UnitedStates
Environmental Protection
Agency
Off ice of
Water
(WH-595)
June 1990
EPA430/09-90-002
xvEPA
A Guide For Evaluating
Wastewater User Service
Charge Systems
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Do This...
.“ Read pages 1-7 to get the overall picture
of what you will do.
..‘ Look to pages 810 for the step-by-step
process.
& Use the worksheets on pages 11-17 to
evaluate a utility.
v Take the form letters on pages 18-22
and adapt them for your own use.
i’ Check the appendix on pages 23-24 for
specific requirements.
This booklet was prepared by Sharon Rollins. Galy Fouts. Alan Major and Anne
Hawkins of The University of Tennessees Institute for Public Service and Haig
Farmer of the U.S. Environmental Protection Agency.
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Getting Started
You’re a federal or state official evaluating the financial
soundness of a wastewater utility operation. Obviously, you
need a general understanding of wastewater operations. But
pnmarily, you need to know if the utility is generating enough
revenue to properly operate and maintain itself.
Why?
Because how a wastewater utility handles revenues and
expenses is crucial. Good financial management can prevent
premature deterioration of facilities that ultimately leads to
discharge permit violations.
This manual will help you evaluate whether wastewater
utility’s user service charges are adequate tocover operations.
It will tell you how to organize for a field visit, what homework
to do, with whom to meet, what questions to ask, what
records to review and how to analyze all the information you
gather.
Your first evaluations will be time-consuming. However,
with some experience. you’Ll learn exactly what documents to
get and what questions to ask—and how to ask them!
Eventually, you can evaluate a utility’s financial operation in
a few hours.
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You don’t need to be an accountant or have a background
in utility finance. You can use this guide to effectively
evaluate the system’s financiaihealth.
Wastewater user fees are NOT a mystery.
Once you understand all thepieces and fit them together,
they’ll create a clear picture of the overall financial operation.
The Big Picture
You will look at the wastewater treatment facility’s
financial management system and how it fits into the overall
utility operation.
Two major components—revenues and expenses—make up
the financial operation. And these two components have
several pieces. We’ll examine the relationship between these
pieces closely.
Be aware that the financial operation doesn’t stand alone.
To properly evaluate a facility, consider other things that can
impact the health of the system. For sound operation, a
facility should have:
• an effective organizational structure,’
• clear, written policies and procedures,
• trained, conscientious staff,
• efficient operation and maintenance practices,
• accurate budgets, audits and record-keeping,
• good customer relations.
S
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Evaluating Revenues
and Expenses
Two major components make up the financial picture of a
wastewater utility operation—revenues and expenses.
Reve Rues...
..are all monies
received for
wastewater
operations. Get
thesefiguresrfxom
management,
• budgets and
financial
statements.
A user service charge is the central and most important
piece of a facility s financial puzzle. Its the fee charged users
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Special User Charge Requirements
ForEPAfunded facilities, the utilitymust comply
with its EPA approved user charge system to:
Charge each user (or user class) its proportionate
share of the operation, maintenance and
equipment replacement costs based on qupntity
and qw lity of discharged wastes. —
• Notify users of rates rnnii 11y . —
I • Distribute infiltration and Inflow costs
proportionally among all users.
• Impose surcharges for wastewater that requires
additional treatment.
• Establish a financial management system to
account for revenues and expenses.
(For further EPA requirements, see page 23.)
State and local governments may:
• Specify an acceptable accounting system—how a
utifity records, classifies and reports information
on finances and operation of the system.
• Require certain reserve funds or coverage ratios
on debt.
for the collection and treatment of wastewater. It accounts for
nearly all of a system’s total revenue.
An effective rate structure will cl arge users their
proportionate share of the operatton. maintenance, equipment
replacement and debt service costs. Usually, a local
government implements its rate structure through an
ordinance or resolution.
Keep these things in mind:
• The user service charge for wastewater collection and
treatment should relate proportionally to the quantity and
quality of wastewater produced by the user. If the discharge
from all users is substantially equal—as expected from resi-
dential customers—then user fees would be based on the vol-
ume of wastewater. For commercial and industrial users who
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discharge high strength wastes, a surcharge is added because
it costs more to treat their wastes.
Normally the user service charge is based on the cus-
tomer’s water meter reading. Frequently, meter readings are
adjusted to account for water not discharged to the sanitary
sewer system. If water meters do not exist, then the charge is
based on equivalent dwelling units.
• How are the fees structured? Are the fees proportional
to use? Volume discounts or premiums are not proportional.
Is there a minimum bill? If so, is the minimum bill compatible
with the concept of proportional user service charges? Does
the utility bill monthly?
• The user service charge should include the costs of
transporting and treating inflow/infiltration. When the I/I
costs cannot be assigned to any particular user or user cate-
gory, the costs are distributed proportionally among all users.
• Are the fees reviewed and adjusted annually?
• Is there provision for informing customers annually of
the user fee schedule?
• Are customers outside the political boundary bified in
proportion to their use?
There are other pieces to the revenue picture but they are
very minor.
• Hookup/Impact fees... charges for new customers con-
necting to existing sewer lines.
• Taxes/Assessments.. .special front footage or other
annual charges.
• Interest earnings.. .interest earned from investments
like checking accounts, savings accounts and treasury bills.
• Other... may include sales of treatment byproducts such
as composted sludge and the penailties charged for not pay-
ing the sewer bill on time. This penalty is often a percentage
of the total bill.
Total
wastewater
treatment
rate equals
total costs
for
operation,
II UAU IL I LUJ ice,
equipment
replacement
and debt
service
divided by
total volume
of treated
was tewater.
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Operating
expenses do
riot include
the purchase
costs of new
capital
facilities (like
more
treatment
capacity or
sewer lines).
Operating
expenses
also exclude
1eprecto.tLon—
ti timate
oj vmuch
value the
utility’s plant
and
equipment
lose in a
given time
period.
• Salaries and benefits.. .the largest expense of most
wastewater operations.
• Utilities.. .the cost for electric, telephone, water and gas
service.
• Equipment replacement.. .generally the cost of obtaining
and installing equipment or accessories necessary to
maintain the capacity and performance for which the
treatment facility was designed and constructed. Annual
contributions to a separate equipment replacement fund is an
excellent financial management practice.
Other expense items include:
• Chemicals.. .for the treatment processes.
• Supplies and parts.. .lab supplies, gaskets, belts and
lubricants.
• Contract services.. .for equipment service, plant
operation or sewer line evaluation.
• Administrative.., the cost of providing facilities for
conducting business, liability insurance, postage. etc.
- -
• Principal and interest.. .payments made to retire debt.
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The Pieces...
What Do They Mean?
So far, we examined the pieces comprising the cash flow
operations of a wastewater utility. Obviously, revenues must
equal or exceed expenses for the operation to be financially
healthy. If that is not the case, the utility is in trouble.
Ultimately, facilities will deteriorate and violate discharge
standards.
Keep in mind your examination is a “snap shot” view of
where the utility’s financial operations are at this particular
time. Be aware of any blips in the snap shot. Is there
anything unusual happening with the financial operations
this year? For instance, were expenses down this year
because of al-i unfilled vacancy? Were revenues off because of
inadequate billing or collection procedures?
S
Where Do You Find Them?
Now you know how to recognize the user service charge
system components. You know what each piece means. But
where do you find them?
The pieces for the user service charge system puzzle are in
the local government’s financial records, the heads of local
government managers and at the treatment facility. This
means that YOU will venture into the land of local
government to solve the puzzle. You must know what
information to ask for, who to talk with, how to recognize
what you see and how to interpret what you find.
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The Evaluation...
Step-by-Step
H,
Understand why
Know WHY you need to evaluate a wastewater user
service charge system. Your evaluation may be a
compliance check, particularly if federal or state
grant or loan money was used to finance
construction.
v’ Perhaps the local government requested your
assistance in evaluating its user service charge
system to improve it.
Recognize the pieces
V Be familiar with the components of a user service
charge system. This booklet presents the pieces.
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plf
Prepare for the appointment
V Know what records you need to review: the most
recent audit report: the current budget; the
wastewater rate schedule; the sewer use ordinance;
contracts with other utilities; debt service schedules.
V Contact the appropriate local government official—
the wastewater system’s financial manager, the local
government’s comptroller or finance director or
utility manager.
V Schedule an appointment providing at least
2-4 hours for discussion, reviewing financial records
and touring wastewater facilities.
V Ask the official to provide the appropriate records for
the appointment.
Confirm
Follow-up your telephone conversation with a letter
(see sample on page 18) stating the purpose of your
upcoming visit. Set a beginning AND ending time for
the appointment and tell what records you need.
Include the User Service Charge Worksheet so they
can see what information you need.
V Confirm the meeting the day before the appointment.
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1 A j PPointment
V Discuss the operation with managers; review the
system’s financial records, ordinances and
management policies; and complete the User Service
Charge Worksheet.
V Tour the treatment facilities. Determine if what you
see confirms the information you obtain from records
and discussions with management. —
Point out problems
4f______
V Talk over problems as you see
them. Let the local
government kn
ow what will be
in your follow-up
letter.
—1
V
1-
Use the User Service Charge Worksheet, your
discussions with management. and what you saw at
the treatment facility to develop a report.
v
Advise the local government managers of your
findings, conclusions, comments and
recommendations. See pag 20 for a sample letter.
V Have the local government report back to you.
V Take any enforcement actions necessary to correct
the problems you found during your evaluation.
-1
After the visit
-4
Follow up
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Worksheet-i
Utffity/ Community Name: _________________
Name of Local Contact:
Telephone Number: I - Date
User Service Charge Worksheet
Management/Operating Policies/Compliance
1. Describe any NPDES permit violation(s) which occurred within the
last 12 months and the reason(s) for the violation(s).
2. Did insufficient operating revenues contribute to the NPDES
violation(s)?
3. Does the utility receive monthly accounting reports for wastewater
revenues and expenses? _____________________
4. Does the utility have a pretreatment ordinance?
5. Does the organizational structure of the wastewater utility present
any operational problems?
6. What is the annual personnel turnover rate? ___________________
7. Are the procedures for collecting delinquent wastewater bills
adequate?
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Worksheet-2
1. Does the wastewater budget show revenues and expenses by line
item? (Note: The wastewater budget should be separate from other
governmental utility budgets like water, garbage disposal, etc.)
2. What are the total annual budgeted revenues for the wastewater
operation?
TOTAL BUDGETED REVENUES
$
User service charges
Hookup/impact fees
Taxes/assessments
Interest earnings
Other
Total Budgeted Re venues
3. What are the total annual budgeted expenses for the wastewater
TOTAL BUDGETED OPERATING EXPENSES
-
Salaries and benefits
Utilities
F Equipment replacement fund
Chemicals —
Supplies and parts
Contract services
Administration
Principal and interest payments
Other
Financial Information
operation?
Total Budgeted Operating Expenses
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Worksheet-3
4. What are actual revenues to date? How do they compare with
budg eted revenues to date?
BUDGETED REVENUES VS. ACTUAL __
$ Budgeted I $ Actual
Total Revenues
—
5. What are actual expenses to date? How do they compare with
budgeted expenses to date?
BUDGETED EXPENSES VS. ACTUAL
f
$ Budgeted $ Actual
Total Operating Expenses
6. Does the wastewater utility show a cash flow problem?
III
ACTUAL REVENUES & EXPENSES
-
[ Total Revenues
Total_Operating_Expenses_(-1
Cash A vailable
7. How does the utility cover a revenue deficit?
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Workshe et-4
8. Does the utility review user service charges and adjust them
annually to reflect budgeted or actual expenses?
• ri
9. Does the utility have an equipment replacement
fund (ERF)?
b(
• r;i
10. What percentage of operation, maintenance and equipment
—
replacement funds are set aside for equipment replacement?
Equipment
Replacement ERF Costs
I =
Fund (Total Operating Expenses) - (P&1 Payments)
Xl00%
(ERF) (%)
ERF(%)=
11. Does a certified public accounting firm review
; the utility accounts?
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Worksheet-5
1. Does the utility distribute the wastewater collection and treatment
costs proportionally to each user, user class or political jurisdiction?
(40 CFR Pail 35) ric i:
2. Does the utility use a sewer use ordinance that incorporates a
proportionate wastewater rate schedule? (Attach a copy.)
(4OCFRPart35) rt
3. Does the utility distribute the I/I costs proportionally to each user,
user class or political jurisdiction? ____________________
(40 CFR Part 35)
4. Does the rate schedule specify a uniform rate for wastewater
treatment based on the volume of usage?
Rate = / 1000 gal ) ‘ -
5. Does the rate schedule provide for a minimum charge?
• r
6. What is the minimum charge? ________________
$1
7. Are customers notified annually of the wastewater rates?
(40 CFR Pan 35) I ’-
8. What is the actual total operation, maintenance, equipment
replacement and dëbt-service costs per 1000 gallons of wastewater
treated by the utility?
OM&R + Debt Service Costs _________
Treatment Rate = _____________________ = $1 I /1000 gal
Total Flow
User Service Charge System
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Worksheet-6
9. How does the utility determine wastewater user fees? (Check one)
Water meter readings? I I
Equivalent dwelling unit?
Other? [ Specify) ______ ____________________
10. Does the rate schedule specify sm-charges for high-strength wastes?
11. How does the utility determine surcharges?
12. What is the average annual wastewater bill for a typical residential
user? $1
13. Are users billed separately for wastewater services?
14. Do all political jurisdictions served by the utility. have a sewer use
ordinance which incorporates a proportional wastewater rate schedule?
(40 CFR Part 35) I ( ’1&
15. Do users outside the utility’s political boundary pay the same rate as
inside users? - -- - -
16. Do all serviced political jurisdictions meet the same user service
charge system conditions as the wastewater treating utility? (If No,
describe.)
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Worksheet-7
Wastewater Facility Tour
1. What is the current average flow trea ed at the facility (gallons per
day)?
gpd
2. Does the facility appear to operate normally? _____________
__________________________________________________________________________ U •
3. Is any equipment out of service? (Specify)
• r i
4.
Does maintenance appear satisfactory?
• r i
•
5.
Is good housekeeping evident?
I _ . _
• r ;
6.
Is the laboratory clean and well-organ ized?
It
• r i
7.
Are adequate chemicals, supplies and parts on
hand?
• r i
8.
is staffing adequate for the operation?
‘L T
• CI
9.
Are operators certified?
It .
• ri
. .
!
10.
Does the staff receive formal training?
i
• ri
!
11.
Do operational and compliance records appear
adequate?
I’(Y,
12.
Note other comments or problems:
L
!
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Sample Letters
Inittal letter to schedule art appointment for a user charge
evaluation
(Date)
Mr. James Sullivan
Finance Director
City of Simthtown
100 S. Main St.
Smithtown, TN 37923
Dear Mr. Sullivan:
This letter confirms our appointrtlent for (time), (month)
(date). (year), and lets you know what information I will need
to obtain during our meeting.
As we discussed on the telephone today. I will be evaluating
Smithtowns wastewater user service charge system. I need to
determine if it is generating sufficient revenues to cover
operation. maintenance, equipment replacement and debt
service costs. The evaluation will consist of (1) a meeting with
you and your staff to discuss the utilitys financial operations
and (2) a brief tour of the wastewater facilities. These
activities should take about four hours to complete.
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1 have enclosed a User Service Charge Worksheet I will use at
the meeting. Please complete as much of this worksheet as
you can before our meeting and be prepared to respond to the
questions. I will also need to review the following information
on your wastewater operation:
• the most recent audited financial statement,
• the current budget,
• current year-to-date revenues,
• current year-to-date expenses.
• the wastewater rate schedule and ordinance (or
resolution), and
• the sewer use and pretreatment ordinances.
Please call me at (area code and number) with any questions
you may have prior to our meeting.
Sincerely,
Anne Taylor,
Public Utility Specialist
enclosure
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Follow-up letter after a user charge eualuottort
(Date)
Mr. James Sullivan
Finance Director
City of Smithtown
100 S. Main St.
Smithtown, TN 37923
Dear Mr. Sullivan:
It was a pleasure to meet with you and your staff on (date) to
discuss your wastewater utility’s financial operations. As a
result of our discussions and the tour of your wastewater
treatment facility. I noted the following concerns.
1. The was tewater and water accounting systems are not
separate. The water and wastewater operations need to be
financially independent arid self-sufficient. The
Smithtown wastewater treatment facility was partially
financed by a grant from the U.S. Environmental
Protection Agency. This means Smithtown must establish
a financial management system which separately
accounts for wastewater revenues and expenditures. The
system must also identify the basis for determining
operation, maintenance, equipment replacement. debt
service costs and user service charges.
2. The wastewater utility does not collect surcharges from
users discharging high-strength waste although the
Smithtown wastewater system’s sewer use ordinance
requires a surcharge on thos users whose wastes
increase operation arid maintenance costs. This
ordinance must be enforced as a condition of your EPA
grant.
3. The actual wastewater expenses to date at the half-way
point in this fiscal year are $125.000. The total budgeted
amount for the fiscal year is $200,000. This results in a
projected deficit of 50 .0O0 for the year. User service
charges must be increased to provide the needed
operating revenue since collection of surcharge revenues
will not be sufficient to eliminate the deficit.
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4. The wastewater unit volume rate is insufficient to cover
the operational costs of the utility. A rough calculation
showed that the OM&R costs are$1.20/ 1000 gallons and
____ debt service costs are $0.60 for a total rate of $1.80! 1000
gallons.
___ 5. The accounting system does not budget for an equipment
____ replacement fund. You need an equipment replacement
fund to pay for equipment and accessories that wear out
___ during the life of the treatment facility. The fund is not to
be used for expanding the capacity or enhancing the
treatment facility ’s performance. It must be used to keep
____ the facility operating at the level for which it was designed
___ and constructed. Again, this is a requirement of the EPA.
___ 6. At the treatment facility, the secondary clarifier sludge
____ return pump was inoperable and a backup pump was not
available. The sludge return pump is essential to proper
___ operation. As we discussed during the visit, you should
install a temporary pump as soon as possible and repair
___ or replace the inoperable sludge pump. You need a
backup pump to prevent this circumstance from
reoccumng.
____ 7. The treatment plant grounds were poorly maintained. The
___ grass needed mowing: discarded equipment was lying
___ around: spillage from the sludge hauling operation
created a nuisance. The appearance of a wastewater
treatment facility is usually a good indicator of the level of
___ professionalism, motivation and training of the staff. It
___ also may be an indicator of inadequate funding/staffing of
____ the treatment facility. As a result of our discussions and
____ tour of the facilities, it appears that ad itional staff is
___ needed to achieve proper operation and maintenance.
___ 8. At the treatment facility, there was only a two-day supply
of chlorine and a limited supply of laboratory reagents
and chemicals on hand. Good management practice
requires an adequate supply of essential chemicals and
reagents on hand to operate and maintain the facility
properly. From our discussion, it appears the Smithtown
___ utility should revise its purchasing procedure to allow the
— superintendent to order routine supplies directly without
— waiting for governing body approval.
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9. This system had exceeded its monthly average BOD
NPDES permit limit fOr two consecutive months. The
major cause of this violation appears to be inadequate
sludge return. The pump outage discussed above should
be rectified immediately.
Many of the above concerns are consistent with the
conclusion that Smithtown’s wastewater treatment facility
needs more financial resources for proper operation and
maintenance. I have enclosed a copy of EPA’s public iion
Building Support for Increasing User Fees that tells how to
increase the facility’s revenue base.
Please develop a corrective action plan with compliance dates
to address the above findings, and submit the plan to this
office no later than (date).
Our office will be glad to work with the City of Smithtown to
protect its water quality and improve its wastewater financial
operations. If you have questions about this report, please feel
free to call me at (area code and number).
Sincerely,
Anne Taylor.
Public Utility Specialist
enclosure
cc: Mayor
City Council
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Appendix
Key EPA Regulatory Requirements for a User Charge System
A User Charue Svsteni:
Regulatory
Citation
40 CFR Part
• Distributes OM&R costs for wastewater
treatment to users (or user classes) in
proportion to the total loading of each
user (or user class); but, allows a lower
user charge for low-income residential
users after public notice and hearing. -
• Generates sufficient revenue to offset
OM&R costs.
• Allows the user charge system to be
based on actual use or, under certain
conditions, to be based on ad valorem
taxes.
• Establishes user classes as required.
35.2140
(a)(b)(i)
(Section 204W)
of Clean Water
Act}
35.2140
(a) (b)
35.2140
(a) WI
35.2140
(a) (b)
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• Notifies users annually of user charge
rates and the portion of ad valorem
taxes (if any) related to waste-water
treatment services. -
35.2140 (c)
• Establishes a fInancial management
system to account for revenues and
expenditures.
• Distributes infiltration/Inflow costs
among all users.
• Requires that toxic dischargers pay for
the incremental costs of treatment and
sludge disposal.
• Is adopted by all local government(s)
that contribute wastes to the treatment
works through legislative enactments or
other appropriate authority.
• Goes into effect before the treatment
works begins operation and remains in
effect during the useful life of the
treatment works.
35.2140 (d)
35.2140 (e)
(SectIon 301
of Clean Water
Act)
35.2140 (g)
35.2208
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