COFee: A Market Driven Solution to Today?s Clean Water Challenges

COFeeA fundamental question: Which alternative is most cost effective ? going through the process of planning and financing for more wastewater treatment capacity, or making better use of existing treatment capacity by making permitted dischargers be more efficient??

Assuming that your NPDES permit is current or will not require a change in the treatment process in the near term, it is always better to productively use each unit of treatment capacity before reaching the common threshold of 85 percent usage when planning for additional capacity is required.

Given that threshold point at which a publically owned treatment works (POTW) would begin the expensive and time consuming task of treatment system expansion, is there a financial management technique that would move a system toward a goal of 84.99 percent treatment system capacity and thus, avoiding the threshold in the short term? One instrument for achieving that goal is implementing a Capacity Optimization Fee (COFee) system, such as the one recently designed for the City of Nampa, Idaho by Voltaic Solutions, LLC.

While working with Nampa?s Industry Working Group in 2012, Voltaic Solutions designed their comprehensive Industry Incentives Policy that included the COFee system. Approved by the Nampa city council in November 2012, the Incentives Policy establishes four key tools to promote the economic development and efficient use of the wastewater system by industrial customers:

? ?Licensing? of purchased capacity to discharge;
? Providing for the loan, lease or purchase of discharge capacity;
? Granting industries the ability to exchange their capacity ?licenses? (with city oversight) in an open market system; and
? Through the COFee, promoting the most efficient use of permitted industrial discharge allowances.

How the COFee Works
A permitted industry can discharge up to 115 percent of their annual peak discharge level. If, for example, their permitted level is 125 percent of their peak, then the COFee is assessed on the discharge above 115 percent up to the 125 percent permitted level. Essentially, the COFee is charged for the difference between the higher permitted level and the demonstrated maximum use of the treatment system. In this example, the industry has 10 percent more capacity than it potentially needs ? and this is 10 percent of their permitted discharge level that could be used by another customer. The ?incentive? then, is to offer the unneeded or excess capacity to a participating industrial discharger through the capacity exchange (market function).

Efficient use of existing capacity is what motivated the City of Nampa to design the COFee. It is the purchase of and the right to exchange the ?license? that makes the COFee work. The idea is that if industrial customers would only use the capacity of the system they really needed, perhaps the purchased, but unneeded, discharge capacity could be used by someone else ? perhaps by that next industry whose need for discharge capacity in the treatment system might force the city to begin expensing the process of system expansion (85 percent planning threshold). ?

?Unneeded? Discharge Capacity

So, what if that industry holds on to the ?unneeded? discharge capacity? In our example, the industry holding unused capacity would be assessed the Capacity Optimization Fee. The City of Nampa?s recent cost of service study includes the COFee which, when assessed, compensates the city for the typical costs associated with being ready to provide wastewater treatment for this industrial customer that really doesn?t need it. Though the fee is relatively modest, the principles of customers paying for what they use (or in this case, what the city must be ready to provide even if they don?t use it), are reinforced through the COFee.
As mentioned earlier, it is the ability to exchange the ?license? to discharge that makes the COFee really work. Knowing that a 15 percent buffer exists over and beyond the maximum annual discharge level means that a well-managed industrial discharger wouldn?t need to hold on to unused capacity. The COFee system creates a disincentive to the industry for holding unused capacity for speculative purposes by assessing charges that recover the costs of capacity readiness.

On the other hand, it is the ?market? for discharge capacity that determines whether holding onto unused capacity for the eventual sale to a new customer makes economic sense to that industry.? The capacity ?exchange? truly creates the market. One could foresee that as total discharge capacity of the wastewater plant becomes scarcer, capacity units exchanged in the market would become more valuable. Either way, under the COFee system, a city is compensated for the unused permitted capacity of the system, or new industries may become new wastewater system customers. Thus, the COFee helps move the community toward the most efficient use of the POTW. When the COFee is fully operational, the market drives the industrial participants toward the most efficient or productive use of (each unit of) capacity. The COFee allows the individual market needs of each participating industrial discharger to be achieved (by over- or under-consuming) while meeting the overall discharge requirements of the POTW.

Another Feature of the Capacity Optimization Fee System
It buys time. The reality is that a growing city will inevitably need to upgrade its wastewater treatment facilities ? not only to meet growing demand, but also to adapt to ever more stringent NPDES discharge targets. Installing the COFee mechanism helps to squeeze ?excess? and previously committed discharge capacity from the users that affect system limits the most. This excess might be all that is needed to accommodate modest demand and give the community more time to prepare for the financial and political challenges that come with POTW expansion.

The innovation of the Capacity Optimization Fee within the broader policy of incentives for industrial customers has become the City of Nampa?s approach to solidifying the connection between wastewater infrastructure and economic development. The COFee system concept demonstrates how a financial management mechanism can transform how communities achieve the goal of providing the best service to the most customers at the least cost for the longest period of time.

For more information about the COFee and its implementation, contact the authors at Voltaic Solutions, LLC.

Kevin O?Brien is the executive director of the Great Lakes Environmental Finance Center and the Center for Public Management in the Maxine Goodman Levin College of Urban Affairs at Cleveland State University.
William L. Jarocki is the founder and president of Voltaic Solutions, LLC, a consultancy firm specializing in public finance and management and software development, based in Boise, Idaho.
Kristina J. Gillespie is the chief operating officer at Voltaic Solutions, LLC.

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