Stormwater | Developing Equitable Fees

Developing Equitable Stormwater Fees

What do customers perceive as "fair"? Setting rates that reflect the cost of providing service.

By Grant Hoag

When a city turns to billed stormwater fees in support of a new stormwater program, the issue of fairness will quickly arise. In fact, for many states the law requires that fairness be quantified and documented before the fees can be implemented. Often your city's need for new funds is the result of an increased emphasis on stormwater pollutants, and this can be problematic because, while old stormwater fees traditionally were based on runoff volume, new fees should be linked to pollutants in the runoff.

This article describes the evaluation process used to calculate pollutant-based fees for stormwater programs. The illustrated values are based on the methodology supporting new stormwater fees for several major metropolitan areas in California. With this methodology, stormwater fees can be equitably billed to the parcels, creating the hydraulic and pollutant remediation burdens on your stormwater program.

Background
By evaluating the sources of pollutants of concern and the costs of their remediation, it is possible to create a nexus between the program costs and the stormwater service charges to individual parcels. This nexus usually places higher rates on commercial and industrial sites and lower costs on residential areas and parklands. Article XIII of the California Constitution provides that a documented nexus between the level of a fee and the city's cost of providing the service is required. It prohibits subsidies between customer classes, thus requiring that fees be determined for parklands and schools, and mandates that the affected customers must vote on and approve the fee. While this level of rigorous analysis and approval might not be required for funding the stormwater program in your city, the methodology developed here should be both instructive and helpful.

Rate-Setting Process
Unlike public water, gas, or electricity utilities, stormwater service to runoff dischargers is not voluntary and cannot be metered. As such, few stormwater-discharge customers see the need for charges, and higher-than-usual community resistance occurs when a city tries to create new stormwater utility fees. In this potentially hostile environment, it is vital to clearly document the need and equity of the fees.

The documentation should demonstrate due diligence in the fee-development process, including addressing stakeholder concerns, searching for alternatives to fees, and justifying the need for fee-based funding. Finally, an emphasis on the nexus between the cost of services provided and the program benefits received is required. The technical steps of this nexus process are illustrated in Figure 1, and the steps shown in the figure are explained below.

Assess Revenue Requirements. This step quantifies the annual need for fee-based funding. Revenue requirements equal operating and maintenance (O&M) expenses, project- (capital-) related expenditures, and net nonoperating expenses. Total revenue sources can include fees, city interfund transfers, tax proceeds, and drawdowns on fund balances. The portion of the total revenue derived from new-user fees depends on your community's goals. The right selection of funding sources will help secure community backing, while the wrong one will ensure community resistance and underfunding of a program.

Conduct Cost-of-Service Analysis. This step validates the rate-calculation procedure by identifying the nexus between the cost of services and the benefits received. This is based on an estimate of stormwater runoff and pollutant loads from each property and the costs for disposal of runoff and remediation of pollutants. The results are unit rates useful in determining the fees for individual parcels.

Develop Fee Structure. Stormwater fees (both the structure and the amount) can vary significantly among cities and states. Nationwide, a survey of 200 utilities indicated that roughly half are based on impervious area, one-quarter are based on a combination of impervious and gross area, and the remainder are based on other factors. Under new stormwater-discharge permits, pollutant abatement and remediation activities are a growing part of the stormwater costs. As such, the resulting new fees should include a pollutant-load element in the same way that wastewater fees to a restaurant typically have a high-strength component.

Recommend Fees. The recommended fee structure must be based not only on equity but also on acceptability. If the fees are too complex to be understood, they are more likely to be rejected. A comparison of the proposed stormwater bills with those of other cities can increase the comfort of the elected officials. Appropriate fee exemptions, credits, and dispute mechanisms can also provide a boost to acceptability.

The methodology presented below is similar to that recommended by the Water Environment Federation for the development of wastewater rates. It is based on customer discharge characteristics and the functional cost components of runoff and pollutant remediation budgets.

Runoff-Load and Program-Cost Factors
To develop nexus-based fees, we use two load factors to cross-reference stormwater program costs with customer charges. The two load factors are stormwater volume and runoff pollutants, as identified in the stormwater-discharge permit. Each is explained below.

Stormwater Volume. The historical stormwater service of channeling runoff and discharging the flows will always remain one of the key services of any stormwater utility. As such, the current funding mechanisms should remain in place, even as the new National Pollutant Discharge Elimination System (NPDES) stormwater permits add pollutant remediation tasks. It is easier to add incremental new fees to supplement existing funding than to replace the current revenue program with completely new—and higher—fees. Nonetheless, inclusion of runoff volume, described here as hydraulic loading, in funding calculations is essential to retaining a complete perspective of a stormwater utility's funding needs.

Pollutants of Concern. Pollutants of concern listed in a city's stormwater-discharge permit can generally be classified into the following categories:

Trash
Hydrocarbons
Sediments
Nutrients
Pathogens
Toxics

Trash and other solids are predominately associated with residential and commercial detritus. Sediments from soil erosion are measured from suspended and settleable solids and are particularly common in agricultural areas. Pathogens, as measured by enterococcal, fecal, and total coliform, represent the potential for hazardous bacteria and viruses in the stormwater flows. These are especially common in first-flush rainfall events. Hydrocarbons represent the oil and grease loads in runoff, often from parking lots and roadways. Nutrients, as from fertilizers, are represented by phosphates, ammonia, and nitrates and come from landscaped and agricultural areas. Toxics are typically heavy metals, such as copper in brake dust, cadmium, mercury, and lead.

It is important to identify the pollutants actually being remediated in your stormwater program. Although the six stormwater-borne pollutants listed are undesirable, for equity's sake only the pollutants being prevented or remediated in your specific program should be included. The determination of the costs and loads associated with the runoff and pollutant factors is described in the following sections.

Stormwater Utility Customers
Identifying appropriate customer classifications for new stormwater service billing is problematic, as there is an incentive by billing staff to use existing water- or sewer-utility customer databases, which lack key stormwater dischargers, such as undeveloped lots, agricultural areas, and parks. Existing utility databases also lack parcel areas for each user. In contrast, typical tax-assessor databases contain most parcels in a service area and include data on parcel size and land use. As such, tax-assessor parcel data can be used effectively if consolidated into stormwater billing groups. The billing groups can be classified as follows:

Single-family parcels
Multifamily complexes
Commercial
Industrial
Landscaped
Undisturbed
Institutional (schools, parks, and local agencies)
Agricultural

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Figure 2 illustrates the proportion of land-use areas and billable parcel numbers for a typical city.

The biggest drawback of tax-assessor data is that it may not include tax-exempt institutional land uses, such as schools, parks, and military bases. Data from those particular dischargers must be collected from other sources. In contrast, there are two land uses within the tax-assessor data that may best be excluded from billable customers; freeways and military bases will likely have their own stormwater permits and would therefore be excluded from funding responsibility for your city's permit. Finally, local streets should be considered as stormwater conveyance facilities and can be excluded from billing along with storm drains, canals, and street-meridian grassy swales.

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Evaluation of Stormwater Program Costs
Stormwater program budgets are typically developed by O&M and other activities, including capital improvements, engineering, flood control, permitting/inspection, and program management. Figure 3 illustrates the proportional cost of each activity.

Activities Versus Loadings. Unfortunately, the cross-referencing for fees is based on loading factors rather than activities, so it is necessary to identify the functionally based objective of each activity. For example, flood control activities can be allocated primarily to the hydraulic function, while permitting and inspection activities are allocated primarily to toxic and pathogen controls. Figure 4 illustrates the reallocation of activity costs to stormwater loading factors. It includes the hydraulic factor and the pollutants of concern.

Certain activities benefit some but not all customer classifications. For example, street-sweeping activities serve residential and commercial customers but no others to any significant degree. As such, before allocating activity-based costs to loading factors, it first may be appropriate to segregate the cost of any activity that benefits solely one or two customer classifications.

The Myth of Project Grants. In developing funding for stormwater programs, a variety of revenue sources must be sought. These include developer impact fees, permit and inspection fees, and federal funding for planning programs and pilot studies. It is important, however, not to overestimate the benefits of project grants in the hope that these will significantly reduce or eliminate the need for new stormwater fees because most new stormwater program costs are for ongoing pollutant remediation activities that will be ineligible for grant program funds used for capital-project construction.

Stormwater Loads From Parcel-Based Customers
This section develops parcel-based stormwater loading factors. The evaluation of the stormwater loads should be limited to billable customers and should not attempt to estimate the total regional levels of hydraulic and pollutant loads. The main reason for limiting the evaluation is that total regional loads are both difficult to determine and irrelevant with respect to the data needs for a stormwater rate structure for billing. The development of hydraulic and pollutant load factors is simplified by the creation of the equivalent residential parcel unit (ERPU).

An ERPU value of 1.0 is defined as the runoff and pollutant load from a standard, residential, single-family dwelling parcel. The ERPUs for all other parcels are described in relationship to this standard residential parcel unit. For example, if the stormwater load from an industrial lot is 30 times that of a standard residential parcel, it would have a billing factor of 30.

Runoff Loads Using Coefficients. Stormwater runoff volume is estimated using land-use type and parcel size. Billable stormwater runoff volume is estimated using a basic water-resource planning concept: Q = cia. The equation says that the runoff volume Q from a parcel equals the runoff coefficient (cross-referenced to land use) multiplied by the rainfall intensity of a standard 0.75-in. storm multiplied by the drainage area. Table 1, based on values developed for the County of San Diego in California, lists the runoff coefficients for this standard storm. Not coincidentally, the land-use classification for each parcel is generally available from the local tax assessor's office, while runoff coefficients are available from many city, county, or regional planners. These regional planners may also have parcel land-use information based on parcel layers of a geographic information system (GIS). Note that GIS data might lack the legal billing basis of a tax assessor's database. In addition, defensible parcel-level impermeable-area data can be difficult and expensive to collect and might best be limited to very large or unusual parcels.

As shown, agricultural areas in southern California have the lowest runoff coefficients and industrial parcels have the highest. Landscaped areas with frequent irrigation are estimated to have high runoff levels.

Pollutant Coefficients. There have been a variety of stormwater studies on many of the six pollutants of concern. For stormwater fee development in California, the most relevant information has been developed by the Southern California Coastal Water Research Project. Specific toxic, nutrient, and sediment discharges by land use were identified in "Modeling Stormwater Mass Emissions to the Southern California Bight" (Drew Ackerman and Kenneth Schiff, Journal of Environmental Engineering, April 2003). The pathogen load factors are from Modeling Arid, Urbanized Watersheds: Part II, Bacterial Runoff (Ackerman, Los Angeles Regional Water Quality Control Board, December 2001). Trash and hydrocarbon values are based on the best professional judgment using empirical observations.

Based on the previously described stormwater-program costs, the loading factors for each of the pollutants can be averaged into a single pollutant coefficient for each parcel land-use type. The unit pollutant load for different land uses, when cross-referenced to the pollutant loading level from a single-family residential parcel, resulted in the pollutant coefficients for the land uses listed in Table 2.

As shown, undisturbed lands have the lowest pollutant coefficient (10% of the ERPU rate), while standard (row-crop) agriculture has the highest.

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Stormwater Loadings for Parcel Classifications
To determine the proportion of program costs to be borne by a parcel class, the calculated hydraulic and pollutant loading coefficients are multiplied by the areas of each parcel land use. The results are illustrated in Figure 5. Note that the hydraulic discharges from certain land uses are significantly different from the pollutant loads. It is also informative to contrast these allocations with the parcel areas illustrated in Figure 2.

The results demonstrate that the allocation of costs for pollutant remediation is significantly different from the runoff-based allocations. As such, the costs of complying with the new NPDES permits cannot, in the case of California areas, be equitably billed to stormwater program customers using the historically popular runoff coefficient-based fees.

Stormwater Fees by Parcel Classifications
The final step in developing stormwater fees is to divide the total cost by the total area of each parcel-based land use, thus calculating the unit fee based on area. These results are listed in the stormwater fee structure in Table 3. As shown, equitable area-based fees can vary from $0.12/1,000 ft.2 for undisturbed areas to $2.73/1,000 ft.2 for industrial parcels.

Table 3 also lists flat rather than variable fees for single-family residential parcels. Fee structures may be simplified when warranted by the cost-of-service findings or by community needs. Simplifying a rate structure can increase its acceptability while retaining its cost-of-service equity. The simplifications include replacing variable-parcel areas for residential customers with a class average and consolidating the land-use classifications into a handful of billing classes.

These simplifications can be done equitably if supported by the cost-of-service findings. For example, a review of the single-family parcel sizes may indicate that a significant majority of these customers do not vary materially from an average size. If true, it may be possible to use flat-fee bills for all single-family parcels. As residential parcel types can represent up to 90% of a community, an enormous simplification of the billing process is possible when warranted by homogenous parcel sizes.

In a similar fashion, if it is possible to consolidate a range of parcel-based land-use classifications into a handful of stormwater billing classes without a loss of billing equity, it should be done to promote ease of customer understanding, administrative convenience, and practicality. As a general rule of thumb qualified by the accuracy of the data, a stormwater bill may be equitable when it is ±10–20% of the cost-of-service findings.

Guest author Grant Hoag, P.E. is a specialist in financial consulting for stormwater and other municipal utilities and city governments. He is manager of financial services with Brown and Caldwell in Irvine, CA.

SW January/February 2004

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