COST REDUCTION AND SELF-HELP HANDBOOK
                 August 1986
                 Prepared  by
             Roy F.  Ueston,  Inc.
      West  Chester,  Pennsylvania   19380

                     for
Wastewater Environmental Research Laboratory

                     and

   Office of Municipal  Pollution  Control
    U.S. Environmental Protection Agency

-------
                        DISCLAIMER
This report has been reviewed by the Wastewater
Environmental Research Laboratory and Office of Municipal
Pollution Control, US Environmental Protection Agency, and
approved for publication.  Approval does not signify that
the contents necessarily reflect the views and policies of
the US Environmental Protection Agency, nor does mention of
trade names or commercial products constitute endorsement
or recommendation for use.
                            ii

-------
                             FORWARD

    With  the  passage of  the  Clean Water  Act  in 1972,  this
nation  committed  itself  to  the  construction  of  facilities
necessary  for  the elimination  of water  pollution.   Through the
Construction   Grants   Program,   the  L'SEPA  provided  financial
assistance  to  many  communities to  construct  their  wastewater
facilities.

    Selection   of  a   wastewater   technology   should   include
consideration  of  both  construction   and  operational   costs.
Although   Federal   and  State   financial  assistance   may  be
available   for  construction   costs,   operational  costs   are
generally the responsibility of local communities.

    The USEPA  recognizes that  some  local communities may  have
difficulty  in  financing  the  construction  and  operation  of
wastewater  facilities.  This  report  is  one  of  a  series  of
guidance materials on  financial  management  issues related  to
the  cost-effective  construction  and  operation  of  wastewater
facilities.  This  particular  report focuses  on  suggestions for
identifying and  remedying excessive  cost  factors involved  in
facilities operations.
                        Michael  J. Quigley, Director
                        Office of Municipal Pollution Control
                               iii

-------
                             ABSTRACT

     This  report  presents  communities  experiencing  higher  than
 expected  operating  costs  for  their wastewater  facilities  with  a
 methodology to identify and reduce operating costs.   This
 report  may  assist public  works  managers,  elected officials  and
 engineers involved  in  facility  operational  audits  to  more
 systematically identify potential  problems  and more fully
 consider  possible options for reducing  costs.  All aspects  of
 facility  operating  costs  are  explored.  The cost reduction
 techniques  outlined  in  the report  can be  used  by communities
 desiring  to  take a  comprehensive look at  cost  savings in  all
 phases  of operation  as  well as  those  communities interested in
 evaluating  a particular aspect.

     The recommendations and procedures  in the  report  are  based
 in large  part upon  actual  field experience  in  fifteen
 communities.  About  half  of the communities were experiencing
 significant  cost/operational problems with  their facilities.
 The  remainder had initiated efforts to  identify and implement
 cost reduction measures.   The case study  communities  were
 selected  by  the  contractor, the Wastewater  Environmental
 Research  Laboratory.and the Office of Municipal Pollution
 Control based upon recommendations of EPA Regional Office
operation and maintenance coordinators.   An additional twenty
 communities  were contacted by telephone.  Their experiences are
 also reflected in this  report.

    The material covered  in this report is  summarized in  a  four
 page brochure entitled  "Reducing the Cost of Operating
Municipal Wastewater Facilities."  The Dreader  interested  in
other financial management aspects of operating wastewater
 facilities may be interested in a  report  entitled  "Going  All
 Nine Innings" which  is  currently in preparation by the Office
of Municipal Pollution  Control.  It is  scheduled for  release in
May 1987.  "Going All Nine Innings" will  include a summary  of
material  from this handbook as well as other financial
management topics not .covered here.  It is  intended for a
general audience.

    This report was  prepared by Roy F. West'on, Inc. in
fulfillment of contract no. 68-03-3109 for  the US Environmental
Protection Agency.         '".  "
                                iv

-------
                        TABLE OF CONTENTS


Section                      Title                          Page

         Disclaimer                                         ii

         Foreward                                           ii1

         Abstract                                           iv

         Figures                                            vi

         Tables                                             vii

         Exhibits                                           viii

   I      Part I:  Introduction - Defining the  Problem
               Background                                   1-1
               Factors  Contributing to  the High  Cost         1-2  -
               of Wastewater Operations
               Purpose  of this Handbook                     1-8

   II     Part II:   Methodology - Conducting a  Cost
         Reduction Assessment
               Basic  Objective                              2-1
               Methodology
                       Step  1:  Identify  High-Cost Areas     2-3
                       Step  2:  Itemize High-Cost            2-7
                       Components
                       Step  3:  Determine Cost Reduction     2-10
                       Opportunities
                       Step  4:  Develop and Evaluate         2-10
                       Program Alternatives
                       Step  5:  Formulate an Implementa-     2-18
                       tion  Plan
               Summary                                       2-20

   III   Part  III:  Options  for Reducing  Costs
               Overview                                     3-1
               Reducing Labor Costs                          3-1
               Reducing Energy Costs                         3-15
               Reducing Chemical  Costs                       3-29
               Reducing Water  Use and Water Supply Costs     3-35
               Reducing Maintenance and Repair Costs         3-37
               Controlling Administrative  and Overhead
                Expenses                                    3-44
               Controlling Capital Expenditures              3-47
               Balancing the Budget and Maximizing Revenues  3-57

-------
                         LIST OF FIGURES

Figure No.                   Title                          Page
   II-l     Basic elements of a Cost Reduction Assessment    2-2
   11-2     Steps in conducting a Cost Reduction Assessment  2-4
                               vi

-------
                          LIST  OF  TABLES
Table No.                    Title                          Page
   II-l     Typical Wastewater Operation Expenditures       2-5
            (Line Items)
   II-2     Typical Revenue Sources                         2-9
   II-3     Example Format:  Listing of High-Cost Items
            and Applicable Cost Reduction Options           2-11
   II-4     Cost Reduction Option - Line Item Cost Matrix   2-12
   II-5     Description of Program Elements for a Given
            Cost Reduction Alternative                      2-14
   II-6     Typical  Simple Payback Periods                  2-16
   II-7     Life-cycle Cost and Simple Payback Analysis     2-17
  III-l     Summary of Cost Reduction Opportunities         3-2
                              vii

-------
                         LIST  OF EXHIBITS

Exhibit No.                  Title                          Page
   1        Cost Breakdown by Line Item (Example Form)      A-l
   2        Cost Breakdown by Uastewater Operation
            Activity (Example Form)                         A-3
   3        Tabulation of Revenue Data (Example Form)       A-7
   4        Cost Reduction Options                          A-8
                              vlll

-------
                        PART  I:   INTRODUCTION

                        DEFINING THE PROBLEM
 BACKGROUND
    Many small communities have been  faced  with  serious  financial
 burdens due to high-cost wastewater  projects.   These  communities
 have found that they  cannot  support  the cost of operating  their
 wastewater facilities without  imposing  high user charges.   This
 situation   is   created   when  actual   operating  costs  exceed
 expectations  or when the revenue base is less than expected.   In
 most cases, both factors  are  evidt,. .  to  some extent.

    The  end result  of a  high-cost  project  can  be  manifested -in
 different  ways.  The most obvious result is  excessive user  fees.
 However,  many  communities  elect not to  charge the  high  sewer
 rates,  and either  operate  at  a  deficit or  subsidize the  sewer
 operations  with  revenues from water operations or  the  general
 fund.   In   some  cases  the lack of adequate revenues  can  lead to
 default  on financial  obligations (i.e.,  bonds and  loans).  In
 other cases a  community may simply cut back on various operating
 expenses (e.g.,  cut  staff, curtail use of chemicals) which
 can  seriously  impact plant performance.

   Small communities are  particularly vulnerable to the  impacts
 of a high-cost  project because of their  limited  financial  capac-
 ity  (i.e.,  limited revenue base and ability to carry debt).   Part
 of  the  problem  is  related  to  the  fact that certain wastewater
 technologies,  are simply  not  suited  to  small  communities.   The
more  sophisticated  a  treatment  facility is, the less likely it
 is that a small community will be able to support the associated
operating  expenses  (i.e.,  staff,  chemicals,  utilities,  etc.).
The special needs of a small community must be taken into
account  in the  planning and  design  stages in  order  to avoid
high-cost   situations.    It  is  particularly  important   that  a
community  demonstrate  its   financial  capability to  operate  a
wastewater  facility before  it  commits itself to  implementing
such a project.
                                1-1

-------
     The U.S.  Environmental  Protection  Agency  requires  that  a
 financial  and management capability analysis  be  conducted before
 a Step 3 construction grant can be approved.   This  analysis,
 which is to be performed according to  guidelines provided in the
 Financial  Capability Guidebook,1  must  "demonstrate  that  the
 community has the legal, institutional,  managerial,  and
 financial  capability to  ensure construction,  operation,  and
 maintenance (including equipment  replacement)  of the proposed
 treatment system."2  This requirement  will  hopefully prevent
 communities from implementing  a construction  project without
 fully appreciating the financial  commitments  involved.

     There  are many small  communities,  however, that  have rea-
 lized too  late,  after building wastewater  facilities,  that  the
 cost of operating those  facilities is  far  greater than they
 expected.   These communities desperately need  advice^on  how to
 minimize their operating  costs, in  order  to  make  the  financial
 burden  on  the community,  and on the individual users,  as bear-
 able as possible.

     The U.S.  EPA Wastewater Environmental  Research  Laboratory
 sponsored  a research  project charged with  developing a cost re-
 duction and self-he-lp program  to  assist  these  communities.
 This handbook is the  product of the initial project  study
 effort.  Although the  primary focus of  this  handbook  is to
 assist  communities  with  existing  wastewater facilities in
 helping themselves  reduce their operating costs,  the guidance
 offered  should also be useful  in  identifying potential high-cost
 items  (e.g.,  energy-intensive  treatment  processes or equipment)
 to be considered in planning and  designing  a new  facility.

 FACTORS  CONTRIBUTING  TO THE HIGH  COST  OF WASTEWATER  OPERATIONS

     The  term  "high-cost project"  cannot  be  strictly  quantified,
 since it is a  relative term that must  be defined  somewhat
 subjectively  for a  particular  situation. What  may be considered
 excessively high cost  in one community may  be  perfectly
 acceptable  in  another.   It  is  totally  dependent  on how the
 community  (i.e., local officials,  individual users,  and
 taxpayers)  perceive the  financial  burden
^Financial Capability Guidebook; prepared by Municipal Finance
 Officers Association and Peat, Marwick, Mitchell & Co. for
 U.S. EPA Office of Water Program Operations, March 1984.

^"Financial and Management Capability for Construction,
 Operations and Maintenance of Publicly Owned Wastewater
 Treatment Systems; Final Policy, 40 CFR Part 35,
 February 17, 1986.
                               1-2

-------
 placed on  them.   The  limits  defining what  is  a high cost  and
 what is not are generally a function  of  a  community's  size,  tax
 base, socioeconomic  status,  geographic location, and  the  level
 of existing public services provided.

     Although it is difficult to quantify the limits  of high cost
 related to the construction and operation of a  municipal  waste-
 water system,  there are  certain indicators  of potential high
 cost  problems.    In  fact,  the  U.S.   Environmental  Protection
 Agency suggests the use of such  indicators  to  identify projects
 that  have  "a   high   probability  of   encountering   financial
 difficulties."1   Some   of   the   suggested    indicators    are
 presented below.   (Note  that these  are only  guidelines;  EPA
 encourages  States   to  adopt   these  or  develop   additional
 indicators.)
            INDICATORS OF POTENTIAL  HIGH COST  PROJECTS2

     o     Capital  Cost Per HouseholdI - National  figures  in-
          dicate  tha.t new projects  for which  the  total  cap-
          ital  cost per household exceeds $6,000  are  gener-
          ally  high  cost.  The figure  for  capital costs  of
          sewer service is  $4,000 per  household.

     o     Total  Annual  Cost  Per  Household  -  On  a national
          basis,  projects  tend  to  be  high cost  when   the
          total  annual  cost  per   household  exceeds 1.5%  of
          median  household  income.

     o     Capital  Cost  of  Treatment Per  1,000 Gallons  Per
          Day  of  Capacity  -  When  the  cost of  building a
          treatment  facility  exceeds  $3,000 per  1,000  gal-
          lons  capacity, the  technology proposed may be  in-
          appropriate.

     o     Annual   Operation,   Maintenance,   and   Replacement
         TOM&R)  Cost Per Household -  When the  OM&R  for a
          project  exceeds $100 per  household, the  treatment
          technology  selected may  be  too   complex  for   the
         community.  Unlike capital  cost, OM&R .will increase
          in  the   future as   labor,  materials,  and  energy
         costs increase.  If OM&R costs are high  initially,
         the system  is  starting  at  a disadvantage.

Construction Grants 1985 (CG-85),  Municipal Wastewater  Treat-
 ment, Appendix K -  Financial and Management Capability  Informa-
 tion Sheet, EPA 430/9-84-004, U.S. EPA, July 1984.
2Ibid. Attachment A, Suggested Screening System Elements.
                               1-3

-------
     It  Is  important  to  note,  however,  that  these  guidelines are
 intended only  to  provide  a  general  indicator of potential high-
 cost  problems,  which relates  primarily to the  user's ability to
 pay.  In some  cases, it is  impossible  to provide  wastewater
 service and  not charge  more than  the minimum limits prescribed
 by  EPA's expensive project  criteria.   This  is  especially  true
 for smaller  communities where  the user base is  too small  to
 effectively  spread out  the  minimum  fixed costs  of building and
 operating  necessary  wastewater facilities.

     In such  cases, the  only recourse is to  minimize the finan-
 cial  burden  to  the greatest extent  possible by  reducing costs
 and by increasing revenues  without  increasing  individual  user
 charges.   This  is essentially  the purpose of implementing a
 cost  reduction  and self-help program.   In order to accomplish
 this, three  key cost  determinant variables  must be controlled:
 PROJECT COST, OPERATING COST,  and REVENUE CAPACITY.

    Project  cost  (i.e., the total cost of building a wastewater
 facility including engineering fees, legal  fees,  interest pay-
ments, and land cost, as  well  as construction cost) has a direct
 impact on  total annual  cost through debt service.  Therefore,
any reduction in total  project cost will in effect reduce
operating  cost.  The'relative  impact on overall operating cost
will depend on  the level  of outside grant funding and the type
of  financing.   Reducing project cost will have  the greatest
impact when the local share of capital cost and the interest
rates on borrowed capital are  high.  These  conditions often
apply to small  communities  which typically  have difficulty
securing grant monies due to low rankings on state construction
grant priority lists, and have  difficulty in securing financing
at reasonable interest  rates due to the lack of sufficient tax
and revenue base.   Factors  which can contribute to excessive
project  cost are listed below.
                               1-4

-------
        FACTORS CONTRIBUTING TO  EXCESSIVE  PROJECT COST

     o    Inadequate  consideration  of less-costly collection
          system alternatives.

     o    Inadequate  consideration  of cost-effective
          treatment technologies.

     o    Failure to  seriously consider operational
          improvements  or  facilities  upgrading versus plant
          expansion.

     o    Oversizing  of facilities  due to  unrealistic growth
          projections and  flow estimates.

     o    Designing overly-sophisticated facilities which
          are  inherently expensive, energy intensive, and
          operationally complex.

     o    Failure to  perform Value  Engineering analysis.

     o    Failure to  consider the impact of inflation on
          ultimate construction and operating costs.

     o    High  debt service  payments.

     o    Failure to  seek most competitive bid possible.

     o    Excessive,  unnecessary construction change orders.
    Operating cost (i.e., the day-to-day cost of owning and op-
erating wastewater facilities, including debt service, as well
as operation and maintenance costs) has the most direct finan-
cial impact on a community, and is therefore often perceived as
the root of the problem in a high-cost project.  Actually,
operating cost should be viewed more as a symptom of the
problem rather than the cause.  In order to attack the problem
of high operating costs, the individual components of operating
cost must be identified.  Debt service is one major component
of operating cost.  Labor, operating expenses, outside
services, and overhead are the other major costs components.
These components are affected by many different factors.  Some
of the factors which can contribute to excessive operating
costs are listed below.
                               1-5

-------
       FACTORS CONTRIBUTING TO EXCESSIVE  OPERATING  COST

     o    Maintaining larger operating  staff  than required.

     o    Excessive outlays for overtime  pay.

     o    Cost of in-house administrative services  (manage-
          ment, accounting, billing,  payroll,  revenue col-
          lection,  etc.).

     o    Excessive power  consumption/excessive utility
          charges.

     o    Excessive use of chemicals/failure to consider
          use  of less expensive alternative chemicals.

     o    Excessive equipment  repair  and  replacement caused
          by inadequate routine maintenance.

     o    Cost of outside  services  (professional services,
          treatment and disposal fees,  etc.).

     o    Cost of miscellaneous expenses  (rent, miscellane-
          ous  supplies, vehicle maintenance, etc.).

     o    Overhead  expenses (fringe benefits,  insurance,
          etc.).
    Regardless of the magnitude of operating costs, there is
usually no perception of a high-cost problem as long as operat-
ing revenues are sufficient to cover operating costs (provided
excessive user fees are not being charged).  Wastewater opera-
tions commonly rely on non-user charge revenues as well as user
charges to cover operating cost.  In some cases, a community
may simply not have sufficient service base (i.e., service area
population) to support wastewater operations without imposing
unreasonable individual user charges.  However, in many cases,
excessive user charges can be reduced to reasonable limits by
taking advantage of supplemental revenue generating capacity
such as selling waste byproducts, staff service (e.g., lab
analysis).  Factors affecting the revenue capacity of a
wastewater operation are listed below.
                               1-6

-------
    FACTORS CONTRIBUTING TO INSUFFICIENT REVENUE CAPACITY

    o     Inadequate  user  charge  revenue  base  related to
          size  of service population  and  individual user's
          ability to  pay.

    o     Refusal  of  users to connect.

    o     Inequitable user charge  system (e.g., not  charging
          non-residential users their  fair share).

    o     Excessive   accounts  receivable  (delinquent   user
          fees/payments).

    o     Reliance on  user  charge revenues, alone  without
          considering opportunities to generate supplemental
          income.

    o     Insufficient  budgeting   resulting  in underestima-
          tion of revenue requirements.

    o     Failure  to  take advantage of investment opportun-
          ities.

    o     Diversion  of revenues  to pay for  other  services
          (e.g.,  water, road repair).
    It can be  seen  that  in order to deal with  the problem of a
high-cost  wastewater operation,  it is  important  to understand
the various cost  components  involved,  and the numerous contrib-
uting  factors  that  can cause  inefficient operations and exces-
sive costs.  Once these  factors  have been identified, the proc-
ess of remedying  a  high-cost problem is relatively  straightfor-
ward.
                               1-7

-------
 PURPOSE OF THIS GUIDEBOOK

     The information provided in this handbook focuses on
 reducing operating costs  and  maximizing revenue capacity  since
 these  offer  the  greatest  practical  potential  for  mitigating
 high-cost  impacts  for  communities  with   existing  wastewater
 facilities.  Specific  guidance  pertaining  to the  evaluation  of
 project costs during the  facilities planning stage is given  in
 EPA's   construction    grants    guidelines    document  CG-85.1
 Further  guidance  is  provided  by  the  EPA  Report  entitled
 "Planning   Wastewater    Management   Facilities    for    Small
 Communities.2  it  is  also  suggested  that  a value  engineering
 analysis be  conducted  during  the design phase of  a project  in
 order  to   identify  possible  cost   saving  design  modifications
 that might be  implemented before proceeding with  construction.
 Guidance on  conducting value  engineering  studies  is  given  in
 EPA's "Value  Engineering for Wastewater  Treatment Works."3

     The second  part of this handbook presents a  methodology for
 conducting a  cost  reduction and self-help assessment.  This  is
 intended to show how a community should go about evaluating its
 own  wastewater  operation  to identify cost saving  opportunities
 which might be  implemented.  It  is  important  that the reader
 realize that  in order  for such  an  assessment to be  successful,
 it must be custom-tailored  to  suit  the  particular needs of the
 situation  in  question.   It is  recognized  that  a  complete and
 comprehensive analysis is  not  always appropriate  and,  in many
 cases,  simply  cannot be  afforded.   The person  conducting the
 assessment  must  concentrate   on   those  items  which    offer
 significant  cost-saving  potential, and for  which  cost-saving
 measures  can  be practically implemented  with reasonable invest-
 ments of time and  money.   The  purpose of the  methodology
 presented  in  Part II  is to  help identify those areas where the
 greatest cost-saving  potential exists.
^Construction Grants 1985  (CG-85), Municipal Wastewater Treat-
 ment; Section 7.3, Demonstration of Financial Capability-and
 Appendix K, Financial and Management Capability Information
 Sheet, EPA 430/9-84-004,  U.S. EPA, July 1984.
^Planning Wastewater Management Facilities for Small Communi-
 ties, EPA-600/8-80-030, U.S. EPA, August 1980.
•tyalue Engineering for Wastewater Treatment Works, EPA 430/9-
 84-009, U.S. EPA, September 1984.
                               1-8

-------
    The  third  and final part  of the handbook presents specific
guidelines pertaining to different methods of reducing operating
costs  and  improving revenue  capacity.   These  guidelines  are
presented  in  the  form  of  cost reduction  options,  which  are
intended   to  illustrate   the  use  of   specific  cost-saving
techniques,  as well  as  define the broad  range  of approaches to
reducing  the  financial  impact  of wastewater  operations.   The
intent is  not  to  provide an all  inclusive  list of options,  but
rather to  stimulate cost-saving ideas  on the  part  of facility
operators  and  wastewater system  managers which  suit  their  own
particular   situations.     Specific   references   are   cited
throughout   the   handbook   to   provide   further   sources   of
information  pertaining  to  the  various methods  and techniques
discussed.

    The  handbook  is  meant  to  serve  as an  initial  reference on
the subject of reducing the cost of operating wastewater facili-
ties.  The reader  must  rely on  his  own knowledge and judgment,
and that of  his staff and  outside consultants in applying these
guidelines to  develop  a  workable plan suiting  his particular
situation.   The   reader   is   encouraged  to   seek  technical
assistance   and   advice   from  the   appropriate   state   water
pollution control  agency and EPA regional  office.
                               1-9

-------
                       PART II:   METHODOLOGY

              CONDUCTING A COST  REDUCTION  ASSESSMENT
 BASIC OBJECTIVE

     Every community  will  have  its own  specific  reasons  for
 conducting  a  cost  reduction assessment.   However, most  will
 have the same  basic  objective:   to determine  what  can be done
 to   improve  their  financial  capability  to operate   a  public
 wastewater  system without placing  an  undue  burden on  users  and
 taxpayers.     This   usually   involves   reducing    operating
 expenditures  and  maximizing revenues.   The specific  means  of
 accomplishing this will  vary from one community to another.

     It  is important  to  note that the only effective solution to
 a high-cost problem  1s  one that can be  implemented.  Therefore,
 the   evaluation  of   options  and   the   development  of a  cost
 reduction program must  consider the  institutional  limitations
 and   financial   capability  of  the  community  in  determining
 whether  or not  a  proposed measure is  Implementable.   For  the
 same  reason,   each  community's   approach   to  conducting _an
 assessment  will  differ  in  terms of the range  of alternatives
 considered and the depth of  the analysis.

     Although  it would be  desirable to  conduct a  complete  and
 comprehensive  investigation  of  all  possible  options in  all
 cases,  it must  be realized  that many  small  communities simply
 do  not have  the resources  to  undertake  such   an  effort.    The
 basic elements  in  a  complete assessment are  depicted  in Figure
 II-l.  Obviously the  scope  of such  an effort can be very broad,
 touching  on all  aspects  of  wastewater  facilities  operation  and
 program  management.   For  communities  with  limited staff  and
 financial resources,  it  may  be  more productive to  concentrate
on  certain  functional areas (e.g., energy  requirements,   staff
utilization, and purchasing)  which  are  suspected of being major
contributing factors to a high-cost  problem.
                               2-1

-------
                  Phase)
            Preliminary Assessment
     Phase II
Functional Evaluation
                                              Facility Operation!
                                                • Facility Design
                                                • Process Control
                                                • Energy Requirements
                                                • Chemical Use
                                                • Maintenance Practices
                                                . Equipment Reliability
                                                • Discharge Requirements
                                              Program Management
                                                . Staff Utilization
                                                • Financing of Debt
                                                • User Charge Revenues
                                                • Other Revenue Sources
                                                . Cash Management
                                              Support Services
                                                 • Personnel
                                                 • Accounting
                                                 • Purchasing
                                                 • Outside Services
       Phase III
Overall Program Evaluation
      Phase IV
 Alternative Solutions.
Recommendations, and
 Implementation Plan
                                                                                                   Plan
    • BaMd hi part on • diagram found m Compahmnt Ottgnottic fvtlutVon ml Salfcttd Ui
                                                                           I (EPA 430/9-12-OOJL U.S EPA. Frtwaiy 19M.
Figure  II-l.    Basic  Elements  of  a  Cost  Reduction  Assessment,
                                           2-2

-------
 METHODOLOGY

     When  conducting  a  cost  assessment,  a  standard  procedure
 should  be  followed whether  a community  intends  to  prepare  a
 complete comprehensive analysis or elects to limit  the  analysis
 to certain functional  areas.   The  five  basic  steps  to  this
 procedure are as follows:

     o    Step 1:  Identify High Cost  Areas  (Line  Items)

     o    Step 2:  Itemize  High Cost Components  (Cost Centers)

     o    Step 3:  Determine Cost Reduction Opportunities

     o    Step  4:   Develop   and  Evaluate   Alternative  Cost
          Reduction Programs

     o    Step 5:   Formulate an Implementation Plan

     The  relationship of these steps to the four  phases  depicted
 in Figure II-l is  shown in Figure II-2.   General guidelines on
 how to conduct a  cost assessment are  presented  below.

 Step 1:   Identify High  Cost Areas

     The  logical  place  to   start  the  search  for  cost reduction
 opportunities  is  to identify  specific high-cost items  associated
 with  wastewater   facility  operations.   The   proper  way  of
 identifying  these  high-cost  items   is to  examine  wastewater
 utility  expenditures  of  previous years  and  note  items  that
 appear  to  be  excessive.    These   cost items  would  be  prime
 candidates for  cost reduction.

     It  is  important  for  the  utility  manager  to  use  accurate
 cost  data  in  making the determination  of high-cost items.   The
 initial  identification  of high-cost   areas  will  generally  be
 based on  existing budget information  and  records  of expenditure
 accounts.   The most common major  line items used  in budgeting
 wastewater  operations  include  LABOR,  UTILITIES,  MATERIALS  and
 SUPPLIES,  CONTRACTUAL SERVICES, MISCELLANEOUS EXPENSES, CAPITAL
 OUTLAYS,  and  DEBT  SERVICE.   These   major  line  items  can  be
 further  subdivided as   shown  in Table  II-l.  It  is recommended
that  operating   costs  be  itemized   to  the  greatest  extent
possible  in order to identify the  specific  sources of high-cost
problems^
                               2-3

-------
Phase 1
Preliminary
Assessment

Step 1.
Identify High-
Cost Areas



Phase II
Functional
Evaluation



Step 2.
Itemize High-
Cost Components

— ^
Step 3.
Evaluate
Options



Phase III
Overall
Program
Evaluation
Step 4.
^ Develop and
Evaluate Alternative
Programs



Phase IV

Alternative Solutions.
Recommendations, and
Implementation Plan
Step 5.
r Formulate
Implementation
Plan


Figure II-2.  Steps In Conducting a Cost Assessment,
                         2-4

-------
                   (LINE ITEMS)
 Labor (including Fringe Benefits)

     o    Administrative
     o    Operations
     o    Maintenance
     o    Support
     o    Contingency (overtime/part-time help,  etc.)

 Utilities

     o    Electricity
     o    Fuel  Oil/Natural  Gas
     o    Water

 Materials and  Supplies

     o    Chemicals
     o    Maintenance and Repairs
     o    Laboratory Supplies
     o    General  (tools, lubricants,  protective clothing, etc.)

 Contractual  Services

     o    Legal,  Accounting, Revenue Collection, Engineering,
          etc.
     o    Sludge  Disposal
     o    Treatment/Disposal Charges
     o    Service Contracts
     o    Contract Operations
     o    Laboratory Testing

Miscellaneous  Expenses

     o    Office  Expenses (rent, utilities, phone, postage,
          supplies,  etc.)
     o    Building and Landscape Maintenance
     o    Vehicle Maintenance
     o    Motor Fuel
     o     Insurance
     o     Training and Conferences
     o     Equipment  Rental

Capital Outlays

    o     Process Equipment Replacement
    o     Vehicles/Construction Equipment
    o     Plant Expansion/Upgrading
    o     Collection System Expansion
    o    Major System Repairs
    o    Special  Studies

Debt Service

    o    Bond Principal  and Interest
    o    Short-term Debt
    o    Automotive Loans
    o    Mortgage Payments
    o    Sinking  Fund Contributions
                               2-5

-------
     It is  important  that  all  appropriate  direct  and  indirect
 costs  associated with  facility operations  are  included in  the
 tabulation  of  expenses.   This tabulation  can  be  recorded  by
 filling in  the  first  column ("total line  item cost")  in  Exhibit
 1  (see Appendix).  Once  these  costs have been compiled, review
 the  data  and  note those cost items which exhibit one  or more  of
 the  following characteristics,  as  candidates for cost  reduction:

     1.    Items  which  constitute a  significant portion  of the op-
          erating  budget —  Look  for cost items that  constitute
          20 percent or  more of  the total  operating cost  (not  in-
          cluding  debt service cost). Also note when debt service
          accounts for more  that  40 percent of  the  total oper-
          ating  budget.

     2.    Expenditures  over budget  —  Compare  annual   budgets
          againstactualexpenditures   for  .previous  years   to
          identify items that have consistently  exceeded budget
          allocations.

     3.    Items  which  appear to be excessive in  relation to ex-
          perience at  other  comparable  facilities —  Review lit-
          erature  on   operating  costs for similar-si zed  facili-
          ties or  discuss operating costs  with other communities,
          state  agency  personnel assigned to sewage operations,
          or professional consultants.

     4.    Items  which  have  increased in  cost over the past  few
         years  — A  simple calculation of  average  annualcost
          increases over the past  five  years by line  item can  be
         used   to    identify    costs    that   have   increased
         dramatically compared  to  other budget items.

     5.    Items  which  are subject  to  significant cost increases
         in the future  —  Look for cost  items  that  are likely
         to increase  due  to rate  changes (e.g.,  electric rates)
         or pending contract agreements  (e.g.,  labor  union con-
         tracts,  disposal service  contracts).

    After   completing  this  exercise,  a   prioritization    of
potential high-cost problem areas  can"be  done.  A  general  rule.
in prioritizing problem areas  is  to place  the most  emphasis  on
the  larger  cost items where the absolute cost  saving potential
is usually  the greatest.    Remember the  objective is to lower
the  overall cost  of operating the  wastewater system,  so select
cost   items  where   even   modest   reductions   (i.e.,  percent
reduction in that cost  item) can  result in significant absolute
cost savings in terms  of the overall operating budget.
                               2-6

-------
    Generally Tabor and utilities will be the largest line Items
in a wastewater operations budget, typically accounting for 50
to 75 percent of total operating expenditures, excluding debt
service.  Therefore, there are usually many opportunities for
cutting costs in these areas.  However, it is important to
search for potential high-cost items in all of the cost
categories listed in Table II'-l.  Very often, significant cost
savings can be achieved in what might be considered minor line
items on the budget.

Step 2:  Itemize High Cost Components

    The next step in a cost reduction evaluation is to determine
why costs are as high as they are for specific items.  Some of
the sources of high-cost problems may be obvious; however, the
following procedure should be used in order to compile a valid
data base and rationale for evaluating cost reduction options.

    Once expenditures have been broken down into line items (in
Step 1), the individual line item costs need to be allocated to -
the different system components.  Typical wastewater system
components include the TREATMENT PLANT, PUMP STATIONS,
INTERCEPTORS AND FORCE MAINS, and COLLECTION SEWERS.  A
separate general administrative and support services component
should be included to account for costs that apply to overall
system operation.  If alternative collection systems exist,
other components to be considered might include GRINDER PUMP
UNITS, SEPTIC TANK/EFFLUENT PUMP UNITS, VACUUM VALVES, and
VACUUM STATIONS.  In order to pinpoint specific sources of high
costs, these components can be further subdivided as
appropriate.

    Exhibit 1 (see Appendix) is provided to facilitate the
itemization and allocation of operating costs according to line
item and system component.  Exhibit 2 presents a format for
distributing selected line item costs (i.e., those where high
costs are suspected) among individual system subcomponents or
activities.  These exhibits can be used to tabulate actual
expenditures, or they may be used as matrices to identify where
the major expenditures are occurring, without quantifying the
actual cost for each item.  Both of these exhibits can and
should be modified to suit a particular wastewater operation.
For example, the line item terms used and the assignment of
different costs to these line items should be consistent with
the system of accounting presently in use.
                               2-7

-------
     Detailed  cost  information  and  a  thorough understanding of
 wastewater system  operations  is  necessary  to make an accurate
 assessment of the  causes  of high operating costs.   In order to
 fully appreciate the  impact of different cost  items, it  is
 important  to  identify any patterns or  trends (e.g., seasonal
 variances) affecting  expenditure levels.   Therefore, cost data
 should be  available on a  monthly basis, disaggregated by
 wastewater operation  component,  if possible (i.e.,  treatment
 plant, collection  system, etc.).

     Assembling monthly expenditures  of plant operations can be
 a  relatively  simple task, basically  involving  just  the
 recording  of  monthly  bills and disbursements.  Energy costs,
 for  example,  can be easily tabulated on a  monthly basis by
 merely listing the monthly utility bills.  For other cost items
 (for example,  chemicals which may  be purchased on a bulk basis)
 determining monthly costs necessitates the calculation of
 monthly usage estimates for each unit  process.  This can be a
 difficult  and  time-consuming task; however, it will be useful
 in pinpointing instances  of excessive  usage.

     The information derived through  this compilation of monthly
 costs  is used  to further  refine the  identification of specific
 operational activities  which are causing operating costs to be
 greater than  they  should  be.

     Since  most small wastewater utilities do not record their
 operating  costs in the  format just described,  it may be
 necessary  for  the  utility manager  or plant operator to conduct
 a detailed facility audit  to disaggregate operating costs by
 system component on a monthly basis.  The audit itself can help
 utility managers and operators better understand the reasons
 for  high-cost  problems, since it forces them to critically
 examine all aspects of  facility design, operation, and
 management.

     Revenue data must also  be reviewed in order to identify
 potential   revenue insufficiencies, and to determine if all
appropriate revenue generating opportunities are being
 realized.   The various  sources of  revenue generally available
to a public wastewater utility can be divided  into user charge
 revenues and non-user charge revenues as shown in Table II-2.
 In compiling.revenue data,  it is again useful   to show how
 revenue income varies from month to month.  Exhibit 3 can be
used to tabulate the pertinent revenue information.
                               2-8

-------
               TABLE  II-2.  TYPICAL REVENUE SOURCES
 User Charge Revenues

     Service Fees*

     o    Residential
     o    Commercial/Institutional
     o    Industrial
     o    Suburban (outside municipal  or service  area  limits)

     Ad Valorem Taxes

     o    General  Property Taxes
     o    Improvement Assessments (taxing districts)

 Non-User Charge Revenues

     Special  Assessments

     o    Connection Fees
     o    Development Fees
     o    Sewer Availability Charges

     Special  Service.Fees

     o    Septage  Treatment
     o    Charges  for Treating Wastes  from Other  Service Areas
     o    Personal  Services  Contracted  to Others
     o    Service  Call  Charges

     Sale of  Byproducts

     o    Eff1uent
     o    Sludge/Sludge  Products
     o    Digester  Gas
     o    Nursery Stock,  Crops

     Sale of  Assets

     o    Used  Equipment,  Vehicles, etc.
     o    Land, Buildings, etc.

     Rent/Lease Income

     o     Land  for Agricultural Use
     o     Buildings, Unused Storage Space
     o     Construction Equipment, Portable Generators, Pumps,
          etc.

     Interest on Investments

    o     Construction/Reserve Funds
    o     Operating Accounts
Including surcharges for extraordinary use or waste strength
 and forfeited user discounts.

                               2-9

-------
     In  summary,  the  reasons  for  high operating costs can be
 determined  by  reviewing operational procedures, facility
 design,  and  cost data  by wastewater utility function for each
 of  the  potential high-cost problem areas identified in the
 preliminary assessment phase.  This will, in many instances,
 necessitate  the  completion of an audit, since the financial
 data maintained  by small wastewater utilities is typically not
 sufficient  to  isolate  the specific sources of high-cost
 problems.

 Step 3:  Determine Cost Reduction Opportunities

    Once the data base for cost  reduction has been prepared as
 a result of  the  previous activity, alternative cost reduction
 measures can be  identified and analyzed.  The analysis of cost
 reduction measures can be done by members of the audit team;
 that is, utility managers, facility personnel, or outside
 consultants or specialists.  This decision should be made by
 the utility manager.

    Depending on the comprehensiveness of the data base prepared
 as a result of the previous  steps in the assessment, a
 follow-up facility evaluation may be necessary.  Once it is
 determined that  a data base of sufficient detail  exists, a set
 of options and alternative solutions for each problem area can
 be developed.  The general format provided in Table II-3 might
 be used to list  these options.  The alternatives to be
 considered should include realistic solutions that will
 generate desired cost savings and have a reasonable chance of
 implementation.  The evaluator should, nevertheless, consider a
 broad spectrum of possible solutions, so that a large number of
 alternative solutions can be considered.

    As an aid in identifying possible cost reduction solutions,
 a list of representative options is provided in Exhibit 4.
 Table II-4 illustrates in matrix form which options might be
 considered to reduce costs or augment revenues in different line
 item cost categories.

Step 4:   Develop and Evaluate Alternative Cost Reduction
 Programs

    In order to realistically evaluate the effectiveness of
proposed cost reduction measures, workable program alternatives
need to  be developed.  This involves considering the various
individual  options  proposed collectively, so that the
system-wide implications of implementing these actions (e.g.,  .
 impact on other treatment processes, impact on total  manpower
requirements) can be assessed.  One purpose in doing this
                              2-10

-------
     TABLE  II-3.   EXAMPLE  FORMAT:   LISTING OF HIGH-COST  ITEMS
                 AND APPLICABLE COST REDUCTION OPTIONS
                 Line Item                        Possible
Subcomponent    cost element    Reasons for      corrective
or activity       affected       high cost         actions
                              2-11

-------
ro
 i
ro
	 ; 	 f
P"' 1
OPTIONS
STAFFING
1. Reduce Labor Requirements
2. Share Staff
3. Minimize Overtime
4. Contract Staff to Others
FACILITY OPERATIONS
5. Energy Conservation
6, Alternate Energy Sources
7. Minimize Demand and Penalty Charges
B. Chemical Use Monitoring
9. Alternate Chemicals
10. In-plant Water Conservation
11. On-site Water Supply
12. Preventive Maintenance
13. Service Contracts
ADMINISTRATION AND OVERHEAD
14. Eliminate Administrative Positions
IS. Outside Administrative Support
16. Competitive Bidding
17. Low Maintenance Building and Grounds
CAPITAL EXPENDITURES
18. Capital Improvement Planning
19. Creative Financing
BUDGET MANAGEMENT
20. Enterprise Accounting
21. Expand Service Base
22. Cash Management
I**
££Li





*














I



•

i
M
*•• !
UMM



























•ttt
•*•»



























PMI



























•MX










'
















CM
Mk



























HftU
IMtMCt
M0
MIMM



























i
CM
kMMI
••Men


























I—..—
HMMl

















i.. 	









Cwu
(MX,



























1
0>M i
|M»

j
1
























MMPNM*

























i
i
                                                                                                                                                          DO
                                                                                                                                                          §
                                                                                                                                                          TO
                                                                                                                                                          m
                                                                                                                                                          o
                                                                                                                                                          •o
                                                                                                                                                          o


                                                                                                                                                           I
                                                                                                                                                           o
                                                                                                                                                           o
                                                                                                                                                           30
                                                                                                                                                           i—i

                                                                                                                                                           X

-------
 Is to exactly define what is involved in carrying out a  given
 plan (i.e., specific staff changes, organizational  changes,
 changes in operating procedures, etc.),  what it will  cost  (i.e.,
 additional operating costs to be incurred,  amount of  capital
 investment required, etc.),  and what is  to  be gained  (i.e.,
 amount of cost savings over  given period of time).

     A format similar to that shown in Table II-5 might be  used
 to list the various elements of a proposed  program in a  fashion
 that allows a summation of manpower requirements and  costs for
 individual program elements  so that the  net cost of
 implementing the program can be determined.  This also allows a
 determination to be made of  the net increase or decrease in
 staff that would be required.

     The alternative cost reduction programs considered should
 be designed so that they represent different levels of
 implementation cost.  Generally, program alternatives will  fall
 into one of two categories:

     1.    Those requiring little or no cost  to  implement. For
          example, changes to operation and  maintenance
          procedures.

     2.    Those requiring a significant capital  outlay to imple-
          ment.  For example, design modifications or
          replacement of equipment.

     Solutions involving simple management decisions which  can
 reduce  a high-cost situation should be considered for immediate
 implementation.   More comprehensive solutions,  which  require
 time and money to implement, should be carefully evaluated to
 determine if the benefits (i.e.,  cost savings)  justify the
 investment required.  An assessment  of implementation
 time-frame,  that is short-term (over the  next year) or
 long-term (1  to  5 years)  should be  part of  this  evaluation.

     Each alternative under evaluation should be  accompanied by
 a  listing  of advantages and  disadvantages (see  Table  II-5).
 This  information will  help in  selecting the most appropriate
 implementation  strategy.

    An  engineering and  economic analysis  of each alternative
 should  be  performed  to  determine  the  cost of its implementation
 and the  associated  benefits.   The level of  detail and  amount of
 data  required  for this  analysis depends on  the  types  of correc-
 tive  measures  being  considered, and  the complexity  involved in
 quantifying expected  cost  savings.   For most alternatives under
 evaluation, a  simple  payback analysis  technique  can be used to
 determine  the  relative  attractiveness of  investing  in the
 implementation of various  cost  reduction  measures.  The output
of this  calculation  is  the number of years  required to recover

                               2-13

-------
                 TABLE II-5.  DESCRIPTION OF PROGRAM ELEMENTS FOR A GIVEN COST  REDUCTION  ALTERNATIVE
                                                                                            Impact
                                                         Increase/  Increase/   Increase/   on  other
Description                                              decrease   decrease   decrease   processes
   of        Affected    Specific  Increase/                in         in          in          or          Other
  program    operation   actions   decrease   Capital       labor     energy      other    treatment     advantages/
  element    activities  required  in staff  investment    cost       cost     expenses   efficiency  disadvantages
                                                        2-14

-------
 the Initial  capital  investment.   The  general  rule of thumb in
 private enterprise is that  the payback  period should be less
 than 5 years,  preferably less than  2  years, to justify
 significant  investments  of  capital.   However, the relatively
 long service life of a typical wastewater  facility may justify
 longer payback periods.   Examples of  typical  payback periods
 for different  types  of cost cutting measures  that might apply
 to a wastewater operation are presented  in Table II-6.

     For major  capital-intensive  alternatives, a more detailed
 life-cycle cost (i.e., present worth) analysis should be per-
 formed.  This  type of analysis considers the  initial capital
 investment,  the useful life of the  equipment  involved, the cost
 to operate and maintain  the equipment,  and the annual operating
 cost savings over the period of  useful  life.  Table II-7 pre-
 sents  a format which  can be used in calculating life-cycle sav-
 ings and  simple payback  period.   A  very thorough discussion of
 life-cycle and simple payback cost  analysis methods is provided
 in the Life  Cycle Cost Manual prepared  by the National Bureau
 of Standards.1

     The final  task in the evaluation  phase .involves the ranking
 of program alternatives  according to  cost-effectiveness and
 implementability.  Typically, ranking criteria include
 engineering  feasibility,  cost, legal/institutional impacts,
 financial capability, acceptability,  and environmental impact
 (i.e.,  as it may affect  compliance  standards).  The information
 generated in filling  out Tables  II-5 and II-7 should provide an
 adequate basis  for ranking  program alternatives.

    .In  comparing alternatives, the distinction between low-cost
 implementation  alternatives  (i.e., involving little or no
 capital outlay,  and having  immediate  short-term payback) and
^Life Cycle Cost Manual for the Federal Energy Management Pro-
 gram, prepared for the U.S. Department of Energy by the U.S.
 Department of Commerce, National Bureau of Standards, NBS Hand-
 book 135, December 1980.
                               2-15

-------
                TABLE II-6.  TYPICAL SIMPLE  PAYBACK PERIODS1
                  Cost Cutting Measure                     Payback period

Preferential operation of most efficient pumps              Immediate
Electrical demand scheduling                                Immediate
Hydraulic adjustments (when possible)                       Immediate
Maintenance of electrical contact surfaces                  Immediate
Waste heat recovery system                                  0-15 years
Boiler maintenance program                                  5 months
Correction of electrical power factor                       8 months
Rigorous program of pump maintenance                        1-2 years
Installation of night lighting system                       1-2 years
Use of "fine-bubble" aeration diffusers                     1-5 years
Recovery and use of methane gas                             1.-  5 years
Replacement of incandescent with fluorescent lights         2-4 years
Replacement of standard motors with high efficiency motors  3-30 years
Installation of high efficiency variable speed drives       5-15 years

Energy Conservation in Municipal Water and Wastewater Treatment Sys-
 tems, seminar sponsored by Pennsylvania Governor's Energy Council, pre-
 pared and presented by Ayres, Lewis, Morris and May, Inc., 1983.
                                   2-16

-------
                         FABLE  II-7.  LIFE-CYCLE COST AND SIMPLE PAYBACK ANALYSIS
                          Estimated
                         net savings                Salvage    Replacement       Net2
                          1n annual    Capital1    value of      cost of       Life Cycle     Simple3
                          operating   Investment    capital       capital       Cost  Savings    payback
Cost saving measure         cost       required   Improvement  Improvement  (present worth)   period
iFrom Table II-5.

            Present worth of     Present worth of   +  Present worth of     Present  worth  of
2NLCCS   = Annual Net Savings " Capital  Investment       Salvage Value  •",  Replacement  Cost
  (Present worth factor Is a function of useful life period, usually 20 to 30 years, and discount  rate)
  (Inflation Is not Included except for cost Hems subject to unusual  escalation  such as energy  costs).
3SPP
Capital  Investment
         Annual Net Savings - Annuanzed Replacement Costs
                                                  2-17

-------
 capital-Intensive alternatives  should  be  kept  in mind. Most
 utility managers  and  facility operators will be quick to accept
 cost cutting measures involving no  significant up-front
 investment.   However, in  order  to achieve maximum long-term
 cost saving  benefits, certain capital  outlays  will usually be
 required.  The  implementation of a  few low budget cost cutting
 measures does not in  itself  constitute a  valid, complete cost
 reduction  program effort,  but should only be considered the
 initial  phase in  carrying  out an effective long-term program.
 Therefore, the  more capital-intensive  options  should not
 necessarily  be  rejected on the  basis of high cost, if they
 appear  to  be cost-effective  over the long term.  If funds
 cannot  be  made  available  for such investments  at the present
 time, they might  be considered  in later phases of program
 implementation  with proper capital  improvements planning.

 Step 5.  Formulate an  Implementation Plan

     The  implementation plan  defines a  strategy for setting a
 course of  action  to place  the selected cost reduction program
 into operation.   The  implementation plan is developed in the
 following  manner:

     1.   Select preferred cost  reduction program based on the
         alternatives evaluated.

     2.   Formulate a  plan of action which identifies individ-
         uals,  departments,  agencies,  etc. responsible for
         implementation; projects an implementation schedule
         and  cost  estimate and  outlines the financial
         arrangements for  implementing the preferred solutions.

     3.   Develop a mechanism for ongoing performance
         evaluations.

    The alternatives  evaluation step described previously exam-
ined sets of  alternative cost reduction measures aimed at alle-
viating high-cost problems.  The evaluation culminated in a
ranking of alternatives, considering advantages, disadvantages,
cost, and economic cost-effectiveness.

    The results of this analysis should be reviewed with the
wastewater facility personnel and local officials in selecting
a preferred solution.   Part of  this final  review process should
be an examination of legal, institutional, and financial con-
straints that may affect implementation (e.g., limits of au-
thority provided by operating charter, provisions of service
agreements).
                               2-18

-------
     Final agreement on the desired solutions will provide the
basis  for developing an  Implementation plan; that Is, a plan of
action  to serve as a guide for placing the cost reduction meas-
ures Into operation.  The Implementation plan should, at a
minimum, Indicate the following:

     1.   "Who" will be responsible for Implementing the cost
         reduction measures.

     2.   "When" will the measures be put Into operation.

     3.   "How" will the cost reduction measures be carried out.

    4.   "How much" will It cost to Implement.

    The plan should, therefore, Identify Individuals and
responsibilities, establish a timetable for certain actions,
identify funding requirements, allocate resources, and define
the specific steps that must be taken to put these measures
into practice.  The implementation of a program should be
planned and scheduled to minimize the impact on facility
operations.

    Performance objectives should be established in order to
measure the success of specific cost reduction measures', and
also to monitor overall  facility operations.  These performance
targets should be evaluated on a periodic basis through a moni-
toring program to track operating costs and facility perform-
ance.  This monitoring and performance evaluation effort will
provide the means to assess whether the cost reduction measure
is meeting expectations, and whether other (perhaps more dras-
tic) measures should be considered to reduce operating costs.
                              2-19

-------
 SUMMARY

     The guidelines presented  in Part  II  are  intended  to  provide
 a general  procedure to be followed  in conducting a  cost
 reduction  assessment.   The methodology presented attempts to
 systematically itemize the specific sources  of  high-cost
 problems,  and then develop cost cutting  solutions for the key
 high-cost  items.

     A list of possible cost reduction options to be considered
 is provided in Exhibit 4; however,  the specific details  of a
 proposed cost cutting  measure  will  be determined by the  design
 and operating characteristics  of the  facility or piece of
 equipment  in question.  This  requires an  intimate knowledge of
 a particular system's  design  and operation.  Therefore,  it is
 strongly recommended that the  assessment  be  conducted  as a team
 effort involving  personnel  directly responsible for different
 aspects of system operations  (i.e., plant operator, maintenance
 foreman, utility  manager, municipal manager, bookkeeper,
 consultant, etc.}.  This will  assure  that the cost  saving
 proposals  developed are not only effective,  but also  practical
 and implementable.

     Carrying out  this  type of assessment also serves  as  a means
 of evaluating overall  facility performance,  and can be used to
 address  other problems not directly related  to high cost (e.g.,
 non-compliance with permit requirements).  If, in fact,  a
 facility is experiencing serious operational performance
 problems,  an expanded  diagnostic evaluation may be  warranted.
 Specific guidance  on conducting "comprehensive diagnostic
 evaluations" and  "composite correction programs" is available
 from U.S.  EPA.1*2   If  such  an  evaluation is  to be performed,
 much  can be gained by  considering cost reduction opportunities
 at  the  same time  as part  of the  analysis effort.  It  is
 important  in  conducting any assessment of a wastewater facility
 operation  to  consider  the  technical as well as the  economic
 factors  involved  in optimizing  system operation.
1Comprehensive Diagnostic Evaluation and Selected Management
 Issues, U.S. EPA-OWPO, EPA 430/9-82-003, February 1982.
^Improving POTW Performance Using the Composite Correction
 Program Approach, U.S. EPA-CERI, EPA 625/6-84-008, October
 1984.
                               2-20

-------
               PART III:   OPTIONS FOR  REDUCING  COSTS
 OVERVIEW

     As stated  in the  Introduction,  the cost  reduction options
 presented here do not represent  an  all-inclusive  list of
 cost-saving techniques.  However,  every attempt  has  been made to
 identify a broad and  diverse  range  of alternatives  for reducing
 operating costs and maximizing revenues. This is  intended to
 help plant managers and  operators identify cost reduction
 opportunities  that might be applicable to their particular
 situation.

     The  options discussed  here relate to the various high cost
 areas  identified in Step 1 of the Cost Reduction  Methodology
 (labor,  energy, chemicals, etc.)  as well as  other factors
 affecting the  overall  efficiency of a wastewater  operation
 (e.g.  excessive equipment  breakdown, poor plant performance,
 insufficient revenues, etc.). Table III-l lists possible
-options  that might be effective  in  reducing  costs and improving
 operational efficiency in  several different  areas.  Specific
 cost reduction  opportunities  are addressed in the following
 discussion.

 REDUCING LABOR  COSTS

     Labor cost  is  a direct function of staff size and staff
 composition. Therefore,  the key  to  reducing  labor costs is to
 provide  the required  range of operating skills with the fewest
 number of staff possible, without compromising plant
 performance or  operator  safety. Some of the methods that can be
 applied  to  accomplish  this include:

    o     Productivity  Incentives
    o     Flexible  Scheduling
    o     Contracting Staff to Others
    o     Private  Contract Services
    o     Public Agency Contract Services
    o     Cooperative Agreements
    o     Automated Process Monitoring

    Further information  on how these techniques might be
applied to reduce  labor  cost  is presented below.
                               3-1

-------
                           Table III-l


             Summary of Cost Reduction Opportunities
                  Cost Reduction
  Problem         Opportunities             Direct Benefit
High labor  o Productivity incentives  o Reduces total staff
costs                                    requirements

            o Flexible scheduling      o Improves staff
                                         utilization/minimizes
                                         overtime

            o Contracting staff        o Generates additional
               to others                 revenue/offsets labor
                                         costs

            o Private contract         o Reduces staff require-
              services                   ments/controls costs

            o Public agency contract   o Reduces staff require-
              services                   ments

            o Cooperative agreements   o Serves mutual staff
                                         needs

            o Automated process        o Eliminates extra shifts
              monitoring

High energy o Energy conservation      o Minimizes energy
costs                                    consumption given
                                         existing equipment and
                                         facilities

            o Load management          o Minimizes demand
                                         charges

            o Power factor adjustment  o Minimizes power factor
                                         penalty

            o Time of use scheduling   o Takes advantage of
                                         lower off-peak rates
                               3-2

-------
                            Table  III-1
                            (continued)
   Problem
      Cost Reduction
      Opportunities
     Direct Benefit
 High  energy o  Rate negotiation
 costs
 (continued) o  Alternative  energy
               sources.

            o  Fuel conversion
            o Energy  recovery
            o Process and equipment
              modification
High
chemical
costs
o Chemical use monitoring
            o Process modifications
            o Alternative chemicals
            o Competitive bid
              purchasing
Excessive   o In-plant water
water use     conservation

            o Effluent reuse
           .0 On-site wells
o Reduces total charges

o Lessens dependence on
  public utilities

o. Takes advantage of loir
  cost" fuel availability

o Reduces energy
  purchases

o Reduces energy consump-
  tion and demand/
  improves power factor

o Eliminates chemical
  wastage

o Reduces chemical
  requi rements

o Accomplishes equal
  treatment using less
  expensive chemicals

o Minimizes purchase
  price of a given
  product

o Reduces water con-
  sumption

o Reduces net water
  consumption

o Provides less expensive
  water supply
                               3-3

-------
                           Table III-l
                           (continued)
  Problem
Cost Reduction
Opportunities
Direct Benefit
Excessive   o Preventive maintenance
breakdowns/
high repair
costs       o Spare parts inventory
              management

            o Service contracts
            o Life cycle bidding of
              equipment purchases

Poor plant  o Process monitoring and
performance   control

            o Process and equipment
              modifications
            o Operator training
            o Performance incentives
            o Private contract
              services

            o I/I  correction programs
                     o Extends equipment
                       service life

                     o Expedites repairs/
                       minimizes down time

                     o Limits repair costs
                       to fixed service fee

                     o Shifts repair cost
                       liability to vendor

                     o Improves treatment
                       performance

                     o Improves treatment
                       performance, reduces
                       energy and labor
                       requirements

                     o Improves individual
                       operating skills

                     o Encourages operating
                       personnel to take
                       performance standards
                       more seriously

                     o Improves efficiency of
                       facility operations

                     o Minimizes peak flow
                       impacts/increases net
                       flow capacity/reduces
                       chemical  use and
                       pumping requirements
                               3-4

-------
                           Table III-l
                           (continued)
  Problem
Cost Reduction
Opportunities
Direct Benefit
Poor plant  o Water Conservation by
performance   users
(continued)
            o Flow equalization
              facilities
                     o Increases net flow
                       capacity/reduces chemi-
                       cal  use and pumping
                       requirements

                     o Improves treatment
                       performance/reduces
                       peak energy/demand
High        o Internal reorganization  o Eliminates or reduces
Adnrirrfstra-   number administrative      personnel
tive and
overhead
expenses    o Regional administrative  o Eliminates need for
              and support services       administrative and
                                         support personnel
            o Private contract
              services
            o Low maintenance building
              and landscaping features

            o Competitive bid
              purchasing

            o Competitive employee
              benefit and insurance
              packages
                     o Provides  administra-
                       tive and  support
                       functions at fixed
                       service fee

                     o Reduces maintenance
                       costs

                     o Minimizes purchase
                       prices

                     o Minimizes cost  of
                       fringe  benefits and
                       insurance
            o Cutbacks in travel, etc.  o Reduces expenses
            o Reevaluate existing
              contracts for outside
              services
                    o  Possible  cost  savings
                       by  performing  services
                       in-house  or with  other
                       contractors
                               3-5

-------
                           Table III-l
                           (continued)
  Problem
Cost Reduction
Opportunities
Direct Benefit
Unbalanced  o Enterprise
budget and    accounting
insuffi-
cient       o Aggressive revenue
revenues      collection

            o Service base expansion
            o Supplemental sources
              of income

            o Case management
High        o Creative financing
capital
improvement
costs       o Capital improvement
              planning
            o Capital  reserve funds
            o Privatization
                     o Achieves self
                       sufficiency

                     o Increases revenue
                       income

                     o Increases revenue
                       capacity

                     o Increases total  income
                     o Takes advantage of
                       investment income
                       opportunities

                     o Minimizes  long-term
                       debt service

                     o Allows municipality
                       time to make  financial
                       arrangements  for future
                       capital  projects; sets
                       clear priorities

                     o Reduces amount  of
                       capital  that  needs to
                       be  borrowed

                     o Private sector  provides
                       capital  investment
                               3-6

-------
 Productivity Incentives

     The  most obvious  incentive  that  can  be offered  to  improve
 individual  productivity  is monetary  reward (e.g., salary
 increases,  bonuses).   Time off  (e.g.,  extra  holidays,  vacation
 time)  can also  be  an  incentive  reward.   However, it may be
 difficult to apply an  explicit  formula which measures  and
 rewards  for productivity, especially in  smaller operations.
 Nonetheless, employees should be made  aware  that individual
 productivity will  be  weighed heavily in  performance reviews.
 Having staff fill  out  daily logs or  timesheets which detail
 specific tasks  performed day-to-day  may  provide useful informa-
 tion for evaluating individual  productivity.

    A  more  subtle  and  possibly  more  effective means of
 maximizing  staff productivity is to  provide a work atmosphere
 which  encourages individual contribution and development.  The
 most important  element of such  an approach is effective
 communication between  management and staff which encourages
 feedback from the  operating staff (e.g., suggestions for
 improving an operation or cutting costs).  Employees should be
 encouraged  to take pride in their work and given opportunity
 for developing  individual skills and experience (e.g., outside
 and on-the-job  training).  It is very  important to define job
 functions as broadly as possible to  avoid "pigeon-hole"
 assignments  with limited responsibility.  Ideally, each
 employee should be  exposed to all phases of a facility's
 operation.   This tends to provide the employee with a  greater
 appreciation of his individual   role  and  responsibilities, and
 also provides a cross  training  of staff which allows one
 individual  to cover for another as needed without sacrificing
 operations  efficiency.

    Individual productivity may be difficult to measure quanti-
 tatively, but it is fairly easy to tell when there is  room for
 improvement.  When  individual  productivity is high, the opera-
 tion will generally run very smoothly, even in the event of
occasional  emergencies (e.g.,  equipment breakdown, process
upset).
                               3-7

-------
 Flexible Scheduling

     Multiple work shifts  and  overtime charges  can  significantly
 increase labor costs.   In many cases, it may be possible to
 eliminate these extra  shifts  through  flexible  work scheduling.
 For example, "flex-time"  type arrangements  can be  made  to allow
 some people to come in late and  leave later.   This can  extend
 the period of time that the facility  is manned without  paying
 overtime. Another approach would be to have specifically de-
 fined overlapping shifts  (e.g.,  7 a.m. to 4 p.m. and 11 p.m. to
 8  p.m.)  which also results in at least one  person  being on duty
 for a greater portion  of  the  day, while the facility is fully
 staffed  for several  hours each day, so that certain jobs which
 require  more than one  person  (e.g., safety  backup, major
 repairs) can be done.

     Having a well  defined dally  work  schedule  for  each  staff
 member will  help maximize staff  utilization.  By scheduling
 routine  maintenance  chores (e.g., equipment lubrication, pump
 station  inspection)  so as not to  conflict with times when
 operator attention is  required for process  monitoring and
 control  (e.g.,  diurnal  peak flows) one person  can  attend to
 more  than one job function.   It  may be appropriate to have
 different schedules  for different times of  the year. For
 example,  longer  work days may be necessary  to meet the demands
 of peak  seasonal  flows for several months while shorter days
 are  in order the  rest  of  the  year.  The relaxed work schedule
 in  the off-season  compensates for the extra effort during the
 peak  flow season,  which would otherwise require overtime pay.

    Another  means  of avoiding overtime charges is  to provide
 "comp-time"  (time off  with pay)  in lieu of  overtime pay.  Under
 such  an  arrangement, the  employee is  given  one hour off at
 straight  time pay for  every hour  of overtime. This  avoids
 paying a  premium  for overtime.  The time taken off should be
 prearranged  with  supervisors  to avoid disruption of normal
operations.

    Operating  schedules might also be altered to reduce
manpower  requirements.  For example,  by converting  to a batch
treatment  process, operator attention would only be required
for the  duration of the batch  treatment.  In another example,
the manpower  required  to man  a septage or sludge receiving
facility  could be  reduced  significantly by  restricting
discharges to certain  times during the day.
                               3-8

-------
                 ILLUSTRATION - FLEXIBLE SCHEDULING
     The operators at the 1  mgd  Block Island,  Rhode  Island
 Sewage Treatment Facility adopted  an innovative  system of  staff
 scheduling to meet unique operating conditions.   Their work
 force schedule is designed  to accommodate  the dramatic
 fluctuation in diurnal  and  seasonal  sewage flows. The Island's
 summer population is nearly ten times greater than  its winter
 population.  In order to reduce overtime hours and  yet provide
 sufficient staff time at the plant to handle  routine and
 emergency maintenance procedures,  the full-time  staff (of  two
 persons)  operate on an  alternating 8-day/4-day off  schedule
 during the summer, with overlapping 2-day  periods between  two
 operators to  handle major maintenance activities- (e.g.,
 inspection of pump stations).   The extra time devoted to the
 plant operations during the summer (resulting from  on-call
 requirements  and extended work  shifts),  is  compensated by  a
 shorter workweek during the winter (off-peak) months. Paid
 overtime  is therefore eliminated through this  "comp-time"
 arrangement.   This has  helped keep salary  costs  under control
 and  has enabled the operating staff to maintain  second jobs  .
 without affecting their commitments  to the  plant and conveyance
 system operations.
    Obviously,  work  schedules must  fit the  specific needs of
the facility  in question, and also  be acceptable to the staff.
Nonetheless,  in most  cases, there is great  opportunity for
reducing labor  costs  by  simply modifying work schedules to
maximize staff  utilization.
                    m

Contracting Staff to  Others

    If an operating  staff is not fully utilized, it may be
possible to contract  out some of the staff  (on a part time
basis) to other municipalities or private interest.  This
brings in additional  revenue which  can offset labor costs, and
may possibly avoid the need to cut  staff.   It is very possible
that nearby municipal treatment plants or privately owned
treatment facilities  may be in need of a trained operator or
maintenance person, but cannot support a full-time staff.  The
feasibility of  such an arrangement  will depend on the amount of
unutilized staff 'time available and the ability to schedule
outside services so as not to conflict with an individual's
primary operation and maintenance responsibilities.
                               3-9

-------
     Another way of taking advantage  of underutilized  staff  is
 to share staff with other municipal  departments.   A formal
 arrangement can be made  where  a  certain split  of  time between
 departments is specified.  Alternatively,  each department can
 simply pay on  an hourly  basis  for the  time actually spent.

 Private Contract Services

     A wide variety of services related  to  the  operation and
 management of  wastewater facilities  can be performed  by private
 firms under contract.  These contract  services- range  from
 one-time special  studies (e.g.,  engineering reports,  financial
 audits)  and common retainer-type arrangements  to  total plant
 management (i.e.,  contract operations).  The Use  of temporary
 labor services (i.e.,  using temporary  labor service agencies)
 and  equipment  service  contracts  are  other  forms of contract
 services that  can  be provided  by the private sector.

     Contract services  can be used to supplement existing
 administrative and technical staff functions,  or  they can be
 used  to  replace these  functions  entirely.   The degree to which
 contract services  are  employed will  determine  the extent of
 staff reduction possible.   Of  course, the  benefit of  reduced
 labor costs  resulting  from staff cuts must be  weighed against
 the cost of the contract services.

     In order for contract services to be cost-effective, some
 net reduction  in operating cost  or financial liability must be
 realized  by the operating agency.  This  should take into
 account  the savings  in direct  salary costs as  well  as fringe
 benefit  costs,  insurance costs,  and miscellaneous expenses
 (e.g., staff training, work clothes, tools).   In  some cases,
 the cost  of contract services  may equal  or even exceed current
 labor  related  costs, but still be  cost-effective  if certain
 cost  liabilities are shifted from the operating agency to the
 contractor.  For example,  under  a  typical  contract operations
 agreement,  the  contractor  agrees to provide a  specific service
 (e.g., operate  a treatment  facility within  certain  performance
 limits)  for a  set  fee over a specified  period.  If the actual
 cost of maintaining the  agreed upon performance limits is
 greater  than projected (e.g.,  chemical  requirements are under-
 estimated, or  additional manpower  is needed),  the  operating
agency is not obligated  to pay those additional unexpected
costs.   It should  be noted that  the provisions for  financial
liability will   vary from one contract to another,  and  must be
mutually agreed upon by  the contractor and the operating agency.
                               3-10

-------
     The basic premise in contract services  is  that  a  given  task
 can be performed more efficiently by a  private contractor due
 to the fact that costs have to  be controlled  in order to make a
 profit.  This often  results in  improved facility  performance
 (i.e., compliance with discharge requirements)  as well as cost
 savings.  In fact, in a contract operations arrangement, the
 contractor may incur financial  penalties  (e.g., reduction of
 service fees) if a certain  level  of performance is  not achieved,

     Another advantage that  a full-service contract  operations
 arrangement offers to the operating agency  (i.e., sewer
 authority or municipality),  is  improved budget  stability.
 Except for extreme unforeseen events, such as major equipment
 breakdown or facility damage, the contractor usually  bears  the
 risk of cost overruns.   Once the service fee  is negotiated, the
 actual  expenditure for that  line item is set as far as the
 operating agency is  concerned.   Long-term contracts can have
 the added advantage  of protection the operating agency from
 unusual  inflation and price  escalation.

     A  contract operations arrangement also relieves the
 operating agency of  certain  administrative and  supervisory
 duties  (e.g.,  personnel  management,  dealing with  labor unions,
 subcontractors,  regulatory  agencies).   In addition, access  to
 expert  technical  advice  through  the  contractor's  staff may
 reduce  outside engineering  consultant fees.  Finally,  the
 operating agency's overall  insurance  liability may  be  decreased
 since they are not directly  responsible for the operating
 personnel.
                ILLUSTRATION - CONTRACT OPERATIONS
    The City of Lebanon, Oregon contracted with a large private
operation and maintenance firm to provide complete contract
operations at its 3 mgd activated sludge treatment plant.  The
private firm provided its own plant superintendent (that
position was vacant) and retained all existing wastewater
personnel.  After the first year of the contract, the
performance of the plant was significantly improved, a backlog
of neglected maintenance items was attended to, energy demand
was reduced by 25 percent, and the contractor stayed within the
projected operating budget.
                               3-11

-------
     In  another  case,  the  City of Vancouver, Washington recently
 awarded a  10-year  contract  to a  private contract operations
 firm based on a successful  previous  contract with the same
 firm.   The renewed contract actually resulted in a substantial
 savings over the previous contract.   As a result, an
 anticipated sewer  rate  increase  was  not necessary.
     Contract services may offer  significant cost reduction
potential,  particularly  in  smaller communities unable.to
provide the skilled  staff required to operate a wastewater
facility.   However,  care must be taken in developing a
contractual agreement which will guarantee contractor
performance and also limit  the financial liability of the
operating agency.

Public Agency Contract Services

     Public  agencies, such as local sewer authorities or
regional sewer districts can provide contract services much
like private firms do.  This can range from very specific
operation and maintenance tasks  (e.g., pump station
maintenance) to complete contract operations.  However, in most
cases, this is done on a cost reimbursement basis rather than
on a fixed  price contract, as it is more common in private
contract operations.  Public agencies are less likely to assume
primary responsibility for  treatment facility performance.

    Although public agency contract services may not offer some
of the advantages of private contract services (e.g., budget
stability based on fixed price contracts, shifting of cost and
performance liability), they may be attractive to smaller
wastewater  operations which cannot justify full-time staffs of
their own.  Very often, regional sewer districts or
metropolitan sewerage agencies have ample manpower and
technical  resources to provide such services to communities
outside their normal service areas. This is sometimes referred
to as "circuit rider" or "satellite" operations.
                               3-12

-------
   ILLUSTRATION-CONTRACT SERVICES BY REGIONAL SEWERAGE AGENCIES

     Several  regional  sewerage agencies  have  found success in
 providing  operational  and maintenance services to outlying
 rural  communities.  The  Harbor Springs  Area  Sewage Disposal
 Authority  (HSASDA), in Harbor Springs,  Michigan, and the Kent
 County Department of  Public Works  (KCDPW), in Grand Rapids,
 Michigan,  provide routine and emergency operation and
 maintenance  services  to  small communities outside their normal
 service areas.   Each  community has  an operating contract with
 the  regional agency.   Service charges are based on the actual
 services rendered (i.e., a time and materials-type
 arrangement).   Field  staff in both  of these  agencies complete a
 detailed-weekly timesheet that identifies their time spent on
 different  accounts and operational  activities.

     In  Washington County, Oregon, the Unified Sewerage Agency
 (USA) operates  two small package plants (less than 1 mgd
 capacity each)  under contract with  two-municipalities.  A USA
 field crew of two persons spend half of their time at each
 facility.  This  crew essentially travels between the two plants
 for  routine  inspections and corrective  maintenance.
    The concept of public agency contract services should be
carefully considered along with the option of private contract
services, recognizing the difference in the types of contracts
alluded to above.  The feasibility of such an arrangement will
depend on the proximity of the nearest existing municipal or
regional wastewater operations and their staff resources.

Cooperative Agreements

    Neighboring communities might also consider entering into a
cooperative agreement where they share wastewater operations
personnel when neither can support a full-time staff on its
own.  This can be done by either forming a joint public
authority or service district, or through an intermunicipal
agreement.  The intermunicipal agreement, which would be the
least complicated from a legal and administrative point of
view, would require one of the municipalities to assure
responsibility for staff management and administration.
                               3-13

-------
   ILLUSTRATION - COOPERATIVE AGREEMENTS BETWEEN MUNICIPALITIES

     The  two  small communities of Montrose and Portland,
 Arkansas (population of about 1,000  each), for  example, share
 one  operator between their  two  sewage treatment facilities.
 This individual  also serves as  the water supply system operator
 for  the  combined municipal  water supply system.  Special radio
 communications  have been  set up between the two cities for
 emergency maintenance calls.  This, arrangement  saves both
 cities the cost of employing a  full-time person, and enables
 part of  the  labor costs to  be absorbed by the water supply
 system as well.

     In another example, the South Fork Sewer and Water
 District, in  Wallace, Idaho, recently purchased a high pressure
 sewer cleaning machine  which greatly increases the efficiency
of the sewer  cleaning operation.  The purchase of the expensive
 equipment was made possible through a cooperative agreement
with neighboring communities.   The district shares the
equipment with one city,  and provides sewer cleaning services
 to another.
    This type of intermunicipal cooperation can result in
considerable cost savings for the participating
municipalities.  However, in order for this type of arrangement
to work, groups of two or more municipalities with small
wastewater facilities must be in reasonable proximity of one
another, and must recognize the mutual need and common benefit
of such an agreement.

Automated Process Monitoring

    It may be possible to eliminate existing night shifts by
installing automatic process monitoring and alarm systems.
Assuming the primary function of the night shift is to monitor
plant operation and respond to emergencies, much of the
associated labor cost can be eliminated by relying on an
automated monitoring system to record operating data and
contact on-call operators or maintenance personnel in the event
of a serious system malfunction (e.g., power failure, pump
station failure) using an automatic dialer.
                               3-14

-------
     Recent advances  in microcomputer and microprocessor
 technology provide considerable  capability in process
 monitoring as well as remote  process control.  Although the
 cost of these systems may  be  high,  the savings in labor costs
 may result in relatively short payback periods.

 REDUCING ENERGY  COSTS

     At  most wastewater facilities,  energy (i.e., electricity,
 gas, fuel  oil)  is a  major  budget  item.  With the continuing
 escalation of electricity  and fuel  prices, energy costs have to
 be  controlled to prevent a corresponding escalation in sewer
 rates.   More and more energy  saving features are being
 incorporated into sewage treatment  plant design as a result of
 these recent trends.   There are also many opportunities for
 reducing energy costs at existing facilities. The range of
 options include:

     o    Energy Conservation
     o    Electrical  Load Management
     o    Power Factor Adjustment
     o    Time of Use  Scheduling
     o    Rate Negotiation
     o    Alternate Energy Sources
     o    Fuel Conversion
     o    Energy Recovery
     o    Process and  Equipment Modification

     A more  specific discussion of options follows.

 Energy  Conservation

     The  objective of  an energy conservation program is to
minimize  non-productive energy consumption without making major
modifications to existing equipment.  Energy conservation
opportunities in a wastewater operation can be divided into two
categories,  those related to lighting and heating systems, and
those related to treatment process and pumping systems.

    Very often, the energy requirements associated with
lighting and  heating  treatment works buildings (e.g., process
buildings, control  rooms, laboratory, administrative offices)
can be  significant. Simple conservation measures such as
turning lights off in unoccupied areas and lowering thermostat
settings can  have a noticeable effect on energy costs.
                               3-15

-------
     The concept of zone heating should be applied  if possible
 so that different areas of a building can be  heated  only  to  the
 degree needed for a specific use.   For example,  an empty  garage
 does not need to be heated at all,  and an unoccupied process
 building does not need to  be maintained at room  temperature
 unless the treatment process is temperature sensitive.  In all
 cases building insulation  should be utilized  to  the  maximum
 extent possible to minimize heat loss from heated areas.

     In plants operated on  a dayshift basis, the  heating system
 should be "turned down" overnight.  The same applies  to hot
 water heaters.  In some cases computerized HVAC  control systems
 may be appropriate, although the cost of installing  such  a
 system must  be justified in terms of annual net  cost savings.
 It may be possible to  integrate HVAC control  with other com-
 puterized control  systems  (e.g., electrical load management or
 process control  systems).  .

     Lighting costs can be  reduced by disconnecting or removing
 the light bulbs  from selected light fixtures  in  areas where
 illumination appears excessive or unnecessary.   However,  care
 should be taken  to assure  adequate  lighting exists in all areas
 where  personnel  safety is  a  concern.   Another option  is to
 replace existing light fixtures (e.g., incandescent  and mercury
 vapor  lamps)  with  more efficient units such as fluorescent and
 high  pressure sodium lamps.   This may be  particularly
 applicable in cases where  large outside  areas need to be
 illuminated.

     In treatment  process and  pumping  systems, energy
 requirements  can be reduced  by selectively controlling the use
 of certain process  equipment.   The  most obvious  example is
 aeration  equipment,  which  can  be turned on  or off based on
 actual  air requirements.   This  requires continuous process
monitoring which can be  done manually or  with the aid of
 automated  computerized control  systems.   Selective use of
 pumping  systems  (e.g., operating a  smaller pump at near peak
 efficiency for a longer  period  rather than  operating a larger
 pump in a  series of shorter periods)  can  also reduce total
 energy  consumption.  In  some  cases,  it may be possible to take
a process  unit off-line  completely  without  significantly
affecting  treatment  performance  and  thus  save the energy
 required  to operate  the  unit.   This  is particularly  applicable
where  redundant process  units  exist.

    If  heated treatment  processes (e.g.,  heat treatment of
sludge, anaerobic digestion) are used, insulation of treatment
units and external process piping should  be considered to
minimize heat loss and thereby  reduce  energy requirements.
                               3-16

-------
     Finally, water conservation by service  area  customers,  and
 infiltration/inflow correction programs  can indirectly  reduce
 energy requirements by reducing pumping  requirements.
                ILLUSTRATION - ENERGY CONSERVATION

     The chief operator at the  Watkins  Glen,  New  York  sewage
 treatment facility initiated an  in-house  energy  audit which
 resulted in the implementation of several  energy conservation
 measures.  Lighting and heating  conservation measure  alone
 resulted in a 23,000 kilowatt-hour drop in energy usage in one
 three-month period.  In addition, a redundant treatment process
 line (including a  clarifier, aeration  basin, and aerobic
 digester) was shut-down.   These  measures  together with other
 minor process and  equipment modifications  reduced energy
 consumption by over 300,000 kilowatt-hours in the first year
 the  program was implemented.   This resulted  in a net  cost
 savings of over $3,000 in spite  of a 30 percent  electric rate
 increase.
    Although  the  cost saving  resulting from an individual
energy conservation measure sometimes appears insignificant,
the cumulative effect of  implementing a plant-wide conservation
program can be dramatic.

Electrical Load Management

    Any treatment plant operator realizes that electrical
energy cost is not only a function of the amount of power
consumed  (i.e., kilowatt  hours), but is also a function of the
rate at which the power is consumed (i.e., "demand").  Power
demand is defined as the maximum average electrical load
(measured in  Kilowatts) over a given time interval, usually 15
minutes, exerted at any time during a billing period. Most
power utilities impose a  "demand charge" in addition to the
base rate for Kilowatt-hours consumed.  Rate structures vary
from one utility to another, and can be very complex in terms
of the calculation of demand charges.

    Very often the demand charge is determined not only on the
basis of peak demand for the current billing period but also on
the basis of peak demands in previous billing periods (e.g., as
a function of the mean peak demand of the previous 11 months).
Therefore, a single high peak demand can affect power costs for
up to a year after the demand occurred.  This points out the
importance of controlling electrical loads to the greatest
extent possible in order to minimize demand charges.
                               3-17

-------
     A treatment facility will  always have certain peak power
 demands that cannot be avoided due to the starting and running
 of high horsepower electrical  motors.  However,  by scheduling
 the operating cycles of different power equipment to  avoid
 coinciding periods of high demand, the average electrical load
 (i.e., the basis for demand charges) can be  minimized.  This
 approach to controlling power  Demand is referred to as "load
 management."

     Electrical  load management programs can  be as simple as
 establishing a  daily operating schedule for  starting  and
 stopping certain high load power  equipment  (e.g., pumps, blower
 motors)  to avoid coinciding demand peaks.  More effective load
 management can  be accomplished by continuously monitoring
 plant-wide power demand and cutting back on  the  use of certain
 equipment when  demand reaches  a given point.   There should be a
 predetermined priority for cutting back different electrical
 uses based on the importance of that use.  For example,  HVAC
 equipment might be temporarily shut down before  resorting to
 turning  off pumps and aeration units.   This  technique, known as
 "load  shedding" can be implemented using computerized  automated
 control  systems.   Such control  systems  are becoming more
 practical  with  recent developments in microcomputer technology
 (i.e.,  small  personal  and  business computer  systems).

     One  option  to simply shutting off certain  equipment  during
 high demand  periods is to  switch  to  alternate  sources  of power
 (e.g.,  self-generated electricity)  during these  periods. This.
 option  is  discussed later  in this section.

 Power  Factor  Adjustment

     In addition  to  basic energy charges and demand  charges,
 many rate  structures  include a  power factor adjustment which
 can  Increase  energy costs.  The power  factor is  a measure of
 electrical efficiency related  to  the degree to which electrical
 current  is out  of phase with voltage.   Certain types of
 electrical equipment  (e.g., induction motors and  certain
 variable-speed  drives)  have inherently  low power  factors. Such
 equipment  requires  more current to  produce a given  amount of
 power.  This  is not  reflected  in  the measurement  of real power
 (i.e., kilowatt-hours), and therefore utilities  charge a
 penalty  to recoup  the  cost of  generating  the additional  current.

    The power factor  for an electrical  motor is  very sensitive
 to motor load. Power  factor decreases  significantly when a
motor is under loaded  (i.e., operated at less than  its rated
 horsepower). With  the  variation in  pumping and aeration
 requirements at a typical  treatment  plant, it  is  inevitable
 that motors will  be operated at less  than their  rated  capacity
a large part of the time,  thus  creating a low power factor.
                               3-18

-------
     High  power factor penalties  can  be  reduced by  (1) replacing
 Induction motors  with synchronous  type  motors which  have high
 factors,  (2)  adjusting operating cycles so  that motors operate
 at  nearer their rated capacities,  or (3)  Installing  corrective
 power factor  capacitors.   Synchronous motors are very expensive
 and generally not cost-effective,  except  In very large motor
 applications  (1,500  hp or  larger).   In  many cases  operating
 cycles are dictated  by uncontrollable diurnal and  seasonal flow
 variations and cannot be modified.

     In most cases, the use of power  factor capacitors
 represents the most  practical and  cost-effective means of
 correcting a  low  power factor.   These capacitors cause current
 and voltage to be out of phase In  the opposite direction and,
 therefore, counteract the  effect that Induction motors and
 other coll  type devices have  on  power factor.  They  can be
 Installed higher  on  the Individual pieces of equipment having
 low power factors, or they can be  Installed at a central
 location  In the plant's electrical system.  Although these
 capacitors are fairly expensive, costing  from several hundred
 to  several  thousand  dollars each,  the savings In power factor
 penalties can  pay for the  capacitors  In a few years.  If the
 power factor  Is Improved significantly, there may  even be a
 credit to the  energy charge.

 Time  of Use Scheduling

    Many  utilities charge  different  rates for energy use
 depending  on the  time  of day, charging  higher rates  during peak
 use hours  (typically early morning, mid-day, and early
 evening).   In  such cases,  the use of  electrical equipment
 should  be scheduled  to  the maximum extent possible in off-peak
 periods.  This  can  be  done manually or with the use of timer
 controls.

    Any scheduling of equipment use  should be coordinated with
 electrical  load management objectives as discussed earlier.  In
 fact,  time  of  use  scheduling and load management can be
 integrated  using  computerized control systems which seek to
optimize  the use  of  electrical equipment so that overall  energy
costs  are minimized.   Automated control  systems can be very
expensive, and may be  difficult to justify unless significant
reductions  in utility  charges can be  realized.
                               3-19

-------
 Rate Negotiation

     It should be obvious from the preceding discussions that
 electrical  energy costs are greatly Influenced by the rate
 structure established by the power utility.  Most wastewater
 facilities  are treated as Industrial  users by power utilities
 and therefore are subject to rate schedules specifically
 developed for industrial uses.  As a  general  rule, these rate
 schedules do not take into consideration the  unique operating
 constraints that a wastewater treatment facility is subject  to.

     For example, an unusual  storm event can cause a dramatic
 increase in pumping requirements due  to excessive Inflow into
 the sewer system.  Under certain rate schedules the wastewater
 facility owner would have to pay an excessive demand charge
 based  on this single event.   In some  cases, a single high
 demand event such as this might affect demand charges for up to.
 a  year following the event.   In situations such as this the
 wastewater  facility owner should seek relief  from these
 excessive charges from the power utility.

     A  waiver from time of use charges might also be sought on
 the basis that sewage high flow periods tend  to coincide with
 peak power  use periods and cannot be  controlled by the
 wastewater  facility operator.  It may be possible to convince
 the power utility to grant certain concessions (e.g., increase
 the flat energy use charge)  but waive demand  and time of use
 charges.  Most power utilities will be willing to negotiate  the
 terms  of the rate schedule.   If the power  utility refuses to
 grant  the desired concessions an appeal  to the State Public
 Service Commission might be  warranted.

 Alternate Energy Sources

     It is unlikely that a wastewater  operation can be totally
•independent  of power utility companies (through the use of
 alternate energy sources).   However,  it  may be possible to
 significantly reduce the amount of electricity and fuel
 purchased, and  thereby reduce energy  costs.   Of course, the
 capital  and  operating costs  of energy generation equipment
 (e.g.,  dlesel  generator, windmill, hydropower turbine)  must  be
 taken  into account in computing the long term cost-effect-
 iveness  of alternate energy  sources.
                               3-20

-------
     In some cases the economic feasibility of such  an  option
 will depend on the availability of a primary energy source
 (e.g., steady prevailing winds, stream with hydropower
 potential).  In other cases the availability and cost  of  fuel
 will be a factor.  However, in all  cases the cost-effectiveness
 of using alternate energy sources is ultimately determined  by
 the magnitude of avoided purchase costs. This will  be  a
 function of current prices and rate structures, and the total
 quantity of energy that can be self-generated.

     The most obvious alternate source of electrical  energy  at a
 wastewater treatment plant is  the emergency standby generator
 (usually diesel powered) required for back-up power in event of
 power outages.  These generators are usually designed  to  meet
 the total  energy requirements  of a  treatment facility, but
 normally stand idle most of the time.   Since back-up generators
 are usually required equipment at most plants,  there is
 essentially no capital  investment.   The only additional costs
 incurred are the cost of fuel  and the  cost  of the extra
 maintenance required.

     Although standby generators can generate enough power to
 operate an entire plant, they  are intended  to operate  only  for
 short  periods of time,  and are generally not appropriate  for
 24-hour operation.   If  24-hour power generation is  desirable,
 redundant  equipment would be required  to provide back-up  in
 case of breakdown,  and  to allow for routine maintenance.  In
 most cases,  this  would  require the  purchase of  additional
 equipment  which can be  a significant capital  investment.

     A more practical  use of existing standby generators is  to
 supplement purchased  power supply during peak use periods.
 This is  a  particularly  effective means  of avoiding  premium
 charges  when  time of use rates apply.   Standby  generators can
 be  easily  be  timed  to "kick-in"  during  those times  of  the day
 when the higher rates are in effect.   Standby generators  can be
 also be  used  in lieu of load shedding  during periods of high
 demand  to  minimize  demand charges.

     Other  more  nonconventional  methods  of generating
 electricity onsite  include windpower systems, low-head
 hydropower systems, photo  voltaic systems,  geothermal  power
 generators and  fuel cells.  The  use  of photo  voltaic cells,
 geothermal power generators, and  fuel cells  in  wastewater plant
applications  1s very  limited due  to  the  current cost and  state
of art of  these technologies.  Windpower  and  low-head
 hydropower systems  generally have more applicability,  but are
 somewhat geographically  limited.  Windpower  systems are best
 suited to the plains  states, mountainous  regions and coastal
areas, while the use of  low-head hydropower  systems require
                               3-21

-------
 reasonable proximity to a stream with, hydropower  potential,
 preferably with a existing dam structure.   The  capital  cost of
 these systems will  vary greatly depending  on  site requirements,
 but in general  such systems are fairly capital  intensive  and  .
 will  require a large initial  investment, and  will  have
 relatively long payback periods.

     Alternate sources of heat for space heating and  process
 heating purposes include heat pumps,  active and passive solar
 systems,  and geothermal  systems.   Except for  geothermal
 systems,  these alternate energy sources are normally limited to
 space heating and water heating applications.   The use  of
 geothermal  systems  is obviously dependent  on  the  existence of  a
 suitable  geothermal  heat source.   The  coincidental location of
 an  existing  treatment plant near  such  a source  is very
 unlikely,  but if such a  source  exists,  the feasibility  of
 tapping it should be  investigated.

     Heat  pumps  have  been successfully  used in residential and
 commercial applications  for years.  The same  systems  can  be
 used  to provide  more  economical  space  heating in  wastewater
 operation  buildings.   Most HVAC systems can be  easily adapted
 to  use  a  heat  pump.   The major  capital  investment will  be the
 cost  of the  heat  pump unit itself, and  the cost of installing a
 well  if groundwater  serves as the  heat  source/sink.

    The use of  solar  heating  systems can reduce fuel
 consumption  in  conventional heating systems, but  it  is  unlikely
 that  such systems will  provide  a major  space  heating
 contribution unless buildings are  specifically  designed with
 solar heating in  mind.   This  is particularly true for passive
 systems where building orientation is critical.  Active systems
 with  roof collectors  that  can be positioned to  maximize solar
 exposure are somewhat adaptable, but involve more hardware
 (i.e.,  collectors, piping  systems, pumps,  storage systems) and
 are more capital  intensive  (I.e.,  greater  capital investment
 and longer payback periods) than passive systems.  Nonetheless,
 opportunities for utilizing solar  heat  that do  not involve
major structural  retrofitting or major  capital  expense should
 be seriously considered  as  a  means of reducing  fuel and/or
 electricity consumption.
                               3-22

-------
              ILLUSTRATION - ON-SITE POWER GENERATION

     A 1.2 tngd treatment plant on Block Island,  Rhode Island  Is
 totally powered by two 150-kw diesel  powered  generators  eight
 months of the year.   The use of the on-site generators is
 necessitated by the  fact that the generating  capacity of the
 relatively small  private power utility on the island is
 extremely limited during the spring and summer  tourist season
 when energy demand is high.  The plant operators  have
 determined they can  produce electricity for less  than it would
 cost to purchase it  from the power utility under  the current
 rate schedule.  The  only reason the generators  are  not used
 year round is that the energy requirements are  drastically
 reduced in the off-season due to lower flows:  It is also more
 cost-effective to purchase the power.   The use  of the on-site
 generators has been  so successful  that the plant  operators are
 investigating other  possible uses (outside of the plant) for
 the  excess power generated.
     The opportunities  for  using  alternate  energy  sources will
 vary from site-to-site. Although certain alternatives may, at
 first, sound  totally  impractical, no  alternative  should be
 ruled out until  a  preliminary cost analysis  is done.  It should
 be  kept in mind  that alternate energy sources can also provide
 the added advantage of protection from future utility price
 escalation.

 Fuel Conversion

     Significant  cost savings  may be realized by switching from
 one type  of fuel to another for  space heating, process heating,
 and  vehicle operation.  This  usually  requires some retrofitting
 or  modification  of equipment,  and thus  involves an up-front
 capital investment.  Modifying furnaces and boilers in space
 heating,  digester  heating, and heat treatment systems to burn
 natural gas instead of fuel oil  is  a  common example of fuel
 conversion.   Converting vehicles (e.g., cars, trucks,
 forklifts, backhoes) to operate  on  propane gas rather than
 gasoline  is another example.   Another option worth considering
 is  the use of waste oil in place of distilled fuel oil.

    The cost-effectiveness of  such  conversions will depend
 largely on the prevailing prices and  local availability of
different  fuels.   Long range price  trends as well as current
 prices should be considered in evaluating fuel conversion
options.   One means of mitigating the effect of future price
 increases  is  to  secure long term supply contracts.  Such
contracts should be awarded by competitive bidding in order to
obtain the lowest-pricing possible.
                               3-23

-------
     If fuel  conversion programs are implemented,  the  equipment
 replaced (e.g.,  burners, engine carburetors,  storage  tanks)
 should be retained in case it is decided  to switch  back  to the
 original  fuel  at some point in the future.  It  is also possible
 to modify equipment to accommodate multiple fuels.

 Energy Recovery

     A significant amount of energy is  generated by  the
 operation of wastewater treatment facility.   Much of  this
 energy is in the form of side products (e.g., digester gas) and
 waste heat which can  be recovered and  used to help  satisfy the
 energy requirements of the plant.

     The use  of digester gas (byproduct of anaerobic digestion)
 is  probably  the  most  recognized method of energy  recovery in
 wastewater operations.   Digester gas,  or  "biogas" as  it  is
 sometimes referred  to,  has many potential uses.   It can  be used
 as  fuel  for  furnaces  and boilers serving  both space heating and
 process functions  such  as digester heating and sludge heat
 treatment.   It can  also be used to fuel internal  combustion
 engines which  might be  used  to  drive pumps, air blowers,
 electric  generators or  vehicles.

     In  order to  utilize digester gas,  certain burner and
 engineer  modifications  are required.   A gas cleaning unit,
 compressor, and  storage tank  must also  be provided  in most
 cases.  The cost of these items and any other ancillary
 equipment  (e.g.,  special  pumps,  power  drives, electric
 generators) should  be included  in the  payback analysis.  The
 cost-effectiveness  of digester  gas recovery is largely a
 function of the volume  of gas generated.  Therefore, it may be
 difficult  to justify  biogas  recovery systems  in small treatment
 plants  (i.e.,  less  than  1  MGD).

    Waste  heat can  be generated  from many sources in a
 wastewater treatment  plant  including pumps, compressors,
 electrical motors and transformers, heated process units,
 process piping, combustion  equipment,  internal combustion
 engines and engine  exhaust.  The  amount of heat that can be
 recovered  from noncombustion equipment  is generally
 insignificant; however,  the heat  generated by this equipment
 can contribute to warming  interior building spaces depending on
 its location.  Waste heat  recovery from high temperature
 combustion processes  (i.e., incinerators, furnaces, and
 internal combustion engines) is more effective, but requires
that fairly complicated  energy  recovery systems be installed.
 In most cases such  systems are  not practical  for  small
 treatment  facilities.
                               3-24

-------
     One potential source of recoverable energy that is usually
 .overlooked is the sewage itself.  For example, sewage effluent
 can serve as the heat source/heat sink for a heat pump system
 used for space heating.  The effluent is an ideal heat source
 and sink since its temperature fluctuates very little
 year-round.  Wastewater heat pump systems require special
 design to prevent fouling and corrosion problems, and therefore
 will generally be somewhat more expensive than conventional
 heat pump units. Another recently developed energy recovery
 method takes advantage of the hydraulic head created by the
 sewage flow to drive a turbine powered electric generator.
 These low-head hydropower generating systems, which can be
 installed interceptor sewer lines or plant outfalls, can
 operate on as little as 10 to 20 feet of head.

     Another relatively simple energy recovery device is the air
 to air heat exchanger which extracts heat from exhaust
 ventilation air and  preheats fresh outside air used in space
 heating.  This method can be particularly effective in process
 buildings that require 100 percent outside ventilation air.
 Without an air to air heat recovery system, the heat loss
 associated with exhaust ventilation air can be significant.
          ILLUSTRATION -  HEAT PUMP ENERGY  RECOVERY SYSTEM

     The  recently upgraded Hasting, Nebraska  Water Pollution
 Control  Facility utilized a  water to  air  sewage effluent heat
 pump energy  recovery  system.  The heat  pump  is  part of a total
 energy management system at  the  5.4 MGD plant which also
 Includes  the use of multi-fuel boilers  and air  to air  heat
 recovery systems. The total  cost of  heat pump  energy  recovery
 system was $605,000,  while the associated savings in operating
 costs amounts  to $24,000 per year.

     "Treatment Plant  Heating Requirements Trimmed," R.  M.
 Helgoth;  C. G. Arnold, Public Works,  August  1984.
Process and Equipment Modification

    There are numerous process and equipment modifications that
can be made to improve the overall energy efficiency of a
wastewater facility.  However, before  implementing any process
or equipment change, the potential long term operating cost
savings must be carefully weighed against the initial capital
cost.  The lost salvage value of the replaced equipment (i.e.,
Its current value based on remaining service life less any real
salvage value) should also be taken into account.
                               3-25

-------
     If the treatment facility is operating at less than design
 capacity, it may be possible to eliminate redundant treatment
 units (i.e., parallel process trains).  This can result in
 significant energy savings, and may improve the performance of
 individual treatment units, since it is likely they will  be
 operating nearer their ideal design loading.  Such
 modifications should be applied first on a trial basis to
 assure that effluent quality is not adversely affected.

     Energy savings can also be realized by controlling the
 operating cycles of pumps and aeration equipment.  By operating
 such equipment on an intermittent rather than continuous basis,
 total  energy consumption is reduced. By scheduling the
 operating cycles.of different equipment to avoid coinciding
 use, peak energy demand can also be reduced.  These operating
 schedules should be designed to assure that minimum operational
 design criteria are not compromised.  In most cases this can
 easily be accomplished without continuously operating pump and
 aeration equipment.

     Certain equipment modifications can improve energy
 efficiency and thus reduce energy consumption.  For example,
 pump impellers can be changed to Improve pumping efficiency
 when actual  flow conditions differ from the original  design
 assumptions.  Changing the sheaving of motor drives might also
 be considered.  Different types of pumps may be inherently more
 efficient under certain conditions (e.g., screw pumps vs.
 centrifugal  pumps under low head conditions).  Likewise,
 certain  types of aeration equipment will  be more energy
 efficient than others depending on the application.  The
 relative efficiency of diffused air versus surface aeration
 versus brush type aerators must be evaluated on a case by case
 basis.

     However, when the type of aeration system is given, there
 are certain  modifications that can be implemented to improve
 energy efficiency.  With mechanical  surface aerators and  brush
 type aerators, horsepower requirements, and therefore energy
'requirements,  are a function of immersion depth.  This can be
 adjusted  by  either raising or lowering the aerator or by
 adjusting outlet weir levels.  Ideally, the aerator blades or
 brushes  should be at the minimum depth required to maintain
 minimum  D.O.  levels.  In diffused air systems conversion  from
 coarse bubble  to fine bubble diffusers can result in noticeable
 energy savings.
                               3-26

-------
     The use of more efficient motors and power drive equipment
 will also reduce energy consumption.  The efficiency gains
 possible with high efficiency motors are greater for smaller
 horsepower motors (i.e., 5 to 8.5 % for a 1 hp vs.  2% for a 100
 hp motor); however, the total net energy savings possible are
 greater for the larger motors since total energy consumption is
 greater.  When motor load conditions vary greatly (I.e.,
 pumping and aeration requirements cover a wide range) variable
 speed power drives may be the preferred means of matching motor
 horsepower and load (as opposed to using throttling or bypass
 valves).  The increase in overall efficiency gained must  be
 weighed against the capital  cost of this equipment  which  can be
 relatively expensive.

     Besides focusing on particular pieces of equipment in
 searching for energy reduction opportunities, the modification
 of whole unit process  operations should also be considered.
 Sludge management, for example, can involve relatively high  "
 energy requirements.  One option that might be considered is
 off-site sludge dewatering and disposal (i.e., trucking liquid
 sludge to a regional treatment facility).  The economies  of
 scale at a larger treatment  facility may result in  a net
 savings in total  treatment and disposal costs even  when the
 additional  hauling cost is taken into account.  Shutting  down
 dewatering and/or incineration operations at the smaller
 facilities will  result in significant energy cost savings.
 Short of off-site treatment,  certain pretreatment options might
 be  considered (e.g., using centrifuges to lower the moisture
 content of the  sludge  and thus reduce incinerator fuel
 requirements),  or equipment  replacement may be in order (e.g.,
 use of belt filter in  lieu of vacuum or plate and frame
 filter).   Since  such modifications  require  significant  capital
 investments,  they must  be justified by a thorough
 cost-effectiveness  analysis.
               ILLUSTRATION - PROCESS MODIFICATION

    At the Saline, Michigan 1.4 MGD treatment plant a
considerable savings in energy costs was realized by modifying
the operation of the return sludge pumps.  The pumps which had
been operated in a continuous recycle mode, were placed on an
intermittent operating cycle.  This caused an increase in
average sludge solids concentration and reduced sludge
recycling by over 200,000 gallons per day.  This reduced energy
consumption by 38,200 kilowatt-hours per year and resulted in
an annual savings of $1,900.  Implementation cost (automatic
timers) was negligible).
                               3-27

-------
               ILLUSTRATION - EQUIPMENT MODIFICATION

     Plant operators at the Wheaton, Illinois sewage treatment
 plant  replaced coarse bubble diffusers with fine bubble
 diffusers In order to Improve the energy efficiency of their
 aeration process.  By comparing the performance .of fine and
 coarse bubble diffusers in side-by-side-aeration basins, the
 operators determined that the fine bubble diffusers consumed 30
 to 40  percent less energy than the coarse bubble diffusers
 under controlled conditions (i.e., maintaining a given D.O.
 level).  The use of the fine bubble diffusers reduced the
 number of blowers that needed to be on line at any given time
 from three to two, which-reduced the average peak electrical
 demand by 33 percent.  After one year of operation energy
 consumption was reduced by 12 percent (from 660 .kwhr/million
 gallons to 580 kwhr/milHon gallons).  The conversion to fine
 bubble diffusers resulted in a total savings, of $14,800 per
year in direct energy costs and $6,000 per year in avoided
 demand charges.  These savings were achieved by converting only
 pne of two aeration basins:  A total savings of $33,000 per
year is projected when the other basin is converted.
    Process and equipment modifications generally involve some
capital investment.  It may be difficult to justify such
investments, especially when the modification involves
abandoning a major piece of equipment or structure which has
much of its design life remaining.  Nonetheless, the resulting
long term energy savings may more than justify the initial
investment and lost salvage value.  Payback periods can range
from less than a year to over twenty years.  Obviously, a very
careful cost-effectiveness analysis must.be done before
implementing any major process or equipment modification.
                              3-28

-------
 REDUCING CHEMICAL COSTS
     Chemicals are used in wastewater treatment processes  for
 many different purposes, Including disinfection,  pH adjustment,
 sludge conditioning, nutrient addition,  coagulation and
 flocculation.  Very often the physical-chemical mechanisms
 involved in chemical addition are not fully understood by plant
 operators, and chemical  misuse can result.   Too often, chemical
 addition Is done on a "trial  and error"  basis  (i.e.,  "If  a
 small  amount of chemicals works, larger  dosages will  work even
 better").  This usually results in wasting  chemicals, which can
 be very expensive.  Even when properly applied, the use of
 chemicals can Involve significant operating costs.   Aside from
 the cost of the chemicals themselves and the cost of maintain-
 ing chemical storage and feed equipment, there may  be addi-
 tional  costs due to secondary process impacts  (e.g.,  the  cost
 of handling excess sludge generated by lime addition).
 Therefore, every attempt should be made  to  minimize chemical
 usage  and associated operating costs. Specific measures  that
 might  be considered include:

     o     Chemical  Use Monitoring,
   - o     Process Modification,
     o     Use of Alternate Chemicals, and
     o     Competitive Purchasing.

     These methods are discussed below.

 Chemical  Use Monitoring

     Chemical  dosages should be determined by laboratory
 testing,  and confirmed by full-scale operational  monitoring.
 It  Is common for chemical  feed metering  pumps  to  be initially
 calibrated  and  then  left  alone.   Ideally, these systems should
 be checked  weekly, or at  least once or twice a month  to be sure
 they are  consistently delivering chemicals  at  the calibrated
 feed rate.   The  feed devises  sho.uld be recalibrated if
 necessary.

    Periodic  testing (e.g., monthly jar  tests) should be
 perforated to  confirm that  the  chemical dosages being  applied
 are correct.  Changes in wastewater characteristics (e.g.,
 flow, waste  strength)  can  significantly  increase  or decrease
 the dosages  required.  It  may  be possible to develop  a
 correlation between  certain waste  characteristics (e.g.,  flow,
BOD, Total Phosphorus) and chemical  dosage  based  on a  •
 compilation of test  data collected  over  a period  of time.  This
would allow dally adjustment of  chemical  dosages  based on the
continuous monitoring of key wastewater  parameters.   Although
the correct dosages  would  still  need  to  be  confirmed  by
periodic jar  tests,  these  could  be  done  less frequently.
                               3-29

-------
     With certain types of chemical addition, continuous
 monitoring  is required as part of a feedback control system.
 This controls the amount of chemical applied (e.g.,
 disinfection systems where chlorine dosage is controlled to
 maintain a  given chlorine residual and neutralization systems
 where the addition of acid or base is controlled as a function
 of the measured pH).  It is important that such systems
 compensate  for lag time (the time between chemical addition and
 measurement of effect) so that overdosages do not occur.  The
 dosages for flocculation, nutrient addition and sludge
 conditioning systems can be based on periodic testing, once a
 history of typical  waste characteristics is established.
 Within certain limits chemical dosages can be. adjusted based on
 operator judgement in response to observed changes in process
 performance (e.g.,  to improve settling or de water ing
 properties).  However, such adjustments should be within the
 range of dosages dictated by the results of the periodic jar
 tests.

 Process Modifications

     The amount of chemicals required for various chemical
 addition purposes can be controlled to some degree by making
 certain process modifications.  In fact, it may be possible to
 eliminate the need  for certain chemicals altogether by
 maximizing the performance of different unit processes.  For
 example, it may be  possible to maintain stringent effluent
 requirements (e.g.,  suspended solids concentrations less than
 20 mg/1) without the use of flocculant aids by maintaining
 proper  sludge age and food to mass ratio (F/M) in order to
 produce a sludge with good settling characteristics.  This is
 done  primarily by controlling sludge wasting.  Another means of
 meeting stringent suspended solids limitations is to maximize
 the  performance of  the secondary clarifiers.   Maintaining
 proper  sludge blanket depth is a key factor in this regard.  In
 some  cases,  equipment modifications (e.g.,  increasing weir
.length  to reduce solids  overflow) may be appropriate.
     When  chemicals  are used  for odor control  or H2$ control
 (e.g.,  prechlori nation, sodium permanganate,  hydrogen  peroxide)
 other non-chemical  treatment methods should  be considered.  For
 example,  pre-aeration  can  be used  in lieu  of chemical  oxidizing
 agents.   Certain  structural  modifications  in collection  systems
 and  inlet structures  (e.g.,  the use  of drop  inlets)  can  also  be
 effective in  controlling H2$ and odor problems.
                               3-30

-------
     The method and point of chemical  addition  can also affect
 the amount of chemicals used.   Some chemicals  (e.g., polymers)
 require dilution and aging in  order to  maximize  their
 effectiveness.  If such chemicals  are not  properly prepared,
 excessive dosages will  be required to produce  the desired
 result.  Likewise, proper mixing  and  time  of contact must be
 provided when any chemical  is  applied to wastewater of sludge.
 The point of addition can greatly  affect the degree of mixing
 and time of contact that occurs.   Improper application
 techniques not only result in  excessive chemical use, but also
 reduce  the effectiveness of the treatment.
               ILLUSTRATION - CHEMICAL CONSERVATION
                   THROUGH PROCESS MODIFICATION

    When  the annual bids  for chemical purchase at the Watkins
 Glen, N.Y.  treatment  plant were  received in 1980, the price of
 lime had  increased 21  percent and the price of ferric chloride
 had increased  60 percent  over the year before (these chemicals
 are used  for vacuum filtration sludge conditioning).  This
 prompted  the chief operator to initiate an intensive chemical
 conservation program.  The program had two basic elements or
 phases.   In the first  phase, net sludge production was reduced
 by holding the sludge  in  aerobic digesters for longer periods
of time.  This reduced chemical use by almost 10 percent.  In
 the second phase the  F/M  ratio in the aeration basin was
 reduced to the maximum extent possible by reducing sludge
wasting and increasing sludge recycling.  This reduced sludge
production and resulted in an additional 36 percent reduction
 in chemical use.
    Any proposed process modification should be tested at near
full scale conditions to assure that process performance and
effluent quality are not compromised.  Plant operators should
be encouraged to conduct such experiments in order to better
understand the response of the plant to different conditions
and operational modes.
                              3-31

-------
 Alternate Chemicals

     In many cases, different chemicals  can  be used  for  a  given
 purpose.  A good example is sludge conditioning  where lime,
 ferric chloride, alum and organic polymers  are often used
 interchangeably.  In most cases  polymer addition will be more
 cost-effective in terms of the cost of  chemicals required to
 accomplish the desired degree of conditioning.  Although  lime
 is less expensive pound for pound, significantly greater
 quantities of lime are required.   On the  other hand, additional
 chemical  handling facilities (e.g., mixing  tank, aging  tank)
 may be required when converting  from lime and ferric chloride
 or alum to polymer, which will obviously  involve some capital
 investment.  Polymers might also  be applied in conjunction with
 other  conditioning chemicals in  order to  reduce  the dosages
 required for the other chemicals  used.  Another  consideration
 that should be taken into account when  lime addition is
 involved is the added cost of handling  and disposing of the
 increased  amounts of sludge generated.  Lesser quantities of
 sludge are generated than with other chemicals.  The associated
 cost savings should be included  in the  analysis  of
 cost-effectiveness when evaluating chemical addition
 alternatives.

     Using  different forms of a particular chemical agent  (e.g.,
 ferrous  chloride instead  of ferric chloride)  may also prove
 cost-effective if the alternate  forms of  chemical are available
 at a lower price.   However,  differing dosage  requirements must
 be considered  in determining the  net  savings  based on
 equivalent performance.

     The cost of chlorine  for disinfection is  a significant item
 in most  treatment  plant operating  budgets.  Several other
 disinfection options  exist  (e.g.,  ultraviolet  radiation,
 on-site  sodium hypochlorite  generating).  However, conversion
 to  such systems  can  involve  significant capital  cost.
 Nonetheless, long-term  annual operating savings  may warrant
 such conversions.
           ILLUSTRATION  -  USE OF ALTERNATE  DISINFECTANT

    When a new 2 MGD wastewater treatment facility was built by
the French Creek District in North Ridgeville, Ohio in 1975, it
included a disinfection system using sodium hypochlorite
instead of chlorine.  The hypochlorite solution is prepared
on-site using electrolytic cells.  This eliminates the cost of
chlorine purchases and the hazards associated with chlorine
handling.
                               3-32

-------
     The hypochlorite system consists  of an  electrolytic unit,
 DC rectifier, two brine pumps,  recycle  tank,  two  recycle pumps,
 heat exchanger, storage tank, two  product pumps,  an acid
 flushing system, water softener, and  salt storage.containers.
 The system consumes approximately  25,000 KWH  of electricity and
 18,000 pounds of salt per year.  The  cost of  producing the
 hypochlorite solution 1s about  $0.34  per pound of solution (at.
 $0.042/KVIH and $0.034/pound of  salt).   The  cost of purchasing
 hypochlorite from a local  commercial  supplier would be $1.32
 per gallon ($1.05/pound).   The  resulting cast saving  1s over
 $3,000 per year.
     Plant operators  should  experiment with the use of different
 chemicals and  combinations  of chemicals to determine 1f
 alternate chemicals  might accomplish an equivalent treatment
 effect at a  lesser cost.  Operators should attempt to keep
 current about  recent developments 1n the use of different
 chemical additives.   The use  of bacterial additives might also
 be considered  for certain purposes  (e.g., odor, grease, and
     control) in  11 eu of chemicals.
Competitive Purchasing

    Considerable savings can be realized by simply seeking the
"best deal" when purchasing chemicals.  Competitive bids should
be sought from different suppliers.  Long term supply
contracts, with or without escalation clauses, can be an
effective means of controlling chemical costs.  Supply
contracts should include specific performance standards or
specifications in order to guarantee the quality of the product
supplied.  The performance of any chemical additive should be
periodically tested (e.g., jar testing) to assure that the
product meets the guaranteed specifications.

    Documentation of daily chemical use and trends of changing
chemical use over time can be used as an indicator of possible
variations in chemical quality.  Jar testing should be
performed to confirm any suspected discrepancies from
performance specifications.  If the supplied chemicals do not
meet specifications, the supplier should either replace them or
offer some monetary compensation depending on the terms of the
supply contract.
                               3-33

-------
     Chemicals purchased 1n large quantities  will  typically cost
 less than chemicals purchased 1n small  quantities.  Before
 purchasing a bulk quantity of chemical, first  be sure  that the
 chemical  can be used prior to its losing  effectiveness  due to
 long-term storage.   Another factor to consider is
 transportation cost.  The cost Incurred to transport the
 chemical  may exceed the cost of the chemical itself.
 Therefore, the local availability and method of carrier should
 be investigated.

     The cost associated with chemical addition 1s also  related
 to the form in which the chemical  1s purchased (I.e.,  liquid,
 powder, or gas).  Labor requirements may  be  less  for chemicals
 which are fed from  stock solution versus  those which require
 preparation, (e.g.  mixing or dilution).   However, the costs of
 a  liquid  chemical will  generally be higher than a chemical
 purchased in powder form.  Therefore, the reduced labor
 requirements need to be weighed  against the higher purchase
 price.

 REDUCING  IN-PLANT UATER USE  AND  MATER SUPPLY COSTS

     A wastewater  treatment  plant is  typically  not a major water
 user; however,  a  reduction  In water  use will generally  result
 in  some cost savings.   If alternate  sources of water supply can
 be  utilized,  water  utility  fees  can  be  significantly reduced or
 eliminated.   Options to  consider Include:

     o     In-Plant Water  Conservation;
     o     Effluent Reuse;  and
     o     Independent Water Supply.

 These methods  are discussed below.

 In-Plant  Water  Conservation

     Considerable water can be  conserved by ceasing wasteful
 water use practices. Water conservation measures to consider
 include the  repair  of leaky faucets  and valves; limiting the
amount of water use  for equipment washdown, cleaning walkways,
 etc.; and control of landscape watering.  The  use of sprays to
 control  foaming in  aeration basins and clarifiers can often be
cut  back without sacrificing effectiveness.  If such sprays are
used, they should be checked dally and adjusted as needed to
provide the necessary foam control with minimum water use.
Other water consuming process equipment (e.g.,   pump seals and
packing)  should also be Inspected daily to assure that water is
not used.
                               3-34

-------
     Plant-wide  water  use  should  be monitored on a weekly or
monthly basis to  detect unusual  peaks or Increasing trends of
water  use.  This  may  Indicate excessive water use or a supply
line leak.  When  such trends are observed, the source of the
excessive use or  leak should be  Isolated and corrected.

     Flow restricting  devices can be Installed on certain
plumbing fixtures (e.g.,  shower  heads and-washroom faucets) -to
further reduce  water  use.  Water-saving toilets might also be
considered.  Existing toilets can be modified to reduce .-water
use.

     While Individual  measures such as these might only
accomplish modest water savings, the cumulative effect of a
plant-wide water  conservation program can be dramatic.
            ILLUSTRATION - WATER CONSERVATION PROGRAM

    As part of an overall cost-cutting campaign, a water
conservation program was Instituted at the Watklns Glen, N.Y.
Treatment Plant.  This consisted mainly of making a
conscientious effort to monitor and control water use
throughout the plant.  Dally Inspections of pump packings,
seals, and sprayers were conducted, and leaky plumbing fixtures
were repaired.  The Installation of water saving spray heads In
the foam control spray equipment reduced water usage from 6
gallons per minute to 1.4 gallons per minute.  Further water
usage reductions were realized when a redundant parallel
treatment train was taken off-line.

    The net reduction In-annual water use over a two-year
period was just over 1,000,000 cubic feet of water.  This
represented a reduction of 70 percent, and over $8,000 1n water
bills.
                              3-35

-------
     The  key to  implementing  an  effective  in-plant water
 conservation program is  to carefully monitor water use
 throughout  the  plant.   Cases of excessive water use will
 generally be fairly  obvious  when  such monitoring is done.
 Records  of  monthly water use should be plotted and compared
 against  previous years  to determine the effectiveness of
 implemented conservation measures.

 Effluent Reuse

     The  use of  plant effluent to  supplement an outside water
 supply can  help reduce water utility bills.  Plant effluent can
 be used  in  many non-potable  applications  such as equipment
 washdown, chemical mixing, and  landscape watering.  The treated
 effluent would  normally  be obtained from either the chlorine
 contact  tank  or post aeration basin.  This would require the
 installation  of a pumping and piping system (which should be
 clearly  labeled as non-potable  water).

     The  cost-effectiveness of installing such a system will
 depend on the current water  rates being paid and the extent to
 which effluent can be used for  non-potable uses throughout the
 plant.

 Independent Water Supply

     It may  be possible to reduce or eliminate the need for
outside  water supply by  developing an independent source of
water supply; for example, an on-site well.  This obviously
 requires a  suitable source of water, which must be of potable
quality  if  it is to be a totally independent water supply.  The
cost of  developing the necessary water supply facilities
 (usually an on-site well, storage tank, and pumping system) and
operating the system must be taken into account when evaluating
the potential cost savings possible by eliminating water
utility  charges.  The comparison of life cycle costs should
consider the likelihood of future water rate increases.
                               3-36

-------
 REDUCING MAINTENANCE AND REPAIR  COSTS
     Excessive maintenance and  repair  requirements can have
 direct cost  impacts  (e.g.,  expenditures  for time and materials
 and  outside  services),  as well  as  indirect impacts such as
 process downtime.  This may also  increase expenditures for
 emergency storage  or alternate  treatment measures.  Since most
 treatment plants are fairly equipment  intensive, the potential
 for  mechanical  breakdown always exists.  The  financial impacts
 of these breakdowns  can be mitigated  by controlling the
 frequency and duration  of these events, and by limiting
 financial  obligations through  service  contracts, extended
 warranties,  or  insurance policies.  Specific methods of
 controlling  maintenance and  repair costs are discussed under
 the  following headings:

     o     Preventive  Maintenance.
     o     Spare  Parts Inventory  Management.
     o     Service Contracts,  Warranties, and Insurance.

 Preventive Maintenance

     Preventive  maintenance  is doing all the things necessary to
 keep equipment  running  smoothly.  Preventive maintenance sounds
 easy, but it  is sometimes difficult to train people to pay
attention to  the small  tasks such as regularly checking
equipment and providing  routine maintenance (e.g., equipment
lubrication,  checking seals).  Too often, mechanical  equipment
1s Ignored until is  breaks down, at which time significant
effort and expense is incurred  to make the needed repairs.
Routine equipment checks and maintenance requiring a few hours
per week can minimize the number of unscheduled shut-downs and
emergencies due to major mechanical failures.

    A comprehensive preventive maintenance program should
include the following elements:

    1.    Operator/Maintenance Staff Orientation - Plant
         operations staff should be familiar with the design
         and  function of all mechanical equipment.  They should
         be able to detect signs of problems  that might lead to
         equipment  failure, and be able to pinpoint  the source
         of the trouble when such  problems develop.   All
         available  equipment information (e.g., technical
         specifications, vendor brochures, operating  manuals)
         should be  carefully studied,  and on-site training
         conducted  by the respective  equipment vendors  and/or
         the  design engineer.
                              3-37

-------
     2.   Record of Equipment Specifications  -  A complete  record
          of all technical  Information  pertaining to  mechanical
          equipment should  be maintained  on  file to  facilitate
          easy reference.  These files  should Include detailed
          equipment specifications,  plans, shop drawings,  parts
          lists, operation  and maintenance manuals,  and  any
          other Information pertaining  to equipment  design,
          operation, maintenance,  and repair.

     3.   Maintenance Planning and Scheduling - Based on a
          review of equipment specifications, operation  and
          maintenance manuals, and manufacturer literature,
          preventive maintenance objectives should be
          established, and  a  plan  for carrying  out the necessary
          activities developed.  This should  Include  a detailed
          schedule  that specifies  when  various  maintenance tasks
          are to be performed on Individual pieces of
          equipment.  This  schedule  should provide for routine
          Inspection as well  as  periodic  equipment overhaul as
          required.

     4.    Maintenance Log - A complete  record of all  maintenance
          and repair performed on  each  piece  of equipment should
          be  maintained on  file.   It should contain  such Items
          as  work classification,  number  of hours worked, type
          of  job, name and  number  of equipment,  parts or
          supplies  required,  purchase order number,  receipt, and
          total  cost.   These  records should be  kept as
          maintenance history records.  Such  records  can be used
          to  detect trends  of Increasing  breakdown frequency or
          Increasing maintenance requirements which might
          Indicate  the need for  equipment overhaul or
          replacement.

     5.    Record  of Expenditures - A detailed account  of all
          expenditures  related  to  preventive  maintenance should
          be  kept for cost control purposes,  and  also  to provide
          Input  to  the preparation of realistic operating
          budgets.   All  costs  representing time and materials
          (Including  the cost  of service  contracts) should be
          accounted  for.

     Most  preventive  maintenance may be performed by  plant
personnel, even  1f  they have  only self-taught  mechanical
knowledge; however,  some preventive maintenance  and  most
corrective maintenance  will  require special   training.  The
equipment must  be repaired quickly  and properly.  Many pieces
of equipment have a  warranty  period; unqualified adjustments
may  nullify warranties.  All  warranty Information should be
filed until they expire.  Untrained plant personnel  should
assist and learn from outside mechanical contractors  and vendor
personnel In order  to be prepared for the next maintenance or
breakdown task.
                               3-38

-------
     In some situations, contract maintenance services  become
 attractive and cost-effective.  (See discussion  of "Service
 Contracts.")  This 1s especially true when  specialized  tools,
 equipment or specially trained  personnel  are required  for
 system maintenance.

     Effective preventive maintenance program requires  a
 thorough understanding of system operations and maintenance
 needs as determined  from the Interpretation of  well-kept
 operating and service records.   The use of  computers for
 planning preventive  maintenance and storing reference  data
 (e.g., equipment specifications, parts lists, O&M Instructions)
 Is  becoming popular.   Computerized  systems  can  greatly
 facilitate the monitoring of day-to-day maintenance
 requirements and the  updating of maintenance logs.  Sharing the
 computer with other  departments (e.g., process  control, spare
 parts  Inventory) can  often justify  the Initial  capital  cost.
 If  a  computer 1s not  available, there are several manual
 scheduling methods that can be  used.   Some  form of card-file
 system Is probably the most common.   Regardless of the
 recordkeeping/ "tickler" system used, 1t  Is Important  to
 maintain a complete and up-to-date  record of all  maintenance
 activities 1n order to assure that  necessary preventive
 maintenance Is not neglected.

 Spare  Parts Inventory Management

    A  preventive maintenance  program  cannot be  effectively
 Implemented without managing  a  plant's spare parts Inventory so
 that critical  maintenance  and repairs can be performed  In a
 timely manner.  This first  requires  the preparation of a
 complete  listing of all  critical  spare parts, tools, and
 materials  that  should  be on hand  at all times.  The availability
 of various  Items through local  suppliers  should be considered
 In preparing  this  11st.  The use  of  salvaged  parts and used
 equipment  should also  be considered as an alternative to
 purchasing  new  spare  parts. The  spare parts  Inventory should
 not be allowed  to  grow too  large  since a  very large parts
 Inventory  can easily  become unmanageable  and require a  very
 large  capital Investment.

    Items  to  Include  In a spare  parts  Inventory range from
bearings,  seals, couplings and belts,  to  pumps, motors, and
power drives.   In  addition, an adequate stock of  tools and
lubricants should  be provided.  This  1s especially Important 1f
specialized tools  or lubricants are required.
                               3-39

-------
     It may be possible to standardize certain parts and
 materials so that more than one piece of equipment can  use  the
 same spare parts.  Parts standardization Is one area where  high
 potential cost savings can be realized.  Many pieces of
 equipment In wastewater treatment have similar components.   For
 example, many pumps, aerators, blowers, compressors, conveyors
 and mixers use common bearings, grease seals, and  other similar
 components.

     Most equipment manufacturers do not make these components
 themselves.  They purchase bearings, seals, and other Items
 from component manufacturers and Install  them Into their
 system.  Because It 1s very expensive to develop and
 manufacture unique components (such as bearings or seals), most
 equipment manufacturers design their equipment so  that  standard
 size;  readily available subcomponents are used.  However,
 equipment manufacturers often assign their own part numbers  to
 a bearing or seal  that may be purchased from a component
 manufacturer.  Therefore, It may be difficult to determine when
 similar components are used.  Usually the equipment
 manufacturer will  provide the original  part number and
 manufacturer's name upon request.   Very often it will be
 determined that more than one piece of equipment will use the
 same "generic brand" parts.   This makes 1t possible to  reduce
 the  total  inventory of spare parts, since common stock  parts
 can  be  shared by different pieces of equipment.  Also,  by
 having  the standard part numbers, replacement parts can  usually
 be purchased  locally at lower cost.   Typical  items  that  can
 usually be standardized include:

     o     Bearings;
     o     Grease/Oil  Seals;
     o     Drive Motors;
     o     Gears;
     o     Packing;
     o     Mechanical  Pump Seals;
     o     Electrical  Components  (breakers,  solenoids,  timers,
          resistors,  transistors, etc.);
     o    Metal  Stock  (channel, box  angle  iron, diamond plate,
         grating,  etc.);  and
     o    Lubricants.

     Numerous  and sometimes large quantities of lubricants are
often stored  at wastewater treatment  facilities  due  to the
various types  of equipment in operation.   The  space  required to
store and the difficulties involved  in maintaining  an adequate
stock of lubricants  is often costly.  Therefore, it  is often
desirable to  limit the number of lubricants by purchasing
equivalent types which can be used  interchangeably  for the
various equipment.  The  total cost of lubricants will probably
also be reduced since "generic brands" can be  used  in place of
                               3-40

-------
 expensive "name brand" products.  011 company distributors can
 often prepare a 11st of equivalent lubricants and required
 quantities to stock based on the model number and type of
 equipment used. Usually this Inventory service is free of
 charge so long as the lubricants are purchased from the oil
 company distributor providing the service.

     An inventory of equivalent lubricants can be performed
 In-house after carefully reviewing equipment maintenance
 manuals.  However, It is Important that maintenance personnel
 familiarize themselves with the various lubricants available.
 Many pieces of equipment have been prematurely worn out or have
 required replacement of bearings and other parts because
 someone has ordered the wrong lubricant.  It is necessary to
 check manufacturers recommendations.

     Once a complete list of required spare parts (Including
 quantities of each part required) is prepared, the needed spare
 (e.g., parts, tools, lubricants) should be purchased.   All
 items should be stored in a clean, we11-protected stock area
 and organized so that an item can be easily located when
 needed.   A record of Items added to and taken from the
 Inventory should be maintained so that the spare parts manager
 is always aware of stock levels.  A standard procedure for
 reordering supplies should be established.  Such a procedure
 should specify when to reorder stock.  This will  assure that
 the stock is  adequate, minimize paperwork and avoid oversupply
 of items.

     Arrangements  should be made with suppliers to establish
 standard  procedures for purchasing, including delivery time.
 This should also  be done for Items not stocked in the  spare
 parts  Inventory so  that downtime will be minimized.  The spare
 parts  manager should be prepared to order any item that might
 be needed to  replace or repair any piece of equipment  in the
 plant.  The spare parts  manager should also  be familiar with
.the  shipping  options to  expedite delivery when a  critical  item
 1s  needed.

     In order  to expedite the purchase of a needed spare part or
 piece of  equipment  not  in  the spare parts  inventory, purchasing
 approval  from the authority's administration  or governing  board
 should be prearranged.   Certain  dollar limits (should  be
 established and there  should be a  procedure  for verifying  such
 purchase approval (e.g., by  the  plant superintendent or plant
manager). Such an arrangement will  avoid unnecessary delays in
order approvals.
                               3-41

-------
     Finally, 1t 1s very Important to keep a record  of all
 expenditures Incurred 1n maintaining the spare  parts  inventory
 (e.g., the cost of purchasing new supplies, the cost  of
 rebuilding salvaged parts, labor costs  associated with managing
 and staffing the spare parts department).   This provides useful
 input to the preparation of future operating budgets.   The
 current asset value of the spare parts  inventory should be
 determined every year for accounting purposes.

     The use of computerized information systems can greatly
 facilitate the efficient management of  a spare  parts  inventory.
 Such systems can be used to maintain a  record of current stock
 inventory and to indicate when items need  to be reordered.
 Programs can also be developed to assist in the purchasing of
 spare parts by maintaining a listing of available suppliers,
 current prices, shipping options, purchase order arrangements
 and ordering details for different items.   If a computer is not
 available, a reliable manual  filing system should be  used.

 Service Contracts, Warranties, and Insurance

     One means of reducing maintenance and  repair costs is to
 limit the operating authority's  responsibility  or liability for
 certain maintenance and  repair items.  For example, service
 contracts can be entered Into  through which  a manufacturer or
 local  vendor will  maintain a given piece of equipment  for a set
 fee.   The terms of such  service  contracts  will  vary.   The
 cost-effectiveness of a  service  contract,  as compared  against
 providing the necessary  maintenance in-house, must  be  evaluated
 on  a  case-by-case  basis.   Service contracts  are  often
 especially attractive when special  skills  or tools  are required
 to  perform a  maintenance task.   Such  contracts  might  be
 considered for especially complex mechanical equipment (e.g.,
 centrifuges,  vacuum filters, belt filter presses) and  for
 unique  maintenance tasks such  as sewer  cleaning, tank  cleaning,
 and major equipment overhauls.   In every case,  the  cost of a
 service contract should  be compared  to  the cost of  performing
 the service  in-house.  The current demands on maintenance staff
 should  also be  considered  in assessing  the merits of outside
 service  contracts.   If a  service contract  is being  considered,
 competitive  bids shold be  sought from different  service vendors.

    Another means  of reducing  repair  costs  is to extend the
 warranties on  certain  pieces of  equipment.   Such warranty
 extensions can  often  be  arranged when purchasing a  piece of
 equipment.  Although  certain exceptions  may  apply, extended
warranty will generally  cover most  repairs and can greatly
 reduce  repair costs,  especially  in  the  event of a major
breakdown.  The potential  avoided  repair costs must be weighed
against  the cost of the  extended  warranty.   Routine equipment
maintenance must still be  provided  in-house; in  fact,  failure
to provide required maintenance  may nullify  the warranty.
                               3-42

-------
     Some manufacturers or vendors  many offer  the  option of
 "life cycle bidding" when purchasing equipment.   With  such a
 bid, the manufacturer or vendor guarantees  that maintenance and
 repair costs will  not exceed a  certain amount over a specified
 period of time (conceivably through the projected life of the
 equipment).  Maintenance and repair costs exceeding this  amount
 are absorbed by the manufacturer or vendor, although certain
 restrlctons may apply (e.g., mechanical  failures  due to abuse
 will  not be covered).  Again, the  potential cost  savings  over
 time must be weighed against the Increase In  purchase  price
 associated with this type of bid.

     The cost of equipment replacement and repair  due to unusual
 events such as explosion, fire, hall, lightning,  and wind, can
 often be covered under extended fire Insurance or comprehensive
 physical  damage Insurance policies.  Damages  due  to the failure
 of certain types of equipment can  also be covered by Insuring
 Individual pieces  of equipment  (e.g., boiler  and  machinery
 physical  damage Insurance).   The cost of such Insurance
 policies must be justified by the  potential cost  savings  (I.e.,
 avoided losses). A sewer authority can also Insure Itself to
 cover unusual  maintenance and repair costs.   This Involves
 setting up a contingency fund for  major repairs and equipment
 replacement not otherwise provided for In the the operating
 budget.  This avoids the cost of Insurance premiums; however,
 there 1s  always some risk that  the contingency fund will  not be
 sufficient to cover repair costs.

     There are several  methods to reduce the cost  liability
 associated with equipment maintenance and repair. The  economic
 tradeoffs between  the varous options must be  carefully
 assessed.  In some cases, service  contracts,  extended
 warranties, and Insurance policies may be applied even though
 they  are  determined not to be cost-effective.  This might  be
 done  to create  a more stable operating budget, protected  from
 the risk  of Incurring unexpected high repair  costs at  anytime.
 Although  this may  not In Itself result In cost savings, 1t can
 help  stabilize  revenue requirements from one  year to the  next
 by eliminating  many of the unknown cost  factors In the
 operating budget.

 CONTROLLING ADMINISTRATIVE AND  OVERHEAD EXPENSES

    Administrative and overhead  expenses Include  all
 expenditures not directly related  to the day-to-day operation
of the  treatment system.  This Includes  administrative  salaries
 (I.e.,  plant manager,  superintendent,  clerical support, etc.)
as well as miscellaneous  expenses  (I.e., office expenses,
 building  and landscaping  maintenance,  vehicle maintenance,
Insurance,  etc.) and outside  services  (e.g.,  legal, accounting,
engineering, and data  processing services). Since the
expenditures  in these  areas  are  relatively small  compared  to
the large  ticket budget
                               3-43

-------
 items  (e.g.,  staff  labor,  utilities, chemicals), little
 attention  is  given  to cost control.  However, the potential
 cumulative cost  savings  resulting from controlling
 administrative and  overhead expenses can be significant, and
 should  be  considered.  Some of the cost reduction measures that
 might be applied include:

    o    Consolidation or  Elimination of Administrative
         Positions;
    o    Competitive B1dding/"Comparison Shopping";
    o    Low  Maintenance Building and Landscaping Features;
    o    Cutbacks in Non-Operating Expenses; and
    o    Contract Operations/Privatization.

 These topics  are discussed  below.

 Consolidation or Elimination of Administrative Positions

    In most cases, a small  wastewater operation cannot justify
 a full-time administrator.  Very often administrative duties
 will be assumed by the plant superintendent or chief operator;
 however, this may become a  significant burden.  When it 1s not
 possible for  the superintendent or chief operator to assume
 these responsibilities, a  part-time administrator might be
 sought.  This generally  proves to be impractical.

    Another option to share an administrator with other small
 wastewater operations.  Such an arrangement might be
 coordinated through a regional sewer agency.  It may also be
 possible to contract for such services through a professional
 services contractor.  The  concept of full contract operations
 is discussed  later in this  section.

    Whatever  arrangement is selected, care must be taken to
 assure that the necessary administrative functions are
 provided.  The cost-effectiveness of a contract services
 arrangement versus having a full-time administrator should be
 evaluated.

 Competitive Bidd1ng/"Comparison Shopping"

    When purchasing supplies and equipment, every effort should
be made to obtain a given item for the least cost.  With major
 items such as vehicles, competitive bids should be sought from
different suppliers.  On smaller items, price quotes should be
 sought from several  vendors before making a purchase.  This
also applies to items such as employee benefit packages and
Insurance programs.  For example, less expensive hospitalization
and insurance policies may be available.
                               3-44

-------
     If certain services are  provided under contract by
 professional  service contractors  (e.g.,  engineers, law firms,
 accountants)  these contracts should be evaluated to determine
 1f the same services might be provided by others at a lesser
 cost.   The practicality and  cost-effectiveness of providing
 such functions with In-house staff should also be evaluated.

     Every expense Item should' be  considered. However,
 administrators should note that paying more for a particular
 Item may be justified 1n some cases (e.g., when an extended
 warranty or life-cycle bid 1s Involved).  Current expenditures
 should be reviewed monthly and compared  against the project
 expense budget.  Evidence of excessive expenditures should be
 Investigated  to assure that  the expenses are legitimate and
 that excessive prices are not being paid for particular Items.

 Low Maintenance Building, and Landscaping Features

     The effort devoted to building and site maintenance can
 often  demand  a considerable  amount of manpower. Such
 maintenance 1s usually provided by the plant operating staff.
 It may be possible to reduce the  labor requirements associated
 with this task by Installing low  maintenance building and
 landscaping features such as aluminum siding or masonry
 building exteriors In lieu of surfaces that require painting.
 Stone,  gravel, or mulch  ground cover 1n  lieu of grassed areas
 will eliminate the need  for  frequent mowing.

     Although  such features should be Incorporated during the
 design  and  construction  stages, certain  steps can be taken to
 reduce  maintenance requirements of exiting facilities.  Any
 capital  Investment required  for such renovation projects must
 be  justified  by payback  1n avoided annual maintenance costs.

 Cutbacks  in Non-Operating Expenses

     In  evaluating the expense budget, particular attention
 should  be paid to expenditures for non-operating expenses, such
 as  travel,  and conference attendance,  Such expenditures should
 be  justified  on a  case-by-case basis and should not be taken
 for granted.  The  budget  for  travel and conference attendance
 should  be shared  to  the  greatest  extent  possible, so that all
 staff can take advantage of  legitimate training and '
professional  development opportunities.
                               3-45

-------
 Contract Operations/Privatization

  .   One  very  effective means of  controlling administrative and
 overhead costs  is  to  delegate the  resonsibility for plant
 administration  to  a private contractor.   Contract operations
 and  privatization  are two ways to  accomplish this. Under a
 contract operations arrangement, the municipality or sewer
 authority contracts with a private contractor who assumes full
 responsibility  for staffing and operating the public wastewater
 facilities for  a predetermined fixed fee.  The term of such a
 contract can  be one (1) to five years  (5) years or more
 depending on  state laws.

     In a privatization arrangement, the wastewater facility is
 owned and operated by a private concern, which in turn provides
 wastewate services to a municipality or other defined service
 area under a  service  agreement.  In such  an arrangement, the
 private  owner is usually completely responsible for all
 operating costs.   The term of a privatization service agreement
 will typically  be  twenty (20) to twenty-five (25) years.  The
 feasibility of  privitization may be subject to modification in
 tax codes.

    Contract operation and privatization arrangements can take
 many different  forms.  The assignment of operational and
 financial  responsiblities will vary.  The contractual
 agreements can become very complex.  Legal and financial
 liabilities must be carefully evaluated.

    Contract operations and privatization are attractive only
 if the service can be provided at less cost to the user than
 possible with a publicly operated system.  Aside from the
 direct cost savings involved, such contractual arrangements can
offer the municipality or sewer authority protection from the
 risk of unusual and unexpected future increases in operating
 cost depending on  the terms of the contract agreement.  An
obvious disadvantage to such an arrangement is that the
municipality relinquishes control of the wastewater operation.
This should not have any detrimental effect if the interests of
the municipality are  fully protected by the terms of the
 service agreement.  The advice of legal, financial, and
 engineering experts should be sought before entering into such
an agreement.
                               3-46

-------
 CONTROLLING CAPITAL EXPENDITURES
     The capital  cost of building,  enlarging and upgrading
 sewage treatment and collection  facilities is .normally-financed
 by local  governments or public authorities, with supplemental
 Federal and state grants.   Over  the  past  decade, construction
 and equipment costs  have risen dramatically,.as well as the
 cost of financing (e.g., interest  costs). Concurrently,
 cut-backs in Federal  and state grants  have made it expensive
 and sometimes economically  infeasible  to  implement planned
 capital improvements.

     The result is that  wastewater  utilities must carry higher
 debt service burdens.   To help control the rising cost of
 financing capital  improvements,  several-alternative financing
 techniques have  emerged. Those  that appear applicable.to
 wastewater utility operations Include:

     o    Creative financing.
     o    Capital  improvement planning.
     o    Capital  reserve funds.
     o    Privatization.

 Creative  Financing

     The escalation of .construction costs  and interest rates,
 combined  with the decreasing availability of Federal
 construction  grant funding  and.the constraint of local debt
 limits  has had a .significant impact on the ability of many
 communities  to finance  capital projects.  This has led to the
 development of a  number  of  innovative  financing techniques
 which can  raise capital  for needed wastewater facilities.  Very
 often when community  leaders realize the  true cost of financing
 a wastewater  project  through conventional methods (e.g.,
 general obHgaiton bonds, revenue bonds,  special assessment
 bonds), they  recognize  a need to consider innovative financing
 alternatives.

     In  the past,  the tax.exempt  status of municipal bonds was
 sufficient incentive ..to  encourage the  purchase of relatively
 low  interest  securities.  This is no longer the case.
 Increasing interest rates in the prime lending market have
driven  up  municipal bond Interest rates, thus increasing the
debt service  burden on the  municipality issuing the bond.
Securing bond  insurance or  a bank letter of credit may Improve
a municipality's credit  rating and lower the interest rate on
the bond issue.  However, certain costs are involved.
                               3-47

-------
     In order to make lower Interest  municipal  bonds more
 attractive, several  innovative types of long-term,bonding
 options have been introduced.  The more  common  ones include:

     o    Zero Coupon and Step  Coupon Bonds
     o    Tender Option  Bonds
     o    Floating Rate  Bonds

     Zero coupon bonds pay no current interest  and thus avoid
 the cost of interest payments  throughout the term of the debt.
 This type of bond is sold at a relatively large discount so
 that the investor is assured of a guaranteed appreciation in
 principal.   Step coupon bonds  pay lower than normal interest
 rates In the early years of the bond term and  produce an
 increasing  rate of return in later years.  The advantage to the
 municipality issuing the bond  is that less interest needs to be
 capitalized during the  construction  period, reducing the size
 of the bond.

     Tender  option bonds give the bondholder the option of
 redeeming the bond notes before they reach maturity.  Since
 these bonds are more liquid than a conventional 30-year bond,
 they will generally  have lower yields (I.e., they are sold at a
 lower interest rate), lowering Interest costs.

     Floating  rate bonds bear interest at a rate that varies as
 a  function  of a predetermined  Index, usually the prevailing
 prime lending rate.   The objective of the Issuer 1s to reduce
 current  interest  expenses rather than risk paying higher
 Interest  rates  later In the bond term.   "Adjustable floating
 rate"  bonds have the added  feature of giving the bondholder the
 option of tendering  the bonds  at specified dates during the
 bond  term.  The Issuer  can  then adjust  the rate on the tendered
 bonds  and reissue them.   "Floating fixed rate" bonds offer the
 option of fixing  the Interest  rate at some point during the
 bond  term.

    The  potential  for Increased Interest yields over the long
 term  encourages the  Investor to accept  lower initial  interest
 rates on  floating  rate  type bonds.   On  the other hand, if
 interest  rates  do  not escalate, the  issuer's total debt costs
 will be  less  than  they  would have been  with conventional fixed
 rate bonds.   However, the  Issuer should understand that if
 interest  rates  do  escalate, the total amount of debt service
 will increase.  This  is  generally acceptable for wastewater
 utility operations since  their cash  flow position usually
 improves with  time as the service base  is expanded and revenues
 Increase.

    The applicability of these and other innovative bonding
options should be  thoroughly investigated with the advice of
 legal and bond counsel.
                               3-48

-------
     One alternative to Issuing a bond  to  raise  needed capital
 Is to secure a loan.  Given the size of a  typical  wastewater
 capital project,  borrowing from a conventional  lending
 institution may be impractical;  It  may be practical, however,
 to, secure low Interest or no Interest  loans through  state
 sponsored revolving loan  funds or trust funds.  At least four
 states (California, Georgia, New Hampshire, and New  Jersey) are
 in the process of developing such revolving fund programs other
 States are expected to Initiate such a program. There are
 various other ways in; which states can offer assistance to.
 local  conmunitfes in securing reasonable  project financing
 (e.g., bond guarantees,, bond banks.,-  bond  pools, matching
 grants.).  The state municipal  league  should be able to
 Identify what, If any,, state agencies  offer such assistance.

     When It is obvlxms that the cast of financing  a  capital
 project will  impose a- significant financial  burden on a
 comnunity, long-term leasing and lease purchase arrangements
 should be considered.   Under such an arrangement,  a
 municipality or a public  sewer authority would  lease a facility
 rather than own it.  Such an arrangement might  include a
 purchase option allowing  the leassee to acquire the  facility at
 some  point in time.  Another approach  involves  selling an
 existing property (e.g. an  operating treatment  facility) and
 then  leasing  it back.

    The leasing of a wastewater facility will generally involve
 an agreement  between a. municipality  or public agency and a
 private Interest  (e.g., a corporation, leasing  company, or
 group of Investors) through which the  private interest can
 achieve certain tax advantages (e.g..,  investment tax credits,
 depreciation).  This Is especially true for "leveraged leases"
 in which  an Investor contributes a relatively small  percentage
of the  equity and. receives  the  tax benefits  on  the full value
of the  asset.   Such arrangements  can become very complicated,
but can offer significant financial  benefits to both parties.
This option must  be carefully evaluated since Federal tax laws
 Impose  certain  constraints  which  may affect  the economic
feasibility of a  project.   (It  should  be noted  that  potential
changes In  the  tax  law may  diminish many of the current tax
advantages  possible through  the  leasing of public  facilities).
                               3-49

-------
           ILLUSTRATION - SELF FINANCING WITHOUT GRANTS
     Many communities have financed  and  built  their  own  systems
 without Federal  financial  assistance.   The  Carlisle Suburban
 Authority (Carlisle, PA),  the  communities of  Middletown,
 Odessa, and  Townsend (New Castle  County, DE),  Evesham Township,
 NJ,  the City of Wilsonville, OR,  the City of  Lenexa, KS, and
 the  Borough  of Ephrata,  PA are all  examples of small
 communities  (with  sewage treatment  plants of  less than  4 MGD)
 that have financed the construction of  new  or  expanded  sewage
 treatment facilities without Federal grant  assistance.  In
 fact, most of these communities have financed  their sewage
 systems without any form of outside financial  aid,  relying
 totally on the proceeds  from the  sale of bonds  and  available
 municipal  funds  to finance the needed capital  Improvements.  In'
 each of these communities,  growth pressures demanded Improved
 sewage  services.   Therefore, a large portion of the debt
 service on the new facilities  is  assessed to  new customers.

     The City of W1lsonv1lle, Oregon, for example, recovers much
 of the  debt  retirement costs for  its sewage treatment plant
 expansion  project  through  connection charges.   The  city
 expanded  its  treatment plant in 1981 from 1.0 MGD to 2.25 MGD.
 Connection fees  were  set at roughly $1,000 per equivalent
 dwelling  unit.   Revenues from  the sewer connection  fees have so
 far  been  sufficient  to pay the bulk of the annual principal and
 interest  costs on  their  general obligation bonds.   Excess
 revenues  from connection  fees  have  also been used to maintain "a
 reserve fund  for future  capital improvements and contingencies.

     Self  financing of a wastewater  facility also gives  the
 community  increased  incentive  to  pursue cost saving
 opportunities.   In Ephrata, Pennsylvania, force account labor
 (i.e.,  municipal employees) was used to perform the time
 consuming  front  end  renovations and groundwork  for  the  sewage
 treatment  plant  expansion.  The borough manager estimates that
 $1 million was saved  by using  force account labor,  not  only as
a result of wage rate differentials, but also from  direct
control of construction costs  and personal project  management.
 In Carlisle,  Pennsylvania,  similar  construction cost savings
were made  by  expediting the construction phase, thereby
avoiding additional  interest and inflationary costs.  According
to Carlisle's design  engineer, without outside  grant
assistance, the community  had  the flexibility to phase  and
schedule the construction  to meet its needs.   It was able,
therefore, to formulate a  favorable interim and long-term
financing  arrangement to suit  the affordability of  the  service
area residents.
                               3-50

-------
                  ILLUSTRATION - STATE TRUST FUNDS
     In an effort to provide a new source  of funds  for  public
 wastewater facilities, the State of New Jersey  has proposed  an
 Infrastructure trust fund to provide low  Interest  loans, or
 grants to local  governments. Under this arrangement, the
 state-sponsored  loans would cover a fixed portion  of project
 costs. Loan repayments would help maintain the  trust, fund and
 provide future loans.

     Under the  state's proposal,  the trust would make low
 interest loans to localities to  cover a percentage of  the total
 project cost.  Local  governments  would repay the loans  over a
 15-year period.  Localities would also be  responsible for
 financing the  local  share of the project  costs. Limited grants
 might also be  available to help  reduce  this  local  share in some
 cases. New Jersey estimates that replacing current Federal and
 state grants with loans will  result in  user  fees roughly 30
 percent higher than  they would be with  grant funding.  However,
 the  cost to the  community could  be as much as 50 percent less
 than It would  be if  the community had to  finance its projects
 on its own. The  implementation of the state's proposal depends
 on a large extent on  whether Federal  construction  grants can be
 used to capitalize the bank.
    Federal tax  laws, rulings  by the  Internal Revenue Service,
and state enabling legislation will influence the  feasibility
of many of these creative  financing techniques. As  stated
earlier, the use of these  innovative  financing methods can
involve very complex legal agreements and financial
arrangements. The Implementation of such arrangements should be
done under the supervision of qualified legal and  financial
experts.

Capital Improvement Planning

    In preparing a sound financial plan for a utility,
provision must be made for future capital improvements. A
capital Improvement plan identifies specific sewage system
needs, and outlines a course of action to satisfy those needs.
It is Important that utility managers do not view the capital
Improvement plan as a "wish list," but view it as a realistic
projection of facility needs, Including equipment replacement,
system expansion, and facility upgrading.

    The types of capital improvements to be considered when
projecting facility needs include:

    o    Sewer extensions.


                               3-51

-------
     o    Equipment replacement (e.g., pumps* process equipment,
          vehicles)

     o    Treatment plant expansion.

     o    Treatment system upgrading.

     Obviously, many factors influence when these types of
 expenditures will be incurred.  The replacement of equipment
 can be predicted to some degree, based on estimates of service
 life, while the need for sewer extensions and treatment plant
 expansions will be determined by service area growth trends.
 Although it is not possible to predict exactly when these
 expenditures will occur, a rough estimate of capital needs over
 time can be prepared.  For example, the replacement of a given
 piece of equipment can be assumed to occur at regular intervals
 based on an estimate of service life.  The tinning of system
 expansion and facility upgrading should be consistent with long
 range plans.

     Once a realistic schedule of future expenditures is
 developed, a reserve fund should be established to provide the
 capital  funds when needed.  This can be done in many different
 ways.  It can be capitalized from bond proceeds (i.e., a
 specific amount of capital set aside in a separate interest
 bearing  account) or it can be set up as a sinking fund, where
 contributions are made to a special reserve account on a
 regular  basis.  A reserve fund can also be initially
 capitalized and then supplemented with sinking fund
 contributions.

     The  monies deposited in a reserve fund can be from excess
 general  revenues or they can be specifically designated in the
 budget and rate structure.  The latter approach is preferred
 since this is the only way to assure that the reserve account
 will  be  adequately funded.   One method of generating reserve
 funds is to capitalize the depreciation of the treatment plant
'and collection system.  This treats depreciation as an
 operating expense, which can be included in the operating
 budget and recovered through service fees.

     The  key to effective capital  improvement planning is to
 accurately define current and future capital requirements.
 This  requires a fairly detailed accounting of system assets
 (e.g., treatment and collection system infrastructure and
 accessory equipment, buildings, vehicles} and periodic updating
 of current replacement costs.  Projections of future service
 area  population and service demand should also be periodically
 updated  to define a realistic timeframe for system expansion.
                               3-52

-------
     Once  prepared,  the  capital  Improvement plan should be
 reviewed  on  an  annual basis,  and modified, 1f appropriate.
 Sinking fund contributions might be adjusted based on such
 reviews.   These reviews should  be conducted during budget
 preparation.

     Capital  Improvement planning -Is projection of major capital
 outlays.   By setting money aside for  future expenditures, high
 financing .costs can be  avoided.  This can also eliminate the
 need for  Imposing special assessments on service area
 customers.   Even where  a major-capital Improvement project
 requires  financing  to raise the necessary capital, planning
 ahead allows time to formulate  the best financing package.
 This makes it possible  to take  advantage of current Investment
 market conditions (e.g., low  Interest rates, Impending tax law
 changes),  and Issue debt when conditions are right.

     However, the.most Important reason for having a capital
 Improvement  plan Is that It assures that needed capital
 Improvements will be Implemented.  Too often, facility
 Improvements are put off Indefinitely simply because the money
 1s not available.  An effective capital Improvement plan will
 prevent this from happening.

 Capital Reserve Funds

     The concept of using reserve funds for future capital
 Improvements  was Just discussed.  The use of reserve funds In
connection with municipal bond  Issues Is very common.  Most
bond trust Indentures will require a debt service reserve
 (usually equal  to one year's debt service) to assure that funds
are  always available to make principal and interest payments.
 In this application, the reserve is used as a contingency
account.  Contingency type reserves can also be established to
cover uncollectible accounts  (i.e., delinquent customer
accounts that are written off) and to provide self Insurance
 (I.e.,  cover certain losses due to accidents).
                               3-53

-------
    While contingency type  reserves set aside funds for events
that may or may not occur,  a capital  reserve provides for
expenditures that are expected to occur.  For this reason, this
type of special reserve  requires continuing contributions to
maintain the fund, as in a  sinking fund.  The contributions
should be built into the rate structure.  A portion of service
fee revenues should be used to fund the reserve.  Most bond
indentures require certain  rate covenants that mandate that
rates will be established to provide  a buffer of excess revenue
to assure that debt service is covered.  If this coverage is
actually provided, the excess revenues can be deposited in a
capital reserve fund.  Certain connection fees and other
special assessments (e.g., development fees, treatment capacity
purchase fees) might also be used to  fund reserves for future
projects.

    The use of capital reserve funds  supports the concept of
"pay-as-you-go" capital  financing, which seeks to minimize the
amount of debt required  to  finance a  capital project by
increasing the equity contribution (i.e., paying 'up-front).
Some investment experts  frown upon maximum debt financing
(i.e., financing the entire cost of a project through bond
proceeds).  Bond issues  where the utility makes a meaningful
equity contribution are  generally be  rated higher than those
involving maximum debt financing.  This makes the bonds more
attractive, and should result in lower interest costs.  The
total  debt service will  be less due to the smaller bond size
and lower effective Interest rate.
                               3-54

-------
     A working capital  account can be used  like a  capital
 reserve fund since it  provides funds to  meet  immediate  capital
 requirements.  However, working capital  is intended  to  provide
 a cashflow buffer, and is generally limited in size  (usually
 equivalent to 2 or 3 months operating expenses).   Nonetheless.,
 municipal  finance analysts may view working capital  as  a  form
 of a capital reserve,  and like to see it incorporated Into a
 utility's  rate structure.

     The main advantage of a capital  reserve fund  is  that  it
 minimizes  the need for short and long term financing*   The
 provision  of such reserves makes a municipal  bond more
 attractive to investors, making lower interest rates may  be
 possible.   Finally, the existence of capital  reserves will
 assure that capital improvements will be implemented when
 needed, and not put off for lack of capital.

 Privatization

     Recently, there has been much interest in privatizing many
 traditional public sector services,  Including refuse
 collection, parking, fire fighting,  water  supply, and most
 recently,  wastewater collection and  treatment.  Under this type
 of arrangement, commonly referred to as  "privatization,"  a
 private interest will  own and operate a  public  facility and
 charge a fee for the services provided.  Privatization  is being
 considered  by more and more communities  as an alternative to
 financing  large capital  projects themselves.   This is
 particularly applicable to wastewater projects  since the
 decreasing  availability of Federally sponsored  construction
 grants  is making it increasingly difficult for  many  communities
 to  raise the capital required to build or  expand  a wastewater
 facility.

     Privatization  can  be thought of  as having three  components,
 namely:

     o    Financing.
     o    Turnkey construction. -
     o    Full  service  operation  and  maintenance.

     Privatization  financing  schemes  will generally have the
private  sector  contribute  some amount of equity (i.e.,  capital)
which entitles  the  investors  to  certain  tax benefits.   In many
cases, the  bulk  of the  capital  is  provided from the  proceeds of
tax-exempt  industrial  development  bonds  (IDBs), backed  by the
privatization contractor.  The main  feature of privatization
financing is that  it does  not  require the  municipality  or sewer
authority to  incur  any  debt.   If IDBs are  involved,  they  are
issued by a  separate agency  (e.g., a  local  industrial
development  authority).  Therefore the municipality's debt
capacity Is  unaffected.
                               3-55

-------
    Once the  financing is secured, the privatization contractor
 is  responsible for designing and constructing the facility.
 Since the contractor is in charge of both design and
 construction, significant cost savings can be realized.
 Engineering costs will be less since the engineering is
 generally done in-house.  Construction costs will be less since
 the design engineer has more flexibility in preparing
 construction  specifications.  Since the contractor does not
 have to comply with EPA construction grant regulations, design
 and construction time can often be cut in half.  This may
 result in significant cost savings due to avoided cost
 escalation.

    Upon completion of the construction phase, the contractor
 must demonstrate that the facility meets specified performance
 criteria.  The contractor is responsible for starting-up the
 facility and providing day-to-day operation and maintenance of
 the facility through the terms of the service agreement.  The
 contractor is normally responsible for all costs associated
 with the operation of the facility.  The contractor recovers
 these cost through a service fee collected from the
municipality.

    A privatization venture involves fairly complex legal and
 financial arrangements which need to be documented in detailed
 service agreements.  These agreements often consist of two
parts: one dealing with the construction period and one dealing
with the operations phase.  Some of the Items addressed in the
service agreement include:

    o    Construction specifications.

    o    Construction schedule.

    o    Guarantees of facility performance by the contractor.

    o    Guarantees of waste volume and waste characteristics
         by the municipality.

    o    Basis for service fees and sharing of project revenues.

    o    Assigned rights and liabilities of different parties.

    o    Contingency provisions.

    o    Provisions for dealing with changes in laws that
         affect facility operation.
                              3-56

-------
     Preparing  such agreements requires the efforts of a multi-
disciplined team of  engineering, legal, and financial experts,
Including bond counsel and the bond underwriter.  The develop-
ment of a financial  agreement can also Involve extended
negotiations with the contractor.  The municipality should be
prepared to devote the effort required to prepare the necessary
legal and financial  agreements Involved In Implementing a
privatization  plan.                         ;.

     In order to be attractive, a privatization proposal must
demonstrate that the necessary services can be provided for a
fee  less than  It would cost the municipality to build and
operate the needed facilities Itself.  However, the
municipality must be assured that the contractor Is committed
to the long term operation of the facility.  If possible, the
service agreement should specify that the contractor Is liable
for  any regulatory penallties resulting from non-compllance
with discharge requirements.  At the same time, the
municipality must be convinced that the proposed costs are
realistic, and that  the contractor (I.e., the equity owner) has
the  financial capacity to secure the debt Incurred and pay
liquidated damages.  Obviously, privatization requires a firm
working relationship between the municipality and the
contractor.  This Is why privatization is often referred to as
a public/private partnership.  In actuality, it is a legal
arrangement where each party must fully understand its
responsibilities and obligations.  In order for the arrangement
to work, the municipality and contractor must work together
like-partners, because, if the arrangement fails, both parties
lose.
                               3-57

-------
BALANCING THE BUDGET AND MAXIMIZING REVENUED

     The  basic objective of budgeting in a wastewater operation
is  to  develop a  financial  plan that provides sufficient
revenues to cover  debt service, operating costs, maintenance
costs, and replacement costs.  In order to maintain a balanced
budget,  revenues must equal or exceed costs.  This is
accomplished by controlling costs and taking full advantage of
revenue  opportunities.  Cost control at a wastewater utility
requires sound financial planning and financial management at
the  administrative level,  as well as day-to-day attention to
cost saving opportunities  on the part of the operating staff.
Day-to-day cost saving measures have been discussed in previous
sections.  This section addresses adminstrative measures that
can be taken to help balance the budget, including:

    o     Enterprise accounting.

    o     Rate setting.

    o     Aggressive revenue collection.

    o     Service base expansion.

    o     Supplemental sources of income.

    o     Cash management.

Enterprise Accounting

    The  key to financial  planning and financial management Is
the adoption of a  self-sustaining utility management
philosophy.  Under this concept, the utility's financial plan
is based on generating sufficient revenues to cover the total
cost of deliyering a service.  Increased attention to the goal
of self-sufficiency can also help provide the motivation for
Implementing many of the cost reduction methods discussed in
this document.  In developing a financial plan for a self-
sustaining utility, the primary goal 1s to account for and
recover all costs incurred in operating and maintaining the
sewerage system.  This is often referred to as enterprise
accounting.

    Setting up and implementing an enterprise accounting
program requires that the utility manager carefully identify
all  the costs involved in operating the utility and accurately
determine its revenue-generating capacity.  After analyzing
total outlays and income, the utility should establish a rate
structure that will provide the revenue required to balance the
                               3-58

-------
 budget. When sewer rates are kept artificially  low  (i.e.,
 subsidized by a  municipality's  general  fund  or  water system
 revenues), the operating budget will  usually be fixed.   In most
 cases it will  not fully provide adequate operating  capital and
 capital improvement funds.   Enterprise  accounting,  on the other
 hand, allows the utility manager to  establish whatever
 operating and  reserve accounts  are required, providing adequate
 revenue can be generated to  fund the accounts.

     In developing the operating budget  for an enterprise
 operation, the utility manager  should consider  long-range needs
 as  well  as day-to-day operating costs.  Typical  long-range cost
 items to consider include:

     o    The cost of repairing  and replacing sewerage system
          infrastructure and  equipment (e.g., pumps, blowers,
          sewer lines, vehicles)  based on realistic  projections
          of service life.

     o    Capital  investment  required for needed  capital
          improvements (e.g.,  plant upgrading, sewer extensions).

     o    Increased  future debt  service  costs, given the reality
          of higher  interest  rates  and larger local  shares, due
          to  reduced Federal  and  state funding.

          The cost of complying  with  emerging regulatory
          requirements  (e.g.,  plant upgrading, increased
          monitoring requirements,  sludge disposal restrictions)

     In  defining opportunities for  generating the revenue needed
 to  fund  the  identified  budget items,  the following  possible
 revenue  sources should  be considered:

    o     The potential  for expanding  service area and thus
          increasing the  revenue  base.

    o     The assessment of sewer rates  based  on  an equitable
          sharing  of capital and  operating costs  (i.e., service
          charges  that take into  account the  actual volume and
          strength of wastewater  from  different sources).

    o    Supplemental sources of income in addition to service
         charge revenues (e.g.,  sale  of effluent or sludge).

    It is very Important that the  projection  of costs and
revenues be an accurate as possible  In order  to develop
realistic budgets and financial  plans.
                               3-59

-------
     In order to  establish an  effective  system  of accounting for
 costs  and  revenues,  the  utility should  develop an automated
 system for keeping track of expenditures  and revenues,  this
 will  enables the manager to closely monitor the budget and make
 adjustments  to the financial  plan  on  a  timely  basis, as
 required.
               ILLUSTRATION - ENTERPRISE ACCOUNTING
    The  Kent  County  Department of Public Works  (KCDPW) of Grand
 Rapids,  Michigan  is  an example of a  sewage utility that
 operates on an  enterprise accounting-type budget.  The KCDPW
 derives  its revenue  solely from user fees from  its customers.
 The utility has established an accounting system that documents
 the expenses  and  revenues of over a  dozen separate sewage
 systems  and water  systems.

    The  enterprise accounting system contains standard cost
 data plus documentation of the time  spent by maintenance staff
 in twenty-four  (24)  maintenance activities.  The computerized
 reporting system then makes this  cost and manpower information
 available to  participating municipalities (i.e., customers).
 This provides back-up documentation  submitted with monthly
 invoices.  Utility managers at the KCDPW are also initiating an
 employee productivity/performance evaluation system using the
 information reported in this system.  The KCDPW Managers hope
 to utilize the  information to better forecast and schedule
 manpower requirements, and improve overall staff efficiency in
 performing routine maintenance tasks.

    In the Village of Dexter, Michigan (population 1,750), the
Village Manager has  recently automated the revenue and
 expenditure data utilized in the  municipal budget.  The manager
 now has access .to  expenditures and revenue data by department
 (e.g. sewer, water,  refuse collection) on a monthly basis.  The
monthly print-out  shows a comparison of monthly expenses and
 revenues, year-to-date totals and  the annual budget by line
 item within each municipal service fund account.  The
 information is used to track expenses and identify high-cost
 items as part of the budget control  and preparation process.
                               3-60

-------
     If properly implemented,  enterprise  accounting  should
 Improve the efficiency of any wastewater operation.  The key to
 its success is  that the utilities  manager  become more aware of
 cost control  and revenue enhancement opportunities.  To put it
 simply, a wastewater operation should  be managed as  if 1t were
 a  private enterprise (i.e., a profit making  venture).  The only
 difference 1s that there is no profit  per  se; any income in
 excess of total  operating expenditures is  applied to reserve
 accounts to serve future needs (e.g.,  to .fund capital
 improvement projects).

     Although  enterprise accounting may force utilities to raise
 service fees, very often other sources of  revenue can be
 identified to help generate the supplemental income  required to
 support the operating budget.  In  most cases, enterprise
 accounting will  give the utilities manager more flexibility in
 budgeting a wastewater operation.  This  is because the manager
 can budget whatever Is appropriate provided  there is a plan for
 generating the  required revenue.

 Rate Setting

     A vital part of enterprise accounting  is establishing a
 rate structure.   This discussion is presented to highlight the
 principle of  "fair and equitable"  allocation of costs in the
 rate setting  process.  That is,  not only should rates be set to
 generate  sufficient revenue (as required in  enterprise
 accounting),  but the rates should  reflect  the actual cost of
 providing service to different classes of  users.

     Establishing fair and equitable user fees can be a
 complicated process, particularly  for  service areas where the
 quality and quantity of wastewater generated by different users
 varies widely.   Utility managers have  to decide how to best
 allocate  the  costs  of system  0, M, & R (operation, maintenance,
 and  replacement)  and  debt service  as part  of their annual
 budgetary process.   The  first step is  to accurately determine
 the  total  user charge revenue requirements.  In some cases, the
 cost of the wastewater operation 1s subsidized with  funds from
 general tax funds or from the revenues of  other utility
operations  (particularly water supply  systems).  In such cases,
 the user  charge  revenues do not reflect  true operating costs.
 In determining true operating costs, reserve funds should be
 Included  to provide  for  future replacement and capital
 Improvement needs.

    The following items  should be  considered in developing a
 rate structure:
                               3-61

-------
         The  basic  user charge  should assess all users of
         wastewater services for their proportionate share of
         operating  costs  based  on the strength, volume, and
         flow rate  of their discharge.  The operating costs
         should  include debt service and administrative costs,
         as well as day-to-day  O&M costs.

         A reserve  fund for future replacement of major
         equipment  should be established.  The reserve fund
         should  be  a budgeted item each year (based on an
         assumed depreciation rate) and be allowed to
         accumulate (e.g., in a sinking fund) to provide
         immediate  funds  for equipment replacement when needed,

         A reserve  fund for future capital improvements (i.e.,
         system  expansion, upgrading, and rehabilitation)
         should  be  established  to provide a source of local
         share capital for future projects.
           ILLUSTRATION - MODIFICATION OF RATE STRUCTURE
    Public opposition to the high costs of sewerage services in
Sussex County, Delaware, forced the County to reevaluate its
user charge system.  The County provides water and wastewater
utility services to several water and sanitary sewer districts
in the coastal (recreational) part of the county.  Sanitary
sewer district residents were paying between $350 and $500 per
year for sewer services under a uniform rate structure (i.e. a
front footage assessment to cover debt service and a flat rate
per EDU to cover O&M expenses).  High seasonal peak flows
demanded that the newly constructed treatment facility have a
large capacity which was underutilized much of the time.
Repayment of the very large debt placed an unfair financial
burden on the full-time resident users who were not responsible
for the peak summer flows.  A consultant hired by the County
recommended a modified rate structure based on recovering the
actual costs of providing sewer service, as a function of the
peak and average flow characteristics, wastewater strength, and
the number of full-time and part-time residents.  The
recommended user charge system resulted in a more equitable
distribution of user fees among full-time and part-time
residents.  Given the more reasonable fee structures, new
customers were more willing to connect to the system and the
effective service area was significantly expanded.  The
combination of modified sewer rates and expanded service area
reduced the typical homeowner's sewer service charge by as much
as 50 percent.
                              / 3-62

-------
     Rate  structures,  therefore, can  Influence the cost of
 service to the  customer  and affect the ability of a utility to
 raise  the necessary funds  to operate, maintain, and repair the
 system on a continuing basis.  Concern about rate structures
 and  operating costs Incurred In small municipalities has been
 expressed by many  state  regulatory agencies, Including the
 Oregon Department  of  Environmental Quality  (DEQ), the New
 Jersey Department  of  Environmental Protection (DEP), and the
 Illinois  Environmental Protection Agency  (EPA).  The Oregon DEQ
 has  offered technical assistance and advice to communities on
 how  to Improve  their  financial planning.  The New Jersey DEP,
 In conjunction  with the  EPA, has sponsored the publication of a
 series of guidebooks  on  the financial management of wastewater
 facilities.  The Illinois  EPA, on the other hand, Is
 considering reviewing wastewater utility audit reports and rate
 structures In order to Identify financial problems and to
 monitor operations costs on an annual basis.  The EPA Region I
 Office (In Boston, MA),  along with participating New England
 States, has recently  sponsored financial management workshops
 for  municipal officials, and financed the publication of a
 Utility Management Manual  which describes many financial
management options.

Aggressive Revenue Collection

     Once  a budget  Is  prepared and user rates are established,
 It becomes the  responsibility of the utility to collect the
revenue from the service area customers.  The utility must
assure the timely  receipt of customer payments in order to
maintain  a positive cash flow.

    Many  techniques are being used by the public and private
sector to alleviate the problem of delinquent payments. Some of
these techniques include:

    o     Use of preaddressed (and/or postage paid) return
          envelopes.

    o    Stiff late payment penalties.

    o     Prompt notification of overdue payments (automated
         cost reporting systems can help managers monitor
         delinquent accounts).

    o    Use of computerized billing and recordkeeping system.

    o    Post office box arrangements (payment checks are
         delivered  daily to the utility's bank for immediate
         deposit).
                              3-63

-------
          Bank  collection  arrangements which enable customers to
          pay utility  bills over-the-counter at local banks.

          Customer  budget  plans designed by the utility to
          spread the cost  of service uniformly over the year.
          (This helps,  the  customer budget his or her resources
          on a monthly basis.)
        ILLUSTRATION - AUTOMATING BILLING AND RECORDKEEPING
    The automated cost reporting system utilized in Dexter,
Michigan enables the town manager and clerk to devote more time
to billing and collecting delinquent bills.  It also allows the
Village to bill on a monthly basis, thus helping to spread the
annual cost of service in lower monthly installments and to
better monitor and reduce the number of delinquent accounts.
These changes helped improve the village's case flow position.

    Monthly billing requirements and concerns for delinquent
accounts led the South Fork Sewer and Water District to
automate their billing system.  Each of the 1,000 sewer
accounts in the District has a computerized payment file which
shows payment histories, water usage, and service performed.
The recordkeeping and billing system enables the District to
maintain tight control  over the status of unpaid bills.
Service Base Expansion
      c
    One method of dealing with increasing operating costs is to
expand the revenue producing base of the wastewater utility.
Service base expansions can only be done if the treatment plant
has the available capacity.  This available capacity may be
used to treat wastewater, septage, or sludge from adjacent
communities through various arrangements as illustrated below:

    o    Small  independent treatment facilities (e.g.,
         developer-built facilities or small public utility
         systems) can be phased out and connected to a central
         treatment plant which has usable capacity.

    o    Two independent treatment systems can be connected on
         a "load-shifting" basis.  That is, during peak flows
         an overloaded plant can send wastewater flows to an
         underutilized plant for treatment.  In this way, both
         plants remain operational and expansion of the
         overloaded plant can be avoided, or at least delayed.
                               3-64

-------
     o    Septage from septic tank pumping,  and  sludges  from
          other existing wastewater treatment  systems  can be
          accepted for a fee.  In most  cases,  only minor capital
          Improvements will  be required to accommodate the
          treatment of septage and additional  sludge,  and the
          Increase In operating cost should  be nominal.
          Therefore, the fees collected can  produce a
          significant return on revenue.

     o    Unsewered developments can be added  to the treatment
          system through the extension  of sewer  collection
          lines.  If the plant Is underutilized, the additional
          flow to the plant  through an  expanded  customer base
          may contribute to  Improved plant performance.  Using
          up  available plant capacity may not  be feasible In
          every case; however, there 1s a potential for
          generating additional  revenue by using the facility to
          Its maximum capacity.

     o    Local  sewer connection ordinances  (I.e., laws
          requiring that a developed property  connect  to the
          public sewer system 1f service  Is  available) should be
          en forced.

     o    In  cases where the demand for sewer  service  1s great
          but treatment capacity 1s limited, plant expansion may
          be  justified.   A thorough cost-effectiveness study
          should be done to  determine If  the Increased revenues
          justify the capital  Investment.

     Even  If  plant expansion Is  not required,  expanding  the
service base may Involve considerable  capital Investment (e.g.,
extension of sewer lines, phasing out  existing  smaller  treat-
ment  facilities,  Installation of sewer lines  to connect to the
main  treatment  plant,  retrofitting the existing plant to
accommodate  septage or  sludge handling and  treatment).

    Special  legal  and  Institutional  Issues  associated with the
expansion of the  user  base  need  to be  examined.  Significant
technical Issues  Involving  the  treatment of septage or  sludges
at an existing  plant  (e.g.  the  Impact  of shock  loads) also need
to be addressed.

    While expanding  the  user  base through the addition of more
customers or  by providing additional treatment  services may
offer significant  financial advantages,  the technical feasi-
bility of such  plans must be  carefully evaluated.  Projections
of service demand and  facility  needs must be  accurate and
realistic.  The costs and benefits of  alternative user.base
expansion scenarios should  be thoroughly examined to evaluate
the full potential of various options.
                               3-65

-------
         ILLUSTRATION  -  EXTENDING SERVICE TO NEW CUSTOMERS
     In  Sussex  County, Delaware, household sewage service bills
of  up to  $500  per year  caused much dissatisfaction and protest
from County  residents.   In order to reduce the high user
charges which  resulted  from the construction of a new sewage
treatment  plant, the County expedited the completion of local
facilities plans which  allowed the eventual connection of an
additional 2,500 customers to the system.  These new customers
now constitute a third  of the total user base for the treatment
facility.  User charges for system customers were reduced
dramatically by the addition of these customers.
     ILLUSTRATION - SUPPLEMENTAL INCOME FROM SEPTAGE TREATMENT
    Many sewage utilities have found that offering septage
treatment services provides an additional source of revenue.
In Somersworth, New Hampshire, for example, a 2.6 MGD facility
treats on the average about 7,500 gallons per day of septage
delivered to the plant by private haulers.  Annual revenues
from septage treatment fees were $12,000 In 1982, which
represents ten percent (102) of the sewage department's annual
revenues.
Supplemental Sources of Income

    Additional Income from treatment system operations can be
realized through creatively promoting the resources available
at the plant.  Additional revenue from the sale of treatment
system by-products, such as sewage effluent, sewage sludge,
methane gas, and other recoverable products, 1s possible with a
little Imagination and salesmanship.  Many communities
underestimate the value of the waste material being produced at
their wastewater treatment plants.  With a sound marketing plan
and good public relations effort, selling waste material can be
an effective means of raising revenue.  The reuse of residual
wastes may also eliminate or reduce the cost of otherwise
disposing of these residuals.

Some examples of raising supplemental income include:

    o    Sewage effluent and sludge can be sold directly to
         farmers to Irrigate tree nursery products and crops.
         Sewage utilities can also grow crops or nursery stock
         by irrigating with sewage effluent to market locally.

                              3-66

-------
     o    Land application of septage or sewage sludge,  which
          also serves as a nutrient base for crop  production.

     o    Other recoverable products, such as methane  gas,  could
          become a marketable product to local  industry.

     o    Contract services to other utilities (see  discussion
          on "Contracting Staff to Others" in "Reducing  Labor
          Costs" Section).

     o    Interest income (see discussion on "Case Management").

     The feasibility of selling effluent or recovering waste
 by-products should be carefully evaluated before  attempting to
 implement such a program.  This: evaluation should consider
 technical feasibility (i.e. the ability to consistently produce
 the desired by-product), as well  as market demand and public
 acceptability.  If the demand for the product Is  not  great
 enough, the additional  income generated may not cover the
 capital Investment and increased  operating costs  involved,
 despite the savings in disposal costs that may be realized.
 Public  protests (e.g.  objection to land application of  effluent
 or sludge products) may delay or  even prevent  the
 implementation of by-product reuse schemes.  The  posture of
 local and state regulatory agencies can also have great  impact
 on the  feasibility of reuse plans.
           ILLUSTRATION  -  SUPPLEMENTAL SOURCES OF  INCOME
Producing a  Case  Crop  Using  Effluent  Irrigation

    The sewage  treatment  facility  in  the City of Roosevelt,
Utah,  is being  used  to irrigate  land  which grows a cash crop
for the utility.  The  treatment  facility consists of a
.facultative  lagoon with winter storage and land disposal,
designed to  serve a  population of  about 22,000 people.  The
land disposal system consists of center-pivoted sprayed
irrigation units  that  operate over a  total wetted area of 268
acres.  An alfalfa cash crop is  harvested at this site (3 or 4
times each year).  Total  revenues  from the sale of the
harvested crop  were  $58,900  in FY  1980, $59,400 in FY 1981, and
$59,600 in FY 1982.
                               3-67

-------
    The decision to utilize a cash crop in conjunction with the
 spray  irrigation system in Roosevelt City was made in
 consultation with a plant/soil scientist from the Utah State
 University  Cooperative Extension Service and a local advisory
 group, composed of farmers from the area.  Field evaluations
 and productivity studies were performed by the Cooperative
 Extension Service representative.  The proposed cropping plans
 and economic feasibility studies were then reviewed by the
 local  advisory group, which recommended alfalfa as the cash
 crop with rotation of grain to establish the alfalfa.

    While operating revenues appear to be substantial, a
 comparison of revenue and expenditures for the cash crop
 enterprise  (prepared by the City's auditors) shows operating
 expenses exceeding revenues from the annual harvests.  The
 operating expenses of labor, supplies, cutting and bailing,
 utilities, and equipment repair (of the irrigation system) were
 shown  in the report to constitute a significant portion of the
 total operating cost.  According to the city finance director,
 a positive cash flow can be realized if additional land area
 were irrigated.  The City is considering different crop
 management practices in an effort to increase hay production.

    This example illustrates the importance of carefully
 estimating operating costs, and being realistic in projecting
 the revenue potential for such ventures.

    Equally important in this case is the need for continuous
 follow-up and performance evaluation of the project by
 knowledgeable persons (e.g., farmers and crop management
 specialists in this case) to review the techniques used, and
 formulate recommendations to enhance the productivity and
efficiency of operations.

Lease of Effluent Irrigated Cropland

    At the Township of Gratton, Michigan, sewage facility
revenues from the leasing of an irrigated apple orchard
constitute one source of operating revenue.  A local farmer
pays a $6,600 per year fee to the Township to lease the orchard
 site which includes the use of effluent from the Township's
wastewater facility for irrigation water.  This revenue
represents about nine percent (9%) of the total annual
operating budget for the sewage collection and treatment system
in the Township.  The Township is also planning to harvest
timber from hardwood trees planted at another- sewage disposal
 site where effluent is used to irrigate the land.
                               3-68

-------
 Selling Effluent

     In Hillsboro, Oregon, the Unified Sewage Agency  sells
 sewage effluent In the summer months to a  golf course  and  to  a
 tree farm'for Irrigation.  Proceeds are about $7,500 per year.
 The sewage agency personnel  have estimated the average revenue
 for the sale of effluent to  be $10 per acre-foot.  Revenues
 from the sale of effluent for Irrigation will  vary according  to
 the climate, proximity to users, and price and availability of
 alternative water supply sources for Irrigation.

 'Selling Methane Gas

     The sale of methane gas  from the Unified Sewage  Agency's
 Forest Grove Facility (2.5 MGD) to a nearby Industrial  park Is
 also under consideration. The adjacent businesses would use
 the gas to help fuel  their boilers.

 Recovering Other Haste Products

     The Unified Sewage Agency has also discovered that silver
 chloride,  recovered from spent COD solutions In their
 laboratory, Is  a marketable  product.  In 1982, the recovered
 s'llver chloride was sold for about $100. The spent COD
 solutions  are normally disposed of without attempting  to
 recover the silver chloride.

 Selling Sludge

     The Galesburg Sanitary District has been applying  sludge  to
 a  sod  farm adjacent to the treatment plant.   This saves the
 district the cost of  hauling the sludge 17 miles to  a  landfill
 and  results In  a savings of  $60,000 a  year 1n  sludge disposal
 costs.   The District  has contracted with an  Individual  to
 operate the sod farm  on the  District's land.   The contractor
 plants  grass seed,  maintains It, and then  pays the District for
 each square yard of sod harvested.
    These extra sources of  revenue, however  small, can be used
to supplement the operating budget.  They can also be utilized
to set up funds for special purposes.  For example, an
"incentive fund" to serve as a basis for merit awards, could be
established, or a special fund for training  seminars and travel
for plant operations personnel could be maintained.  These
creative uses of the utility revenues have the added benefit of
encouraging creativity and pride in the operations staff.  The
main advantage of having supplemental sources of income is that
the utility does not have to depend entirely on service fees to
raise the needed revenues, and thus may avoid unpopular rate
increases.
                               3-69

-------
Case Management

    As mentioned in the previous section, the interest in
investments can produce supplemental  income for a wastewater
utility.  Very often, this additional revenue can be realized
without a lot of time or effort on the part of the utility
manager.  Case management is the process of managing the
utility's fiscal resources in order to take advantage of cash
availability for investment and maximize the yield on
investments.

    There are basically two options that a community can choose
in implementing a cash management program. The two options are:

    o    Consolidate temporarily idle cash from available fund
         accounts within the utility  operation into a single
         special fund for investment, and invest the available
         monies in low risk securities (e.g., treasury bills,
         certificates of deposit, repurchase agreements).

    o    Participate in local  government investment pools
         coordinated and managed by county or state agencies.
         Idle cash for investment can be found in a variety of
         fund accounts (e.g.,  water and sewer operating
         budgets, revenue sharing funds, tax collection funds,
         and construction and  capital improvement funds).
         These idle monies may be simply awaiting use, set
         aside for pending payments,  held in reserves required
         by law, used as operating reserves, or collected in a
         revenue account.  Interest earnings from pooled cash
         investments are typically credited to the contributing
         funds based on the proportion of their contribution.
         Generally, cash flow  management accounting systems
         (i.e.,  automated record keeping systems) are necessary
         to  track and forecast cash needs and balances.  Cash
         flow forecasts, for example, can tell  the case manager
         how much idle cash will be available for investment,
         when and for how long.  Simple computer programs can be
         written to track the  status  of investment funds.  Some
         banks offer this service as  part of their financial
         management services to  municipalities and utilities.
                              3-70

-------
     Local government Investment pools can be organized through
 the auspices of the state or be created by local  governments
 themselves In cooperation with independent administrative and
 investment advisors.  Consolidating separate accounts  into a
 pooled cash fund increases the flexibility of the investments.
 It enhances the ability to invest larger sums of  money for
 longer periods of time, generally resulting in higher  Interest
 rates and higher yields.  Investments should be made in safe
 and liquid interest bearing funds to ensure that  monies are
 available upon demand and that investments are protected from
 market defaults.  Despite the advantages of cash  management,
 many local units of government are reluctant to pool their
 resources into a county or statewide pooled Investment fund.
 In order for such investment pools to be successful, the
 participating agencies must be comfortable with the  fund
 manager and trust that sound Investment decisions will  be
 made.   It may take some time to earn this trust,  but once
 established, Investment contributions and average yields could
 increase noticeably.

     Over a dozen states and a multitude of localities  have
 organized local  government Investment pools.   State operated
 local  investment pools, for example, managed  some $2.5  million
 in assets in 1981.   The participation in a  state  operated
 investment pool  can  help simplify cash management for  small
 communities  that have  neither the staff nor the resources  to
 develop a full-scale cash management program of their  own.
                  ILLUSTRATION -  INVESTMENT POOLS
     In Kent County, Michigan, investment pooling is coordinated
and managed by the county treasurer's office.  During 1982,
about twenty-eight townships, cities, and villages earned over
$585,000 in Interest through the county's pooled investment
fund program.  (The invested balance for the local government
unit pool in that year was $4.7 million.  Interest yields in
the pooled fund program for the year averaged over 14 percent,
which is at least twice the Interest yield which the local
governments were accustomed to receiving in their normal
investment practices.  The participants in the local government
unit pool Included rural townships, some of which invested debt
fund proceeds from the sale of bonds used to finance sewer and
water projects.  Other townships Invested both operating and
debt fund revenues Into the county pool.
                              3-71

-------
    In the City of Portage, Michigan, a pooled cash management
program was initiated by the city manager and finance
Department in 1980.  The system consolidated idle cash from
thirty-six different fund accounts in the city government.
These included the general operating fund, water and sewer
operating and debt funds, and a variety of other debt and
operating funds.  In fiscal 1981, the total city-wide interest
earnings from the 36 funds was $1.2 million.  In the subsequent
fiscal year, it was $1.6 million - the equivalent of most 4
mils of property tax.  The interest earnings from the Pooled
Investment Program are roughly three (3) times what they were
before the cash management and investment pool programs were
initiated.
    Pooled investment (and cash management) programs operate
within a defined framework of legal and administrative
constraints.  Legal constraints consist of Federal, state, and
local laws and regulations that restrict or otherwise affect
local cash management practices.  Federal laws and regulations,
for example, strictly govern investments of grant funds and
money from the sale of municipal bonds.  Other Federal
regulations require special treatment of interest earned on
investments of Federal funds (e.g., revenue sharing).

    As with other local  government functions, the powers,
duties, and responsibilities of municipalities in the area of
cash management are set forth by state law (except for home
rule municipalities).  Local laws may restrict the fund manager
in a number of ways as well.  This makes it essential that the
fund manager carefully review all local ordinances, state
statutes, and Federal laws, and seek professional advice to
avoid legal problems.  State municipal leagues may be able to
offer information regarding the use of such investment programs
in a particular state.
                              3-72

-------