How Paying for Tomorrow’s Clean Water Will Be Different

Regional and Statewide Charges and Fees Can Help Pay for Projects to Reduce Stormwater and Agricultural Runoff

By Michael Curley

Forty-five years ago, when the Clean Water Act (CWA) was passed, urban sewage was the No. 1 source of water pollution. The 1972 Act included the Construction Grants Program managed by the U.S. Environmental Protection Agency (EPA), which by 1987 had funded more than $70 billion in grants to publicly-owned treatment works (POTWs). With local matching funds added, there was a total of more than $100 billion spent on upgrading POTWs. And in those days, 30-40 years ago, $100 billion was real money!

By 1987, EPA was tired of giving grants. Too much overbuilding and too much dependence on federal largesse. President Ronald Reagan was not a fan of grants either. So, the CWA was amended and the Construction Grants Program was replaced by the Clean Water State Revolving Fund (CWSRF) program. This new program provided loans, not grants, to POTWs. Since then, the CWSRF has provided more than $125 billion in financial assistance.

The 1987 amendments permitted the CWSRF to fund non-POTW projects, including non-point source projects. But in the past 30 years, 96 percent of CWSRF money has gone to POTWs.

This huge infusion of money worked. Today, urban sewage is no longer the No. 1 source of water pollution. Instead, agricultural runoff and stormwater are the No. 1 source of water pollution. This has caused two major problems.

First, the CWSRFs, having spent 96 percent of their $125 billion on POTWs, are used to making out $3 million checks to wastewater agencies. They have little experience lending, say $50,000, to a farmer for a Best Management Practice (BMP) that would reduce agricultural runoff.

The second problem is worse. When the CWSRFs loaned money to wastewater authorities, these agencies usually had tens of thousands – if not hundreds of thousands of ratepayers – over whom they could spread the cost. An upgrade to their treatment plant might cost $10 million. But they could borrow 100 percent of this money from their CWSRF, at say, a 4 percent interest rate for a term of 30 years. This would result in an annual payment of about $600,000. Now if the authority had 100,000 ratepayers (all paying equally), it would cost each one of them $6 per year or $0.50 per month.

Contrast this with a farmer who can build a constructed wetland on two acres of his land that he doesn’t need for crops. This would certainly make a major reduction in the runoff from his farm. The wetland might cost $100,000. The farmer could also borrow from the CWSRF under the same terms and conditions as the POTW. His annual payment would be about $6,000, which is $500 a month. But, the only person he can spread this cost over is himself. How many farmers are going to pay $6,000 a year to reduce water pollution out of the goodness of their hearts?

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There is no legal authority under the CWA to require the farmer to do anything. He can simply go on polluting. This sounds like an ugly choice: keep polluting or pay $6,000 a year for the next 30 years. But in fact, that is the way things are. And that is why paying for tomorrow’s clean water has to be different.

The same situation is true with stormwater. Many wastewater utilities are saddled with the responsibility for reducing stormwater. The less rainwater a parcel of property absorbs, the more it exacerbates the urban stormwater problem. If the rainwater has no place to go, it heads for the nearest sewer or conduit where it joins countless more gallons of rainwater – usually in a sanitary sewer – all of which carry all of the pollutants from lawn fertilizer to animal waste to roadside garbage into the river or lake that receives the community’s excess rain.

Properties that are impermeable create the worst stormwater problems. However, there are new ways of dealing with impermeable land, called green infrastructure. This basically replaces concrete and cement with vegetation, which absorbs rain as it falls. Another strategy – one that can be used for parking lots – is permeable pavement. This is pavement that allows rain to percolate underground to the earth below the pavement.

All of this said, when it comes to paying for green infrastructure, we have the same problem that we have on the farm: much of it needs to be on private land. There are finance programs – the same ones available to farmers – but they are loan programs and loans must be paid back. Therefore, the same question arises: Who is going to pay for the green infrastructure on private property? The owner?

Again, putting it a different way, what governor or mayor is going to tell the pastor of a large urban church that he must tear up his concrete parking lot and replace it with, say, $50,000 of permeable pavement? Who is going to tell that pastor he must take the money to pay for the permeable pavement out of the Sunday collection plate? No mayor I know.

The point here is that paying for tomorrow’s clean water is going to be different than paying for today, or at least different from paying in the past. How? The answer is that different people will be paying. They are:

  • Downstream customers and ratepayers of the sewer authority. For lack of better terminology, we call this process “adoption.”
  • The state itself. A state’s CWSRF actually absorbs or “eats” the cost of an upstream project. This process is called “sponsorship.”
  • A few of us. This refers to “nutrient credit trading,” where those few people who have NPDES permit problems and need nutrient credits actually buy them from the farmer who undertakes the project and owns the credits.
  • By many or all of us. This is where fees/charges are created and implemented on either a statewide or a regional – usually a watershed – basis.

How is paying for tomorrow’s clean water going to be different? The answer is that different people will be paying.

New Payment Structure No. 1 – Adoption

The first source of payment is the folks downstream who are the ratepayers of the sewer authority. We can also call this process, “adoption.” The sewer authority “adopts,” i.e. pays for, the upstream project.

How do ratepayers, say, 20 miles downstream, wind up paying for the farmer to build a constructed wetland? To begin, this business of having downstream ratepayers pay for upstream agricultural runoff projects is rare today. A major reason for this is numbers. How do you count the nutrients? How do you actually know that the constructed wetlands project will remove x lbs. of nutrients? For example, let’s say a sewer authority identifies an upstream farm where a constructed wetland could easily be built. Its own scientists might estimate that such a wetland would remove x amount of nutrients, which is more than enough to satisfy the new requirement on the sewer authority’s NPDES permit. Also, the construction of a wetland would be cheaper than the alternative of making an upgrade to the sewer plant.

In this case, the sewer authority would propose to the environmental regulators that they pay for the construction of the wetland instead of upgrading their sewage plant. They would probably invite the regulators (or their staff scientists) to inspect the wetland site.

Once the sewer authority had the agreement of the state regulators that the wetland would satisfy the new requirements of the permit, they could then make a deal with the farmer to go ahead and build the wetland.

This is the smart way to pay for tomorrow’s clean water.

New Payment Structure No. 2 – Sponsorship

In the late 1990s, the State of Ohio began to address the same payment problem with a concept they call “sponsorship.” Sponsorship programs were developed by Ohio’s Environmental Protection Agency in conjunction with the Ohio Water Development Authority, which manages the CWSRF. Since Ohio created its program, the states of Iowa, Oregon, Delaware and Idaho, through their respective CWSRFs, have followed suit. Many other states are now considering developing such programs.

A sponsorship program looks very much like a grant program, but it isn’t. It is actually a loan to a sponsor who adds it on to one of its own traditional projects and pays off the loan for both projects at a much lower rate of interest that actually saves the sponsor a little money.

The reduced interest rate serves as a incentive for the wastewater utility to sponsor the upstream project. The cost of the watershed project is paid through savings realized from the reduced loan interest rate. The result is that two beneficial wastewater management projects with triple bottom line benefits get done for a slightly less cost than a traditional wastewater project alone.

New Payment Structure No. 3 – Nutrient Credit Trading

Nutrient trading is an excellent idea. Mechanically, it is very much like adoption, however, it envisions a much more sophisticated system. Adoption, as you saw, is very subjective and hit-or-miss. Nutrient trading implies a system where nutrient credits are well known, well understood and, above all, countable.

Nutrient credit trading involves quantifying nutrients that pollute water into “credits.” This task must be undertaken by environmental scientists who work for the state. There are the usual two sides to the nutrient credit trading equation – those who can create credits and those who either need them outright (such as a developer) or are willing to pay for them because they just want the benefit.

Let’s say a farmer can earn 10,000 nutrient credits by building a constructed wetland on his or her property. There is a developer downstream who wants to build a subdivision but they must deliver 10,000 nutrient credits to the sewage treatment plant that serves their proposed development to get a permit. Eventually, the farmer and the developer reach an agreement on a price per nutrient credit. So, the farmer might make a small profit and the developer gets the permit approvals he needs from the state so he can build his houses.

Unfortunately, nutrient credit trading doesn’t work very well yet.

The Government Accountability Office (GAO) has recently issued a study on nutrient trading entitled: “WATER POLLUTION, Some States Have Programs to Help Address Nutrient Pollution, but Use Has Been Limited.” The GAO found that only 11 states have nutrient trading programs at all, and that of those, only three had any significant trading activity: Connecticut, Virginia and Pennsylvania. Of these, Virginia’s and Connecticut’s programs are limited to “point-to-point,” which means that the only parties who are trading are POTWs.

The GAO found that only one state – Pennsylvania – has a nutrient credit trading program that applies to farms, etc., with non-point source agricultural runoff. Even Pennsylvania’s program is far from robust. They currently have only four auctions a year, but there are only a handful of trades at each auction.

New Payment Structure No. 4 – Statewide or Regional Funds

These are funds that in no way are connected to sewer authorities. They are independent funds.

These independent funds are created by one or another unit of government. The money in these funds comes from fees, charges or taxes that are imposed by the government or agency. They should have several very important characteristics.

First, they should plainly say what the money is going to be used for. Maryland has a statewide fund called the “Bay Restoration Fund,” where the money comes from the “Bay Restoration Fee,” which is actually a tax. Everyone in Maryland is familiar with the Chesapeake Bay, the nation’s largest estuary. So, a “Bay Restoration Fee” makes perfect sense to them.

Another state in the Midwest was thinking of creating a statewide fund and calling it the “state clean water fund.” Good name.

Another state was considering creating a clean water fund, but they were thinking of funding it with a one-penny increase in their sales tax. Bad idea. People will complain about it without understanding its underlying purpose: clean water.

The second important characteristic is that the tax or fee is as broad based as possible. Everyone pollutes. Everyone enjoys the benefits of clean water. Everyone should pay.

The third important characteristic is that the fee should be reasonable. It should not be painful for the public to pay.

There are almost no regional funds in the United States. In 2005, the City of Raleigh started a program to protect the Upper Neuse River watershed. Six years later they created a “watershed protection fee” that they charged to the customers of its water utility. The fee was $0.01 per 100 gallons of water. It cost the average homeowner about $0.40 a month. Raleigh’s fee brings in about $1.8 million per year. The City of Durham also created its own fund, also based on water bills. They charged considerably more than Raleigh, about $6 a month.

The fourth and final important characteristic of environmental fees is to make the uses or purposes of these funds as broad as possible. They should be used to reduce any kind of pollution, not just agricultural runoff. Not effluent from POTWs. Not just stormwater. Any form of water pollution.

As of this writing, there is only one statewide fund. As noted above, it is Maryland’s Bay Restoration Fee. It is very broad based and was originally based on the number of toilets in a building. The local news media reinforced the purpose of the Bay Restoration Fee by referring to it as the “flush tax.” Now, that’s what everyone in Maryland calls it, except the politicians!

The flush tax is very reasonable. In 2004 when it was created, it was $2.50 per month per ERU. In 2012, the flush tax was doubled to $5 per month per ERU, with barely a whimper from the public.

The flush tax is used to pay debt service on bonds issued to pay for POTW projects that needed doing immediately. But the state is slowly expanding the purposes for which the flush tax can be used.

So, the Maryland flush tax is truly ingenious and deserves emulation by other states.

Adoption and sponsorship are essentially temporary fixes on the payment problem. Fees and charges, whether regional or statewide are the real way to pay for tomorrow’s clean water.

Michael Curley
Visiting Scholar | Environmental Law Institute

Michael Curley is a lawyer who has spent the majority of his career in project finance and the last 25 years in energy and environmental finance. He joined the Environmental Law Institute as a visiting scholar in 2013. He is the author of Finance Policy for Renewable Energy and a Sustainable Environment, published by Taylor & Francis in 2014. In 1990, Curley was appointed to the Environmental Financial Advisory Board at the U.S. EPA, where he served for 21 years under four presidents. Over the past 20 years, he has taught environmental and energy finance and law courses at the Johns Hopkins University and George Washington University as well as Vermont Law School.

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