
11 Some Waste Treatment Plant Operations and 131
Processes Applicable to Treatment of Wastewater
vi
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ACKNOWLEDGMENTS
The authors wish to thank the project monitor, Dr. Marshall Rose, and
Dr. Roger Shull, both in the Implementation Research Division, for help
in defining the bounds of this research effort. We also acknowledge the
many persons in the Environmental Protection Agency and in state agencies
who patiently explained to us many issues concerning waste treatment and
discussed with us the potential impacts of alternative cost-sharing programs.
Finally, we are indebted to those persons in the National Bureau of Standards,
especially Dr. Vartkes Broussalian and Dr. Peter Colwell, who gave helpful
comments in the course of the in-house review process. The responsibility
for all errors and shortcomings in the paper, however, rests with the
authors.
vii
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SECTION I
EXECUTIVE SUMMARY
The Environmental Protection Agency (EPA) administers the Construction
Grant Program for the abatement of wastewater pollution. The Federal
Water Pollution Control Act Amendments of 1972 (1972 Act) describe to
some extent the eligibility requirements for a community to apply for
EPA grants and the percentage Federal cost shares that can be awarded
for community abatement projects.
The Construction Grant Program, as enacted by the 1972 Act and administered
by EPA, has been criticized for being inefficient in that it encourages
a misallocation of resources in wastewater pollution abatement. The
purpose of this study, undertaken at the request of EPA, is to evaluate the
existing and alternative cost-sharing programs primarily with respect to
efficiency and to some extent equity (see Section IV for definitions of
efficiency and equity). Cost sharing affects efficiency through its
incentive effects on the choices by local communities for one kind or
size of abatement program over another. Cost sharing affects equity in
abatement through its differential treatment of participating communities.
The existing cost-sharing program as described in the 1972 Act and implemented
by Agency regulations is discussed. Theoretical relationships between
cost sharing and its incentive effects on community decisions regarding the
size of abatement projects and the kind of techniques used therein are
identified. Case examples illustrate the biasing effects on communities of
current rules that apply different cost-sharing percentages to different
techniques and to different cost categories. Local communities have
incentives to pick techniques which cost them the least money, but under
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existing rules, these are not necessarily the least-cost techniques to
the nation. Equity in the sense of fairness to parties participating in
abatement seems violated in that cost sharing is not directly related to
or varied with benefits received. Finally, legal and other institutional
constraints appear to play a significant role in affecting what techniques,
plant or nonplant, are chosen by communities seeking assistance in pollution
abatement. Specific findings of the study are summarized below:
(1) Application of the same percentage cost share to all plant and nonplant
techniques for the purpose of abating wastewater pollution will encourage
nonfederal interests to simultaneously select the combination of techniques
which is least costly to the nation as well as to themselves.
Applying the same share (regardless of what that share is) across all
techniques will eliminate the potential cost-sharing bias for some techniques
over others (e.g., for plant over nonplant techniques) that exists under
the current rules. (See Sections IV and V.)
Granting of cost-sharing eligibility to all technically viable alternatives
would encourage consideration of new technologies. Where only part of a
multiple-purpose project is abatement, sharing only those costs that could
properly be allocated to abatement per se would encourage the efficient
scale of abatement. Thus a lower Federal cost share would apply to
techniques that provide other benefits in addition to abatement, than to
techniques which provide abatement only, and the cost share would decrease
as the cost of providing those other benefits increases relative to the
cost of abatement.
(2) Application of the same percentage cost share to all categories of
project costs (i.e., to capital; to land for both site and process; for
operation and maintenance; and to planning) will encourage community
selection of the nationally least-cost technique(s) of providing abatement.
Because operation and maintenance costs are not currently shared at all by
the Federal government, while capital costs are shared, grant recipients
are biased towards capital-intensive techniques even though all techniques
may be eligible for the same percentage share of capital cost. (See
Sections IV and V.)
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Where only one category of cost (e.g., capital) can be shared, two alter-
native approaches for encouraging local selection of the least-cost
technique(s) might be considered in lieu of the same percentage for all
categories. The first approach is to vary the share of the single cost
category to be subsidized so that the local share as a percentage of
total project costs (i.e., the effective cost share) will be uniform
across all techniques. A second approach, still providing a Federal share
for one category only, would impose a constraint on the percentage of
total costs that the Federal agency could bear. The cost-sharing bias
would be reduced to a degree dependent on how low the constraint is, and
in some cases would be completely eliminated.
(3) Nationally efficient scales of abatement would be encouraged by reducing
the effective Federal cost share.
The legislation governing the Construction Grant Program does not specify
nationally efficient scales of abatement (i.e., the maximization of national
net benefits) as an objective of the program (see Section III). If,
however, this were an objective, the Association Rule (see Section IV)
could accomplish it by encouraging grant recipients to choose a scale of
abatement that is nationally as well as locally efficient. For most
projects, existing Federal cost shares probably exceed those that would be
obtained from applying the Association Rule (see Section V). Lower Federal
shares would tend to encourage more efficient scales of abatement, but
could nevertheless be set large enough to provide some incentive for
communities to expand their abatement activities. Since adequate information
regarding the incidence of abatement benefits is not available, further
research is needed before specific percentage cost shares can be selected.
(4) Varying cost shares in proportion to community size, other things being
equal, may lead to inefficient scales of abatement.
Over some range of abatement levels, the average cost of abatement is likely
to fall as a result of economies of scale. Assuming that this range of
decreasing average cost extends to large scales of abatement, big cities
with large demands for abatement would be expected to have lower average
costs than small cities with less demand for abatement.
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One way of encouraging small cities to demand higher levels of abatement:
and thereby profit from economies of scale is to raise the percentage
cost share for small cities above that of big cities. However, the
efficient scale of abatement for a small city may be much less than that
scale at which average costs are minimized (see Section IV). Thus,
applying preferential Federal cost shares to small cities to encourage
them to take advantage of economies of scale may result in oversized
projects from the standpoint of maximizing net benefits from abatement.
Achieving efficient levels of abatement is not necessarily incompatible
with taking advantage of economies of scale, however. For example, it
might be advantageous to individual cities as well as the nation for cities
to join in the construction of regional treatment plants that would lower
the average cost of abatement to all while at the same time providing the
efficient level of abatement.
(5) Returning all industrial user fees collected against the Federal grant
to EPA for redistribution through the Construction Grant Program will
eliminate the problems described below, without reducing the amount of
funds available to municipalities.
Existing Federal user fee practice allows grantees to retain part of the
user fees collected from industry to repay industry's share of the Federal
grant. Retention of these user fees by the grantee increases the Federal
subsidy and reduces the effective cost share to the grantee. The more
industrialized the community, the larger this additional subsidy and the
lower the effective cost share of the grantee. This practice has the
following effects: (a) the tendency towards construction of larger-than-
efficient scales of abatement is increased because the grantee's effective
share of cost is thereby reduced; (b) the bias towards capital-intensive
and eligible land-intensive projects is increased, because the grantee's
effective cost share is Inversely related to the amount of capital and
eligible land costs that are attributable to industry; (c) a larger Federal
subsidy is provided to industrialized communities than to residential
communities, because the amount of retained user fees is dependent on the
construction cost of facilities provided to industry. (See Section VI.)
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(6) Including an interest charge in user fees collected from industry
against the Federal grant would help assure that industry paid its full
share of costs. Under existing arrangements, industrial users tend to
be substantially undercharged for their part of the costs of facilities
because they pay no interest on their part to reflect the time value of
money. Hence, the user fee revenue is much less than it would be if
industry repaid the full cost of treating its wastewater. (See Section VI.)
(7) Legal and other institutional constraints exist which bias against
the selection of efficient abatement techniques.
The following steps might be considered for eliminating these biases:
(a) educational and promotional efforts to encourage planners to consider
nonplant techniques; (b) encouragement by grant officials of applicants
to consider fully abatement alternatives during the initial project
planning stages; (c) establishment of architects'/engineers' fees based
upon operation and maintenance costs, as well as capital costs, to avoid
bias towards capital-intensive techniques; (d) encouragement of regional
management of wastewater abatement to reduce the inefficiencies resulting
from the narrow view taken by small jurisdictions; and (e) the same treat-
ment of all abatement techniques in the law, the regulations, and the
program. (See Section III.)
In summary, this study has identified action that would increase the local
share of abatement costs; reduce the cost-sharing bias toward capital-
intensive and eligible land-intensive projects; reduce the cost-sharing
bias for some plant over nonplant techniques; increase the Federal and
local expenditures on nonplant techniques relative to plant techniques;
increase the community demand for nonplant techniques; increase the degree
of abatement per national dollar spent, and in general result in more
efficient and equitable projects.
Additional areas of research were identified that might be of value to
EPA in meeting its objectives of encouraging efficient abatement and of
treating cost-sharing parties equitably. One type of research needed is
an investigation of how institutional requirements affect communities'
selections of techniques of abatement. A second research problem is the
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determination of the optimal points in time for reducing and/or eliminating
pollution abatement grants. A third potential area is the analysis of the
link between levels of local performance in abatement and rewards or grants
based on good performance. A loan program for capital that reduces the
amount to be paid back as performance improves should be studied. A fourth
area of research should be the determination of community objective
functions in pollution abatement to see if communities are really concerned
with collection and disposal. A fifth area of research would be to
investigate the responsiveness to varying cost shares of community demand
for nonplant techniques. Additional perspective that is needed to analyze
the potential biases against nonplant techniques might be obtained through
these areas of research.
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SECTION II
INTRODUCTION
PURPOSE
The Environmental Protection Agency (EPA) was directed by Section 317 of
the 1972 Amendments to the Federal Water Pollution Control Act, hereaftert
referred to as the 1972 Act, to continue to investigate and study the
feasibility of alternative financing methods for preventing, controlling,
and abating pollution. Implicit in this directive is a responsibility to
examine cost-sharing programs for nonplant* control and treatment of
sewage as well as for conventional plant treatment techniques. The purpose
of this study is to provide EPA with an evaluation of alternative cost-
sharing programs both for plant and nonplant prevention, control, and
treatment, hereafter referred to as abatement.
The study will evaluate existing cost-sharing arrangements for their
national efficiency and equity effects and will recommend alternative
practical cost-sharing programs that will lead to more nationally
efficient projects and more equitable dealings with communities seeking
assistance in water pollution abatement. Cost-sharing rules will be
proposed that (1) will promote selection by local communities of the
nationally least-cost techniques for providing pollution abatement,
(2) will promote selection by local communities of the nationally efficient
scale of abatement, and (3) will treat each local community in the same
manner with respect to certain defined conditions of fair treatment,
i.e., equity.
*Nonplant control and treatment here refer to all processes "outside
the fence" (see Figure 1).
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SCOPE AND APPROACH
Because EPA's Construction Grant Program is the major program through
which cost-sharing rules set forth in the 1972 Act are implemented, it is
the focus of this study. The incentive effects of cost sharing under
the Construction Grant Program are emphasized. "Cost sharing" as used in
this report refers to the rules for sharing project costs between Federal
and nonfederal participants in a pollution abatement project. "Incentive
effects" refers to the way in which cost-sharing programs might encourage,
or bias, local communities to pick one kind or size of abatement program
over another.
The incentive effects of cost sharing are examined from the standpoint of
two efficiency problems that might arise from a cost-sharing bias. One
problem is that nonfederal interests may be induced to choose a technique
for abating pollution that is not cost effective from the viewpoint of
society (i.e., the nation), although it may be least costly for nonfederal
interests. Another arises in terms of the scale of abatement to be
considered (regardless of the technique(s) chosen for a particular project.
Local communities will be influenced by cost sharing in deciding how large
a project to build. If Federal grants are too large, local communities
will be encouraged to opt for projects that are overdeveloped in the
national sense, i.e., too many resources are allocated to abatement at
the expense of other types of investment projects. If Federal grants are
too low, local communities will be encouraged to opt for projects that are
underdeveloped in the national sense, i.e., too few resources are allocated
to abatement relative to competing investment projects.
In addition to the examination of biasing effects in the cost-sharing rules
per se, the report also examines user fee arrangements for their impact
on effective* cost shares. By changing the effective cost shares, user
fees are found to influence the community government's choice of abatement
programs.
*The effective cost share is the actual percentage of total abatement
'-osts that a project participant must bear after taking into consideration
:he cost-sharing rule and other factors which affect the ultimate cost
:hare.
8
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The two types of efficiency issues—the least-cost technique(s) and the
efficient scale—are examined in the theoretical discussion. However, the
emphasis is placed on cost-sharing incentives as they relate to encouraging
the selection of the nationally least-cost technique(s), as this appears
to be the more prevalent problem and the one for which corrective measures
could be implemented most easily in practice.
In its focus on cost sharing, the study does not review other economic
tools which could be used to encourage polluters to control their wastes
in a particular manner. For example, selective payments to waste dischargers
for waste reduction, low-interest loans for pollution control equipment, and
grants for research and development are forms of subsidies which would
encourage desired behavior. Likewise, penalties in the form of effluent
charges, fines, excise taxes on polluting products, charges for discharge
permits, and required insurance coverage would discourage undesirable
behavior.
GENERAL
Financial requirements to meet pollution abatement goals expressed in the
1972 Act are immense. The 1972 Act authorized $18 billion to be spent in
2
fiscal years 1973 to 1975 under EPA's Construction Grant Program. (Of
the $18 billion authorized, $9 billion have been ordered by the President
3
to be spent; the remaining $9 billion have been impounded.) Costs of
waste treatment plants, pumping stations, and other facilities necessary
to meet clean water requirements through 1990 have been estimated at about
4
$60 billion by a recent survey, but it is thought that costs may run much
higher. In any case, extensive Federal financial support to local
jurisdictions is expected to continue through the Construction Grant Program.
Given the large expenditures, both required and authorized, the importance
of an efficient allocation of resources to pollution abatement is apparent.
And, indeed, there are provisions in the 1972 Act which indicate legislative
concern for promoting efficiency in the abatement program.
Sec. 212 (2)(c) of the 1972 Act, for example, requires that grant applica-
tions be made for "the most cost-effective alternative ... ."
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Nevertheless, the existing cost-sharing rules have been criticized for
inefficiently allocating resources to abatement.*
The central problem of existing rules examined here — that of biasing selection
against the most efficient abatement techniques — results from the variation
in Federal cost sharing among abatement techniques. Although the legislation
Implies that Federal cost sharing for construction costs is now available for
a variety of techniques, historically there has been little Federal cost sharing
available for nonplant techniques. Moreover, some nonplant techniques con-
tinue to be ineligible for construction grants (see Section III). In addition,
for those techniques which are eligible, grants vary as percentages of the
total costs (i.e., capital plus operation and maintenance (0 & M) plus land
costs) associated with the different techniques. Hence, the share of total
costs assumed by the Federal government may vary considerably depending upon
the abatement technique adopted by the municipality. Other things equal,
grant recipients will favor those techniques which cost them the least.
The importance of considering a variety of techniques has been demonstrated
by studies of river basins** which have shown that nonplant techniques and
combinations of plant and nonplant techniques may offer improvements in
efficiency over conventional plant approaches alone. Consider, for example,
Table 1, which shows the costs of alternative abatement techniques analyzed
for water quality improvement in the Potomac estuary. To meet the dissolved
oxygen performance objective of 4ppm, combinations of plant and nonplant
processes (shown under item 2 of the table) are less costly than plant processes
alone (shown under items 3 and A of the table). But while there may appear to
be a number of viable alternatives from both a technical and cost standpoint, from
the standpoint of implementation under existing cost-sharing and institutional
conditions, there may be few alternatives.
With respect to the kinds of alternative abatement techniques which are
available, two general categories are delineated in this report: plant,
*Some efficiency defects of existing rules have been documented in other
studies, among them, Richard Raymond, "The Impact of Federal Financing
Provisions in the Federal Water Pollution Control Act Amendments of 1972,"
Public Policy. Vol. XXII, Winter 1974, pp. 109-110, and Urban Systems
Research and Engineering Inc., Methods for Financing Water Pollution
Abatement from Point Sources, a research paper prepared for the Water
Quality Office of the Environmental Protection Agency, August, 1971, p. 39.
**See, for example, Robert K. Davis, The Range of Choice in Water
Management (Baltimore: The Johns Hopkins Press, 1968).
10
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Table 1. COSTS OF SOME ALTERNATIVE TECHNIQUES FOR MEETING
THE DISSOLVED OXYGEN OBJECTIVE OF 4 PPM IN THE POTOMAC ESUTARY2
(million)
Abatement Techniques
Cost
1. Single Process (Nonplant) Solutions
Reoxygenation
Effluent distribution
Low-flow augmentation
2. Multiple Process (Combination of Plant and Nonplant) Solutions
Various combinations of low-flow augmentation, reoxygenation,
polymer precipitation, step aeration
Combinations using effluent distribution or microstraining or step
aeration with low-flow augmentation and/or reoxygenation
Combinations using lime-alum coagulation and higher degrees of
low-flow augmentation or effluent distribution
3. Plant Systems Using Powdered Carbon Adsorption
4. Plant Systems Using Granular Carbon Adsorption
5. The Complete Range of System Costs
$ 29
$ 85
$115
$22 to $35
$35 to $47
$48 to $78
$79 or more
$127 or more
$22 to $146
Economics. Technology, Institutions
Kneese, Allen V. and Bower, Blair T. Managing Water Quality;
(Baltimore: The Johns Hopkins Press, 1968), p. 222.
Costs are present value (1965 dollars) of capital, operating, and routine maintenance discounted
at 4 per cent for a fifty-year life. Costs of processes other than low-flow augmentation are
based on 2,5 months operation per year.
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those techniques concerned with waste treatment in a plant facility; and
nonplant, those techniques concerned with waste control, prevention,
reduction, or treatment outside the plant. Waste treatment in plant
facilities is the conventional approach to abatement of pollution of
our rivers and streams from inflows of wastewater. However, the nonplant
techniques for treating wastewater, for preventing its generation, for
eliminating some of its detrimental characteristics, and for controlling
it, may be used in lieu of or in conjunction with plant treatment to
combat water pollution from wastewater. Examples of nonplant techniques
are wastewater-flow-reduction programs, active use of the sewage collection
system, in-stream aeration, community septic systems, and low-flow
augmentation. Exhibit 1 lists these and additional pollution abatement
techniques which are considered in this study. A description of each,
as well as an indication of the type of pollution problem to which they
may be applied, is provided in the Appendix.
The term "alternatives" is not meant to imply that these techniques are
necessarily equal to plant treatment or to each other in their cost or in
their ability to reduce or treat a specific kind of sewage, nor that all
are suitable in every situation. These alternatives are simply a nonexhaus-
tive list of technologically viable techniques for reducing water pollution.
Attention should perhaps be called to the distinction between plant and
nonplant techniques. The distinction is somewhat confusing because many
of the treatment processes used in a plant could also be used outside the
plant. Making the distinction on the basis that plant treatment is
capital intensive, whereas nonplant abatement is not, is also confusing,
because nonplant techniques may likewise involve large capital expenditures.
Thus we have chosen a classification scheme based on whether the abatement
technique is applied inside or outside of the treatment plant and the main
interceptor sewer leading into the plant, i.e., "inside or outside the
fence."
The distinction made here between plant and nonplant techniques is illustra-
ted by Figure 1, which shows two versions of a typical municipal sewer system.
To the left of the river on the figure is a "combined system," and to the
12
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Exhibit 1
Alternative Techniques for Abating Wastewater Pollution
I. Wastewater Prevention, Control, and Reduction Techniques
A. Prior to Discharge into Waterway
1. Reduction in Water Use
2. Active Control and Modification of the Sewer Collection System
a. Injection of High Molecular Weight Polymers into the
Collection System
b. Selective Retention and Control of Flow in the Collection
System
c. Pretreatment in the Collection System
d. Controlled Flushing of Sewers
3. Enhancement of New and Rehabilitation of Existing Collection
Sewers
a. Enlargement of Sewers
b. Separation of Storm and Wastewater Collection Systems
c. Design and Construction of Collection System to Prevent
Infiltration and Inflows
A. Control of and Restrictions on Release of Certain Substances
into the Sewer System
5. Influence on Decisions of Households and Industry to Connect
to the Municipal Sewer System
B. During and After Discharge into Waterway
1. Selective Routing of Effluent Discharge
2. Low-Flow Augmentation of Receiving Waters
II. Wastewater and Effluent Treatment Techniques
A. Prior to Discharge into Waterway
1. Treatment in Conventional and Advanced Waste Treatment Plants
2. Land Treatment of Wastewater
3. Community Septic Tanks
4. Raw Sewage Lagoons
B. During and After Discharge into Waterway
1. In-stream Aeration
2. Treatment of Overflow
13
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Figure 1. Combined and separate municipal sewer systems
River
COMBINED SYSTEM
SEPARATE SYSTEM
Combined Submaln
Laterals
Storm Overflow:
Mixed Sewage &
Storm Water
Trunk Sewer
Plant
~~
"Inside the fence"
Laterals
"Outside the fence1
Note: The sewer system, In general, consists of a network of lateral sewers into which buildings
In the municipality are linked via Individual connection pipes. The lateral sewer network
collects sewage (wastewater) from the buildings and carries it to a system of larger trunk
lines. These in turn pass the sewage to a major pipe—the interceptor sewer—which then
transmits it to the treatment plant. At the plant, solids are removed and the resulting
sludge is disposed of by incineration or deposition on land. Treated wastewater (effluent)
is usually discharged via the outfall system directly into a waterway. The difference in
the two systems shown in the Figure is that the combined system (to the left) has only one
system of pipes to collect both storm and sewage flows, whereas the separate system consists
of two separate systems of pipes which handle the storm and sewage flows separately.
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right is a "separate system." For either system, techniques or processes
which would be applied within the interceptor sewer and/or the treatment
plant (i.e., "inside the fence," as shown in Figure 1), are here defined
as "plant techniques." Those techniques which would be applied "outside
the fence" are here defined as "nonplant techniques."
Figure 2 illustrates the application of some of the techniques listed in
Exhibit 1. Note that the nonplant techniques include actions taken
completely outside the municipal sewage collection system and treatment
plant.
ORGANIZATION
A description of existing cost-sharing programs is given in Section III.
The procedure for obtaining grants from EPA is outlined. The eligibility
for and size of EPA grants are discussed, both in terms of legislative
authority and in terms of actual practice. In addition to EPA, the
programs of other Federal agencies which provide cost-sharing assistance
to municipalities for collection and/or treatment of wastewater are
briefly described,, These other agencies are the Farmers Home Administra-
tion, the Department of Housing and Urban Development, and the Economic
Development Administration. Legal, administrative, and other institutional
conditions affecting the selection of nonplant techniques are also
evaluated in Section III to see what changes might be made to provide
additional incentives for local interests to select techniques that are
nationally efficient.
In Section IV the theoretical relationships between cost sharing and the
selection of techniques are derived and discussed. The demand for pollu-
tion abatement is shown to depend on the level of Federal cost sharing.
Necessary conditions for encouraging local communities to select the
nationally least-cost technique(s) for pollution abatement and the
nationally efficient scale of pollution abatement are derived. Charac-
teristics of equity, i.e., fairness, of cost-sharing rules are presented
and applied to existing rules.
In Section V the efficiency implications of existing and alternative
cost-sharing programs are considered. Case examples are given of
15
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ALTERNATIVE APPROACHES TO REDUCTION
OF WASTE WATER POLLUTION
LAND D/SPQSA1 *-
WATER USE
REDUCTION
COMMUNITY
SEPTIC
*
OXIDATION POND
SEWER
MORATORIUM
^ SEWER CONTROL
INFLUENCE
INDUSTRIAL
DECISIONS
1
TREATMENT
PLANT
LOW-FlOVir
AUGMENTATION
Figure 2
-------
cost-sharing biases for certain abatement techniques. The relative costs
to Federal and nonfederal participants of alternative cost-sharing programs
as applied to historical abatement are compared.
Section VI explores the effects of user fees on the Federal and grant
recipients' cost shares. User fee requirements as legislated and as set
forth in grant program regulations are discussed. The effective change
in cost shares attributable to user fee arrangements is determined. The
resulting impacts on decisions regarding abatement programs, and on
residential as compared with industrial communities, are assessed.
The study is summarized in Section VII. Findings of the study regarding
the existing EPA Construction Grant Program and alternative programs are
described. Suggestions are made for further research.
17
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Section II References
1. Federal Water Pollution Control Act Amendments of 1972, PL 92-500, 92nd
Congress, S. 2770, Oct. 18, 1972.
2. Sec. 207, PL 92-500.
3. "Rivers Cleanup Aid Cut," The Washington Post, January 11, 1974, pp. A-l, A-4.
4. Costs of Construction of Publicly-Owned Wastewater Treatment Works: 1973
Needs Survey. Environmental Protection Agency, Washington, D.C.
November 1973.
5. Waste Treatment Fund Allocations. Senate Committee on Public Works.
93rd Congress, 1st Session, Calendar No. 604, Report No. 93-630,
December 13, 1973. p. 6.
18
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SECTION III
DESCRIPTION OF EXISTING COST-SHARING PROGRAMS
AND INSTITUTIONAL CONSTRAINTS
This section is divided into three parts. The first provides background
information on the grant program and discusses the grant eligibility of
the various abatement techniques. The cost shares awarded by EPA are
shown. The second part provides a brief description of cost-sharing
programs of other agencies for wastewater pollution abatement. The third
part describes institutional constraints on the selection of various
techniques.
CONSTRUCTION GRANT PROGRAM
Grants for construction of treatment works are authorized under Title II
of the 1972 Act. According to Sec. 201(g)(l), "The administrator is
authorized to make grants to any state, municipality, or intermunicipal or
interstate agency for the construction of publicly owned treatment works."
In addition to the enabling legislation, the grant process is further
governed by regulations codified in the Code of Federal Regulations under
Title 40, Sec. 35.900 et seq.
The objective of the Construction Grant Program as expressed in EPA literature
is "to assist and serve as an incentive in construction of publicly owned
treatment works which are required to meet State and Federal water quality
2
standards." The objectives of the program are carried out by the sharing
of construction costs of wastewater treatment facilities with municipalities
(i.e., cities, towns, boroughs, counties, parishes, districts — except
school districts), associations, management agencies, and other public
bodies created by or pursuant to state law and having jurisdiction over
disposal of sewage.
19
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The EPA Grant Program makes awards for any or all of the following three
steps: (1) Facilities Planning, during which the applicant's problem is
investigated in detail, existing facilities are assessed, alternative
approaches to problem solving are evaluated, and environmental impact
and cost-effectiveness studies are made; (2) Preparation of Detailed
Construction Plans and Specifications, during which the facilities are
planned, public hearings are held, and blueprints are prepared; and (3)
Construction, during which the facilities are built.
According to Sec. 202(a) of the 1972 Act, the share of cost to be borne by
EPA is 75% of the cost of construction of a treatment works. This appears
to be the current legal maximum Federal cost share.*
It may also be asked if this is the minimum legal cost share. The answer
hinges on the definition of "treatment works." Until recently, as reflected
in the interim grant program regulations, it was required that a fundable
Step 3 project result in an operable treatment works. Thus, under former
interpretation, the legal minimum, as well as maximum, Federal cost share
was 75% of total eligible construction costs of a completed facility.
However, program requirements for a minimum grant of 75% of total construction
costs were criticized, and have since been changed. According to the
3
Senate Committee on Public Works, this requirement did not allow a state
the flexibility
... to use its annual allocation of grant funds among as
many projects on its priority lis;. as it wishes, on the basis
of what can be accomplished in a given year, rather than to tie
up all its funds in a few large projects at the top of a state's
priority list.
The Committee further stated that "phased funding," whereby a portion of a
total1facility would be approved for a grant, would not under the 1972 Act
commit the grant program to eventual funding of the total facility, nor
create a pool of reimbursable claims against the grant program for an
ultimate grant of 75% of the full construction costs of the completed
facility.
*The effective or real cost share borne by the Federal government may
exceed 75% of the costs of construction because local interests can retain
some of the industrial user fees collected against the Federal share. This
additional Federal subsidy is explained in Section VI.
20
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Section 203 of the 1972 Act has since been interpreted to allow states to
divide individual treatment works into separate parts for the purpose of
funding. This new interpretation is reflected in the final program
regulations which provide for grants of 75% of the construction cost of
segments of treatment works. "Segment" is defined as "any portion of an
operable treatment works," and its completion need not result in an operable
treatment works.
It appears, in summary, that the Federal share must comprise a minimum 75%
share of the eligible construction costs of an approved project, but that
the approved project no longer need result in a completed facility.
Available funds for grant awards are allocated among the states in the
ratio of the estimated cost of constructing all needed publicly owned
treatment works in each state to the estimated cost of construction of
4
all needed publicly owned treatment works in all of the states. Computation
of the ratios are based on a "Needs Survey," biennially revised, for public
waste treatment works.* The specific allocation formula recently developed
by Congress and used to allocate the 1975 allotment of Federal funds is
the following: Half of each state's share is based on the ratio of the
individual state's total construction needs to the total of all states'
total construction needs. The other half is based on the ratio of the
individual state's costs to all states' costs for the following three
specific categories of pollution control facilities: secondary waste
treatment plants; advanced waste treatment facilities to meet water quality
standards; and new interceptors, force mains,'and pumping stations. In
addition, the formula provides that no state will receive less than it
received in fiscal year 1972.
Eligible public bodies apply for grants through their state water pollution
control office. The state office reviews each application, coordinates
the plans outlined with other relevant projects in the state, makes recom-
mendations for changes, and if approving of the plan, places the application
*The most recent survey was conducted in 1973 and the results reported
in Environmental Protection Agency, Costs of Construction of Publicly-Owned
Wastewater Treatment Works; 1973 "Needs" Survey.
21
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on a priority list which it then sends to the EPA regional administration.
The EPA administration, one of ten regional EPA offices, makes the grant
award. The total amount of grants made to applicants in a state is limited
.by the state's allocation of grant funds.
Applicants receive grants according to their order of priority as determined
by the state priority ranking criteria. Evaluations and priority line-ups
made by the state water pollution control offices are based on EPA guidelines
and state guidelines which have been approved by the EPA regional administra-
tion. Provisions of the 1972 Act and EPA regulations and guidelines establish
some mandatory criteria for project approval and certification of priority
for grants by state offices, allowing other criteria to be determined by
the state with EPA concurrence. For the most part, the state options are
intended to allow for environmental or other relevant differences among
areas.
The application and award process works as follows: After determining that
a problem exists, the applicant, say a town represented by a town mayor,
makes initial inquiry to its state water pollution control agency. (The
title of the state office varies from state to state; e.g., in Alabama it
is the Water Improvement Commission; in Kansas, the Division of Environmental
Health, State Department of Health; and in Washington, the Washington State
Department of Ecology.) The state office hears the inquiry and suggests
that the applicant make a formal application for a Step 1 grant. Upon
approval, the town assesses its existing wastewater disposal facilities,
present and projected waste loads, and alternative approaches which it might
take to deal with its problem — typically alternative plant processes and
facilities. The plans are submitted to the state agency, which evaluates
the plans and tries to mesh them with other wastewater disposal efforts in
the area. Grants for subsequent Steps can be made either as amendments
to the original grant application or separately. The state office and/or
the EPA regional office may follow up the award process with an investigation
of the functioning of the facilities which were constructed.*
*Information on the grant process was obtained from the following
sources: Interviews with EPA staff; EPA, Federal Assistance Programs
of the Environmental Protection Agency, Reprinted from the Catalog of Federal
Domestic Assistance, Washington, D.C., June 1973, Sec. 66.015; and from
Final Regulations, Federal Register. February 11, 1974.
22
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Eligibility for Grants as Defined in Legislation
Much difference in opinion appears to exist regarding eligibility of nonplant
techniques for construction grants. For this reason, we first explore the
1972 Act for statements regarding eligibility and then examine eligibility
practice under the existing program.
A review of the Act reveals a number of passages which suggest inclusion
of nonplant techniques for grant consideration. Recalling that the Act
authorizes grants for construction of publicly owned treatment works,
consider how it defines "treatment works" in Sec. 212(2)(A):
The term 'treatment works' means any devices and systems used
in the storage, treatment, recycling, and reclamation of municipal
sewage or industrial wastes of a liquid nature ... or necessary
to recycle or reuse water at the most economical cost over the
estimated life of the works, including intercepting sewers, outfall
sewers, sewage collection systems, pumping power, and other equip-
ment, and their appurtenances; extensions, improvements, remodeling,
additions, and alterations thereof; elements essential to provide
a reliable recycled supply such as standby treatment units and
clear well facilities; and any works, including site acquisition
of the land that will be an integral part of the treatment process
or is used for ultimate disposal of residue resulting from such
treatment.
Section 212(2)(B) adds the following items to the definition of treatment:
. . . any other method or system for preventing, abating,
reducing, storing, treating, separating, or disposing of
municipal waste, including storm water runoff, or industrial
waste, including waste in a combined storm water and sanitary
sewer systems.
This is indeed a very broad definition which would appear to include
practically any technique imaginable by which water pollution from
municipal waste and storm water could be abated. Similarly, the definition
of construction, as given in Sec. 212(2), does not limit grants to a
particular kind of "treatment works."
Other passages of the Act emphasize that projects for which grants are
awarded should use the most cost-efficient alternatives. The intent
appears to be to encourage the most efficient technique, regardless of
whether it be "plant" or "nonplant."
23
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There are, however, other passages in the Act which might be interpreted
to prohibit consideration of certain of the nonplant techniques. Most
important to the restrictive interpretation of eligibility are the
requirements in the law for a non-polluting discharge and provision of
the best practicable waste treatment technology (BPT) (now generally
defined as secondary treatment) before any discharge into receiving waters.
For examples, Sec. 201(a)(l) states that ". . . it is the national goal
that the discharge of pollutants into the navigable waters be eliminated
by 1985 . . . ." Section 201(b) states the following: "Waste treatment
management plans and practices shall provide for the application of the
best practicable waste treatment technology before any discharge into
receiving waters . . . . " Finally, Sec. 301(b)(l) states that:
There shall be achieved . . . for publicly owned treatment
works in existence on July 1, 1977, or approved . . . prior
to June 30, 1974 . . . effluent limitations based upon
secondary treatment ....
"Before any discharge into receiving waters" is sometimes interpreted as
disallowing grants for techniques whose application is after the sewer
outfall system. Accordingly, low-flow augmentation and in-stream aeration
would be ruled ineligible for grants.
The above sections may also be interpreted as placing decided emphasis on
treatment as opposed to other forms of abatement. Such an interpretation
might result from the fact that a specified level of treatment is explicitly
required by the law and that attention is on improving the quality of the
effluent discharge. The focus on treatment before discharge might tend to
lessen attention to techniques aimed at prevention, control, and reduction
of wastewater, as well as treatment techniques applied in the stream.
An alternative interpretation of eligibility as defined in the Act, and one
which we think is more defensible, is the following: Emphasis on treatment
techniques ±s^ inherent in the legislation, insofar as goals and requirements
are stated in terms of achievement of nonpolluting discharges and minimum
treatment standards. Likewise, emphasis is on action prior to effluent
24
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discharge. Nonetheless, the legislation does not appear to exclude from
grant eligibility any of the nonplant techniques discussed in this report.*
For one thing, we could find no requirement in the law that the BPT be plant
treatment, nor that secondary treatment be provided in plants. Furthermore,
we do not see that the requirement that the best practicable treatment
technology be applied before discharge necessarily rules out grants for
techniques to reduce, control, or pretreat wastewater prior to BPT treat-
ment. Neither do we see that the law prohibits grants for techniques which
are applied after discharge, so long as they are used in conjunction with
treatment prior to discharge and not in lieu of it. To the contrary, there
are sections of the law which appear to suggest use of such nonplant tech-
niques. Consider, for example, Sec. 302(a):
Whenever . . . discharges of pollutants from a point source . . .
with the application of effluent limitations required under
Section 301(b)(2) of this Act, would interfere with the attain-
ment or maintenance of that water quality . . . , effluent
limitations (including alternative effluent control strategies)
. . . shall be established ....
In conclusion, under one interpretation which might be given to the 1972 Act,
all of the nonplant techniques appear eligible for grants. In particular,
techniques such as land disposal and community septic tanks, which can
provide the equivalent of secondary treatment with no direct discharge into
a waterway, appear especially to satisfy the tenets of the 1972 Act.
Techniques which prevent or reduce the generation of wastewater also
appear to comply with the law by reducing the discharge of pollutants
into waterways. Nonplant treatment techniques, which alone or in combination
with each other or plant techniques, are able to fulfill water quality
standards likewise appear compatible with the law.
With respect to types of costs, i.e., capital cost, land, labor, and manage-
ment costs, made eligible for funding under the law, the main indication
of eligibility appears in the definition of construction, which is defined
in Sec. 212(1) as follows:
*An exception might be techniques requiring expenditure for collection
systems in new communities, grants for which are implicitly prohibited by
Sec. 211 of the 1972 Act.
25
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. . . preliminary planning to determine the feasibility of
treatment works, engineering, architectural, legal, fiscal,
or economic investigations or studies, surveys, designs,
plants, working drawings, specifications, procedures, or
other necessary actions, erection, building, acquisition,
alteration, remodeling, improvement, or exterior of treat-
ment works, or the inspection or supervision of any of the
foregoing items.
Thus, while the law is not specific with respect to cost eligibility by
type of costs, eligible costs would appear to include labor, equipment,
materials, and management necessary to obtain the treatment works. There
appears, however, no intent in the 1972 Act to fund operation and maintenance
of the facility once constructed.
Eligibility for Grants in Practice
Let us now examine eligibility of alternative techniques and costs under
the grant program as set forth in policy documents, publications, and as
described by EPA grant officials.
First, it appears that the general philosophy of the program is centered
quite heavily on treatment per se, and the term "treatment," as used in
program literature, appears devoid of the additional meanings given it in
the 1972 Act, where the definition was extended to include control, preventio
and other forms of abatement. It also appears that the term "works,"
broadly defined in the Act to include any method or system for pollution
abatement, is often translated in program literature to "facilities," and
thence to "plant."
The emphasis on the treatment plant and its immediate appurtenances (i.e., t^
interceptor and outfall sewers) appears in the following statement of project
eligibility set forth in an EPA program brochure:
. . . (eligible costs include) those to construct new treatment
plants, to expand or improve existing plants, to construct
interceptor and outfall sewer lines or to provide pumping,
power, and other equipment necessary to operate a sewage treat-
ment system. Under certain conditions, sewage collection sys-
tems and projects to control pollution from combined sewers
may also receive Federal assistance.8
26
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Allowable and unallowable project costs as further defined in the U.S. Code
of Regulations are listed in Exhibit 2.
Let us now examine eligibility specifically in terms of plant and nonplant
techniques. Table 2 shows for some of the techniques listed earlier in
Exhibit 1 the current maximum Federal percentage share of costs which would,
in principle, apply. From the Table, it appears that (a) 14 of the 19
techniques are eligible for a Federal grant covering 75% of capital cost;
(b) only 4 of the 19 techniques involve land costs which are interpreted
as an integral part of the treatment process, and, therefore as eligible
for a grant equal to 75% of these costs; and (c) none of the techniques
is eligible for Federal grants for land site acquisition (land not an
integral part of the treatment process) or for 0 & M Costs. In-stream
aeration, low-flow augmentation, publicly-owned individual septic tanks
on private property, water-use and waste-reduction programs, and controlled
flushing of sewers (which is regarded as part of 0 & M), are the techniques
currently considered ineligible for Federal cost sharing of capital costs.
These, together with all the other techniques except land treatment, com-
munity septic tanks, and treatment of wastewater overflows, are also
ineligible for Federal cost sharing of any land costs. In contrast, all
of the 19 techniques would be eligible for a planning grant, provided they
related to the particular facility under consideration.
While most of the nonplant techniques appear in principle eligible for a
grant for capital costs, few appear actually to have been funded to any
significant degree. It is, however, difficult to determine to what extent
the general paucity of grant awards to nonplant techniques is attributable
to a more restrictive practice of cost sharing than is indicated by
Table 2. Techniques other than plant treatment only became eligible for
cost sharing under the 1972 Act, and few grants of any kind have as of
this time been made under this law.
Let us now look at Federal cost sharing from a historical standpoint. We
can see from Table 3, which shows cumulative grants by EPA and other Federal
agencies from the inception of the Construction Grant Program through 1972,
that EPA grants have averaged only about 36% of eligible construction
27
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Exhibit 2
Allowable and Unallowable Project Costs
Under the Construction Grant Program
Allowable Costs:
Costs of the grantee which are reasonable and necessary are allowable.
Necessary costs may include but are not limited to:
(a) Costs of salaries, benefits, and expendable material incurred by the
grantee for the project.
(b) Costs under construction contracts.
(c) Professional and consultant services.
(d) Facility planning directly related to the treatment works.
(e) Sewer system evaluation.
(f) Project feasibility and engineering reports.
(g) Relocation and land acquisition costs required pursuant to the Uniform
Relocation Assistance and Real Property Acquisition Policies Act of
1970, 42 U.S.C. 4621 et seq. , 4651 et seq., and regulations issued
thereunder.
(h) Costs of complying with the National Environmental Policy Act, including
costs of public notices and hearings.
(i) Preparation of construction drawings, specifications, estimates, and
construction contract documents.
(j) Landscaping.
(k) Supervision of construction work.
(1) Removal and relocation or replacement of utilities, for which the
grantee is legally obligated to pay.
(m) Materials acquired, consumed, or expended specifically for the project.
(n) A reasonable inventory of laboratory chemicals and supplies necessary
to initiate plant operations.
(o) Development and preparation of an operation and maintenance manual.
(p) Project identification signs.
28
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Exhibit 2 (Continued)
Unallowable Costs:
Costs which are not necessary for the construction of a treatment works
project are unallowable. Such costs include, but are not limited to:
3.
(a) Basin or areawide planning not directly related to the project.
(b) Bonus payments not legally required for completion of construction in
advance of a contractual completion date.
(c) Personal injury compensation or damages arising out of the project,
whether determined by adjudication, arbitration, negotiation, or
otherwise.
(d) Fines and penalties resulting from violations of, or failure to comply
with, Federal, state, or local laws.
(e) Costs outside the scope of the approved project.
(f) Interest on bonds or any other form of indebtedness required to
finance the grantee's share of project costs.
(g) Ordinary operating expenses of local government, such as salaries
and expenses of a mayor, city council members, or city attorney;
except as provided in §35.940-4 for allowance of indirect costs of
the grantee in accordance with an indirect cost agreement negotiated
and incorporated in the grant agreement.
(h) Site acquisition (for example, sewer rights-of-way, sewer treatment
plant sites, sanitary landfills and sludge disposal areas); except
as provided in §35.950-3(a) for land which will be an integral part
of the treatment process or that will be used for ultimate disposal
of residues resulting from such treatment, if approved by the
Administrator.
(i) Costs for which payment has been or will be received under another
Federal assistance program.
(j) Costs of equipment or material procured in violation of §35.938-4(b),
which provides for award to the low responsive, responsible bidder.
Source: "Final Construction Grant Regulations," Federal Register, XXXIX,
No. 29, February 11, 1974, p. 5268.
o
Grants for areawide waste treatment management planning are provided
for under Sec. 208 of the 1972 Act. For fiscal years through June 30, 1975,
these grants are to be 100% of the costs; beyond that time, 75% of the costs
are allowed. 29
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Table 2. ELIGIBILITY FOR EPA COMSTRUCTION GRANTS OF ALTERNATIVE TECHNIQUES. BY COST CATEGORY
Technique
Conventional Waste-treatment Plant
Advanced Waste-treatment Plant
Raw Sewage Lagoon
Septic Tanks - Community tank & collection system
Community truck pick-up & disposal from private
holding tanks
Publicly-owned individual tanks on private property
Land Treatment of Wastewater (Spray Irrigation)
In-stream Aeration
Low-Flow Augmentation
Englarpement of Sewer Collection System - Size of Sewer
Separation of Storm and Wastewater Collection System
Rehabilitation of the Collection System to Prevent Infiltration
Injection of Polymers into the Collection System
Storage Capacity in the Collection System
Pretreatment in the Collection System
Controlled Flushing of Sewers
Treatment of Wastewater Overflows from the Collection System
Rerouting of Outfalls to Reduce Pollution Levels of Receiving Waters
Adoption of Water-Saving or Waste-Reducing Fixtures or Appliances
Maximum Federal Percentage Cost Share By
Categories of Cost
Capital
75
75
75
75
75
0
75
0
0
75
75
75
75
75
75
0
75
75
0
Land
Site
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Process
0
0
0
75a
75*
0
75
0
0
0
0
0
0
0
0
0
75U
0
0
0 & M
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
fland for drainage fields would be eligible.
Some treatment processes may involve land as a part of the process; some do not. Therefore, not all processes are eligible for cost sharing
of land cost.
u>
o
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Granting Agency
Table 3. GRANTS BY EPA AND OTHER FEDERAL AGENCIES AS A SHARE OF
ELIGIBLE AND TOTAL PROJECT COSTS AS OF DECEMBER 31, 1972
Total Approved Projects
No.
Proj ects
Eligible
Construction
Costs
(Million dollars)
Federal Grant
Offer
(Million dollars)
Grants As an
Estimated Share
of Eligible
Construction Costs
Grants As an
Estimated Share
of Total Project
Cost
EPA, alone
12,417
13,441
4,860
36%
24%
EPA and Other
Agencies, joint
effort
873
597
318
53%
EPA Share
183
31%
Other Share
135
23%
Other, alone
474
134
66
49%
Total
13,764
14,172
5,243
37%
Source: EPA, Project Register; Waste Water Treatment Construction Grants, December 31, 1972, p. 193.
on cost data from EPA, Cost to the Consumer. Table 24, as explained in the text, p. 31.
-------
cost. During this period, the legal maximum cost share was 50-55%, rather
than the present 75%. Thus to average 36%, many projects must have been
funded below the maximum levels.
Note that the effective cost share, i.e., the percentage of total (construc-
tion plus 0 & M) costs, is lower than the 36% share of construction costs
since 0 & M costs were not shared by EPA. An EPA share of 24% of total
costs was estimated by dividing EPA grants by estimated total project
costs, which included construction plus estimated 0 & M costs. The 0 & M
costs were estimated on the basis of eligible construction costs as shown
in Table 3 and on the assumptions that construction on the average comprises
65% of total costs and 0 & M comprises 35% of total costs of wastewater
Q
treatment plants.
COST SHARING BY OTHER AGENCIES
Other Federal agencies which cost share with nonfederal groups in water
pollution abatement are the Department of Housing and Urban Development
(HUD), the Farmers' Home Administration (FHA) in the Department of
Agriculture, and the Economic Development Administration (EDA) in the
Department of Commerce. The maximum percentage cost shares of these
agencies are shown in Table 4. It should be noted, however, that these
agencies do not always actively fund projects, due to insufficient funds.
HUD's grant program provides aid to municipalities in construction of new
sewer facilities. Eligible projects are construction of sewers for the
collection, transmission, and discharge of sanitary wastes, and storm
sewer systems for collection, transmission, and discharge of storm water.
Sewage treatment works are excluded.
FHA provides grants to public, quasi-public, or non-profit organizations
serving rural areas for the installation, repair, improvement, and
expansion of a rural waste disposal system, including sewer lines, waste
collection, and treatment of all wastes. In addition, guaranteed or
insured loans are made for project costs not covered by the money grant.
32
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Table 4. MAXIMUM FEDERAL COST SHARES
FOR SEWER FACILITIES PROVIDED BY HUD, FHA, AND EDA2
Purpose
Sewage and
Waste
Treatment
Type
of
Facility
Collection
Treatment
Plant and
Interceptor
Lines
Agency
HUD
FHA
EDA
FHA
EDA
Percentage of Costs
Construction
50 - 90
50
50 - 80
50
50 - 80C
0 & M
0
0
0
0
0
Land Rights
50 - 90
50 c
50 - 80
50
50 - 80
This Table is taken from Marshall and Broussalian, Federal Cost-Sharing Policies for
Water Resources, p. 114.
Cost-share percentages shown in the Table are taken from the respective agencies'
legislative Acts.
'EDA can pay up to 100% of eligible costs on a project for American Indians.
-------
EDA makes grants to private or public nonprofit organizations representing
redevelopment (depressed) areas for construction of sewer systems,
including collection, transmission, and treatment facilities. In addition
direct loans are made if local matching funds are not available.
Thus, all three of the agencies provide grants for collection of sewage,
whereas only two, FHA and EDA, provide funds for treatment.
INSTITUTIONAL CONSTRAINTS TO ABATEMENT
The purpose of this section is to identify and discuss characteristics of
existing institutions or grant program arrangements — other than cost-
share eligibility — which may bias municipalities against efficient choices
in pollution abatement.
One aspect of the grant program which may influence municipalities in their
selection of techniques is the influence of state and EPA design standards
guidelines, and technology transfer manuals. If these are conservative
and emphasize the well-established processes, which nearly always are
processes to be used in treatment plants, they may direct municipalities
away from consideration of more innovative techniques.
Another related characteristic of the grant process which may cause bias
in choice of techniques is the fact that the training and experience of
many state and EPA officials who review applications are often geared
towards plant engineering. Any preference at that level for traditional
plant/engineering solutions may exert a strong bias on the local applicant
whose objective is to achieve a high priority ranking for his project.
Another factor, which may be in part attributable to state and EPA program
operations, is the apparent widespread failure of municipalities fully to
consider abatement alternatives. Greater emphasis by state and EPA officials
on plans which consider a wide range of alternatives would contribute to
adequate identification of the cost-effective abatement approach.
It is customary practice to base architects'/engineers' fees for design
of a facility on the amount of capital costs. This practice may give
them incentive to design capital-intensive facilities. Thus the designs
34
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for abatement facilities provided to municipalities may be biased against
nonplant and/or low capital techniques, and, consequently, the municipality
may not give adequate consideration to these techniques.
The municipality's relative ability to fund the different kinds of costs
comprising its share of pollution abatement may also cause a bias at the
local level. Municipalities may find it easier to allocate funds to
capital costs than to current operations. When funds are short and
expenditures must be cut, servicing the debt issue normally takes prece-
dence over current maintenance and operating requirements. Hence a
municipality may be better able to sustain funding of capital-intensive
techniques than non-capital-intensive techniques, and may, therefore, tend
to have its abatement activities biased towards capital-intensive techniques,
apart from any Federally-induced bias.
Limits to the area of jurisdiction or authority of municipalities may
restrict the choice of techniques. As has been pointed out in studies of
wastewater management, implementation of certain types of abatement
systems, collective facilities, and integrated operation of systems requires
flexibile area-wide institutional arrangements. Moreover, studies have
shown potential cost savings achievable through integrated systems as
compared with conventional treatment. But in many places, regional water
quality management systems are still in the planning stages despite the
fact that current law supports regional planning. Institutional arrange-
ments are generally not sufficiently flexible to allow deliberate variation
in quality of discharge at one point to be compensated for at another
point, or by another method where treatment costs are less. Thus, decision-
making bodies may not have the legal authority to plan and coordinate the
use of techniques in all areas of relevant concern and may, therefore,
be forced to accept less than best solutions.
Another problem which may interfere with efficient choice of size or kind
of techniques is the use of sewerage systems as growth management tools.
Some communities are using their authority with respect to sewage disposal
as a substitute method of controlling other community developments, such
35
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as the rate of population growth. In the words of the chairman of the
Fairfax County, Virginia, Board of Supervisors, "We've used sewers as a
growth management tool. It's a bad one but it is the only one we've had.'
Another example is provided by the Northern Virginia Conservation Council
which recently requested EPA to halt any further expansion at four of the
Washington, D.C. area's major sewage treatment plants. According to the
council, a major reason for its action was that "their enlargement would
12
lead to more growth in the area, which they consider undesirable."
Local decision makers may also resist a tie-in with a regional treatment
system or other solutions which would eliminate their basis for control.
It was reported recently, for example, that the Prince William County,
Virginia, Board of Supervisors was considering building its own treatment
plant rather than participate in a regional effort now underway, despite
estimates that costs would thereby be quadroupled. The reported rationale
was that "the regional plant would remove control of sewer line construction
13
and operation — and thus of growth — from the county."
A very powerful institutional barrier to unbiased consideration of techniques
may be found in the 1972 Act itself. Short of a major change, the high
cost and relatively short time horizon for compliance with the high effluent
standards set in the law, together with the emphasis on plant treatment,
may preclude availability of Federal grants for other kinds of techniques,
such as waste-flow reduction, active use of the collection system, and
in-stream aeration. These and other techniques might otherwise be used
alone or in combination with plant treatment to achieve similar levels of
water quality at lower cost.
There are likely a host of additional special circumstances which cause
techniques to be favored or disfavored. Examples of techniques which
appear to have been disfavored by circumstances are those for correcting
the problem of storm overflow. Both separation of combined sewers and
other applicable techniques, it may be recalled, meet criteria of eligibility
for program grants. Yet construction grant funds generally have not been
available for correcting storm overflow. This "backburner" attitude at
36
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the program level, conveyed to local communities, means fewer project
applications to deal with the problem. One reason for such a position
is a practical one — immense cost of correction. EPA has estimated the
capital cost of solving the storm overflow problem by sewer separation
at $70 billion in 1973, and by alternative methods such as storage and
treatment at $25 billion. (And some communities, if given the choice,
may opt for sewer separation since separation generally requires a lower
proportion of 0 & M costs.) Another reason may be that there are
differences in opinion as to what should be done to correct the problem.
But in any case the cost involved is so great that little has been done
from the standpoint of cost sharing. A similar bias has existed until
recently against raw sewage lagoons, but for a different reason. In this
case, the problem has been doubt within the grant program as to the degree
of treatment achievable by lagoons.
37
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Section III References
1. Final Construction Grant Regulations, Construction Grants for Waste
Treatment Works. Federal Register, XXXIX, No. 29, February 11, 1974.
2. Federal Assistance Programs of the Environmental Protection Agency.
Reprinted from the Catalog of Federal Domestic Assistance, Washington,
D.C. June 1973, Sec. 66.015.
3. Waste Treatment Fund Allocations. Senate Committee on Public Works.
p. 9-11.
4. PL 92-500, Sec. (205)(a).
5. Environmental News. Environmental Protection Agency, January 10, 1974,
p. 2.
6. PL 92-500, Sec. 212(s)(c).
7. The Federal Water Pollution Control Act Amendments of 1972, Highlights.
Environmental Protection Agency, Washington, D.C. December 1972.
8. Federal Grants for the Construction of Municipal Waste Water Treatment
Facilities. Environmental Protection Agency, Washington, D.C.
9. Cost to the Consumer for Collection and Treatment of Wastewater. Environment^
Protection Agency. Washington, D.C., Government Printing Office.
Water Pollution Research Series, No. 17090. July 1970. Table 24.
10. Kneese, Allen and Blair Bower. Managing Water Quality: Economics, Techno l
Institutions. Baltimore, The Johns Hopkins Press, 1968. p. 97-179, an<
Davis, Robert K. The Range of Choice in Water Management, A Study
of Dissolved Oxygen in the Potomac Estuary. Baltimore, The Johns
Hopkins Press, 1968. p. 124-126.
11. "Fairfax Sewage Plan Set," The Washington Post, March 27, 1974, p. C-l,
Col. 1.
12. "Sewage Plant Work Halt Sought," Washington Star-News, January 27, 1974,
p. B-4, Col, 3.
13. "Prince William Tables Funds for Sewer Plant," The Washington Post,
February 5, 1974, Sec. C.
14. Research and Demonstration Program to Achieve Water Quality Goals: What
the Federal Government Needs to Do. General Accounting Office.
Washington, D.C., Government Printing Office. Volume 1, No. B-166506.
Report to Congress. January 1974. p. 339.
15. Ibid.
38
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SECTION IV
THEORETICAL RELATIONSHIPS
This section begins with a selective survey of the theoretical literature
pertaining to cost sharing pollution abatement specifically and water
projects in general. The demand for pollution abatement by grant recipients
is shown to depend on the percentage cost shares borne by grant recipients.
Cost-sharing conditions are derived for encouraging the efficient techniques
and scales of pollution abatement projects.
SELECTIVE SURVEY OF
THE LITERATURE
This survey provides a brief overview of some of the work that has been
done in relating cost sharing in water projects to the selection of the
least-costly techniques and of the efficient scale. Equity considerations
are also discussed. The survey starts with an examination of what has
been done specifically in the wastewater area. The rest of the survey
deals with the theory of cost sharing as it has been developed for water
resources in general.
Robert Davis, in his study of alternative approaches to water quality
management in the Potomac estuary, noted some of the biasing effects of
existing Federal financing arrangements. He illustrated how differences
in the eligibility of techniques for grants may make the most expensive
system in terms of total cost become the least expensive system as viewed
by the local sector. He also pointed out that differences in the kinds
of costs associated with the various techniques, e.g., relatively high
operating and low capital costs for treatment by polymers compared with
relatively high capital and low operating costs for microstraining, can
result in a larger Federal cost share for, and hence a local bias towards,
39
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the more capital-intensive technique under current cost sharing rules.
Richard Raymond has taken a direct look at the cost-sharing bias in pollu-
2
tion abatement. Using estimated costs of selected wastewater treatment
alternatives in the Clevelarid-Akron area, he showed that if a cost-sharing
rule does not cover all cost categories equally, when applied to alter-
native techniques having different compositions of cost (i.e., different
proportions of capital relative to operation and maintenance relative to
land costs), projects with higher national costs may appear cheaper to
a community than projects with lower national costs. He developed a
method of measuring the maximum increase in total cost to the nation
("maximum bias") generated by unequal cost shares among cost categories.
(See Chapter V for a case example taken from Raymond's work.)
In its final report, the National Water Commission (NWC) has commented
2
on the efficiency and equity of the EPA grant program. It criticizes
Federal subsidies in general as being unfair, promoting inefficiency,
and failing to achieve desired results. It criticizes the 1972 Act
specifically for its inequity in deflecting 75% of capital costs from
local users to national taxpayers; i.e., for providing a 75% Federal
cost share for a project that benefits essentially a local area. The
Report also dispenses with redistribution as an equity rationale for
high Federal cost sharing, saying that full sewer charges represent small
proportions of family budgets, and furthermore, that redistribution and
abatement goals should be decided independently. With respect to
efficient techniques, the NWC again criticizes the grant program on the
grounds that it has not stimulated the search for least-cost solutions.
The NWC recommends that the grant program be continued until the backlog
of needed facilities has been eliminated. It recommends a grant cutoff
date within 10 years, hoping that cities will be induced to expedite their
abatement programs to fall within the grant period. Both on economic
and equity grounds, the NWC further recommends municipal waste treatment
as an "ideal" enterprise to put on a self-sustaining basis through use
of user fees and service charges.
40
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More theoretical work has been devoted to cost sharing in the general
area of water resource development (i.e., flood protection, recreation,
fish and wildlife, navigation, irrigation, hydroelectric power, municipal
and industrial water, and shoreline protection) than in pollution abate-
ment per se. The survey that follows covers cost sharing as it has been
applied to some of the purposes mentioned above. However, only those
applications that have relevance to the pollution abatement problem are
Q
included.
Mark Regan was an early advocate of cost sharing of water projects by
9
local interests in proportion to their benefits. He recognized that
local interests had different objective functions than the nation and
that these differences, if not compensated for by cost sharing might
encourage local support of projects that were not nationally efficient.
Edward Renshaw, another leader in recognizing the significance of cost
sharing, investigated the economic efficiency effects of having different
cost-sharing rules for alternative techniques of providing a given water
resource project. For flood protection, for example, he pointed out
that local interests would pick that alternative with the highest ratio
of Federal to local costs, other things equal, even though that selected
alternative might not be the cheapest for the nation.
James Loughlin has also examined cost sharing in water resource develop-
ment. He concludes that differences in cost-sharing policies within
an agency and among agencies lead to national inefficiencies and inequities.
Loughlin recommends a uniform approach to sharing the costs of flood pro-
tection to bring about greater efficiency and equity.
Harold Marshall has derived the necessary conditions in cost sharing for
encouraging local interests to select the least-cost combination of
techniques and the nationally efficient project scale for providing any
12
given water resource project. The condition for encouraging the
selection of the least-cost combination of techniques is that local groups
be charged the same percentage cost share for each technique available
to them. The necessary condition (called the Association Rule) for
41
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encouraging local support of the nationally efficient scale is that local
13
groups be charged according to the benefits that they receive. Marshall
shows that current cost-sharing rules for many of the water programs do
not meet these conditions. (These conditions will be discussed in detail
later in this section.)
Marshall and Broussalian have extended the conventional evaluation of
cost sharing, which centers on efficiency effects, to examine the equity
implications, where equity is considered both in terms of fairness and
redistribution of income. In the same study the general cost-sharing
programs of the grant agencies (EPA, EDA, FHA, and HUD) are evaluated on
efficiency grounds and compared to those programs of the construction
agencies (Corps of Engineers, Bureau of Reclamation, and Soil Conservation
Service).16
Rafuse and Sherman have taken a somewhat unique approach to determining
cost shares for flood protection projects. They maintain that the net
benefits from a flood control project are not additive among benefiting
districts, and therefore that local cost-sharing requirements should not
be based on an addition of these benefits. They introduce the "net
fiscal benefits criterion" as an alternative method for determining what
local interests should be willing to pay. The criterion requires that
local interests be required to pay a share of the project cost that is
equal to the net fiscal benefits (e.g., increased tax revenues minus
increased local government expenses) that they expect to realize from the
18
project. Rafuse and Sherman recognize that their criterion will not
necessarily achieve efficient project decisions, but they emphasize that
19
it has merit in achieving equity among cost-sharing participants.
Chapters 15 and 16 of the NWC Report, entitled "Paying the Costs of Water
Development Projects" and "Financing Water Programs," deal directly with
20
Federal financing programs. The Report concludes that cost-sharing
policies should be consistent among alternative techniques for accomplishing
a given purpose. The Report further concludes that Federal financial
assistance should be clearly identifiable and not obscurred by subsidized
21
repayment schemes. Finally, the NWC provides the following general
rule on subsidies: "Direct beneficiaries of water projects who can
be identified and reached should ordinarily be obliged to pay all
42
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22
project costs that are allocated to the services from which they benefit."
However, the cost-sharing decision to charge direct beneficiaries is more
complex in pollution abatement than in other water programs, such as
flood control, because pollution abatement is a project purpose which
often aims to reduce the costs imposed by one group of people on another.
That is, the polluters are not necessarily the beneficiaries. The
"polluter pays" principle need not be in conflict with the "beneficiary
pays" principle on efficiency grounds. On equity grounds, however,
either of these principles may be considered superior, depending upon
the decision maker's value system. Marshall has described this particular
problem in relation to the cost sharing of salinity control in the
Colorado River Basin, where those who cause salt pollution are not
23
necessarily those who benefit from desalting. A local community which
benefits from sewage treatment could be required to contribute a large
percentage of abatement costs. It could in turn charge user fees and
effluent charges on local residential and industry groups that may both
benefit from abatement and/or cause the pollution that requires abatement.
DERIVATION OF DEMAND
Implicit in the analysis of the incentive nature of cost sharing is the
assumption that the level of cost sharing does affect grant recipients
in their demand for pollution abatement. Other things being equal, we
can expect the demand for pollution abatement by local communities to
depend on the price to them of that abatement and the value that they
place on that abatement. Furthermore, the relationship between the
quantity demanded by grant recipients of pollution abatement and the
local cost share is hypothesized to be an inverse relationship. This
hypothesis is explained with the model below.
Assume that the grant recipient's benefit or welfare function can be
expressed as
BR = BR (Q,M) , (1)
where B = benefits accruing to the grant recipient,
Q - unit measure (i.e., quantity) of pollution abatement, and
M « all other goods and services available to the grant recipient,
measured in dollars.
43
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The graint recipient is constrained in his purchase of M and Q by the amount
of wealth, i.e., his budget, available to him. Therefore the recipient
will maximize his welfare (other things being equal) subject to the budget
constraint which satisfies the relationship
R = M + cPQ, (2)
where R = budget of the recipient,
c = proportion that the nonfederal cost share bears to total
project cost (i.e., nonfederal percentage cost share),
P = national price per unit of Q,
cP = recipient's price per unit of Q, and
cPQ = total costs of Q to recipient.
All functions are considered continuous. To isolate the effect of cost
sharing on demand, we shall assume that the percentage cost share (c)
changes and that the national prices (P) remain constant.*
Figures 3 and 4 show graphically the derivation of demand for pollution
abatement as a function of cost sharing. An indifference curve (I)
represents combinations of M and Q to which the grant recipient is
indifferent. For higher levels of M and Q, the local group achieves
higher levels of satisfaction as represented by I« and I. being located
up and to the right of I.., in Figure 3. The slope of these indifference
curves represents the marginal rate of substitution (trade-off) of M for
Q that the grant recipient is willing to make, based on his judgment of
the value of benefits from extra units of M and Q. These indifference
curves are derived from the welfare function in equation (1).
The lines C-, C-, and C» represent the local budget constraints for
different local cost shares c_, c», and c« where c^ > c~ > c». The slope
of the budget constraints is equal to the negative value of the grant
recipient price, i.e., (cP). As the local cost share of Q diminishes,
the budget constraint pivots at point R and intersects the horizontal Q
axis at points farther to the right. The points of tangency between the
*This assumption is made for convenience of illustration. In practice
the purchase of extra units of pollution abatement might even decrease the
national price through economies of scale. Thus the local demand curve
would still be downward sloping.
44
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$M
M
Figure 3. Indifference curves and budget constraints
Local
Price
Figure 4, Demand for pollution abatement
45
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indifference curves and the budget constraints indicate the economically
efficient combinations. Hence, as the grant recipient's cost share
decreases from ^ to GZ to c^, the recipient's absolute price per unit of
Q decreases, and the grant recipient will increase his purchases from
Qj_ to Q2 to Q respectively, as shown in Figure 4. Thus, the grant
recipient's demand for pollution abatement, other things equal, is shown
graphically to depend inversely upon the percentage cost share that he
must pay.
If the sole purpose of cost sharing for pollution abatement were to
encourage local interests to provide more and more abatement, then it
follows from this demand analysis that reducing the local cost share would
help serve that purpose. But since the Federal budget is limited and
there are other projects competing for scarce Federal funds, we know that
it may be inefficient to simply allocate Federal money for 100% of
abatement costs to the exclusion of other types of projects.
An alternative to cost sharing for inducing greater abatement is to
require a high level of abatement. Let us assume, for example, that
Federal abatement standards or controls are imposed on local communities
and that they are enforced. Figure 5 shows the resulting kinked demand
function (DD) for abatement where Q is the enforced level.
At least Q level of abatement will be demanded regardless of the cost
o
share, and the quantity demanded of additional levels of abatement will
vary inversely with the local cost share.
If the standards or controls were not enforced, then the effective demand
function would be dD, i.e., it would take on the general downward slope
of the function derived in Figure 4.
This type of demand analysis might be extended to explain in part why
with the 75% Federal capital grants provided for in the 1972 Act, or
even with a 100% Federal grant, the abatement levels that are considered
needed may be greater than those levels demanded by the nonfederal sector.
For example, some aspects of higher levels of abatement (e.g., community
growth) might be considered as costs to the community but not to the
nation. In addition, some aspects (e.g., downstream abatement benefits
46
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$
Local
Price
(cP)
D
Figure 5. Demand for pollution abatement, with and without enforcement
external to the abating community) are considered as benefits to the
nation but not to the community. Finally, the community recipient may
put up all of the nonfederal cost share and yet receive only a part of
the nonfederal benefits. Thus it is quite possible that the optimal
level of abatement to the nation may be greater than what the community
will provide even with a 100% Federal subsidy.
Consider Figure 6, where Q has been designated as some nationally
desirable target level of abatement, but where no enforcement exists for
compelling the community to implement Q . Even where the local cost
share approaches zero percent of total project costs, the community will
implement less than Q-, leaving a gap of Q - Q. between what is regarded
as needed (optimal from a national standpoint) and what the community is
willing to build.
It is quite conceivable that a community might exhibit such a demand
function when it takes the narrow viewpoint that the only benefits and
47
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$
Local
Price
(cP)
Demand
.— Q
Figure 6. Insufficient demand for pollution abatement
costs of pollution abatement are those accruing directly to it.*
CONDITIONS FOR EFFICIENCY
Two kinds of efficiency are discussed in this paper. The first is
efficiency in production, which is reached when the least-cost combina-
tion of techniques has been chosen for providing pollution abatement.
The second is efficiency of scale, which is reached when the level of
pollution abatement is such that no addition to or subtraction from
that level could yield positive net benefits. The efficient mix of
techniques and efficient scale can be determined simultaneously. However,
local community decisions on techniques and scale may not be made simul-
taneously, and therefore the two cases are handled separately.
The following assumptions are made. A grant recipient (e.g., local or
state government) and a Federal agency (in this case EPA) share the costs
of a project providing water pollution abatement. The grant recipient
and the Federal donor agency may apply different criteria for evaluating
the project. Grant recipients would be expected to be most interested
in benefits that accrue locally to them and the Federal agency must
*If the situation depicted in Figure 6 were to exist, a 100% Federal
cost share might even be ineffective as an inducement to encourage Q .
A subsidy in excess of 100% or enforced standards would, theoretically,
be alternative means of inducement.
-------
consider benefits that accrue nationally, i.e., benefits that accrue
locally as well as spill over local boundaries. Both the grant recipient
and the nation as a whole are assumed to have downward sloping demand
functions for project outputs. That is, the higher their respective
cost shares, other things being equal, the less output they will demand.
Finally, the production function for abatement is assumed to be charac-
terized, at least after an initial stage, by diminishing marginal returns
to successive input units.
Techniques
The purpose of this section on techniques is not to identify those least-
costly techniques, but to determine what conditions cost sharing must
meet to encourage grant recipients to seek techniques for abating pollution
that^are least costly to the nation (a recognized objective of the 1972
Act ), as well as to themselves.
A necessary condition for least-cost production to the nation is that
12 A _ II , (3)
3T1/ 9T2 " P2
where Q - units of output of pollution abatement,
Tl' T2 = are units of techniques 1 and 2,
Pr P2 = national cost or price per unit of techniques 1 and 2.
PI and P2 are assumed to be constant*in the relevant range of demand for
techniques 1 and 2. This assumption seems reasonable in that the prices
would not be expected to vary much with the size of one project.
This necessary condition (3) is derived as follows. Assume that benefits
to the nation (B) from pollution abatement are a function of Q and that
Q = Q(Tr T2). Assume further that the nation has some budget constraint
for pollution abatement (S). To find the maximum of B[Q(T T.)] subject
to the constraint that S = P^ + P^, we ^ the problem unconstralned
by use of the Lagrange multiplier (X) and maximize the new expression
W-B(Q) + X CS-P^-P^),
where W now is a function of T , T , and X.
*This assumption is essential for the derivation.
49
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A necessary condition for optimization is that the partial derivatives
of W with respect to each variable must equal zero. By doing this for
the two techniques we have
JW _ M • 20. + x (-pi) = °» and (5)
dX- 9Q 9X-
iH. = JOl • M + * (~P2^ = °* (^)
9T2 9Q 9T2
Placing the negative terms to the right side of the equations and dividing
the first expression by the second yields
9Ji . JK£ /9B . JK£ _ XPi . (7)
9Q 3TX/ 3Q
Simplifying equation (7) results in the condition to be demonstrated,
(3)
This means that each technique will be used up to that level at which
the extra output realized per extra dollar spent is equal for the two
techniques. The Federal agency, as an agent for society as a whole, is
expected to select techniques according to this least-cost principle.
To illustrate how a grant recipient will choose among techniques, we
examine his behavior under the assumption that he attempts to maximize
his benefits from abatement subject to his budget constraint. A necessary
condition for his least-cost production is that
-fl!i • (8)
C2P2
where c.. , c. = grant recipient's cost shares (proportions) of techniques
1 and 2 respectively.
26
This condition is derived as follows. Assume that recipient benefits
(B ) are a function of Q and that the recipient has some budget constraint
R
R. To find the maximum of BR [QCT.^ TZ> ] subject to the constraint that
R = C-IPITI + C9P?T2' we can malce the Problem unconstrained by use of the
Lagrange multiplier and maximize the expression
50
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V - BR (Q) + X (R -
where V is now a function of TI> T.,, X, c^ and c.,.
By setting the partial derivatives of V with respect to "S and T equal
to zero, we obtain
8B
, V •
8B
V •
Placing the negative terms to the right side of the equations and
dividing the first expression by the second yields
9BR . |2 - X°1P1 . (12)
3Q 3T2 Xc2P2
Simplifying equation (12) results in the condition to be demonstrated,
c,P.
= JL1 • (8)
Note that identical cost shares (GI = c2> must apply to each technique
if cost sharing is to induce the grant recipient to select the nationally
efficient combination of techniques. If GI > c,,, the recipient will be
biased by cost sharing to choose less of technique 1 and more of technique
2 than is nationally efficient. If c2 > c^ he will be biased to choose
less of technique 2 and more of technique 1 than is nationally efficient.
Only when ^ = c2 does the recipient's maximizing condition (8) become
equivalent to the least-cost condition for society (3). This condition
for equal cost shares can be extended to as many techniques as are reasonable
substitutes for providing a given level of output.*
51
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Rather than assume the grant recipient attempts to maximize his benefits
from abatement subject to his budget constraint, we can adopt an alterna-
tive assumption regarding his behavior in the case where water quality
standards are enforced. In such a case, we can assume that he regards
as given, a level of abatement that must be met.
The necessary condition under the new assumptions is derived as follows.
The recipient attempts to minimize his costs (C ) subject to the constraint
that the level of abatement meets a specified level (Q ). Making the
problem unconstrained by the Lagrange multiplier, we can minimize the
expression
C = c P T + c P T + X[Q - Q(T , T )]. (13)
K J. -L J- / Z / O X Z
By setting the partial derivatives of CR with respect to T- and T9 equal
to zero, we obtain
R = c P - X JK£ =0, and (14)
P - X 9£_ = 0. (15)
Dividing the first expression by the second and simplifying, we find the
same condition derived earlier,
C~T 1
TT ' <«
22
Thus identical cost shares is a necessary condition for encouraging grant
recipients to select the nationally efficient technique both under condi-
tions of constrained budgets and of enforced levels of abatement.
(continued from previous page) the benefits received by that city will
vary with the location of the treated effluent. If the abatement is
above the city, more benefits will accrue locally than if the abatement
occurs below the city. Thus the necessary condition that c.. = c~ might
not apply under these assumptions because the distribution of benefits
may vary by technique. By taking the broader view of the nonfederal group
which includes cities below and above the particular city applying for a
grant, the nonfederal benefits as a collection of regional benefits will
be relatively unchanged by the kind of locational differences described
in the example.
52
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This mathematical derivation of equal cost sharing by technique is based
on differentiable, convex, curvilinear isoquants that do not intersect
the horizontal and vertical axes, thereby eliminating the possibility
that one technique alone would be the efficient choice. The following
graphical analysis in Figure 7 allows for corner solutions, which are
likely to occur in pollution abatement under some circumstances.
Assume that Q. level of pollution abatement can be produced with those
combinations of techniques 1 and 2 indicated by the isoquant abc. Assume
further that the recipient's share of benefits is the same for output Q1
for any combination of techniques 1 and 2 on abc. Isocost R depicts the
locus of quantity combinations of techniques 1 and 2 that will be of equal
cost to the grant recipient with Federal cost sharing. Isocosts S.. and S?
depict the locus of quantity combinations of techniques 1 and 2 that will
be of equal cost (to the nation) in producing Q1 solely with techniques 2
and 1, respectively, where S~ > S-.* The recipient and Federal isocosts
are not parallel because c, ^ c_. In this case, the slope of
R, -c?P7/c..P.. , is steeper than the slope of S. and S-, -P-/P... Because
the recipient's cost share of technique 2 is considerably higher than his
share of technique 1, he will choose a production process using more of
technique 1 than will the Federal agency seeking national efficiency.
If the absolute value of the slope of R is less than that of line segment
be, the grant recipient chooses technique 2 only. The recipient will
stop choosing technique 2 alone and pick the combination of techniques 1
and 2 indicated at b if the absolute value of the slope of R exceeds
that of line segment be but is less than that of ab**. The corner solution
*For any given price ratio, a family of isocosts exists for the nation.
The same holds true for the grant recipient for any given cost-sharing
proportion and price ratio. Three isocost lines (R, S.. and S ) are focused
upon here out of the families of isocosts to illustrate the impact of cost
sharing on the selection of least-cost techniques.
**If R becomes parallel to be or ab, the grant recipient would find
any combination of techniques 1 and 2 on those respective line segments
to be of equal cost in obtaining Q-.
53
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Figure 7. Cost share for efficient technique(s)
54
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at a, picking only technique 1, will become least cost to the recipient
only when the absolute value of the slope of R exceeds that of line
segment ab. Thus, with this isoquant that meets the axes, there are
ranges of cost shares that might induce grant recipients to select the
nationally efficient technique(s).
Figure 7 shows that under the assumed conditions the least-cost technique(s)
for the grant recipient is technique 1. The cost to the nation of producing
Q1 with technique 1 is Sr Yet society can realize (^ at a lower cost,
Sr by using only technique 2. The grant recipient will select the same
technique(s) as the Federal faction for producing (^ only when the slopes
of both factions' isocosts are more nearly equal. If R were to have a
slope with an absolute value less than that of line segment be, then both
the Federal agency and the recipient will choose to produce with technique
2 exclusively, and the savings to the nation (net efficiency gain) from
producing (^ with technique 2 instead of 1 would be the difference in the
costs represented by S2 minus S^ The implication of this analysis is
that where one technique alone is nationally efficient, a limited range
of cost shares might encourage the grant recipient to choose the nationally
efficient technique. But to handle all possible configurations of isoquants
and be assured that the local cost share is in the proper range, it would
seem pragmatic to make C;L = c2 the general rule for all pollution abatement
projects.*
The implications of existing cost-sharing rules for efficiency in production
are evaluated in Section V, where percentage cost shares are displayed by
technique and category of cost for various approaches to pollution abatement.
jicale
The necessary condition for determining the nationally efficient scale of
a water project has traditionally been to equate marginal benefits to
*In addition to the kinked isoquant shown in Figure 7 curvilinear
convex isoquants or straight-line isoquants, both of which touch the axes,
might also be representative of the mix of techniques that would provide
Ql 1Cyel J5 aba;:enifnt- The ^ape of the isoquant depends on the productivity
relationships of the particular techniques examined. The c = c rule is
appropriate for all of these isoquants. * 2
55
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27
marginal costs, i.e., to maximize net benefits, where benefits represent
the change in value of goods and services that result from having a project
as compared to not having it, and where costs include all expenses of con-
struction; interest; and of operation, maintenance, and replacement.
Construction agencies such as the Army Corps of Engineers, the Bureau of
Reclamation, and the Soil Conservation Service traditionally were supposed
to plan all projects to that scale or size where net benefits are maximized.
Additional objectives such as environmental quality and regional development
are considered today in the planning of water projects by these construction
agencies.
The grant agencies that are most important in providing financial assistance
for sewage treatment and collection facilities—EPA, HUD, EDA, and FHA—
have objectives that are less specific than the construction agencies in
terms of a benefit and cost criterion. Their objectives are more mission
oriented, and without detailed criteria regarding the efficient scale or
size of a project. For EPA, for example, Title II of the 1972 Act,
Sec. 201(a), states that "it is the purpose of this title to require and
to assist the development and implementation of waste treatment management
plans and practices which will achieve the goals of this Act." In terms
of scale, Section 204 (a)(5) states the following:
. . . that the size and capacity of such works relate directly to
the needs to be served by such works, including sufficient reserve
capacity. The amount of reserve capacity provided shall be approved
by the Administrator on the basis of a comparison of the cost of
constructing such reserves as a part of the works to be funded and
the anticipated cost of providing expanded capacity at a date when
such capacity will be required.
Needs, as a basis for determining scale, is more ambiguous than a net benefits
criterion. The 1972 Act does not provide a clear description of the nationallfl
efficient scale of abatement.
The nationally efficient scale of pollution abatement, i.e., where net
benefits are maximized, is emphasized in this study. Economies of scale,
i.e., where the average cost of abatement decreases at larger levels of
abatement, will be examined from the standpoint of how it relates to
maximizing net benefits.
56
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A strong argument on efficiency grounds (to be discussed below) can be
made for planning abatement projects to the scale where net benefits are
maximized. Even where some target level of abatement is established, to
ensure the efficient scale the target level should ultimately be based
on a net benefits criterion. Thus the following discussion of the
Association Rule (AR) is provided to demonstrate the cost-sharing
condition (i.e., the AR) which will encourage grant recipients to seek
the efficient scale of pollution abatement from their standpoint as well
as from the nation's standpoint, where maximizing net national benefits
from abatement is assumed to be the national objective.
Assume the following:
B = C = C(Q)
BR = V"' C - CR + CF
BF = dB~ ^ C = *
b = % /dB c . dC /
dQ/^ "*> dcT/^ (17)
where B = total benefits accruing to the nation,*
BR = benefits accruing to grant recipient,
Bp = widespread benefits not assignable to grant recipients,
b = proportion of B accruing to grant recipient at the margin,
C = total costs accruing to the nation,
CR = costs borne by grant recipient,
CF = costs borne by the Federal government,
c - proportion of C paid by grant recipient at the margin, and
c - constant cost share exogenously determined in legislation.
For national economic efficiency, pollution abatement should be provided
at that scale where net national benefits are maximized. Assuming continuous
*Examples of potential benefits from pollution abatement are the
following: value of recreational opportunities gained; reduced costs of
purifying water supplies to meet drinking water or other standards- value
of gains from enhanced commercial and sport fisheries; and reduced'costs
of processing water for production purposes. reaucea costs
57
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and smooth functions, this condition is
M = dC* (18)
dQ dQ
The last increment in scale adds benefits just equal to the marginal costs
of production. If a pollution abatement project is underbuilt or overbuilt
with respect to the scale that is nationally efficient, then too few or
too many resources respectively have been allocated to that project.
To maximize their net benefits, grant recipients will choose, if possible
that scale where
fs - fs (»>
dQ ~ dQ
Grant recipients cannot gain net benefits by altering the size of the
project when this condition is satisfied. Rearranging equations (16) and
(17), we have
% . . dB
dQ dQ (20)
and dC,. ,„
_JL = c • 4C (21)
dQ dQ
By substitution into equation (19), we obtain the following condition:
• <*B = . dC
dQ C dQ . (22)
This maximization condition for local interests shows, by comparing it
with condition (18), that the scale desired by grant recipients will equal
that picked by the Federal agency only if b - c. This condition, i.e.,
that costs are shared in the same proportion as benefits at the margin, is
called the Association Rule (AR). If b > c, grant recipients will choose
a scale larger than the nationally efficient level and dB/dQ < dC/dQ.
*For a derivation of this condition and of the condition for maximizing
efficiency in the presence of a budget constraint, see Stephen A. MargHn>
"Objectives of Water-Resource Development: A General Statement," Design of
Water Resource Systems, Maass, et. al. (Cambridge, Massachusetts: Harvard
University Press, 1962), pp. 31-36.
58
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If b < c, they will choose a scale smaller than the nationally efficient
level and dB/dQ > dC/dQ.*
Figure 8 illustrates the AR graphically. Detnand functions MHB and MRB
represent the willingness-to-pay for pollution abatement by the nation and
by grant recipients respectively.** The downward slopes depict diminishing
marginal benefits to each faction for extra units of abatement. Assume for
illustrative purposes that 75% of MNB accrues locally, as measured by MRB.
Assume further than the marginal national cost curve, MNC, represents the
least-cost combinations of techniques for providing each level of output.
Net national benefits are maximized at Qe because dB/dQ = dC/dQ i e
MNB - MNC. Grant recipients will be encouraged to select up to'Qo'only
when they pay a cost share of 75%, which makes dB/dQ = dC /dQ at Q0
(i.e., MRB = .75 MNC - MRC).*** If thp <»T-a««- ,. -• 4 R
'* " the 8ra*t recipients are charged 50%
of costs, they will choose up to Q,,. The national efficiency loss would
amount to abc if the project were built to this scale. A 90% share to
grant recipients would induce them to choose up to Q If the project
were built to this scale, an efficiency loss of area aed would result
equal to the foregone amount by which extra national benefits would have
exceeded extra national costs up to Q0.
The mathematical and graphical analyses show that the AR meets the necessary
condition for encouraging grant recipients to choose the nationally
5
,cale. However, since this study is focused on cost sharing
*"
,_ dB
**MNB and MRB are respectively — and _ ^
59
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$
Costs
and
Benefits
MNC
MRC
Units of Project
Purpose Output
Figure 8. Cost share for efficient scale
60
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efficient project scale.* Implementation of the AR, however, might be
considered difficult in that information on benefits that accrue to the
grant recipients and to the nation at large is necessary in order to
apply the rule. Alternatives to the AR will be evaluated in Section V.
Now let us examine economies of scale in abatement as they relate to
maximizing net national benefits. As the level of abatement increases,
the average cost per unit of abatement will decrease under certain
conditions. Thus large cities with large abatement projects may benefit
from economies of scale, whereas small cities with small abatement projects
may pay higher unit costs. This part of the study examines the efficiency
implications of varying local cost shares in proportion to community size
to encourage nonfederal interests to take advantage of economies of scale.
As the size of pollution abatement facilities increases, it is reasonable
to expect that the average cost (AC) to the nation per unit of abatement**
will first decrease and ultimately increase, as shown in Figure 9.
The characteristic "U"-shaped AC curve demonstrates economies of scale
from increasing abatement (Q) up to Q^ the minimum AC point, and disecon-
omies of scale from increasing abatement beyond C^.*** (Note that marginal
cost (MC) always intersects AC at its minimum point).
*Application of the Association Rule is not inconsistent with the
application of the same percentage share to all cost categories and techniques
as discussed earlier in this section. Cost shares could vary by project
according to the Association Rule; but to encourage selection of least-cost
techniques, the selected percentage for any given project must be applied
equally among techniques to satisfy the same percentage rule.
**The average cost function is assumed here to represent the least-cost
combination of techniques.
***There is some controversy as to whether or not AC does ultimately
bend upwards. Data on the operation of plants seem to support the contention
that, in the relevant range of demand for abatement, AC declines ^tent±°n
analysis presented in this section applies to either type of AC situation
the "U-'-shaped curve we describe on a priori grounds, or the decreasing '
AC curve that operators have suggested.
61
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MB,
ARC
Figure 9. Average cost and efficient scale of pollution abatement
62
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Several factors contribute to the economies of scale that are reflected
in the decreasing portion of the AC function. Increased specialization
and more efficient utilization of management occurs with larger operations;
more efficient equipment can be utilized in large scale operations; and
finally, partial neutralization of wastes by mixing from different sources
may reduce treatment costs. Eventually, however, the following factors
will tend to push the AC for abatement up. With a large labor force,
plants may become unionized, causing higher wage costs. Disposal of
sludge becomes more and more costly with greater quantities, particularly
in a heavily urbanized area with limited disposal areas. Because collec-
tion is an expensive part of total abatement costs, routing from sources
at greater and greater distances from a central plant becomes prohibitively
expensive.
It was stated earlier that the efficient scale of abatement would be that
level where marginal benefits (MB) to society from abatement just equaled
marginal costs. This efficient level of abatement could be to the left of
C^, say at QI; at Qm; or to the right of C^, say at Q,,. There is no
economic efficiency argument for providing q^ for example, unless MB
happens to be society's marginal benefit function.
An abatement program for a small city might have a benefits function such
as MB-j^; that is, extra benefits from abatement become small at relatively
low levels of Q once the pollution load requirements of that city have
been met. A large city, on the other hand, might show a benefits function
such as MB2, illustrating greater marginal benefits at all scales of
abatement than the small city0
If the grants for construction to the cities are 75%, this means that the
grant recipient cities would incur 25% of the abatement costs, as indicated
by their average cost (ARC) function in Figure 9 (ARC = .25AC). Note
that due to economies of scale, the large city pays less in absolute
amount (ARC2) per unit of abatement than does the small city (ARC ).
With the MB function in different positions, however, the small city might
pay less per unit of abatement than the large city (assuming that AC
rises over the relevant range). The significant finding of this analysis
63
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is that there is no economic efficiency rationale for giving one city
more in percentage terms than to another simply because the absolute AC
of abatement differs between the two. In fact, varying cost shares in
relation to city size, other things being equal, may lead to inefficient
scales of abatement. The analysis does indicate that under some circum-
stances it might be advantageous to cities and to the nation for cities
to join in the contruction of regional treatment plants that will yield
economies of scale, thereby reducing the absolute cost per unit of
abatement to the individual participating cities and to the nation. For
example, in Figure 10 the efficient scale of abatement for city 1 and
city 2 would be Q- and Q2 respectively when they operate singly. But,
if they were to combine their efforts in a regional facility at a joint
level of abatement of Q™, the cost to the nation per unit would be AC3»
which is lower than what would have been paid for separate facilities,
AC1 and AC_. Joint operation would also reduce each city's share of the
costs under a fixed Federal grant program.
CHARACTERISTICS
OF EQUITY
In economics equity is given two meanings: one is fairness. and the
other is redistribution of income. Both concepts of equity are discussed
here but the emphasis in this study is to determine characteristics of
equity by which to evaluate existing and alternative cost-sharing rules
to see if they assure fair treatment to communities seeking financial
assistance for pollution abatement.
Shoup29 has defined six characteristics of a fair fiscal policy from which
we have selected three that seem pertinent to the evaluation of grants
for pollution abatement.* The selected characteristics are relevancy,
continuity, and certainty.
*0thers (e.g., Richard Musgrave, The Theory of Public Finance. McGraw
Hill: New York, 1959) besides Shoup have examined equity. However, Shoup's
equity characteristics are defined in such a way that they can be applied
to existing and alternative cost sharing rules for pollution abatement.
Thus his characteristics of fair treatment were chosen in making this
evaluation of equity.
64
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$
MB
MC
AC
AC1 I
AC
AC
0
Figure 10. Efficient scale with regional abatement
65
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For a cost-sharing rule to satisfy the characteristic of relevancy, it
must treat all project participants equally with respect to the relevant
circumstances affecting them. What are regarded as relevant circumstances
may vary with one's point of view. The grant recipient, for example,
might consider only the benefits that accrue to him as being relevant,
whereas the Federal agency that administers a grant would be expected to
consider all benefits, local and widespread, as relevant in planning a
project. A different group, such as a development agency, might suggest
ability to pay as a relevant circumstance on which to base cost sharing.
In this study "benefits received" are assumed to be the relevant circum-
stance. Accordingly, grant recipients would have to contribute a cost
share in proportion to the benefits that they receive from pollution
abatement in order to meet the relevancy characteristic of equity.*
For a cost-sharing rule to satisfy the continuity characteristic, no major
change in the relative share of costs borne by the Federal grantor and the
local grantee would result from a small change in the relevant circumstances
i.e., the benefits they receive. Thus, given an increase in the ratio of
local to national benefits, the resulting change in the local cost share
will not differ greatly from the change in the local cost share that would
result from adding the next, equal increment of local to national benefits.
To satisfy the characteristic of certainty, a cost-sharing rule must treat
grant recipients equally at different points in time whenever the same
relevant circumstances occur so that the cost-sharing responsibility can
be anticipated with reasonable certainty. The grant program should specify
the relevant circumstances on which cost-sharing rules are based in order
to eliminate any confusion as to whether the relevant circumstances change
over time.
It appears that existing rules fail to satisfy the relevancy characteristic
for most techniques because they do not appear to bear much relationship
to benefits received. Existing rules also fail to satisfy the continuity
*Note that the Association Rule does not necessarily satisfy this
characteristic because it applies to benefits at the margin.
66
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characteristic in that small changes in the proportion of local to national
benefits that might result from changing techniques of abatement can result
in major changes in local cost sharing because of the different cost compo-
sition among categories of cost that are shared differently. Existing
rules must be labeled uncertain in that the actual percent of total costs
borne by nonfederal groups will vary among techniques over time even when
local benefits are the same ratio to total benefits for every technique.
A difficult kind of uncertainty exists in that the eligibility of many
nonplant techniques is not clear.
Relating the nonfederal percentage share of costs more closely to nonfederal
benefits received would satisfy the characteristic of relevancy. Cost-
sharing requirements can be made more continuous and certain by applying
the same percentage to all techniques and cost categories. Local uncertainty
in general could be further reduced if all technically viable alternatives
for abatement were eligible for grants and if eligible project costs were
always in practice awarded grants.
Redistribution of income, a second concept of equity, occurs in the cost
sharing of pollution abatement when the benefits and costs of abatement
are distributed to project interests in such a way as to change the prior
distribution of income. Conflicts of interest over redistribution result
when persons from whom benefits are withdrawn or on whom taxes are imposed
consider such a redistribution to their personal disadvantage and perhaps
also not in the national best interest.* For example, the Federal taxpayers
that support through general taxes a Federal grant program,that helps a
eonmunity combat its wastewater problem, which is essentially local in
nature, have their income redistributed to people in the recipient community.
Equity in the redistributive sense defined here is not treated in this study.
*For a discussion of the relationship between cost sharing and redis-
tribution, and of the implications of using cost sharing as a tool to
effect various kinds of redistribution, see Marshall and Broussalian
itederal Cost-Sharing Policies for Water Resources. pp0 216-224 '
67
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Section IV References
1. Davis, Robert K. The Range of Choice in Water Management, A Study of
Dissolved Oxygen in the Potomac Estuary, p. 125-126.
2. Raymond, Richard. The Impact of Federal Financing Provisions in the
Federal Water Pollution Control Act Amendments of 1972. Public
Policy. J22_:109-110, Winter 1974.
3. Water Policies for the Future. National Water Commission. Washington D.C
U.S. Government Printing Office. Final report to the President and
to Congress of the United States. 1973. p. 77, A85-525.
4. Ibid., p. 78.
5. Ibid., p. 79.
6. Ibid.
7. Ibid., p. 80.
8. Marshall, Harold E. , The Relationships Between Local Cost-Sharing and
Efficient Water-Resource Development (unpublished Ph.D. dissertation,
The George Washington University, 1969), p. 56-89, has a more
comprehensive survey of the literature on cost sharing,
9. Regan, Mark. Sharing Financial Responsibility of River Basin Development.
In: Economics and Public Policy in Water Resources Development
Smith, S. C. and Castle, E. N. (eds.). Ames, Iowa State University
Press, 1961. p. 215.
10. Renshaw, Edward F. Toward Responsible Government: An Economic Appraisal
of Federal Investment in Water Resource Programs. Chicago, Idyia
Press, 1957. p. 50.
11. Loughlin, James C. Cost-Sharing for Federal Water Resource Programs with
Emphasis on Flood Protection. Water Resources Research. .6(2):377
April 1970.
12. Marshall, Harold E. Economic Efficiency Implications of Federal-Local
Cost Sharing in Water Resource Development. Water Resources Research1
: 673-682, June 1970.
13. Ibid., p. 674-676.
14. Ibid., p. 677-679.
15. Marshall, Harold E. and Vartkes L. Broussalian. Federal Cost-Sharing
Policies for Water Resources. National Bureau of Standards.
Springfield, Va., National Technical Information Service. No. PG-208'
304. National Water Commission. 1971. p. 201-214.
68
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16. Ibid.. p. 121-128.
17. Rafuse, Robert W. Jr. and Michael D. Sherman. The Implications of the
Net Fiscal Benefits Criterion for Cost Sharing in Flood Control
Projects. Mathematica Report. Washington, B.C. IWR Report 71-12.
Institute for Water Resources, the Corps of Engineers. 1971. p. ii
49-51.
18. Ibid., p. 51.
19. Ibid.- , p. ii-
20. Water Policies for the Future. National Water Commission, p. 485-525.
21. Ibid., p. 494.
22. Ibid., p. 495.
23. Marshall, Harold E. Salinity Control and Cost Sharing. In: Proceedings
of the Western Resources Conference, 1973. Boulder: University of
Colorado, July 9 and 10, 1973. In press.
24. Marshall, Harold E. Cost Sharing as an Incentive to Attain the Objectives
of Shoreline Protection. National Bureau of Standards. Washington,
D.C. NBSIR 73-294. Corps of Engineers. December 1973. p. 21-23.
25. PL 92-500, Sec. 212(2)B.
26. Marshall, Harold E. Economic Efficiency Implications of Federal-Local
Cost Sharing in Water Resources Development, p. 674-675.
27. U.S. Congress, Senate. Policies, Standards, and Procedures in the Formulation,
Evaluation, and Review of Plans for Use and Development of Water and
Related Land Resources, Sen. Doc. 97, 87th Congress, 2d sess., 1962,
V(c)(2).
28. Marshall, Harold E. and Vartkes L. Broussalian. Federal Cost-Sharing
Policies for Water Resources, p. 58-65, and Marshall, Harold E.
Economic Efficiency Implications of Federal-Local Cost Sharing in
Water Resource Development, p. 675-677.
29. Shoup, Carl S. Public Finance. Chicago, Aldine Publishing Co., 1969. p. 23,
69
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SECTION V
EFFICIENCY IMPLICATIONS OF EXISTING
AND ALTERNATIVE COST-SHARING PROGRAMS
In this section we evaluate the existing and alternative cost-sharing
programs with respect to the efficiency conditions outlined in Section IV.
Some case examples are given of biases for particular techniques of abate-
ment caused by existing cost-sharing rules.
TECHNIQUES
It was shown in Section IV that identical cost shares must apply to each
technique considered for the purpose of abatement if the grant recipient
is to be encouraged by cost sharing to select the nationally efficient
combination of techniques under all conditions. Current rules for cost
sharing pollution abatement, as described in Table 2, are not identical
for all techniques. Thus communities may be biased towards nationally
inefficient techniques for pollution abatement.
The hypothetical example in Table 5 illustrates how cost-sharing, unevenly
applied among alternative techniques, can make the most costly technique
to the nation become the least costly technique to the local community.
The three techniques shown in the table are assumed to be equal in terms
of benefits from abatement, but to differ greatly in total cost.* By
comparing the last two columns, we can see that the ranking of techniques
*The assumption of equal benefits here is made to simplify the example.
Benefit-cost analysis could be used to demonstrate bias effects even where
benefits differ among techniques and where the local-Federal distribution
of benefits differs by technique.
70
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in order of largest to smallest cost to the nation is techniques 1, 2,
and 3; whereas, the ranking in order of largest to smallest cost to the
local community is just the inverse, techniques 3, 2, and 1. The potential
local bias is even greater than Table 5 implies, however. The cost of
technique 1, for which the Federal government pays 75%, can be a maximum
of four times as much as technique 3, for which there is no cost sharing,
and still be preferred by the local community as the cheaper technique.
The maximum biases among techniques are computed by dividing the nonfederal
percentage cost share of one technique by that of another. Thus the bias
of technique 1 over technique 3 (B. ,) is calculated by dividing the non-
federal cost share of technique 3 by the nonfederal share for technique 1.
That is, 1.00/.25 equals 4. Similarly, technique 2, with 50% cost sharing,
can cost twice as much as technique 3, which is least-cost to the nation,
and still be of lesser cost to the local community. That is, the B2 is
1.00/.5 or 2.*
Table 5. IMPACT ON LOCAL PROJECT COST OF
DIFFERENT COST-SHARING RULES: AN ILLUSTRATION
Total Project
Cost to the Local
Community
Nonfederal
Cost Share
25%
50%
100%
Federal
Cost Share
75%
50%
0%
Total Project
Cost to the Nation
$50,000
$30,000
$20,000
\ 25% 75% $50,000 $12,500
2 50% 50% $30,000 $15,000
3 100% 0% $20,000 $20,000
*Raymond has discussed the potential or maximum bias inherent in
Federal cost-sharing rules in "The Impact of Federal Financing Provisions,1
pp. 5-6.
71
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The cost-sharing rule to eliminate these biases is to cost share each
technique in the same proportion. This rule will be effective no matter what
actual percentage figure is chosen.
To encourage consideration of new technologies that might not be known at the
time legislation is drawn up, the cost-sharing eligibility condition could be
specified simply as all technically viable alternatives, thereby leaving
room for expansion of eligible techniques. As long as the same percentage
rule applies to all techniques, there will be no problem with choosing the
nationally efficient technique(s), because the community will be seeking a
technique that is simultaneously least costly to it and to the nation.
A related problem that results from cost sharing all technically viable tech-
niques is determining what part of that technique provides abatement per se,
and consequently what part of the costs of that technique should be cost
shared under the abatement program. For example, rehabilitation of the
collection system to prevent infiltration is a technique that serves at
least two purposes: expanded collection capacity and abatement benefits
inherent in reduced infiltration. On efficiency grounds, only those costs
that can properly be allocated to the purpose of abatement should be cost
shared. Furthermore, the cost share applied to those allocated costs must
equal the share applied to other techniques of abatement. A higher Federal
subsidy would result in an overutilization of improvements in collection
as an abatement technique, whereas providing no Federal subsidy would bias
communities against improvements in collection as an abatement technique
although in fact it might be the most efficient technique.
Allocating costs accurately between abatement and other purposes in a
collection rehabilitation project that serves multiple purposes is a
difficult task.* Because reaching a proper allocation of costs among purposes
*The theory and practice of cost allocation has not been undertaken
in this study. For a description of three commonly used methods of allocating
costs among multiple-purpose projects in water resource programs, see
Marshall and Broussalian, Federal Cost-Sharing Policies for Water Resourrgo
pp. 29-34 and pp. 251-253.''
72
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is difficult, two approaches that do not require cost allocation are
considered here for encouraging efficient technique(s) in a multiple-
purpose project. One is to share the costs of a technique that satisfies
multiple purposes, but at a lower rate than techniques that satisfy only
the pollution abatement purpose. If designed properly, this rule would
have the same impact of sharing equally all techniques where only those
costs applicable to abatement are eligible. The problem still remains,
however, of choosing the appropriate reduced cost share. A Federal share
that is too high will encourage overutilization of the given technique for
abatement, and a Federal share that is too low will encourage underutiliza-
tion of that technique.
Another approach is to use benefits as an index to costs in determining
either the cost allocation or the appropriate reduced cost-sharing rate
for a technique satisfying multiple purposes. However, the distribution
of benefits among purposes has no necessary relationship to the costs, rnd
using benefits as an index is therefore not recommended.
Without in-depth investigation into this problem, the only concrete suggestion
that can be made regarding the cost sharing of techniques serving more
than one purpose is that, on the basis of an efficient allocation of
resources to abatement, a lower Federal cost share should be applied to
techniques that provide benefits other than abatement than to techniques
which provide abatement only, and that the cost share should decrease as
the cost of providing these other benefits increases relative to the cost
of providing abatement. Thus, existing practice which excludes collection
systems in new communities from grant eligibility appears compatible with
this efficiency criteria. It would further appear that repairs to old
collection facilities for the purpose of reducing infiltration be Federally
shared to some extent, although not at as high a rate perhaps as a technique
for treatment only.
Rehabilitation of collection works to prevent infiltration is just one
example of a technique that serves more than one purpose. Other existing
(and future) techniques for abatement might serve multiple purposes, and
thus a reduced Federal cost share would properly be applied to them also.
73
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The previous discussion has dealt with eliminating biases by cost sharing
all techniques for abatement equally. But to eliminate the bias from
unequal cost sharing of techniques, it is not sufficient just to require
that certain categories of costs be eligible for the same percentage cost
share for all techniques. Biases to choose certain techniques still
result when cost-sharing rules which do not cover equally all categories
of costs (i.e., different percentage shares are provided for capital as
compared to 0 & M or land costs) are applied to techniques with different
cost composition (i.e., techniques with differing ratios of capital costs
to 0 & M and land costs). Because 0 & M costs, for example, are not shared
at all by the Federal government, while capital costs are (see Table 2),
grant recipients will be biased towards capital-intensive techniques even
though all techniques may be eligible for the same percentage share of
capital cost. Likewise, grant recipients will try to avoid projects
requiring expensive acquisition of lands for the project site. These
responses occur because the effective nonfederal cost share is unequal
among techniques (i.e., c- J c2).
Table 6 shows the impact on local costs of a cost?-sharing rule which
does not apply equally to all categories of cost. The cost figures in
the table are actual estimates for three alternative treatment techniques
evaluated for the Cleveland-Akron area. All techniques are purported to
meet effectiveness standards, but they differ in the amount of total
costs and in their relative proportions of capital, 0 & M, and land costs.
Construction costs (comprising capital and eligible land'costs) of the
land treatment technique account for about two-thirds of the total costs
of that technique, and substantially less for the other two techniques.
The land treatment technique has the highest cost to the nation ($183,200
compared with $148,500 and $144,600). The effect of the cost-sharing rule,
however, is to make the,land treatment technique the least costly to the
local community ($92,525 compared with $100,350 and $106,725).
The maximum biases among the techniques are calculated.from the local
percentages of total national costs, as shown in the far right column of
Table 6. The B ,, for example, is .74/.51 or 1.45. This means that
-L • j
74
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Table 6 IMPACT OK CHOICE OF TECHNIQUES OF A COST-SHARING
RULE WHICH DOES NOT APPLY EQUALLY TO ALL CATEGORIES OF COST*
Technique
1. Land Treatment
2. Plant (Advanced Biological
Treiriaant)
3. Plant (Physical Chemical)
Annual Dollar Cost to the Nation
(By Cost Category)
Construction
120,900
64,200
50, 500
0 & M
62,300
84,300
94,100
Total
183,200
148,500
144,600
Federal Percentage
Cost Share
(By Cost Category)
Construction
75
75
75
0 & M
0
0
0
Annual Dollar Cost To
the Local Community
(By Cost Category)
Construction
30,225
16,050
12.625
0 & M
62,300
84,300
94,100
Total
92,525
100,350
106,725
Local Percentage
Cost Share Of
Total National Costs
(Effective Cost Share)
51
68
74
''Taken from Raymond, "The Impact of Federal Financing Provisions," p, 5. This Information was presented originally in Wrlght-McLaughlln Engineers,
U.S. Army Corps of Engineers, Cleveland-Akron Three Rivers Watershed Wastewater Management Survey Scope Study, Formulation Technical Appendix.
Development of Array of Alternative Regional Plans for Wastewater Management, November, 1972, Summary Section Table 4.
Data are actual cost estimates for three systems designed to Beet Identical standards as set forth In the 1972 Act. Construction costs are
66Z of total costs for the land treatment technique and 43Z and 352 respectively for techniques 2 and 3.
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the land treatment described in Table 6 could cost nearly half again more
than the physical-chemical plant technique, i.e., nearly $70,000
dollars more, and still be the least costly to the community.* Similarly,
The *1.2 is 1.33, and the B^- is 1.09.
The efficiency implication again is that local communities may select
techniques that are not cost-effective to the nation. The cost-sharing
rule to eliminate this bias is to share all categories of cost for all
abatement techniques in the same proportion.
There are, however, alternative cost-sharing rules for arriving at the same
(or nearly same) effective cost share for all techniques which may be used
in lieu of applying the uniform rule across all cost categories. Some
of these alternatives are discussed in the event that institutional or
other constraints preclude application of the uniform rule.
The possible cost categories to share are land, capital, 0 & M, any combi-
nation of the three, or none. The "none" category can be dismissed as a
plausible alternative because we are assuming that some grant program will
be administered. Although, as we have seen above, applying a uniform
percentage to all categories of costs would be optimal on efficiency grounds
let us suppose that for some reason only one category of cost could be
Federally funded. As an example, let us assume that Federal grants can
be made for capital expenses only. This assumption parallels actual
Federal cost sharing practice in wastewater pollution abatement, wherein
0 & M costs have traditionally not been shared.** Let us further assume,
*Note that Table 6 represents one particular case and is not intended to imply
anything about the general cost relationship of the three techniques discussed.
**There are several reasons for sharing only capital. Practical financing
problems face the Federal and nonfederal administrators of 0 & M grants in
that these grants would accrue to local communities over time and they would
probably vary with growth conditions, inflation, and other uncontrollable
variables. Operation and maintenance grants are entirely open-ended drains
on grantors' budgets. Capital grants, on the other hand, are easier to
administer because they are more precise in total amount and in the time of
allocation. Given these and other considerations, it is not surprising that
grantors would not want to share 0 & M costs.
It is recognized that, theoretically, 0 & M alone could be funded rather
than capital with the rules to be developed. But since capital is most likely
to be funded in practice, we focus on it in the examples.
76
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to keep the problem simple, that most of the costs are attributed to either
capital or 0 & M. Thus nonfederal interests are biased against choosing
techniques that are 0 & M intensive.* Moreover, grant recipients might
be expected to cut the quality and degree of 0 & M below what might be
attained with Federal aid.
To counteract these biases, several approaches might be considered. One
is to award an add-on Federal capital subsidy for a project design that
incorporates the appropriate level of 0 & M and another add-on capital
subsidy over time based on the quality of performance of the grant recipient
in the actual 0 & M of the abatement project. These incentives might be
criticized on the grounds that existing water quality standards require
a certain quality of abatement and that extra capital subsidies are
unnecessary for inducing good 0 & M planning and performance. However,
when no penalties are imposed for failure to comply with standards, the
add-on subsidy becomes relevant.
Under a program of subsidizing capital only, another approach to eliminat
the bias against techniques that are 0 & M intensive is to vary the Feder
capital grant among techniques so that the grant as a percentage of total
projects costs, i.e., the effective grant, will be uniform across all tech-
niques. It was shown in a hypothetical example in Table 6 that grant
recipients would be biased towards technique 1 even with the same Federal
capital share among all techniques, because the ratio of capital costs to
other costs was higher for technique 1 than for techniques 2 and 3. If
the percentage of total costs could be equalized among techniques by making
the Federal capital share vary among techniques, this bias could be
eliminated.**
*Due to the compensation arrangement for architects/engineers that
is based on construction costs (see Section III) , a bias also exists for
the contractor-planner to design capital-intensive abatement projects.
**Calculating the percentage cost shares for any particular project for
different techniques would not be difficult in that project plans include
costs by categories.
77
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With the uniform rule applied across all cost cateogires, any given percentage
share of total costs would encourage community selection of the nationally
efficient technique. However, with subsidization of capital only, the
percentage figure would have to be transposed into an effective capital
cost share that would vary with every change in the composition of cost
categories. For example, to make the effective local total cost shares
equal in Table 6, let us say at 25%, the local share for construction would have
to be 38% for technique 1, 58% for technique 2, and 72% for technique 3.
Applying these different rules to construction for each technique would have
the same effect as charging local interests 25% of all categories of costs.
Yet another approach to reducing the bias against 0 & M intensive techniques
while sharing only capital costs is to restrict the effective Federal
share for all techniques by some predetermined percentage. Such a constraint
will prevent a capital-intensive technique under a capital cost-sharing
program from receiving a much higher grant award than a less capital-intensive
technique. Table 7 illustrates the determination of a percentage constraint
and the biases among techniques with and without imposing that constraint.
As shown in rows 1 and 2 of the table, the three abatement techniques
differ greatly in the relative composition, of cost categories, ranging from
practically all capital in the case of the collection and outfall systems,
to only about one-third capital in the case of in-stream aeration. The
third row of the table shows the computation of project cost to the local
community under the existing grant program of a 75% Federal share for
capital and a zero percent Federal share for 0 & M. The fourth and fifth
rows give the percent of total costs borne by the local and Federal sectors
respectively. The Federal share comprises 70% of the total cost of technique l
49% of technique 2, and 25% of technique 3. The percentage Federal cost-sharing
constraint which will be just adequate to eliminate the bias is equal to the
effective Federal cost share for that technique for which the Federal cost
share is lowest. Accordingly, in this example, the constraint will be the
lowest percentage in row 5, i.e., 25%.
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Table 7. DETERHlHmON 0? A COST-SHARING CONSTRAINT
TO REDUCE POTENTIAL BIAS III SELECTION OF ABATEMENT TECHNIQUES
1) Capital Cost as a Z of Total
Cost (TC)b
2) Operation & Maintenance as
a Z of Total Cost (TC)b
3) Absolute Cost to the Local
Community (C_)
4) Local Cost Share as a Percent
of Total Cost
5) Federal Cost Share es a Z of
Total Cost
6) Maximum Bias Between Techniques
Without Cost-Sharing Constraint
7) Maximum Bias Between Techniques
With 40X Constraint
ABATEMENT TECHNIQUES
Work on the Collection Sewers,
Interceptors, & Outfall System
93Z
Cj - (.25)(.93)(TO •«• (1.00)(.07)(TC)
- .2325(TC) + ,0700(TC)
.3025(TC)
30Z
70Z
2.50
l:2
Treatment Plant
65Z
35Z
CB - (.25)(.65)(TC) + (1.00)(.35)(TC)
R2
- .1625(TC) + .3500(TC)
- .5125(TC)
.51Z
49Z
B. „ - 1.47
2:3
In-Stream Aeration
33Z
67Z
C. - (.25) (.33) (TC) + (1.00)(.67)(TC)
R3
- .0825(TC)
- .7525(TC)
.6700(TC)
75Z
25Z
*It la assumed that the Federal cost char* la 75Z of capital coats and OZ of operation and maintenance costs.
bThe cost composition percentages for the first and second techniques are based on annualized cost data from EPA, Cost to Thaatonsuner for Collection and
Treatment of Wastevater. p. 66. Capital costs include costs of structures and equipment, recovered over 25 years at an Interest charge of 5Z per year
In the'case of the treatment plant, and over 50 years at 5Z In the case of the collection. Interceptor, and outfall systems. Land costs are not included.
The cost composition percentages for in-strram aeration are based on annualized cost data, averaged over 12 variations of mechanical surface and
diffusion aeration systems as reported In William Whlpple, Jr., "Instream Aerators for Polluted Rivers," Journal of the Sanitary Engineering Division.
October, 1970, pp. 1160-1161. Capital costs Include equipment cost and initial Installation, and are recovered over 20 years at 6Z. The percentages
should be viewed as approximate and may not be Indicative of the cost composition of these techniques In general.
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In the sixth row we calculate the maximum biases. Under the assumed rule
of a 75% Federal capital cost share, the dollar cost to the nation of
technique 1, the most capital-intensive project, could exceed by about
two-and-one-half .times the cost of the least capital-intensive project,
technique 3, and still be favored by the local community.* That is, the
maximum bias of technique 1 over technique 3 (^.3)' is .75/.30, or 2.5.
Similarly, B and B are displayed in Table 7.
J- * fL 2. • 3
Limiting Federal capital grant funds to an amount equal to 25% of total
project cost for all techniques Is a constraint that would eliminate the
bias towards techniques 1 and 2 as compared to technique 3. The modified
cost rule would be that the Federal grant program would pay 75% of capital
costs and 0% of 0 & M costs, but that the Federal share will not exceed
25% of total project costs. In the example, the cost to nonfederal interests
is raised from 30% of total project costs to 75% for technique 1, from 51%
to 75% for technique 2, and remains 75% for technique 3. Thus the value
of the bias between all three techniques becomes one, which means there
is no cost-sharing advantage of one technique over another, when the
constraint is imposed.
Note what occurs if the constraint on the Federal capital share is set
above or below the maximum percentage required to eliminate the bias, in
this case 25%. If we assume a 40% Federal limit, for example, row 7
shows that the B, and the B... would be 1.25. Thus whenever the constraint
is above the lowest effective Federal cost share, the biases will not be
totally eliminated. If, on the other hand, we assume a lower constraint, say,
in this example, 10%, the local shares as a percentage of total costs would
all be 90% and the biases 1, i.e., there would be no cost-sharing advantage
of one technique over another. In this case picking a constraint under
25% is in effect an "overkill" of the bias, because once it reaches 25%
there is no more bias to be eliminated.
*For example, other things equal, a local community would be indifferent
to a project utilizing technique 3 at a cost of $10,000 as compared to a
project utilizing technique 1 at a cost of $24,900. This represents a
potential national efficiency loss of $14,900.
80
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Instead of estimating the appropriate funding constraint on a case by
case basis, it could be expressed as a single percent to be applied to
all projects and incorporated into the cost-sharing rule. Such a constraint
would be somewhat arbitrary and would not necessarily eliminate all potential
biases among techniques. However, if set sufficiently low, it would reduce
the extremes of bias between techniques with very different cost composition,
and would likely eliminate all biases between techniques that have a
relatively high percent of costs of the type shared.
There are then approaches to the sharing of one category of cost that will
encourage nationally efficient decisions on the part of nonfederal interests
even where techniques differ with respect to their cost composition. The
constraint approach seems a practical one for at least reducing large
biases among techniques. The constraint approach has the additional
desirable feature of providing a percentage limit to Federal expenditures
for any given project. If the decision were made to disburse a given
Federal budget among more projects, setting the Federal constraint at a
lower percentage would be an effective approach in accomplishing this
objective.
SCALE
It was shown that the Association Rule (AR), i.e., charging grant recipients
a cost share equal to their benefit share at the margin, would encourage
local communities to choose a scale of pollution abatement that is nationally
efficient in terms of maximizing net national benefits. The scale implica-
tions of alternative rules are considered here to see how they rate accord-
ing to the objective of maximizing net national benefits.*
The basic 25% nonfederal share for capital and land processes allowable
under the existing rule appears lower than the likely share of total project
benefits that would accrue to nonfederal interests at the margin. This
*It was pointed out earlier that EPA has no stated objective to
maximize net national benefits in pollution abatement. If such an objective
were to be established, however, it would be useful to see how existing
rules rate.
81
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statement is based on the following rationale: Whereas many of the benefits
from a community abatement project are likely to accrue downstream from
the community building that project, generally most of the abatement benefits
will accrue within a geographical area that may be identified as a
county, state, regional group of states, or as one or more of the 173
economic accounting areas that have been recommended by the Water Resources
Council for measuring regional development impacts. Because the nonfederal
benefit share can be defined as all benefits that accrue at the municipal,
state, and regional levels, and because most of the project benefits are
likely to accrue within these boundaries, it seems reasonable to expect
a high proportion of project benefits to be nonfederal.* The proportion
of benefits in total and at the margin for nonfederal interests is there-
fore expected to be higher than the current cost share that is indicated
by a 25% nonfederal capital share. It may be true that the community that
receives an abatement grant and that has to build the project may receive
only a very small proportion of total nonfederal benefits, but the ratio
of nonfederal to Federal benefits remains high. This situation may be
indicative of the need for effective regional cost-sharing management
systems, and not necessarily larger Federal grants to the community.
The existing Federal share of 75% seems high even for large cities and
regions, where downstream and widespread users of water receive some bene-
fits of abatement. It seems particularly high for small communities that
might use septic tanks or spray irrigation and impact little on water
quality in other areas. At the same time, existing Federal cost-sharing
arrangements exclude from funding a technique such as low-flow augmentation
that is likely to have more direct downstream or widespread impacts than
techniques such as community septic tanks, which are eligible for funding.
This difference in eligibility seems in conflict with achievement of both
efficiency and equity.
If the nonfederal share of benefits at the margin exceeds the cost share,
then there will be an efficiency-in-scale bias for overdevelopment of
abatement; i.e., nonfederal interests will be encouraged by the cost
share to devote too many resources to pollution abatement, other things
*We do not deal here with the problem of collecting from the various
project beneficiaries their portions of the nonfederal cost share.
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being equal. Yet there appears to be a deficit in pollution abatement
activities, and few new plants for treatment are being built under the
1972 Act. This is true even where the state contributes extra money so
that the community's cost share is even further reduced (down to 12.5%
for capital in New York communities). We feel that this discrepancy does
not suggest that Federal cost sharing is necessarily too low, but rather
that other factors may be limiting development. For examples, institutional
constraints (see Section III) and uncertainty regarding ultimate allocation
of Federal money may actually be more significant than cost-sharing rules
in discouraging certain kinds and levels of abatement activities. Limited
local funds and competing demands of alternative local investment oppor-
tunities yielding greater local benefits might result in few funds available
for abatement. Abatement projects might be particularly at a competitive
disadvantage for scarce funds where communities bear most of the nonfederal
cost share but only receive a small proportion of the more widespread
nonfederal benefits. In some cases communities responsible for abatement
may be interested primarily in disposing of wastewater, rather than in
abating pollution resulting from the wastewater. With this narrow view,
the community sees its major wastewater problem as simply disposal, and
therefore it is concerned with collection and transmission more than
abatement. If communities perceive their benefits only from the stand-
point of collection, then this might explain in part why even with availa-
bility of a 75% Federal capital grant, communities have not been induced
to undertake many new projects for pollution abatement.
Effluent standards and other government regulations today make consideration
of abatement activities mandatory for communities. So whether or not
they perceive the benefits of pollution abatement accruing to them per se,
they are faced with legal abatement requirements and penalties which
may or may not be imposed for failure to comply. Given this requirement,
possible penalties, and a responsible attitude on the part of communities,
it seems reasonable to assume that local communities will perceive some
benefits from abatement, even if it is simply to meet improved standards.
We assume, therefore, in the following discussion of scale, that communities
do receive some positive net benefits from abatement.
83
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Although the AR is the appropriate cost-sharing rule for eliminating any
overbuilding or underbuilding bias in terms of the net benefits maximization
criterion (see Section IV), there are practical drawbacks to this rule.
Drawbacks are the fairly detailed information requirements on the incidence
of benefits; the political acceptability of a rule that probably reduces
drastically the Federal share and calls for a varying rather than fixed
Percentage rate among projects; and the relatively complex nature of the
rule in practice. For this reason, we consider alternatives to the AR,
as well as to the existing rules.*
We know that the level of cost-sharing, other things being equal, has
some incentive effects on the pollution abatement that local communities
will demand (see Section IV). We also know that an objective of the EPA
grant program is to encourage abatement of wastewater pollution. A
practical cost-sharing alternative then will involve the application of
some positive Federal share to pollution abatement. In the following
discussion we shall consider alternative cost-sharing rules in two ways:
how they affect scale and how much they would have cost the Federal and
nonfederal participants if they had been applied in meeting the historical
abatement that has been sponsored by EPA.
Table 8 describes historical cost sharing for EPA and three of the four
cost-sharing alternatives discussed in this section: (A) the current rule*
(B) an equal percentage rule for all cost categories but costing the same amount
of money as A; and (C) the current rule imposed with a percentage constraint.**
Each rule is examined in terms of how much it would have cost Federal and
nonfederal participants had it been applied in meeting historical abatement
*For an evaluation of alternative cost-sharing rules for encouraging
the selection of the nationally efficient scale, see Marshall and Broussalian
Federal Cost-Sharing Policies for Water Resources, pp. 173-240.
**The fourth rule discussed earlier was a varied cost share applied
to different cost categories such that the effective nonfederal share
among techniques is equal. This rule was omitted from the table because
of the lack of data necessary to illustrate it.
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Table 8. FEDERAL AND NONFEDERAL EXPENDITURE REQUIREMENTS
OF ALTERNATIVE COST-SHARING RULES VIEWED HISTORICALLY
% Federal
K 0 & M
% Nonfederal
K
Historical0 36 0 64
A 75 0 25
B 49 49 51
C 75 0 25
0 & M
Shares of Total Costs
Federal
$Millions %
100 4,900 24
100 10,050 49
51 10,094d 49
100 7,622 <37
(max . )
(With constraint that Federal share of TC jf .37
Nonfederal
$Millions
15,700
10,550
10,506d
%
76
51
51
12,978 >63
(min . )
TC.)
Total Project Costs
Through December 19723
($Millions)
K
o
o
iH
0 & Mb
0
o
r-
TCb
O
O
0
csl
oo
ut
aln this illustration these costs are assumed to remain unchanged for all of the described rules.
Only eligible construction costs, K, for Federal assistance and the amount of the Federal grant were given
in the Project Register. Thus to calculate 0 & M and total costs we selected the ratio of capital to
total costs for plant treatment used in Table 7, 65%, and solved for TC the following equation:
.65 TC = K. It follows that TC - K = 0 & M. The results are: TC » $13,441/.65 = $20,678, and
0 & M = $20,678 - $13,441 = $7,237.
Historical costs were taken from EPA, Project Register, p. 193.
Differences in Federal and nonfederal absolute shares under A and B are due to rounding of the
percentage share figures.
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costs of projects sponsored by EPA through 1972. Total costs of abatement
to which the rules are applied are $20,600 million, of which $13,400 is
for construction and $7,200 is for 0 & M.*
Historically the Federal share of total costs is estimated to have
averaged 24%. This is based on average Federal shares of 36% for con-
struction cost (K), and zero percent for 0 & M costs. The Federal absolute
share was $4,900 million and the nonfederal share is estimated to have
been $15,700 million.
Rule A is the current rule that applies only to construction costs. Given
the $13,400 million construction cost and the $7,200 million estimated
0 & M cost, the nonfederal share of total costs would be $10,550 million.
Thus a nonfederal share of 25% of capital would be equivalent to approximately
51% of total costs.
Rule B is designed to cost nonfederal interests the same amount of money
as was spent for Rule A ,** but with the local cost share equal across
all categories of cost. Equilibrating the cost shares among cost categories
demonstrates that any potential biases among techniques resulting from
sharing cost categories differently could be eliminated without any
change in the absolute nonfederal or Federal costs that are borne, in
fact, by encouraging consideration of less capital-oriented techniques
that may be less costly to the nation, nonfederal, Federal, and total
costs of achieving a given level of abatement might be reduced.
Rule Capplies a constraint on the size of the Federal grant under the
current cost-sharing rule. The purpose of the constraint is to ameliorate
the biasing effect of unequal cost sharing of cost categories. The
*The capital costs of EPA projects through December 1972 were taken
from U.S. Environmental Protection Agency, Project Register: Waste Water
Treatment Construction Grants (Washington, D.C.: Environmental Protection
Agency), December 31, 1972. The method of estimating total costs is
described in Table 8.
**Actual dollar amounts are slightly different due to rounding of
the percentage share figures.
86
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percentage chosen here for illustration of the constraint is 37%.* Applying
the 37% constraint against the current 75% Federal share for capital could
reduce or leave unchanged Federal expenditures relative to Rule A, depending
on the ratio of capital to total costs. That is, as the ratio of capital to
total costs rises above the level where the constraint becomes effective, the
Federal responsibility becomes fixed for Rule C, whereas it continues to
increase for Rule A. A nonfederal absolute share of $12,978 million becomes
a minimum with Rule C. Had it applied historically, and assuming that
abatement controls or standards did not compel communities to implement the
level of abatement assumed in Table 8, we might expect that the actual
expenditures in total and for each participating party would have been less
with Rule C than with the other rules. Expenditures would probably have
been less because some projects would have received less Federal funding and
would have, therefore, been less attractive to nonfederal interests.
Also, some of the bias among techniques due to different compositions of
cost categories (see Table 7 and its explanation) would have been eliminated
or reduced with Rule C because of the constraint. Given the techniques in
Table 7, for example, imposition of a 37% constraint would eliminate the
B - and reduce the B- and the B_ . The lower the percentage constraint
on the Federal cost share, the stronger would be the correction to the bias
among techniques and the stronger would be the restraint on the scale of
abatement demanded by the nonfederal interests.
Whichever of these approaches is taken, a percentage target must still be
chosen. An effective Federal share of total costs less than the 49%
implied by existing rules would probably tend to encourage more efficient
scales of abatement. However, since available information regarding the
incidence of abatement benefits is not comprehensive, further research
is needed before some specific figure is selected.
*The 37% share is an average of 24%, the Federal percentage of
total costs paid on average from the inception of the EPA program to
present (Table 3), and of 49%, the Federal percentage of total costs
implied in the current law and in the composition of capital versus 0 & M
assumed in Tables 7 and 8.
87
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If cost sharing were to be used as a tool simply to encourage higher
levels of abatement with no regard for the nationally efficient scale,
then the appropriate direction of Federal cost sharing would be up
rather than down. As shown in Section IV, local interests will tend
to demand larger quantitites of abatement, other things equal, as the
Federal cost share is raised. It is recognized, however, that allowing
larger Federal contributions will result in funding fewer abatement
projects with a given Federal budget.
Although no specific percentage is recommended here for cost sharing pollution
abatement, the following general conclusions for encouragement of the
least-cost technique(s) and the efficient scale are reached. Whatever
percentage is selected, it should apply uniformly across all techniques
and cost categories within techniques. If only one cost category can be
shared, then the most efficient rule would be to vary the cost share of
that category among techniques so that the effective nonfederal cost
share by technique will be the same for a project or in general for all
projects using those techniques. If the variable cost share by cateogry
were not acceptable on institutional grounds, then a Federal percentage
constraint might be used to eliminate some of the biases resulting from
different cost compositions.*
Cost sharing by the Federal, versus nonfederal, sector has been the exclusive
focus here, and cost sharing by other groups has been ignored. If the
nonfederal sector (state, for example) applies different rules in conjunc-
tion with a Federal agency that has implemented the rules outlined here,
the implications for scale and techniques may vary from the above description.
The principles outlined for the Federal agency apply, however, equally
as well to nonfederal participants. To assess the total impact of cost
sharing, the cost-sharing rules of all participants would have to be
considered.
*Because there are an infinite variety of rules that might be designed
for sharing one type of cost or for constrained cost sharing, we do not
attempt to make any general statement about how equitable they will be.
88
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Section V References
1. Raymond, Richard. The Impact of Federal Financing Provisions in the Federal
Water Pollution Control Act Amendments of 1972. p. 6.
89
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SECTION VI
EFFECTS OF USER FEES ON COST SHARES*
Legislated user fee arrangements appear to affect the efficiency of the
present grant program in that they influence the effective cost shares
of Federal and nonfederal interests, and thereby create biasing effects
in the selection of abatement techniques and in decisions regarding scale.
User fee arrangements also appear to have differential impacts on residen-
tial as compared with industrialized communities.
This section is divided into four parts. The first part examines the
legislative description of user charges. The second presents four alterna-
tive interpretations of the effects of user fees on cost shares, and assesses
the validity of each. The third part critiques the current practice of
excluding interest charges from industrial user fees. The final part
assesses the impact of user fees on selection of abatement techniques, on
selection of the scale of abatement facilities, and on subsidization of
residential as compared with industrial communities.
*User fees for pollution abatement are charges for waste disposal levied
on users of sewerage removal and treatment services or on users of water-
courses. Several reasons for imposing a fee in pollution abatement are
the following: to obtain revenue to defray the costs of providing abatement-
to encourage polluters to consider alternative and perhaps less costly *
techniques of waste disposal; and to ration efficiently the use of sewerage
services.
In this study the focus is on cost sharing as it affects the choice of
a particular technique or level of abatement. Accordingly, user fees are
discussed here in the context of their effect on abatement cost shares,
rather than in the conventional sense of resource allocation and revenue
generation, per se.
90
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LEGISLATED USER FEES
With respect to legislative requirements for user fees, Section 204 (b)(1)
of the 1972 Act states the following:
. . . The Administrator [of EPA] shall not approve any grant
for any treatment works . . . unless . . . the Applicant has
adopted or will adopt a system of charges to assure that each
recipient of waste treatment services within the applicant's
jurisdiction . . . will pay its proportionate share of the
costs of operation and maintenance ....
In effect, this section provides for collection of user fees to repay
O & M expenses from all recipients of services.
Section 204 (b)(1)(B) requires that the Administrator shall also have
determined that the applicant has done the following:
. . . made provision for the payment to such applicant by the
industrial users of the treatment works, of that portion of
the cost of construction of such treatment works (as determined
by the Administrator) which is allocable to the treatment of
such industrial wastes to the extent attributable to the
Federal share of the cost of construction ....
In other words, user fees will be collected from industrial users to pay
that portion of the grant amount allocable to treatment of industrial
waste.
It is further specified in Section 294 (b)(3) that the grantee do the
following:
. . . retain an amount of the revenues derived from the payment
of costs by industrial users of waste treatment services, to the
extent costs are attributable to the Federal share of eligible
project costs pursuant to this title as determined by the Admis-
trator, equal to (A) the amount of the non-Federal cost of such
project paid by the grantee plus (B) the amount, determined in
accordance with regulations promulgated by the Administrator,
necessary for future expansion and reconstruction of the project
except that such retained amount shall not exceed 50 per centum
of such revenues from such project.
In effect, this last section means that the grant recipient will retain
50% of the amount recovered from industrial users against the Federal
grant. The 50% limit is the effective rule for retention of users fees
because the sum of the nonfederal capital cost and the amount necessary
91
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for future expansion and reconstruction will under normal circumstances
exceed 50% of the amount recovered from industrial users. This may be
demonstrated as follows: The above statement from Section 204 (b)(3)
provides for retention of an amount equal to the sum of (1) the amount of
nonfederal construction cost, which under the existing program is 25% of
construction cost (K), and (2) an amount (E) for future expansion and
replacement; i.e., a total amount equal to .25K + E. The same Section
further defines the limit of retained earnings as 50% of industrial user
fees collected against the grant. This amount may be expressed as .5(.756K)
where 6 is the grant share allocable to industry, K is the amount of
eligible construction costs, .75K is the amount of Federal grants and . 75BK
is the amount of industrial user fees collected against the Federal grant.
Only in the case of a contraction in future costs of abatement facilities
(such as might result from a drop in population, or from a technological
breakthrough reducing the costs of abatement facilities, and/or from a
decline in the general price level) would the amount necessary for future
expansion and reconstruction (E) likely be less than the amount of current
construction costs (K). A sizable contraction in future costs appears
improbable, and the estimated future replacement cost alone would generally
be at least equal to the current amount of construction cost, i.e.,
generally we would expect E >_ K.
Assuming E = K, and setting the two above expressions equal to one another
we may determine the condition whereby .25K + E will not exceed the 50%
limit:
.25K + E = .5(.75BK), where assuming no future expansion, i.e., E = K
1.25K = .3758K. (23)
8 - 3.33.
In other words, for B < 3.33, .25K + E > .5(.75gK). Since 3, the industrial
share allocable to the grant, cannot by definition be more than the whole
i.e., B _5 1, the condition under which ,25K + E will determine the amount
of user fees is impossible under the assumed situation.
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It, however, Is not necessary to assume that E ^ K in order to demonstrate
that the 50% limit is the effective rule. It is necessary only that
E > .125K, since for any E > .125K, .25K + E will exceed the 50% limit. In
other words, even with a large contraction in future growth or a sharp
decline in replacement costs, the 50% limit will still be the effective
rule. Even for E = 0, as was assumed by Raymond in his analysis, 50%
is the effective rule as long as the percentage of the Federal grant
allocable to industry does not exceed 67%. Thus, that part of Section 204
(b) (3) which describes what user fees may be retained appears meaningless
from the standpoint of specifying alternative allowable amounts. The
real import of this Section of the 1972 Act was probably recognized in
formulations of recent program rules and regulations, where it is simply
stated that the grantee shall retain 50% of industrial user fees collected
2
against the grant.
ALTERNATIVE INTERPRETATIONS
Now that we have examined the legislative requirements for user charges,
let us consider how user fee arrangements affect the Federal and nonfederal
cost shares, and illustrate algebraically the impact of user fees on the
cost shares. In assessing the effect of user fees on cost sharing we are
concerned with actual user fee practice as it has been developed from
administrative directives, and not solely the legislative requirements cited
above. The complexity of existing arrangements, however, gives rise to
alternative interpretations of the effects on cost shares. Since the
total effects are not immediately obvious, we will build towards them by
presenting four alternative interpretations (each identified by subscripts)
based on successive levels of information. In the process we point out
the limitations of the first three interpretations and suggest why the
fourth version presented (i.e., equations 30 and 31) appears to represent
most closely current practice.
We begin by restating what cost shares appear to be, based on Section 202 (a)
of the 1972 Act and ignoring user fee practice. According to this provision
of the Act, the Federal grant for treatment works will be 75% of construction
costs. Current interpretation of this provision, as we saw in Section III,
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is that 75% is a maximum, but not a minimum share of construction costs
of a completed facility. Thus, based on the current Interpretation of
this basic legislation, the Federal agency will bear no more than 75% of
construction costs, and the grant recipient no less than 25% of construction
costs. Their effective percentage cost shares may be expressed respectively
as:
\ >-
where C_, • the Federal agency's share of abatement cost,
CL = the grant recipient's share of abatement cost,
K
K » total costs of construction, i.e., capital and eligible land
cost,
M = present value of operation and maintenance costs over the
life of the abatement facility,
L = land costs not eligible for Federal cost sharing,
TC = present value of total costs of a completed abatement facility
over its life.
Now we take into account the effect of the user fee provisions as they
are set forth in the legislation. The first provision, i.e., that user
fees be collected from service recipients to repay their share of 0 & M,
does not appear to affect the grant recipient's cost share.* The
legislation merely specifies how the grantee shall cover one portion of its
cost share, Thus the grantee bears the full cost of 0 & M and covers,
by Federal directive, these costs with user fees collected from recipients
of abatement services.
*In this paper we investigate the relative cost shares borne by the
Federal agency, and by the local government, focusing on the amount that
each must raise against its required share, rather than on who contributes
to each share.
94
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The grantee's method(s) of generating revenue to cover its share of construc-
tion costs is not specified by the Federal government. Thus, at its discre-
tion, the grant recipient may also collect user fees from the industrial
and nonindustrial sectors of the community to defray the grantee's share
of capital costs. None of these activities affects the grantee's cost
share, merely its method of generating funds to pay its share.
The second provision, directing the grantee to collect user fees from
industry equal to industry's share of construction grant funds and to
retain half, does appear to affect the grantee and grantor's cost shares.
Based on the information we have presented thus far, the effect appears
to be to increase the effective Federal subsidy* by an amount equal to the
retained user fees and, thereby, to reduce the grant recipient's cost share
by a like amount. Accordingly, the Federal (grantor's) cost share and the
grant recipient's cost share can now be expressed respectively as:
C < -75K+ .5(.75BK) (26)
F. TC
r » M 4- L + .25K - .5(.75BK) nr,
and CR^ >-U/;
where B = that percentage of construction costs allocable to treatment
of industrial wastes.
The retained user fees constitute a subsidy even though they are drawn
specifically from the industrial sector of the grantee's jurisdiction.
They are viewed as additional subsidy beyond the original grant, because
they comprise revenue ostensibly generated to cover the Federal cost share
which is given instead to the grantee government.
Additional investigation of user fee arrangements, however, shows us that
the real potential cost to the grant recipient is changed somewhat further
' 3
from equations (26) and (27), by Federal Regulations pursuant to the 1972
Act. Regulations stipulate that a minimum of 80% of the retained amounts,
plus interest thereon, must be set aside in a reserve fund for future
expansion and reconstruction. The amount retained in this fund each year
*As a payment by the Federal government to a local government, the
grant constitutes a subsidy. By increasing the amount of payment by the
Federal government to the local government, the retention of user fees
raises the subsidy.
95
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is equal to • -5) (.75gK) m .^ where n = tfce expected 1±fe of
project, in years. Regulations allow the remaining 20% of retained user
fees to be used as a discretionary fund by the grantee as he sees fit.*
The amount of discretionary funds received each period is equal to
(.2H.5H.756K) = .075gK **
n
The reserve fund can be used only for eligible project costs related to
expansion and reconstruction of the original project and only with written
approval of the Regional Administrator. The holder of a reserve fund may
apply that fund to project costs for which a grant is requested or may use
them for project costs apart from any grant request. However, if a grant
is forthcoming, it is required that the amount in the reserve fund be
deducted from eligible project costs for purpose of determining the size
*No clear rationale for the 80/20 percentage split of retained revenue
between reserve funds and discretionary funds was found.
**User fees to recover the industrial share of the grant are collected
over the life of the treatment works in annual payments equal to .3753K
divided by the number of years of expected life, and not including an
interest component. To correctly assess their value, it is necessary to
discount to the present the amount of both the discretionary funds and
reserve funds. Discounting is necessary because the retained user fees
are received in increments over time and there is a time preference for
their receipt. The present values of the discretionary funds (PVn) and of
reserve funds (PVD) are as follows:
K
PV _ " .075SK _ .075BK[(1 + i)n - 1]
D ~ ,_,
PV = J .36K _ .38K[(1 + i)n - n
j^ n(l + i)J ni (1 + i)n
where n = the number of recovery periods over the life of a project,
i = the discount rate,
/'
J = the number of periods before the fund is spent, during which
user fees have been collected from industry, and
(1 + i) - 1 is the uniform present worth discount formula to
i(l + i)n convert a stream of annual payments to a present value,
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of the grant.* Thus, whenever a grant is received, the reserve-fund-holder
has no choice but to apply the amount then in the fund to that project,
and have the amount of. the grant thereby reduced; he need not, however,
have held the fund until a grant was forthcoming.
Since only 20% of the retained amount is discretionary, and the remaining
reserve portion reduces the amount of future grants, it may appear that
the grantee's cost is reduced by just the present value of the discretionary
fund rather than by the full amount of the retained revenue as is shown in
equation (27). This was the view expressed by some EPA grant officials.
According to this third interpretation, the cost shares of the grantor and
the grantee would be expressed as:
S3 ^ c
and
M + L + .25K - D
CR3 - TC , (29)
where D = the present value of the discretionary portion of retained
user fees.
The grantee's cost share as expressed above by equation (29) is greater
than that expressed by equation (27) , which deducts the full amount of
retained fees from the grantee's cost; nevertheless, it is lower than
the grantee's cost share without retention of any user fees as denoted
by equation (25) .
Let us now examine the effect of the reserve portion of retained earnings
(the reserve fund) more carefully. This leads to the fourth, and we
believe most realistic, interpretation of the effect of user fees on
cost shares.
*In connection with determining grants, Section 35.927-17 of the Grant
program Regulations provides the following-
. . , allowable project costs (are to be) reduced by an amount
equal to the unexpended balance of the amounts retained by the
applicant for future reconstruction and expansion . . . , together
with interest earned thereon.
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The reserve fund increases the Federal contribution and reduces the
grantee's effective cost share, despite the fact that it may reduce the
nominal amount of the formal grant. That is, the net 'effect of the
reserve fund is to reduce further the grantee's cost share beyond the
reduction rendered by the discretionary funds alone. The grantee's cost
share is further reduced because the amount accumulated in the reserve
fund is applied to eligible construction costs without an equal reduction
in the amount of grant received. Specifically, the reserve fund impacts
upon cost shares in the following several ways: (1) it reduces the total
amount of eligible project costs by the amount of the fund, (2) it
reduces the amount of the formal grant by 75% of the amount of the fund,
and (3) it reduces slightly the amount of future retained user fees which
are based on the current grant. We shall consider further each of these
effects — the first one reducing the grantee's cost share, the second
two increasing it, but the three effects in net reducing the grantee's
cost share.
Since the reserve fund (R) was originally collected against the Federal share,
reduction of eligible project costs by the amount in the reserve fund results,
in itself, in a Federal contribution of R to abatement. After reduction by the
reserve fund, K - R of eligible costs are left uncovered. Since the formal grant
is provided for 75% of the remaining eligible costs, i.e., .75(K - R) the
effective formal grant is lowered by .75R, as a result of the reserve fund. Thus,
the effect of the reserve fund is first to raise the Federal contribution by
an amount R and then lower it by an amount .75R, amounting in net to an increase
of .25R. Reduction of project costs by R means that only 25% of K - R in
eligible costs remain to the community government, rather than the full 25% of
K. Hence, the effect of R observed here is to reduce the community's effective
costs by .25R.
Now we complete our assessment of the reserve fund's impact by taking into
account the third effect noted above — the reduction in the grantee's future
receipts of user fees. The reserve fund reduces the future receipt of user
fees because the amount of the grant upon which these funds are partly based
is lowered by ,75R, Here., .however, we include in the cost share expression
the impact of the reserve fund only on future receipts of discretionary funds
98
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not on future receipts of reserve funds. The reason is that in our
interpretation of cost shares, we have chosen to evaluate the reserve
fund as a function of past grants, and the discretionary funds as a function
of the current grant. The assessment of the reserve fund as an accumulated
sum based on past grants means that any reductions in the amount which might
have resulted from previous reserve funds is already taken into account.
Expanding the cost share expression to include also the present value of
future reserve funds based on the current grant would result in over-counting
the reserve fund.*
Without the reserve fund, the present value of the future receipts of discretionary
n .0756K
funds is equal to £ ' ,.. . ... j . But when accumulated reserve funds are taken
into account, the present value of discretionary funds is equal to
• As R becomes larger and is deducted from K, the present
.•^
value °^ t'ie discretionary fund becomes smaller. Consequently, the reduction
in the grantee's effective costs becomes less.
•Therefore, the reserve fund increases the effective subsidy on current projects,
wtiile at the same time diminishing it on future projects by reducing the amount
Of future discretionary funds. However, the increasing effects of the reserve
fund on the Federal subsidy substantially outweigh the decreasing effects,
thereby resulting in a net reduction in the grantee's cost share.
jj« combining the observed effects of the reserve portion of retained user
fees with that of the discretionary portion (as shown in the third interpretation) ,
we have the fourth, and we believe, most complete, interpretation of cost
aliares under existing user fee arrangements:
.75(K - R) + R + Dp
% -S - TC - - (30)
and
M + L + .25(K - R) - D
TC
*An alternative interpretation of cost shares would evaluate both the
discretionary and reserve funds in terms of the present value of future
receipts based on the current grant.
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where Cp and CR = the real effective cost shares of the grantor and
4 4
grantee, respectively, of a completed abatement
works, as determined by Federal legislation, regula-
tions, and current practices of the grant program
office,
R = the present value of the reserve portion of retained user fees
which have been collected from industry against its share of
past Federal grants,
D = the present value of future discretionary funds taking into
account the effect of the accumulated reserve fund.
Table 9 shows a grantee's abatement costs for a hypothetical project with
and without the retention of user fees. In this example, the grantee's
share of construction cost is reduced from 25% to 12%, and his share of
total cost from 78% to 73% as a result of retaining user fees collected
against the Federal grant.
In addition to the user fee effect described above, there appear to be
other, more subtle effects of user fee arrangements on cost shares. For
one thing, existing arrangements appear to provide incentive to the fund
manager to spend the reserve fund on eligible costs of projects accorded
high priority by the community, but low priority in the grant approval
process. (Likely examples of such projects are sewage collection-related
as opposed to more treatment-related projects.) By applying the R to
costs of projects which it wishes to undertake, but for which it is unlikely
to be successful in receiving a formal grant, the community can reduce by
R the amount of costs it otherwise would incur, without reducing its over-
all receipt of grant funds. By exhausting the fund prior to application
for a grant which it does expect to receive, the community will avoid
having the fund reduce the amount of the grant. With this approach the
community government could, over time, realize a Federal contribution to
abatement costs equal to .75K + R + D, rather than the .75K + .25R + D_
R
contribution shown by equation (30). That is, it could in this way reduce
its costs by an additional 75% R, plus the value of the excess* of D over
*D represents the present value of the discretionary fund? DR represents
the present value of the discretionary fund, taking into account the
reducing effect of the accumulated reserve fund; therefore D _>_ D_.
100
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Table 9. ILLUSTRATION OF A GRANTEE'S COSTS TOR. A HYPOTHETICAL
ABATEMENT PROJECT WITH AND WITHOUT RETENTION Of USER FEES
User Fee Policy
Without retention
of user fees
With retention of
user fees (i.e.,
current policy)
Grantee's Construction
Cost
$
112,500
54,700
% of Total
Construction
Cost
25
12:
Grantee's 0 & M
Cost
$
1,050,000
1,050,000
% of Total
0 & M Cost
100.
100
Grantee's Total
Cost
$
1,162,500
1,104,700
% of Total Project
Cost to Nation
78
73
Assumptions:
The abatement project under consideration has a total cost with a present value of $1,500,000, 30% of which
is eligible construction costs (K) (i.e., $450,000) and 70% is 0 & M (i.e., $1,050,000). The grant applicant
has $225,000 accumulated in its reserve fund as a result of retention of user fees collected against past
grants. One-fourth of construction costs is allocable to industry wastes. The discount rate is 10% and
the life of the project is 25 years.
Calculations:
Without retention of user fees, the grantee's K cost is equal simply to .25(K) = .25($450,000) = $112,500, and
his 0 & M cost equals 1.00(0 & M) = $1,050,000, comprising a total cost to the grantee of $112,500 + $1,050,000
$1,162,500. With retention of user fees, the grantee's K cost may be calculated as .25(K - R) - D_ =
.25(5450,000 - $225,000) - g»7«.25)(»«50.000 - $225,000) j |^iSl^rj. ^^ ^ ^^,s
0 & M costs would remain $1,050,000, and his total cost would be $54,700 + $1,050,000 = $1,104,700.
-------
D_, beyond the reduction achieved by applying R to costs for which grants
are available. This, however, represents a special case which would hold
true only if the reserve fund is applied to costs which the community would
have otherwise incurred in full.
Another possible impact of the reserve fund not heretofore noted is its
effect of increasing the reserve-fund-holder's prospects of obtaining
additional formal grants. The grant office may accord higher priority to
the grant application of an applicant having such a fund than applicants
without a fund, due to the possibility of bringing forth a relatively
larger total project with a relatively smaller additional Federal grant.
This characteristic may provide conflicting incentives to that observed
above, insomuch as it may encourage the community to apply its fund to
partial payment of major projects for which it is actively seeking grant
assistance.
In any case, the retention of user fees appears to raise the effective
Federal subsidy above 75% of construction costs, and reduce the grantee's
share below 25% of construction costs. As we have seen, part of the increased
subsidy results from the discretionary portion of retained user fees and
part is attributable to the reserve fund.
INTEREST CHARGES ON USER FEES
Existing program regulations require that user fees collected from industrial
4
users not include an interest charge. User fees are collected in fixed
annual payments collected over the life of the facility or over 30 years,
whichever is less. The present value of the total amount collected from
n 756K
industry is equal to Z ',. . ..j, and the amount retained by grantees
j-1 nU '
" 1758K
is equal to Z */i I
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it is collected and placed in an interest-bearing account or securities.
jus a result of the omission of an interest charge, the present value of
the amount collected from industry is less than the amount of Federal funds
spent for industrial abatement facilities. Consequently, industry receives
a Federal subsidy. Unless it were the intent of the law to provide cost-
sharing assistance to industry, as well as to the nonindustrial sectors
Of communities, interest charges are needed to compensate for the time
preference of money. If industry provided its own abatement facilities,
it would forgo the use of the investment funds for other purposes. Similarly,
the Federal government forgoes the use for other purposes of funds expended
for industrial abatement facilities.
To see the substantial subsidy to industry which results from failing to
charge interest, consider the following example. Assume that under existing
arrangements a $100,000 construction grant allocable to treatment of
Industrial wastes would be recovered from industry over approximately
30 years, in yearly payments of $3,333. With a 10% nominal discount rate,
the present value of the $100,000 collected in this manner is, however,
only $31,420 (i.e., $3.333 | ^^^ tl0)3uj - $31,420). With a 10%
nominal discount rate, the annual user fee collected from industry should
be $10,610, rather than $3,333 (i.e., $100,000
.10)
30
(1 + .10)^6 -_1
$10,610,
vhich is $100,000 amortized over 30 years at 10%). Thus, in this illustra-
tive example the annual user fees are less than one-third what they would
be if the time value of money were considered.
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Omission of interest charges from user fees has at least two consequences:
(1) User fee revenue forthcoming to the Federal and community governments
is much less than it would be if industry fully paid its share of construc-
tion costs. (2) Industry receives an additional Federal contribution
towards provision of its abatement facilities, which, other things equal,
will encourage it to tie into municipal abatement systems.
USER FEE IMPLICATIONS
Now that we have shown quantitatively the effect of user fees on cost
shares under various interpretations of the user fee policy, let us con-
sider the potential consequences of these effects.
A number of problems appear to result from the effects of user fees examined
above. A potential efficiency problem arises in that retention of user
fees collected against the Federal grant reduces the grantee's real cost
share and therefore encourages the grantee to select a larger scale of
abatement facilities. If the local community's share of costs is brought
below its share of benefits from abatement at the margin, there will be a
tendency towards overbuilding of facilities.
Another efficiency problem is that retention of user fees collected against
the Federal grant gives incentive to communities to provide capital-intensive
or eligible land-intensive projects for purpose of treating industrial wastes.
The bias towards techniques with a high proportion of eligible construction
cost results because retention raises the potential Federal contribution
to capital and eligible land costs, but does not change the Federal
contribution to 0 & M. The biasing effect is similar to that which would
result from explicitly raising the Federal percentage cost share for
construction costs relative to other cost categories, and we saw earlier
that the more unequal the cost sharing of different categories of costs,
the greater the incentive to the grantee to choose techniques with costs
which are Federally shared over techniques with costs which are not
Federally shared.
104
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The incentive to treat industrial wastes results from the fact that the
grantee can actually improve his net revenue position by increasing construc-
tion costs attributable to treatment of industrial wastes. This may be
demonstrated as follows:
For simplicitly assume that we begin with a community which at the outset
provides no industrial waste treatment, i.e., B = 0; we can now calculate
the change in the net revenue position of the community (AN) which may
result from a change in construction (AK), in ineligible land (AL), and
in 0 & M cost (AM), attributable entirely to inclusion of industry in the
community sewerage system. To indicate the possible impacts, we examine
the change in net revenue under alternative assumptions regarding management
of the reserve fund and collection of user fees to recover the community
government's share of cost.
Let us begin by assuming that the retained user fees collected against the
industrial share of the grant are used in such a way that they do not reduce
the receipt of grant funds. This could be the case if the reserve fund
were applied to eligible costs of projects with high community priority,
but low grant priority, such that the fund reduced the community's cost by
R, without reducing the amount of subsequent grants. (This case is explained
in the second part of this section.)
We further assume that the AM attributable to industry is exactly covered
by user fees collected from industry for those costs, as required in Federal
legislation. Hence, apart from possible economies or diseconomies of scale,
the net revenue position of the grantee (and of the non-industrial community)
is unaffected by changes in 0 & M costs necessitated by industry, i.e., 0 & M
costs incurred are just offset by user fees received. With respect to the
resulting AK and AL, we may make either of two assumptions: (a) that the
community government charges industrial users for industry's part of
construction and land costs not covered by a Federal grant — which it may
do at its discretion, or (b) that the community government does not charge
industrial users for their share of these costs — which it may also do.
105
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First we examine the change in net revenue to the community government
under assumption (a). In this case, the 0 & M, construction, and land
costs incurred by the community government are just offset by industry
user fees, and AM, AL, and AK cancel out of the equation. The receipt
of user fees collected against the grant, however, are unmatched by costs
incurred by the community government and the amount of these fees retained
constitutes a net revenue gain by the community government.
| (1 + i)n - l|
[id + I)* J
+.375AK ,.,„.
(32>
where
AN.. « the summation of costs incurred (negative effect) and revenue
received (positive effect) by the community government due to
provision of an abatement facility for industrial wastewater.
(Subscripts 1, 2, and 3 designate cases examined under alter-
native assumptions.)
AK = the change in construction cost attributable to provision
of service to industry,
(1 4- i)n - 1
,•- ';ft = the present worth formula used to convert a stream
of annual payments to a present value, where n is the
number of interest periods and i is the discount rate, and
the present value of retained user fees under the
assumptions for this case.
From equation (32) we can see the net improvement in the revenue position
of the community government. Thus, in this case, the community government
has incentive to provide facilities with large eligible construction costs
to treat industry wastes.
For the second case let us continue to maintain all the above assumptions,
with the exception that we now assume the community government does not
recover revenue from industry to repay its share of construction costs
not covered by the grant. The other costs incurred by the community
106
375AKfq + i)" - ll
n L_i(l 4- i)n J
-------
government are again just offset by user fees, but construction costs are
-uot offset by user fees. The outcome in terms of the community government's
revenue position is less clear.
AN2 = -.25AK + ^^ r:,; r^n i 03)
Here the provision of services to industry may or may not result in an
advantage to the community government, depending upon the time over which
the user fees are to be collected and the size of the discount rate. For
short time horizons and low discount rates, the value of the retained user
fees could even in this case exceed the additional capital costs incurred
by the community government.
For a third case, we assume that the community government recovers from
industrial users their share of local construction and other costs, but
we now assume that it applies the reserve fund to a future project for
which a grant could be received. That is, the reserve fund is used in
such a way that it reduces the future receipt of grant money. Again, the
expenditures for 0 & M, land, and capital costs are assumed just offset
by receipts of user fees, thereby canceling AM, AL, and AK from the equation.
In this case the change in the community government's net revenue position
resulting from treatment of industrial wastes will be less positive than
in the first case shown above, but nevertheless positive.
* + ?r[.3AK] I (1 + i)n - l| +.0751
n i(l + i)n n
U*. —I
+.150AK I(1 + i)n - ll
n ]_ id 4- i)n J .
Thus, in this case, too, it is possible for the local community government
to improve its net revenue position by increasing construction cost
attributable to industry.
We can summarize the financial effects arising from provision of industrial
abatement facilities, on the various parties involved, as follows: The
Federal government pays 75% of construction costs and recoups an amount
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equal to 37.5% of construction costs in user fees. The community government
pays 25% of construction costs and recovers an amount equal to as much as
62.5% of construction costs in industrial user fees; it pays 100% of other
costs and may receive a like amount in user fees. The industrial sector
of the community at the most pays 100% of total costs, less interest costs;
it receives 100% of abatement services resulting from the total expenditures.
The net revenue received by the community government, which may amount
to as much as 37.5% of construction costs, may be used for the benefit
of both the nonindustrial and industrial sectors. As inducement to industry
to connect to the municipal system, the community government could reduce
«
somewhat its user charges to industry for locally-incurred costs, such that
industry would in effect pay less than 100% of costs less interest. Other
things equal, this effect would be expected to give some incentive to
municipalities to provide capital-intensive and/or eligible land-intensive
facilities for treatment of industrial wastewater, since by so doing the
community at large would benefit.
With respect to other problems arising from existing user fee arrangements,
there may be inefficient, and possibly conflicting, incentives provided as
to the use of the retained amounts. On the one hand, we have seen a
possible incentive for the community to spend the reserve fund for eligible
costs of projects which are accorded low priority or considered of marginal
importance by grant program administrators but which are given high
priority by the community, such that the fund is not used on projects where
the likelihood of receiving a grant is high. With this approach, the
local community deducts the reserve fund from its costs without having
the amount of its grants correspondingly reduced. On the other hand, the
community may have incentive to accumulate the fund for use as a lever in
obtaining future grants.
Another implication of existing Federal user fee arrangements is that they
appear to favor industrialized communities over residential communities.
That is, even though benefits received for two communities may be the same,
the real nonfederal cost shares will vary according to the proportion of
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treatment relegated to industry needs. Construction costs to a residential
community are equal to .25K, and the subsidy amounts to 75% of construction
cost. But for an industrialized community, the subsidy amounts to 75%
of total construction cost plus 25% to 100% of the present value of the
reserve fund plus the present value of the discretionary fund, and the
local share of cost is less than .25K. Thus the communities servicing
industry are given an additional Federal contribution beyond the 75% of
construction costs, which other communities do not receive.*
In general, industrialized communities may benefit from the reserve
fund. The reserve fund provides a sure source of money which, with the
approval of the regional EPA Administrator, may be used for eligible
abatement costs at any time. The approval process is separate from the
usual grant application procedure and does .not require a priority rating.
Thus the grantee-trust-fund holder has a ready source of construction
funds for which it need not compete with other communities. The reserve
fund may also give the grantee an advantage in obtaining additional grants
because, as was explained above, the Federal granting agency will be able
to generate more abatement per Federal grant dollar where the reserve fund
is applied.
A further problem with the existing user fee arrangements is that there
is no guarantee that the municipality will choose to use the discretionary
fund for wastewater abatement. Hence, a portion of the Federal subsidy
may not contribute to the grant program's objective of providing incentive
to municipalities to construct treatment works.
A final implication of the current user fee program, perhaps obvious at
this point, is that it obscures the effective Federal and local cost shares.
As may be seen by comparing equations (25) and (31), the actual cost to
the grant recipient may differ substantially from the 25% of capital plus
100% of 0 & M implied by the main cost-share provision (Sec. 202(a)) of
*Beyond the revenue advantage gained by retention of user fees, the
local community would also benefit if economies of scale resulted from
inclusion of industry.
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the 1972 Act. The legislation and regulations pertaining to user fees are
difficult to understand in prose and logic. As a result, community
governments' interpretations of the law, and, consequently, their ultimate
cost shares, may differ from what was intended by the legislation. Communi-
ties whose managers are skilled in the grant process may be able to utilize
the obscure provisions of existing arrangements to reduce their effective
cost share, whereas communities with less sophisticated management may
receive less Federal contribution.
In summary, existing user fee arrangements are characterized by the following:
(1) Retention of user fees produces a potential bias towards overbuilding;
(2) retention of user fees encourages municipalities to provide abatement
services to industry; (3) retention of user fees biases municipalities
towards selection of capital-intensive and eligible land-intensive techniques
to treat industrial wastewater; (4) omission of an interest charge from
industry user fees is a subsidy to industry and reduces us_er fee revenue;
(5) retention of user fees results in unequal treatment of residential
communities as compared with industrialized communities; and (6) existing
arrangements obscure real cost shares. '
A rationale for the policy permitting municipalities to retain user fees is
to provide the municipality with a source of future funds whereby it might
become self-supporting in abatement activites. And, the retention of user
fees does appear to provide a source of funds for future needs. But the
practice has efficiency and other effects which might be regarded as problems.
Returning these retained user fees to the Construction Grant Program for
redistribution among grant applicants through the regular grant procedures
would appear to eliminate the problems described above, without reducing
the amount of total funds available to municipalities.
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Section VI References
j. Raymond, Richard. The Impact of Federal Financing Provisions in the
Federal Water Pollution Control Act Amendments of 1972. p. 7.
2. Final Construction Grant Regulations, Construction Grants for Waste
Treatment Works, p. 5263.
3. Ibid.. p. 5263-4.
4. Ibid., p. 5263.
Ill
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SECTION VII
SUMMARY, FINDINGS, AND
SUGGESTIONS FOR FURTHER RESEARCH
SUMMARY
The Environmental Protection Agency (EPA) administers the Construction
Grant Program for the abatement of wastewater pollution. The Federal
Water Pollution Control Act Amendments of 1972 (1972 Act) describe to
some extent the eligibility requirements for a community to apply for
EPA grants and the percentage Federal cost shares that can be awarded
for community abatement projects. The construction Grant Program, as
enacted by the 1972 Act and administered by EPA, has been criticized
for being inefficient in that it encourages a misallocation of resources
in wastewater pollution abatement.
The purpose of this study is to evaluate alternative cost-sharing programs
with respect to carefully defined efficiency and equity criteria. The
emphasis is on efficiency. Findings of the study are presented describing
efficiency and equity implications of alternative cost-sharing rules and
of institutional changes affecting cost sharing.
The focus of this study is on the local incentive effects of Federal cost
sharing; that is, how Federal grants might encourage local communities to
pick one kind or size of abatement technique over another.
Fhe existing cost-sharing program as described in the 1972 Act and implemented
jy Agency regulations is discussed in Section III. The eligibility for
grants, that is, what costs are allowable and unallowable under the Construction
Grant Program, is demonstrated to differ when examined from the standpoint
of legislation and what occurs in practice. Eligibility for Federal grants
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is also shown to vary among the different abatement techniques. Cost
shares awarded by EPA are shown to have averaged 36% of eligible construction
costs up to 1972, as compared to the 75% maximum share now allowed for by
the 1972 Act. Institutional constraints other than cost-sharing eligibility
are identified that may bias communities against nationally efficient
choices in pollution abatement. For examples, such constraints as minimum
treatment standards, training and education biases toward plants on the
part of decision-making engineers, small areas of abatement jurisdiction,
and use of sewerage systems as growth management tools appear to play a
significant role in affecting what techniques are chosen by communities
seeking assistance in pollution abatement.
The theoretical relationships between cost sharing and the selection of
nationally efficient techniques (plant or nonplant) for abatement are
discussed in Section IV. A selective survey of the literature presents
the background of work done in evaluating efficiency and equity of cost
sharing in the water resources area. The local demand for pollution
abatement is shown to be inversely related to the local cost share. The
effect of abatement standards on the demand for abatement is also explored,
both for the case where standards are enforced and for the case where
standards are not enforced. The optimal cost sharing rules are then
derived for encouraging communities to select (1) the least-cost techniques
for abatement and (2) the nationally efficient scale of abatement. Exist-
ing cost-sharing rules are found to be inequitable in terms of certain
characteristics of equity that are defined in the study.
In evaluating efficiency implications of existing and alternative cost-sharing
programs in Section V, a number of problems concerning community selection
of abatement were identified in the existing program. Case examples
illustrate the bias effects on communities of current rules that apply
different cost-sharing percentages to different techniques and to different
cost categoires. Local communities under existing rules have a cost-sharing
bias to pick techniques with the minimum local financial commitments, and
these are not necessarily the least-cost techniques to the nation. Alter-
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native practical cost-sharing rules are proposed that do not entirely
meet the efficiency conditions derived in the study, but that more nearly
satisfy those conditions than existing rules.
FINDINGS
(1) Same Percentage Cost Share
for All Techniques
Application of the same percentage cost share to all plant and nonplant
techniques for the purpose of abating wastewater pollution will encourage
nonfederal interests to simultaneously select the combination of techniques
which is least costly for the nation as well as for themselves.' This
rule applies both to the case where communities seek to maximize net
benefits from abatement with a budget constraint and to the case where a
given standard of abatement is enforced.* Applying the same share (regard-
less of what that share is) across all techniques will eliminate the poten-
tial cost-sharing bias for some techniques over others (e.g., for plant
over nonplant techniques) that appears to exist under the current rules.
(See Sections IV and V.)
To encourage consideration of new technologies that might not be known at
the time legislation is drawn up, the cost-sharing eligibility condition
could be specified simply as all technically viable alternatives. Nonfederal
interests would have an economic incentive to apply for grants for tech-
niques that are cost effective.
A related problem that results from sharing all technically viable techniques
is determining what part of an activity is abatement, and consequently
what part of that activity should be cost shared. For example, rehabilita-
tion of sewers is a multiple-purpose project that provides benefits
through abatement as well as through wastewater collection. By cost
*It is recognized that global efficiency in the sense of the efficient
allocation of resources among all national programs is not necessarily
reached by equilibrating cost shares for techniques only in pollution
abatement programs.
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sharing only those costs under the Construction Grant Program that can
properly be allocated to abatement per se, the nationally efficient scale
of abatement will be encouraged. Thus, a lower Federal cost share would
be applied to techniques that provide benefits other than abatement, and
the cost share would decrease as the cost of providing those other benefits
increases relative to the cost of abatement.
(2) Same Percentage Cost Shares
for All Cost Categories
Application of the same percentage cost share to all cost categories of
all techniques for abating wastewater pollution will encourage community
selection of the nationally least-cost technique(s) of providing abate-
ment. All categories of project costs would include capital; land for
both site and process; operation and maintenance; and planning.
A bias to choose certain techniques results when different cost-sharing
percentages for the different categories of cost are applied to techniques
having different cost composition, i.e., different ratios of cost categories.
Because operation and maintenance costs, for example, are not currently
shared at all by the Federal government, while capital costs are shared,
grant recipients are biased towards capital-intensive techniques even
though all techniques may be eligible for the same percentage share of
capital cost. (See Sections IV and V.)
Assuming there are reasons why all categories of costs could not be shared,
two alternatives for encouraging local selection of the least-cost technique(s)
might be considered in lieu of the same percentage for all categories.
The first alternative satisfies the necessary condition for encouraging
the selection of the least-cost technique(s), and the second can satisfy
it under certain situations. The first approach is to vary the share of
the single cost category to be subsidized, let us say capital as an example,
so that the local share as a percentage of total project costs (i.e., the
effective cost share) will be uniform across all techniques. A second
approach, still providing a Federal share for one category only, would
impose a constraint on the percentage of total costs that the Federal
agency could bear. The cost-sharing bias will be reduced to a degree
dependent on how low the constraint is and in some cases will be eliminated.
(See Section V.)
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Findings 1 and 2, if implemented, would enhance equity in comparison to
existing cost-sharing rules in that grant recipients would be more certain
over time of what they will receive for any given total project cost
regardless of the technique chosen or the composition of cost categories.
(See Section IV.)
(3) Consideration of a Reduced Federal
Cost Share
Nationally efficient scales of abatement would be encouraged by reducing
the effective Federal cost share. The legislation governing the Construction
Grant Program does not specify nationally efficient scales of abatement
(i.e., the maximization of national net benefits) as an objective of the.
program (see Section IV). However, the Association Rule (see Section IV)
could meet such an objective by encouraging grant recipients to choose a
scale of abatement that is nationally as well as locally efficient. For
most projects, existing Federal cost shares probably exceed those that
would be obtained from applying the Association Rule (see Section V).
Lower Federal shares could be large enough to provide some incentive for
communities to expand their abatement activities and still tend to encourage
more efficient scales. Since available information regarding the incidence
of abatement benefits is not comprehensive, further research is needed
before specific percentage cost shares can be selected.
(4) Same Percentage Cost Shares for
Communities of All Sizes
Varying cost shares in proportion to community size, other things being
equal, may lead to inefficient scales of development.
Over some range of abatement levels, the average cost of abatement (i.e., the
cost per unit of abatement) will fall as a result of economies of scale.
Assuming that this range of decreasing average cost extends to large scales
of abatement, big cities with large demands for abatement would be expected
to have lower average costs than small cities with less demand for abate-
ment .
One way of encouraging small cities to demand higher levels of abatement
and thereby profit from economies of scale is to raise the percentage
cost share for small cities above that of big cities. (There may also
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t>e nonefficiency reasons for giving small cities preferential cost shares.)
The imnlication of the preferential cost share, however, may be a less
rather than more efficient allocation of resources to abatement. That
±s, the efficient scale of abatement for a small city may be much less
than that scale at which average costs are minimized (see Section IV).
Thus, if preferential Federal cost shares are offered to small cities to
encourage them to take advantage of economies of scale, the result may
be an oversized project from the standpoint of maximizing net benefits
from abatement.
Achieving efficient levels of abatement is not necessarily incompatible
with taking advantage of economies of scale. For example, it might be
advantageous to individual cities as well as the nation for cities to
join in the construction of regional treatment plants that would lower
the average cost of abatement to all while at the same time providing
the efficient level of abatement. Cost sharing is one of many incentives
that could be used to encourage a regional approach to abatement.
(5) User Fees Returned to
Construction Grant Program
•phe problems arising from the grantee's retention of half the industrial
user fees collected against the Federal grant could be eliminated without
reducing the total amount of Federal funding by returning the full amount
to EPA for redistribution through the regular grant process.
Existing Federal user fee arrangements, which allow the grant recipient
to retain part of the user fees collected from industry to repay industry s
share of the Federal grant, increase the Federal contribution to abatement
and reduce the effective cost share of the grantee. The grantee is free
to use 20% of the amount retained in any way he chooses. This 20%, the
discretionary portion, of retained user fees increases the Federal contribution
by its full amount. The grantee must hold the remaining 80% of retained
user fees in a reserve fund for use only for eligible project costs. Claims
to the contrary notwithstanding, the reserve portion of retained revenue
also results in an increase in the Federal contribution to abatement and
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reduces the grantee's cost share. The reserve fund will usually raise
the Federal subsidy by an amount equal to 25% of the present value of the fund
although the recipient may use the reserve fund in such a way as to reduce
his costs by the full present value of the fund. The amount of retained revenue
and hence the size of the Federal and local cost shares, depends upon
the percentage of construction costs allocable to treatment of industrial
wastes.
Efficiency problems which appear to result from existing user fee arrange-
ments are the following: (1) Retention of user fees collected against the
Federal grant provides incentive to municipalities to provide abatement
facilities for treatment of industrial wastes which are capital-intensive
and eligible land-intensive in nature. Municipalities are encouraged to
treat industrial wastes because they may improve their net revenue position
by so doing; they are biased towards provision of capital-intensive and
eligible land-intensive techniques because capital and eligible land
expenditures enlarge the potential Federal subsidy, while expenditures
for 0 & M do not. (2) Retention may increase the grantee's tendency to
select an excessive scale of abatement by increasing further the differential
between the grantee's share of benefits from abatement and its share of
costs. (3) Part of the additional subsidy may not further the objectives
of the grant program since the grantee may choose not to use the discretionary
portion of retained revenue for wastewater abatement.
In addition, under existing user fee arrangements industrialized communities
receive a larger percentage Federal cost share than do communities which
are primarily residential even though nonfederal benefits as a proportion
of national benefits may be essentially the same for both types of communities.
The additional Federal subsidy to the grantee resulting from retained user
fees increases as the industrial component of wastewater increases, such
that the more industrialized the community, the lower the effective non-
federal cost share.
Existing arrangements also appear to give rise to incentive effects which
may not be appropriate to the program or necessarily intended under the
law. The existing program, for example, may give conflicting incentives
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to grantees regarding use of their reserve fund. On the one hand, the
community has the incentive to spend its reserve fund for items for which
it has strong demand but for which the prospects of receiving grant funds
are low. This may lead to use of the fund for purposes which are regarded
as relatively less important and therefore accorded low priority by grant
administrators. On the other hand, possession of the fund may improve
the chances of a community's receiving an additional Federal grant, and
may thereby provide an incentive to hold the fund for use in applying
for grants for large projects.*
The retention of user fees may be criticized in general on grounds that
it obscures the true Federal and local cost shares. Difficulty in inter-
preting the law and regulations may contribute to different ultimate cost
shares among grant applicants. (See Section VI.)
(6) Interest Charge to Industrial Users
Inclusion of interest charges in industrial user fees would make industry
charges more reflective of the economic cost of providing abatement service
to industry, and would increase the amount of revenue available to the
Federal and community governments.
Existing program regulations require that industrial user fees not include
an interest charge. When the payments for industry's share of construction
costs are collected over a long period, without an interest charge, industrial
users tend to be substantially undercharged. As a result, industry receives
a substantial subsidy and, thereby, an incentive to connect to the municipal
abatement system, while potential public revenue is foregone. (See Section VI.)
(7) Elimination of Legal and Other
Institutional Constraints
There are a number of possible institutional obstacles which may discourage
selection of certain techniques even if they are the cost-effective choices.
*As noted above, the existing user fee arrangements also provide incentive
to communities to treat industrial wastewater in the municipal system.
The desirability of this incentive effect was not investigated.
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If, for instance, State and EPA design standards, guidelines, and technology
transfer manuals are very conservative and emphasize the well-established
processes, they may bias municipalities towards treatment plant processes.
Examination of these documents for bias and inclusion of necessary revisions
will help to encourage selection of cost-effective techniques.
The training and experience of many state and EPA officials who review
applications are geared towards traditional piant/engineering solutions.
Educational and promotional efforts to encourage planners to consider
nonplant techniques might lead towards more comprehensive evaluation of
alternatives during the initial planning stages.
Architects'/engineers' fees for design of a facility traditionally have
been based upon the amount of capital costs — a practice which may bias
designs for abatement facilities towards capital-intensive and away from
nonplant and/or low capital techniques. Basing the fees on 0 & M costs,
as well as capital costs, might avoid this bias.
Another institutional problem is that small jurisdictions may not be in a
position to implement certain kinds of abatement techniques, to organize
collective facilities, or to integrate use of multiple techniques; hence,
they may not be able to adopt the cost-effective approach to abatement.
Further development of regional management systems are needed to overcome
this problem.
Emphasis in the law, the regulations, and the program of some techniques
more than others may lead to preferences for these techniques by grant
applicants who perceive them as "favored" in the grant approval process.
Uniform treatment of abatement techniques would avoid this bias. (See
Section III.)
If the seven findings that are identified above were to be acted upon and
appropriate changes implemented in the Construction Grant Program, the
following results could be expected: the local cost-sharing bias for
capital-intensive and eligible land-intensive techniques would be reduced;
the local cost-sharing bias for some plant over nonplant techniques would
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be reduced; Federal and nonfederal expenditures on nonplant techniques
would increase relative to plant techniques; the community demand for
nonplant techniques would increase; and the degree of abatement per
national dollar spent would increase.
SUGGESTIONS FOR FURTHER RESEARCH
The research evaluation undertaken for this report uncovered additional
areas of research that might be of value to EPA in meeting its objectives
of encouraging efficiency in abatement and of treating cost-sharing
parties equitably.
One type of research needed is the investigation of incentive effects of
institutional requirements (i.e., minimum treatment standards, minimum
levels of discharge, etc.) on communities' selections of techniques of
abatement. It might be demonstrated, for example, that institutional
requirements as well as cost sharing represent critical elements in biasing
nonfederal interests in favor of certain kinds of abatement techniques.
A second research problem of relevance to this study is the determination
of the optimal points in time at which to reduce or eliminate Federal
abatement grants. For example, given an objective of meeting a certain
level of discharge by a certain date, grant officials would like to know
at what times and by what percentages grants could be reduced to meet the
discharge level and get the abatement program on a self-sustaining basis
as soon as possible.
A third potential area for useful research is the analysis of the link
between levels of local performance in abatement and rewards or grants
based on good performance. Some states, such as New York, for example,
share up to one-third of the costs of operation and maintenance with cities
that manage their plants well. Variable Federal grants based on local
performance is one way of encouraging good performance. A loan which
makes the amount paid back inversely related to the performance of an
abatement project might be another promising incentive for good local
performance.
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A fourth topic of additional research is the determination of community
objective functions in pollution abatement. If communities do in fact
regard collection and disposal as their primary wastewater goals rather
than abatement, then the optimal approach to encouraging nationally
efficient behavior on the part of communities would have to be altered
accordingly. Incentives cannot be formulated until the objectives of
the parties to be affected are known.
A fifth area of research is the sensitivity of communities to having their
costs varied for certain techniques. This cost-sharing elasticity, i.e.,
the percentage change in the demand for abatement relative to a percentage
change in the local cost share, would enable decision makers to estimate
more accurately the impact on nonfederal demands for abatement of changing
cost-sharing rules.
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APPENDIX
DESCRIPTION OF WASTEWATER ABATEMENT TECHNIQUES
The pollution abatement techniques discussed in the report and listed in
Exhibit 1 are here further described. The purpose is to give the reader
a better understanding of the techniques and perspective of how they might
be applied to particular wastewater abatement problems.
Table 10 shows four major problems faced by many municipal waste treatment
systems. The table gives the typical cause of the problems from a techni-
cal standpoint and possible solutions to the problems, including use of
both plant and nonplant treatment, prevention, and control techniques.
For example, a major problem is pollution from wastewater overflowing the
collection system; the immediate cause is usually insufficient flow
capacity of the sewers; and possible techniques to solve the problem
include separation of storm and wastewater sewers, temporary storage of
storm and wastewater for later transmission to the plant for treatment,
treatment of overflows, increasing the rate of transmission to the plant,
etc. From the table it may be seen which techniques appear more applicable
to each of the particular problems.
It should be noted that all of the techniques listed are not necessarily
technically viable in all situations. For instance, some techniques such
as low-flow augmentation may be site-dependent. Techniques may be applic-
able only in certain cases. For example, rerouting wastewater to a
larger body of water or dividing discharge among waterways to reduce the
burden on the receiving waterway obviously is a viable technique only if
alternative receiving waters are available. Also tradition and legal
constraints may restrict the use of a technique to specific circumstances.
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Table 10. APPLICATION OF POLLUTION ABATEMENT TECHNIQUES TO MAJOR PROBLEMS OF MUNICIPAL WASTE TREATMENT SYSTEMS
Major Problems
1. Overflow of Wastewater from the Collection
System.
2. Unnecessary Treatment of Wastewater in
l_i Municipal Plants.
3. End-of-pipe discharge of "Inadequately
Treated" Wastewater
"Discharge of Untreated Wastewater"
4. Discharge of Effluent In Overburdened
Waterway.
Causes
Too small sewers.
Combined systen with Insufficient storm flow
capacity.
Infiltration of the Collection System.
Improper Inflows into the Collection System.
Discharge Into the sewer systen of water which
could be reused or whose use could be easily
avoided.
Incorporation into the municipal system of
buildings which could be effectively served
by septic tanks.
Insufficient plant capacity.
Inefficiency in Plant Operation.
Inappropriate or Inadequate degree of plant
processes.
Bypassing of plant.
Absence of plant.
Prior high BOD levels from other discharges
of Dtmlclpal effluent or pollution loads from
from other sources.
Solutions
Enlargnent of sewers.
Injection of polymers in collection sewers
to speed flow.
Separation of storn and wastewater sewer
systems.
Off-system or In-systen temporary storage.
Screening, physical-chemical, or other
treatment of overflows.
Periodic flushing of sewers to reduce
pollutant buildups which would otherwise
be contained in overflow discharge.
Repair of leaking sewers.
Relocation of improperly located downspouts
and other sources of inflows.
Installation of water-saving and waste-
reduction appliances and fixtures.
Higher prices for water consumption.
Better coordination between the volume of
hook-ups and treatment capacity.
Improvement in septic service; e.g., through
conmunlty septic tanks.
Enlargement of plant.
Upgrading of management and labor.
Change In or addition to treatment processes.
Alternative treatment which avoids discharge
into waterway, e.g., land disposal.
Raw sewage lagoons.•
Pretreatment In the collection system.
Alternative control or treatment after
discharge Into waterway, e.g.,
in-stream aeration, low-flow augmentation.
Restrictions on release of substances into
the sewer.
Rerouting of discharge to cleaner (larger)
receiving waters.
Division of discharge between several
stream*.
In-stream aeration.
Low-flow augmentation
-------
For example, in-stream aeration has been generally regarded as suitable
for special problems only, such as restoration of a polluted area of a
waterway for which raising the general water quality through advanced treat-
ment of wastewater inflows would be a slow and costly approach. The
technique has generally not been regarded as a substitute for plant treat-
ment per se. Following are descriptions of each technique:
Water Use Reduction Programs are measures undertaken by public agencies
to reduce the volume of water used by households and industry. Since most
water when used becomes wastewater in the sewerage system, a reduction in
water consumption lessens the burden on sewage disposal facilities. (Note
that increasing the volume of water in the sewer system has the negative
effect of increasing the volume of wastewater which must be collected,
treated, and disposed, while increasing the quantity of receiving water
into which effluent or wastewater is discharged has the positive effect
of diluting the concentration of wastes.) Some measures which might be
undertaken by public agencies to reduce water use are (1) education
programs to teach the public water-saving practices; (2) use of water
pricing to decrease the demand for water by increasing its cost; and
(3) tax, subsidy, or regulatory programs to encourage installation of
low water-use devices and appliances, such as reduced-flow toilets and
faucets, level control and water retention devices on automatic washers,
and recycle/reuse systems which treat and reuse bath and laundry washwater
for toilet flushing and lawn irrigation.
Active Control of the Sewer Collection System is using the sewer collection
system to reduce, control, or treat wastewater prior to its entering the
treatment plant. Active control of the collection system affects what
can and should be done in the treatment system. Four of the techniques
whereby the collection system can be used to accomplish wastewater control,
reduction, or treatment are the following techniques:
(1) Injection of High Molecular Weight Polymers into the Collection
System reduces the flow resistance of wastewater and thereby
increases the transmission of wastewater through the collection
system. In effect, the technique is a substitute for enlarge-
ment of the collection pipe, in that both techniques increase
the load capability of the collection system.
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(2) Controlled Flow in the Collection System is the selective
retention and release of wastewater from the collection system
to the treatment system for the purposes of (a) increasing
efficiency in plant operations by achieving more uniform inflows
of wastewater to the plant, and of (b) preventing overflows of
untreated wastewater from the collection system into waterways
when inflows into the system exceed transmission and/or treat-
ment capability. (Retention to prevent overflows may require
the addition of storage facilities to the collection system.)
(3) Pretreatment in the Collection System is any treatment action
taken in the collection system to improve transmission to the
plant or to reduce later processing requirements; e.g., grit
removal may be done in the collection channel, wastes may be
ground and wastewater may be preaerated in order to satisfy
immediate BOD, decrease odor, or improve later processing.
(4) Controlled Flushing of Sewers is the deliberate washing out of
combined sewer systems periodically in order to capture for
treatment the pollutants which accumulate in the pipes during
dry periods and which otherwise would worsen the contamination
problem from storm overflow. Methods of flushing sewers include
(1) the quick discharge of sewage from tanks located in manholes,
and (2) the blocking of the lower end of laterals with quick-
release, inflatable barriers.
This study is concerned with those aspects of Enhancement and Rehabilitation
of Collection Sewers which contribute to abatement of wastewater pollution.
This would include improvement in design or construction of the collection
system which enables the system better to transmit wastewater which requires
treatment and to exclude intake of water not requiring treatment. Innovative
features may be initially incorporated in new collection systems; existing
systems may be rebuilt or repaired to include improvements. Following are
some specific measures which may be taken to improve pollution abatement
by use of the collection system.
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(1) Enlargement of Sewers refers to increasing the size of the
sewer pipes to increase transmission of wastewater through
them. Undersized sewers may cause wastewater to be discharged
before it reaches the plant.
(2) Separation of Storm and Wastewater Collection means the provision
of two separate, parallel systems of pipes; one for carrying
storm runoff from buildings and land and one for carrying sewage —
in contrast to a combined sewer system which carries both sewage
and storm water runoff in the same pipes. Separate systems
require a much larger construction cost than combined systems
because of the duplication of sewer lines required. Separate
systems, however, offer the advantage of reducing pollution
from sewer overflow during wet periods. Overflow is a serious
problem associated with combined systems. Combined sewers are
generally designed to accommodate a maximum volume in excess
of dry-weather flow, but during storms the capacity may be
exceeded, resulting in the discharge of a mixture of storm
water and raw sewage directly into receiving waters. Separation
of the systems usually overcomes the problem of overflows,
but does not prevent the problem of pollution from wastes
present in the storm water, e.g., oily, salty runoff from
streets.
Separation of sewers is not the only means of overcoming the
problem of combined sewer overflow. Possible alternative approaches
include structural alterations to the interceptor systems;
separation of sanitary and storm water within the combined system
by means of a pressure or vacuum sanitary sewer suspended within
existing combined sewers; increase in transmission through the
pipes and/or expansion of treatment capability (see Enlargement
of Sewers and Injection of Polymers); storage of excess wastewater
for later transmission (see Selective Retention); treatment of
overflows (see Treatment of Overflows); selective placement of
overflows (see Selective Routing of Effluent Discharge); reduction
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of contaminants in overflowing water by such things as pre-storm
sewer flushing (see Controlled Flushing of Sewers), storage of
initial overflow with higher pollutant load, and more frequent
cleaning of streets during dry periods.
(3) Construction, Repairs, and Corrective Measures to Prevent
Infiltration and Inflows refers to efforts to prevent the
entrance of ground water into a sewer through breaks, porous
walls, or defective joints, or of the entrance of surface
water resulting, for example, from improper location or
connection of roof drains. Reduction in the amount of
wastewater unnecessarily entering the plant conserves treatment
resources.
Control of and Restrictions on Release of Certain Substances into the
Sewer System means limitations or bans imposed by public authorities on
the release of substances into the sewer system, either by households or
industries, for the purposes of reducing treatment cost or preventing
untreatable waste from entering the system. For example, households might
be restricted in their use of detergents containing phosphates; industries
might be required to extract certain industrial chemicals from their wastes
prior to discharge into a municipal system; and industries, for the purpose
of reducing wastewater volume, might be banned from releasing water which
could be reused by them without treatment (e.g., cooling water).
Influencing Decisions of Households and Industry to Connect or Not to
Connect to a Municipal Sewer System is a way public agencies may affect
the volume and/or composition of wastewater flowing into the municipal
sewerage system for treatment. One direct constraint is the imposition
of a sewer moratorium which prohibits tie-ins. Pricing policy for connec-
tion of buildings to the sewer system is another, though much less powerful,
method of influencing decisions. There are other approaches which may be
undertaken by public agencies which are perhaps less obvious and less
certain in effect than the two above. For example, an industry which ties
into a municipal system generally is charged a user charge to offset the
costs which it imposes upon the system. In practice, however, the user
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charge may not fully cover industry's share of cost, or, by like token,
it might be excessive. Hence the user charge may bias industry's choice.
[Though not likely an instrument of policy, the relative efficiency of a
municipal system may also attract (or repel) industries to (or from) a
tie-in because of the possibilities of sharing in economies of scale (or
operational inefficiences).] There are other public policies and practices
which through subsidization may influence industry's decision. For
example, an industry which is charged a user fee equal to the nominal cost
attributable to its wastewater disposal may nevertheless receive subsidies,
in so much as there is (a) no sales tax on equipment installed, (b) no
local property tax on the treatment facility, and (c) debt financing with
long-term, low interest, tax-exempt bonds. Yet another factor in an
industry's decision to treat its own wastes and discharge directly into a
waterway, or to discharge into a municipal system, is the degree of legal
accountability associated with each choice. Without sophisticated
monitoring devices, industry may reduce its accountability by mixing its
sewage with other sewage in the municipal system. Lack of accountability
also impedes the development by public authorities of an equitable user
fee schedule. Public agencies may also influence industry's decisions by
increasing the desirability of internal (in-industry) wastewater reduction
or treatment per se. This might be done by raising the cost of clean water,
thereby increasing the attractiveness of wastewater recycling and reuse.
Another strategy would be to call public attention to desired and undesired
behavior by industry, relying on their concern for public image to influence
decisions. As demonstrated in Section VI, existing Federal user fee policy,
which allows grant recipients to retain half of the user fees collected
from industrial users against the Federal grant, appears to give incentive
both to municipalities to encourage industry to tie-in to the municipal
system and to industry to choose to connect.
The objective of Discharge Flow Routing and Outfall Location is to place
the effluent discharge into receiving waters so as to reduce the amount of
wastes per unit of water, and thereby, improve water quality. Given a
level of effluent, one method of controlling the ratio of waste to receiving
water is to divide the discharge of effluent among several streams.
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Another method Is to extend outfall systems to larger bodies of water
where assimilative capacity is greater.
Low-Flow Augmentation of Receiving Waters is the supplementation of stream
flow during periods of low natural flow by release of water, usually
Impounded during times of excess flow, for purpose of reducing the concen-
tration of pollutants in the waterway. By increasing the flow of water
relative to waste material entering the waterway, the waste concentration
is diluted (i.e., the ratio of wastes per unit of water is reduced) and
the assimilative capacity of the water is increased. Generally low-flow
augmentation is used to guarantee that water pollution will not rise above
some maximum concentration. The technique is usually accomplished by
damming waterways upstream of the area to be diluted and storing water in
reservoirs prior to planned release. However, it may also be accomplished
by the prevention of or reduction in upstream diversions of water during
critical periods.
A Waste Treatment Plant is a series of tanks, screens, filters, lagoons,
and other process units, which are arranged in close proximity to one
another and generally involve buildings, facilities and a central organi-
zation. The treatment plant is the part of a sewerage system which comes
after the sewer collection system and before the outfall, or discharge,
system. The conventional waste treatment plant may combine any of a
number of processes which together provide primary and secondary treatment,
i.e., removal of suspended solids, biodegradable organics, and micro-
organisms from wastewater piped to it. The advanced waste treatment plant
typically adds to the conventional in-plant processes some additional
(i.e., tertiary) biological-physical-chemical treatment techniques which
enable reclamation of high quality water from wastewater. Table 11
indicates the large array of processes which could be employed in a waste
treatment facility.
Land Treatment of Wastewater is the application of wastewater to land for
purposes of treatment and disposal. This technique goes beyond the practice
of land disposal of sludge, the solid matter remaining after plant treatment
of wastewater, in that both the liquid and solid wastes may be disposed in
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Table 11. SOME WASTE TREATMENT PLANT OPERATIONS AND PROCESSES
APPLICABLE TO TREATMENT 0? WASTEWATER*
Dissolved BOO
Biological
Activated Sludge
Anaerobic Dl^eition
Bio-Flltero
Biom-.i Trnotncnt (Algae Itarvwtinc)
Biolo/'.Jcol in/, Konoval
BttWHlc<1 Arm*. Ion i
Mo-nrnll.ririmtioa
Rio-Hi triricaUon
I'a.-.vcc r Oxidation Ditch
Cheedcal Processes i
OiinJcal Oxidation;
Catalytic Oxidation
CMnrinqtlon
Ozon;ition
W>:t Oxidation
Oionir.il Precipitation
Oicnical Prdnction
Oo-ipil-ition:
Inortvinlc Oialcals
Mylcctrotytes
DlsinfrcLion
ElccLrolyi ic Proeesewi
FJcctru'llalysls
FJcrlrolyois
Inn t>clinn^c
Liqi.H-U'iuld (Solvant)
Inrii.'-rntion:
FJiiili ?.fd-D«d
) IVorrt;: ca:
Carbon A'h'Orftlont
Gr.-iti-Uar Aetlratod
DtrtilliMon
flllritinn:
Coiil filtration
[i/tlnitlon
Reverse Ourcocia
Strlpplnc (Air or SU>a»)
"Under epeclflc oondltlone there will be lladt«S effectlveneaa
Projects of the Industrial Pollution Control Branch. W.it*»r Ponutlnn rontrot Ren<»«rch Kertpa, FPA,
12000—07/71, p. 1-26. (Table originally titled "Unit Operations and Processes Applicable to Treatment
and Control of Industrial Water Pollution.")
Note: No single process removes all pollutants; generally, several methods are required for any
single batch of wastewater.
-------
this manner, and the land application is itself used as a total or partial
treatment process. The technique may be carried out in several ways:
(1) The untreated wastewater, consisting of solids and liquid, may be
spread directly onto the land. (2) The untreated solid and liquid com-
ponents of wastewater may be separated, and the liquid sprayed by an
irrigation-type system on the land, and the solid part either applied
separately to the land or disposed of in some other way. (3) The wastewater
may be partially treated, for instance by a period of storage in an
oxidation pond or sewage lagoon, prior to land application by either of
the above methods. Objectives in land disposal of wastewater may include
land fertilization, in addition to restoration of water quality which
occurs as the water filters through natural soils. When the latter is
the sole objective, marginal land unused for other purposes may be used.
When the former objective is present, the wastewater may be applied to
farmland, woodland, and land under reclamation. Additional possible sites
for disposal which might benefit from fertilization, as well as provide
suitable disposal land in areas where adequate farmland and woodland are
unavailable, are parks and highway medians and shoulders.
Community Septic Tanks are rural sewerage systems which provide wastewater
disposal for a group of buildings. They present an alternative to the
conventional one-septic-tank-for-each-house arrangement now prevalent in
rural areas not reached by municipal sewer lines. There are three main
approaches to community disposal of wastewater in rural areas. The first
is the piping of waste from a group of buildings to a large septic tank,
normally located on public land. Aside from its large size, more extensive
collection system, and location, the community septic tank is identical
to the conventional single-building septic tank. It consists of a large,
watertight container, usually made of concrete or steel and buried under-
ground. In the tank, naturally occurring microorganisms in the sewage
decompose it. The sludge settles on the bottom of the tank, from which
it must be removed periodically, and the clear effluent flows out of the
tank through a system of distributing tiles or pipes into the ground, where
It is absorbed and becomes part of the ground water supply. A second
approach is the periodic collection by truck of wastes from individual
132
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holding or storage facilities located at rural buildings, and the trans-
portation to a disposal area or facility. This second approach may be
necessary in areas where absorption of effluent into the ground from
septic tanks is impeded, such as in areas of heavy rainfall, or where
soil properties provide poor percolation, or where an excessive number of
septic tanks overload absorption capacity of the surrounding ground. A
third approach involves an arrangement by which a designated public
authority assumes ownership and maintenance responsibility of individual
septic tanks located on private property. As used in this report, the
term "community septic tank" encompasses all of the above approaches to
joint disposal of rural wastewater.
A Raw Sewage Lagoon is a pond for receiving and impounding raw sewage
while the interaction of sunlight, oxygen, bacteria, and algae decompose
the waste and restore the water to a purer state. Both gravity separation
and biological reduction are accomplished in the lagoon. Though lagoons
are more often used in conjunction with conventional treatment plants to
provide "polish treatment," raw sewage lagoons have been used successfully
alone to provide treatment. They may be particularly suitable for smaller
communities where needed land is available at reasonable costs and waste-
water loads are of manageable proportions, for treatment of certain kinds
of industrial wastes, and as initial treatment facilities in newly
developing areas prior to dense settlement. In the latter case, they may
be used to provide polishing treatment if a plant is later added. The
raw sewage lagoon may also be used in conjunction with land disposal
techniques, such as spray irrigation, to provide preliminary treatment.
Aeration of Receiving Waters (In-Stream Aeration) Is the introduction of
air or molecular oxygen, by artifical means, into a waterway for the
purpose of raising the level of dissolved oxygen (DO), a key determinant
of water quality. If natural sources of oxygen—primarily reaeratlon
at the surface—are not sufficient to meet the biochemical oxygen demand
(BOD) imposed upon It (i.e., the amount of DO required for aerobic decom-
position of organic matter present in the water), the level of water
quality deteriorates. Raising the level of DO increases the waste assimilative
133
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capacity of the waterway and is one means of improving water quality. There
are a number of different types of systems or processes by which aeration
of rivers, streams, lakes, and ponds may be accomplished. Some systems are
site dependent, such as techniques which rely on weirs or dams. Other
systems are more flexible with respect to site, such as (1) mechanical
surface aerators which transfer oxygen by breaking the water into droplets
and inducing turbulent mixing, (2) diffusion systems which introduce air
or molecular oxygen directly into the water through perforated tubing,
nozzles, or jets installed below the water surface, and (3) the side
stream pressurization system in which a small percentage of the flow
volume of river water is drawn off, mixed with oxygen under pressure and
the supersaturated mixture is diffused back into the river.
Treatment of Overflow refers to the application of treatment processes
to untreated wastewater dischaiged from a sewer system into receiving
waters when flow exceeds the system's transmission and storage capacity.
Generally, overflows occur in a combined sewer system during large
inflows of storm water and consist of a mixture of storm water and raw
sewage. Normal sewage treatment processes could be used, such as
screening and straining and chlorination. Some processes may be applied
to overflows at the rate at which they occur; others require storage of
overflow for treatment.
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BIBLIOGRAPHY
Costs of Construction of Publicly-Owned Wastewater Treatment Works:
1973 Needs Survey. Environmental Protection Agency,
Washington, D.C., November 1973.
Cost to the Consumer for Collection and Treatment of Wastewater. Environ-
mental Protection Agency, Washington, D.C., Government Printing Office.
Water Pollution Research Series, No. 17090. July 1970. Table 24.
Davis, Robert K. The Range of Choice in Water Management, A Study of
Dissolved Oxygen in the Potomac Estuary. Baltimore, The Johns Hopkins
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Environmental News. Environmental Protection Agency, January 10, 1974, p. 2.
"Fairfax Sewage Plan Set," The Washington Post, March 27, 1974, p. C-l,
Col. 1.
Federal Assistance Programs of the Environmental Protection Agency.
Reprinted from the Catalog of Federal Domestic Assistance, Washington,
D.C. June 1973, Sec. 66.015.
Federal Grants for the Construction of Municipal Waste Water Treatment
Facilities. Environmental Protection Agency, Washington, D.C.
Federal Water Pollution Control Act Amendments of 1972, PL 92-500, 92nd
Congress, S.2770, October 18, 1972.
Final Construction Grant Regulations, Construction Grants for Waste
Treatment Works. Federal Register, XXXIX, No. 29, February 11, 1974.
Kneese, Allen and Blair Bower. Managing Water Quality: Economics, Technology,
Institutions. Baltimore, The Johns Hopkins Press, 1968. p. 97-179.
Loughlin, James C. Cost-Sharing for Federal Water Resource Programs with
Emphasis on Flood Protection. Water Resources Research. 6^(2):377,
April 1970.
Marglin, Stephen A. Objectives of Water-Resource Development: A General
Statement. In: Design of Water Resource Systems, Haass, et. al.
Cambridge, Harvard University Press, 1962. p. 31-36.
Marshall, Harold E. Cost Sharing as an Incentive to Attain the Objectives
of Shoreline Protection. National Bureau of Standards. Washington, D.C.
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Marshall, Harold E. Economic Efficiency Implications of Federal-Local
Cost Sharing in Water Resource Development. Water Resources Research.
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Marshall, Harold E. Salinity Control and Cost Sharing. In: Proceedings
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Marshall, Harold E. The Relationships Between Local Cost-Sharing and
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Marshall, Harold E. and Vartkes L. Broussalian. Federal Cost Sharing
Policies for Water Resources. National Bureau of Standards.
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Musgrave, Richard. The Theory of Public Finance. New York, McGraw-Hill,
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"Prince William Tables Funds for Sewer Plant," The Washington Post,
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Project Register: Waste Water Treatment Construction Grants. Environmental
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Rafuse, Robert W. Jr. and Michael D. Sherman. The Implications of the
Net Fiscal Benefits Criterion for Cost Sharing in Flood Control Projects.
Mathematica Report. Washington, D.C. IWR Report 71-12. Institute
for Water Resources, the Corps of Engineers. 1971. p. ii, 49-51.
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"Rivers Cleanup Aid Cut," The Washington Post, January 11, 1974, pp. A-l,
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SELECTED WATER
RESOURCES ABSTRACTS
INPUT TRANSACTION FORM
i. Rcpo : No.
w
ANALYSIS OF COST SHARING PROGRAMS FOR POLLUTION
ABATEMENT OF MUNICIPAL UASTEWATER
Harold E. Marshall
Rosalie T. Ruegg
5. Rejoin Date
6
8. Perfcui,,iog O
I'..-port Nc
EPA-IAG DA H 374
Building Economics Section
Institute for Applied Technology
National Bureau of Standards
Washington, D.C. 20234
13 Type of Repott ainl
1 ^ ^rtiAr; rino fir-- -iiTJitifin * ITtflOO "- -WCrOu
n. spon.juisor luauon j^ijon^nt,! Protection Agency Final
Environmental Protection Agency report number, EPA-600/5-7U-031, November 1971*
This study evaluates existing cost-sharing programs for vastewater pollution
abatement as described in the Federal Water Pollution Control Act Amendments of 1972,
describes alternative cost-sharing programs that provide Improvement in terms of national
efficiency and equity criteria as defined herein, and suggests related areas for further
research. Emphasis is on how Federal cost sharing biases communities in favor of
certain kinds of techniques. The approach is to describe the current cost-sharing
programs for both plant and nonplant techniques; to examine cost-sharing, legal, and
other institutional biases against certain techniques; to analyze efficiency and equity
effects of alternative cost-sharing programs; and to describe the incentive effects of
cost sharing on nonfederal interests with respect to their choices among abatement
techniques. Findings of the study are that more efficient abatement will result if the
same percentage cost share applies to all plant and nonplant techniques of abatement;
the same ^percentage also applies to all categories of cost (e.g., capital, land, opera-
tion and maintenance) for a given technique; the same percentage applies to large and
small communities; institutional constraints on the selection of nonplant techniques are
removed; and if the program provides for Federal cost sharing of every abatement
technique that is technically viable.
ol
Send To:
KiCNTtnc INFORMATION corran
OP THK IMTKNIOM
Harold E. Marshall &
National Bureau of
Rosalie T. Ruegg
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