United States
Environmental Protection Off ice of Water . EPA 816-R-98-002
Agency 4606 February 1998
&EPA INFORMATION FOR STATES ON
DEVELOPING AFFORDABILITY CRITERIA
FOR DRINKING WATER
-------
-------
Contents
. Page
s , ' .
Figures and Tables iii
" f
Preface '. iv
1. Affordable Paths to Compliance . .: . 1
2. Drinking Water and Affordability 6
, Household Willingness-to-Pay vs. Ability-to-Pay 6
Community and Water System Ability-to-Pay > 10
3. Affordability Assessment -.'...' 11
United States Environmental Protection Agency Methodologies '..,.. 11
Affordability Assessment Methods 12
Office of Policy, Planning, and Evaluation Panel 13
4: An Affordability Framework *16
Resource-Flow Models 18
General Framework .20
Affordability for Non-community Water Systems '. 26
5. Examples of the Use of Affordability Criteria ...... .^. 27
/ '
Appendix A - 1996 Amendments to Safe Drinking Water Act on Affordability and Variances A-1
Appendix B -1996 Amendments to Safe Drinking Water Act on Affordability and the State
Revolving Fund ^......... A-5
Appendix C-Policy Statement of the National Association of Regulatory Utility
Commissioners on Affordable Drinking Water A-7
Appendix D - Affordability. of the 1986 Safe Drinking Water Act Amendments A-9
Appendix E - Affordability Measures and Thresholds: Selected Studies A-10
Appendix F - Selected State Policies Using Affordability Criteria . . A-21
Appendix G - Additional References for Information Resources on Affordability A-28
u
-------
-------
Figures and Tables
Figures
Figure 1. Paths to Compliance for Small Water Systems Pursuant to the 1996 Safe Drinking
Water Act Amendments 2
Figure 2. Generalized Resource Flows' To and From Water Systems. 17
Figures 3a and 3b. 'Potential Resources for Publicly and Privately-Owned Community
Water Systems. .19
Figures 4a and 4b. Potential Resources for Public or Nonprofit and Private
Non-community Water Systems. 21
Tables
Table 1. Decision Framework for Variances Pursuant to the 1996 Safe Drinking Water Act
Amendments 3
Table 2. Relationship of Water Prices to Household Ability-to-pay. 9
Table 3. Framework for Affordability Analysis 23
111
-------
-------
Preface
The 1996 Amendments to the Safe Drinking Water Act (SDWA) recognize that the affordability
of drinking water may be an issue for some water systems, especially small systems. The
Amendments provide State drinking water programs with important new tools to help address
affordability concerns. The provisions of the Amendments which most explicitly address
affordability are variances, exemptions, and the Drinking Water State Revolving Fund
(DWSRF).
Small system variances will, under certain circumstances, allow systems which cannot afford to
comply through other means to utilize more affordable "variance technology." Exemptions will
offer small systems facing compelling economic factors up to nine additional years to achieve
, compliance. The DWSRF will provide financial assistance to systems to assist them in achieving
compliance. Affordability considerations play an important role in the implementation of each of
these provisions. States wishing to take full advantage of these provisions will need to develop
affordability criteria.
The 1996 Amendments require the United States Environmental Protection Agency (EPA)
publish, within eighteen months of the statute's enactment, information to assist the States in .
developing affordability criteria. The statute requires that EPA develop this information in
consultation with States and the Rural Utilities Service (RUS) of the U.S. Department of
Agriculture. In order to fulfill this mandate and to ensure consideration of all key stakeholder
ideas, EPA, through its National Drinking Water Advisory Council (NDWAC), established a
broad based working group, whose members included States and RUS, to guide development of
this information document. This document reflects the thorough review by both the working.
group and NDWAC, as well as public comment solicited through a Federal Register notice
(62FR62308 (November 21, 1997)).
' , ' i '
Under the 1996 SDWA Amendments, States have complete discretion in developing their
'affordability criteria. States are not required to submit their affordability criteria to EPA for any
type of review or approval. Once States have formulated their affordability criteria, RUS
suggests that they seek comment from their Rural Development State Director.
IV
-------
-------
1. Affordable Paths to Compliance
The Safe Drinking Water Act (SDWA) Amendments of 1996 recognize that the affordability of
drinking water may be an issue of concern for some systems, especially small systems. Three
important provisions of the Act speak directly to affordability. Section- 1415(e) provides for
affordability-based variances, under certain circumstances, for small drinking water systems.
Section 1416 allows for exemptions that provide systems facing compelling economic factors
additional time to comply with SDWA requirements. Small systems could receive as long as nine
additional years to comply. Finally, section 1452(b) provides that affordability on a per household
basis shall be one of the three factors used to prioritize systems for assistance from the new Drinking
Water State Revolving Fund (DWSRF).
The Act provides small water systems with Alternative paths to compliance, as depicted in Figure
1. Each path incorporates consideration of affordability•— the ability of a water system and its
customers to support the cost of compliance.
The first path leads to compliance via technologies considered affordable according to federal
criteria. This path is generally outside the scope of this information document. The second and third
paths involve the application of State-developed affordability criteria, which are the focus of this
document. The second path leads to compliance via alternative water sources and structural changes
in utility operations (such as interconnection with another system). The third path leads to
compliance through a conditional variance. ,
-------
+.
I
I
6
I
*
j
»•
.C
1.
c
Jr"
*h
<
>
I
£
I
c
r
k.
i
1
k 1
1
•>
I
V
K
$ ?
8 |
•*3^o rs
•§ "2 ** "3 S.
3 iS fl ** *^
o^i § . i
» fl -0 8 « • ?
|!&S|i"3
§ i 2
W -S
rM Q
h
(3
jjSBB!
SYSXE3VI IN
JBBB
«
0
a
a
0
V
0)
0?
jm
)
1YSXE3M OTJX OF
(0
KB
u
^
h
0
u
BB
J
0
«
v V
H
System Does No
Ivleet JMCL but
Ensures >Vdequat
Protection of
^f n ySKMW8&M
*
) £gje^SiifsiBSB!3Jjgi^g^gi^»li
M
u
is*.-
o 8
0 JS
H ^
? S
^ h
(j ft] S j 5
"^ *< 3 « 'S ^
xU!il? ' '
5 * si IS
* N 3 • 8
td il o f< o
"0 C^ M
^ ^4-
Q
ss
CO3VIPLIANCE
V*
^ ^
1 0
0
!3 °
i) 0
•
Tj
V
-(
H
M
s
ffordabiHtv Vai-lanc
Systems serving •< 3.3OO
ys terns serving 3.3OO to 1O,C
•with EPA appro-vat
"NTrt m^cro^ffll cotltnminaTYts
<3 M
^^^^^^^
Human Health.
/-#7^ r^>
^ijsiigijiii^
-y
5 t
J (ft V
1 ^5
> JJ
"*
M
o pro- 1986 SDWA violatior
HIS (.)(6)
*
<
&
Q
00
OS
Os
Ja
S
-»->
§
3
3
O-i
tn
U
CO
>>
00.
U4
^
1
"ea
1
L-r
1
.2
t
CJ
2
^
cs
OH
3
.§>
-------
Section 1415 of SDWA as amended in 1996 allows States with primary enforcement responsibility
(or the United States Environmental Protection Agency (EPA) for States that do riot have primary
enforcement responsibility) to grant variances for compliance with requirements specifying a
maximum contaminant level (MCL) or treatment technique. See Table 1 for a summary of the
decision framework for variances pursuant to the 1996 Amendments to SDWA.
Variances can be granted to:
• , Public water systems serving 3,300 or fewer persons and
• , Public water systems serving more than 3,300 but fewer than 10,000 persons with the
approval of the EPA Administrator.
Table 1. Decision Framework for Variances Pursuant to the 1996 SDWA Amendments
, General Eligibility
1. Systems serving fewer than 3,300 persons.
2. Systems serving fnore than 3,300 but fewer than 10,000
persons (with the approval of the EPA Administrator).
Affordability Conditions of Variance
3. Compliance through treatment installation is not affordable
according to State affordability criteria.
4. Compliance through development of an alternative water
supply is not affordable according to State affordability
criteria.
5. Compliance through restructuring or consolidating with
another water system is not affordable according to State
affordability criteria, or is deemed by the State not to be
practicable. •
Health Conditions of Variance
6. The variance cannot apply to microbial contaminants or to
standards established prior to 1986.
7. , The terms of the variance must ensure adequate protection of
human health.
Technology Conditions of Variance
8. The system must install, operate, and maintain a variance
technology.
-------
In accordance with affordabiiity criteria established by the State (or EPA if the State lacks primacy),
a system is eligible for a variance if it cannot afford to comply with a national primary drinking water
regulation by:
• installing a water treatment method;
• developing an alternative water supply; or
• restructuring or consolidating with another water system (unless the State makes a written
determination that restructuring or consolidation is not practicable).
Granting variances is subject to public health considerations. When granting a variance, the primacy
agency must be satisfied that the terms of the variance will ensure adequate protection of human
health. Variances are not available for microbial regulations or for standards established before
1986. .
Variance technologies will be identified by EPA only in those circumstances where nationally
affordable compliance technologies cannot be identified. The list of variance technologies must be
reviewed by EPA every seven years, or following the submission of a petition supported by
substantial information. Variance technologies will be affordable but they will not necessarily
achieve the quality standard set by the MCL. Variance technologies must achieve the maximum
reduction that is affordable, considering system size and source water quality. Again, the variance
technology selected must ensure adequate protection of public health.
Water systems must comply with the conditions of the variance within three years. Two additional
years may be allowed if the State determines that additional time is necessary to implement capital
improvements or to allow the system to obtain financial assistance. The Act specifies that each
system granted a variance must be reviewed at least every five years after the compliance date
established in the variance to determine whether the system remains eligible for the variance and is
conforming to each condition of the variance (§1415 (e)(5)).
Systems are not the, only thing subject to reexamination. SDWA specifies that "affordabiiity criteria
shall be reviewed by the States not less often than once every five years to determine if changes are
needed to the criteria" (§1415 (e)(7)(B)). The Act also provides for a periodic review of State
programs by EPA to ensure that variances comply with the provisions of the Act. EPA's review
with regard to affordabiiity is limited to a determination that all variances granted comply with the
State-determined affordabiiity criteria. The State and public will be notified if EPA finds that
variances granted are not in compliance with the State's affordabiiity criteria (Section 1415 (e)(8)(A)
and (B)). Appendix A includes Section 1415 (e) of SDWA which addresses affordabiiity and
variances.
In addition to the variance provisions, affordabiiity is also addressed in SDWA provisions related
to the State Revolving Fund (SRF) (see Appendix B) under §1452 (b). States that enter into the
capitalization agreement are required to prepare an annual Intended Use Plan (IUP ) that includes
a prioritized list of proj ects for assistance.
-------
According to the Act (§1452 (b)(3)(A)):
An IUP shall provide, to the maximum extent practicable, that priority for the use of funds be
given to projects that— '<.-.-'
(i) address the most serious risk to human health;
; (ii) are necessary to ensure compliance with the requirements of this tijle (including
requirements for filtration); and , .
(iii) assist systems most in need on a per household basis according to State
affordability criteria.
The Act further allows States to provide up to 30 percent of their capitalization grant to
"disadvantaged communities," which is defined by the Act as "the service area of a public water
system that meets affordability criteria established after public review and comment by the State in
which the public water system is located." .
States may wish to establish different, possibly more rigorous, affordability criteria for variances
than they establish for their SRF. This information document has been prepared specifically to assist
States in establishing affordability criteria for variances (as directed by section 1415(e)(7)(B) of
SDWA as amended). However, the concepts, information, and framework provided herein will also
be useful in establishing affordability criteria for SRF purposes.
-------
2. Drinking Water and Affordability
One of the central challenges of modern environmental management is the provision of safe drinking
water at an affordable price to citizens. Consumers generally pay far less for water services than for
energy and telecommunication services, although available statistics may mask water costs for
customers who pay through taxes or rent.
Water prices are primarily a function of water costs. Factors that increase water costs include
compliance with drinking water standards, replacing and improving the water delivery infrastructure,
and meeting demand growth. Costs associated With meeting demand growth should be recovered
through a fair capacity charge plan under which users benefitting from the increased capacity pay
for it. Debt costs associated with financing projects over time also put pressure on rates. Another
factor that can play a significant role in contemporary rate increases is historic underpricing. For
some water systems, the loss of subsidies and the need to begin pricing water more accurately to
reflect costs can account for substantial, but necessary, rate increases.
Rising costs and prices for water may force a change in consumer expenditure patterns. The cost
of compliance with drinking water standards is only one of several factors contributing to rising
water prices. Water prices send customers a crucial signal about the value of quality water service.
However, for some communities, higher prices may strain water system and household budgets.
Affordability is a function both of the price of water service and the ability of households (and other
water users) to pay for this service. Thus, drinking water can be made more affordable by reducing
the cost of service, increasing the ability of users to pay, or both. For systems which qualify,
variances may offer a lower cost approach to SDWA compliance.
There are many other possible approaches to lowering the cost of service. Economies of scale offer
the most promising means of lowering the unit cost of production, and thus, consumer bills (although
not in every circumstance). Economies of scale are particularly relevant for source-of-supply and
treatment functions and can be achieved through mergers, acquisitions, interconnection, and
wholesale water markets. However, once systems reach a viable size, which varies by geographic
location, there is a smaller benefit to an additional increase in system size. Some economies can be
achieved through common ownership or management even without the benefit of physical
interconnection. Lower cost treatment technologies also provide an important potential means of
making SDWA compliance more affordable. The 1996 SDWA Amendments include point-of-use
and point-of-entry technologies among possible compliance options. Finally, low-cost loans, grants,
and subsidies can help reduce the costs that must be recovered from customers.
Household Willingness-to-Pay vs. Ability-to-Pay
A critical distinction when considering affordability is the difference between willingness-to-pay and
ability-to-pay. Willingness-to-pay reflects consumer preference about purchasing a quantity of
goods or services relative to prices. As prices rise, particularly for essential goods and services,
consumers may demonstrate a reluctance or unwillingness to pay. A price-responsive consumer, for
example, might reduce water usage in response to a rate increase. A large percentage increase in
-------
rates sometimes induces rate shock or a significant reduction in water usage (at least in the short
term). Rate shock also might induce some customers to complain about price increases to
ratemaking authorities (local governing bodies or State public utility commissions), even if those
price increases are cost-justified. At some point if alternatives are available, customers may not be
willing to pay the higher rates of the water utility. Beyond water conservation, some customers may
be able to bypass the system through self-supply, such as drilling a private well.
Concerns about how customers will react to price increases can discourage some water systems from
recovering actual costs. A widely held view in the water sector is that water in many areas has
historically been underpriced. It is difficult to assess the extent to which this is actually the case.
Artificially low prices would lead to inefficient water use and inaccurate public perceptions about
the cost of water. Raising prices, no matter how well justified, can trigger an apparent unwillingness
to pay. In the realm of willingness-to-pay, consumers can make choices.
However, higher prices do not always result in a reduction in water usage. Since water costs are
smaller than other utility costs, customer education about the cost of service may heighten
perceptions of the value of water and mitigate the impact of the rate hike. In a similar vein,
customers may be influenced by neighboring communities' water rates, particularly small rural
systems. Users are willing to pay rates that they perceive as fair and comparable.
Ability-to-pay raises another host of issues. Ability-to-pay focuses not on whether consumers -will'
pay for water service, but whether consumers can pay for water service. Ability-to-pay is primarily
a function of income related to the cost of living, which in turn is primarily a function of
employment. Income (weighted by the cost of living) and employment measures often are used in
estimating a community's socioeconomic conditions and the related ability of consumers to support
utility costs.1 Fixed costs, such as housing, property taxes, utilities, and other necessities, take a
smaller share of household income for households with higher income levels. For low-income
households, the higher proportion of income allocated to fixed costs can make paying bills more
difficult. The availability of income assistance or bill-payment assistance programs can mitigate this
problem.
Finally, rate design by utilities can affect the ability of individual households to pay for basic
services. Some rate structures, such as lifeline rates, are specifically designed to keep a basic block
of usage affordable. A "progressive" rate, like a progressive tax or an increasing-block rate
structure, charges a higher unit price for higher levels of usage. Other rate structures, such as single-
tariff pricing, are designed to spread costs over a wider service population so that service to high-cost
areas (such as those with a very small customer base) is more affordable.2 Some publicly-owned
water systems recover more of their costs through property taxes, income taxes, and more
'Income must be weighed in the context of the cost of living. A household's ability-to-pay with a $30,000
income in one county may be the same as a household with a $22,000 income in another county.
2 Single tariff pricing can also have the opposite and unexpected effect, so it should be evaluated carefully.
If you combine an urban area with dense population and an efficient water system with a suburban area where customers
are widely spread, you may end up with urban customers with a higher percentage of low-income residents subsidizing
wealthier suburban residents.
-------
progressive, revenue-related sources than through water charges.
Varying assumptions about rate design can affect the results of an affordability analysis in important
ways. In other words, the effect of rising costs on affordability can be exaggerated or mitigated by
means of the rate structure. Thus, analysts may want to explore the availability and acceptance of
rate design options when considering the household impact of cost and price increases.
As demonstrated in Table 2, high prices (or large rate increases) alone do not necessarily indicate
an affordability problem; similarly, low ability-to-pay may not present an affordability problem if
water prices are very low. States seeking to measure affordability may want to use several indicators
to determine a system's ability-to-pay.
-------
o
J3
V
t»
i
-S
I
OS .
g
o
&
I
c
8 g
1!
O Qj
0 ^
« 1:
$
s that can
prices
§§
o « -
§!
^.
.3:
,
S3-- '
'M
||
° ~
•=S « S
e w o •••*
o *H v *s rs
o (2 ? § ^
W < >3 O W
£3
1 11'
as- ° -s
to G • JS' •—
O — ^ J5 BB
g 1 g ° -3
11 -sill
"5. a s ° u u
1*8 i "§ o §
tJ £ Q Q CJ
i
IB
to
S
— >.
1 o.
1 s
i
^
•3
1
, S
1 •?•
™ 0
o
o.
M
is
tn
C
O
'•S S?
ii i
6> . o E g
1 frS1 S • .
4> c I p- a
g 1 .1 ° o 2
i IB i i s
S o..g § 1 S
T E -3 c'Z 2
? QJ C *~ WJ fen
O C! O O "* o
j D Z 2 .&
• • • • •
1S|.
Hi
s -I if •
w B. .
,
•£»*
n
eo
S-
2 >> •
1 ?•
S7^
o
o.
»•
o
_l
I"
- ' ^ 1 ' .
Is
, I
• •*§)
S
"8 s
3 u
3
•High income levels
•Employment
•Discretionary expend
•Income or payment
assistance
•Progressive rate struc
I B- '
13 u a. '
^ '2 S
— - ^~" lo
' CXD '.*
9
-------
Community and Water System Ability-to-Pay
Generally, ability-to-pay is determined at the household level. However, a community's ability-to-
pay can be thought of in terms of the aggregation of household ability-to-pay. This issue is relevant
because of variations in income distribution from community to community. Communities with
isolated pockets of poverty but healthy overall income levels are in a better position to provide
payment assistance or to use progressive rate structures to provide affordable.water service to those
in need.
Affordability is often assessed at the water system level in terms of the capacity of systems (or the
communities that operate them) to finance system capital improvements and operations. Water
system financial capacity is dependent to a large degree on household ability-to-pay within the
service territory. Some communities may qualify for low-cost capital or other assistance programs
on the basis of ability-to-pay measures or other indicators of socioeconomic or fiscal distress.
10
-------
3. Affordability Assessment
In the 1970s, the concept of affordability was introduced by EPA's Office,of Water as it sought to
make better decisions and incorporate economic considerations into the Construction Grants
Program for wastewater treatment facilities. Specifically, EPA wanted municipalities with Publicly-
Owned Treatment Works (POTWs) to demonstrate their capability to finance and manage the
construction and operation of facilities.
At the same time, the Office of Drinking Water was developing its own concepts of affordability.
The 1980 Water Utility Financing Study (WUFS), was prepared in response to a 1977 Congressional
requirement that EPA study the cost of complying with new drinking water regulations and
investigate alternative methods of meeting compliance costs (including construction grants and
loans). The study devoted substantial attention both to system-level affordability and household
affordability. However, budget pressures in the 1980s caused the postponement of proposals for
construction grants and loans.
Pursuant to the 1986 SDWA Amendments, the Office of Drinking Water continued to develop
affordability measures. In particular, affordability criteria were needed to determine what constitutes
the Best Available Technologies (BAT) for variances under §1415 of SDWA. In addition to system-
level financial variables, analysts also began to consider the role of household affordability in
determining system viability or capacity.
State regulatory agencies, including both primacy agencies and public utility commissions,
expressed concerns about systems that could not meet standards at prices considered "affordable"
to residential customers (see Appendix C). The public utility commission perspective should be
placed in the context of rapidly rising energy prices in the 1970s and early 1980s which precipitated
the federal Low-Income Home Energy Assistance Program (LIHEAP), utility percentage-of-income
payment plans (PIPPs), and least-cost energy planning.
Concerns about funding for federally mandated standards continued to bring attention to the issue
of drinking water affordability. In the 1990s, EPA's Office of Policy, Planning, and Evaluation
(OPPE) worked to develop a consistent agency-wide affordability policy! In 1995, the
Congressional Budget Office reviewed EPA methodologies for estimating SDWA impacts as a case
study in the context of the "unfunded mandates" debate. Enactment of the 1996 SDWA
Amendments has refocused attention on affordability issues by specifically recognizing the need for
States to develop affordability criteria.
United States Environmental Protection Agency Methodologies
EPA has adopted or considered approximately two dozen methodologies for assessing the financial
burdens municipalities face under federal environmental laws and regulations. It is important to note
that these methodologies focus only upon municipalities. Municipalities and other public entities
own only about 20% of Community Water Systems (CWSs) serving populations of 500 persons or
fewer. Most very small systems are privately-owned or are an ancillary part of some other business
(such as a mobile home park). .
11
-------
Federal mandates requiring consideration of affordability include SDWA, the Clean Water Act
(CWA), the Toxic Substances Control Act (TSCA), the Asbestos Hazard Emergency Response Act
(AHERA), the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), and the Resources Conservation and Recovery Act (RCRA). Affordability
methodologies have been used by EPA in conjunction with:
• evaluating compliance;
• assessing financial responsibility;
• establishing penalties and fines;
• setting standards;
• allocating grants and credit assistance; and
• providing guidelines to States and communities.
Appendix D summarizes a report prepared in 1993 by EPA entitled "Affordability of the 1986
Amendments to Community Water Systems," which measured the cost of the Amendments and
discussed means to pay for these costs.
Affordability Assessment Methods
Affordability assessment typically involves two different levels of analysis. The first level measures
household affordability or ability-to-pay, screening out communities where the household impact
of water system costs is relatively low. The most prevalent household cost measure is annual user
charges as a percentage of median household income (AUC/MHI).
Total Annual User Charges (AUC)
= X percent
Annual Median Household Income (MHI)
where X= a household affordability ratio.
The methodology specifies a threshold determined to be affordable, and systems with a ratio less
than or equal to the threshold are screened out. Systems with ratios higher than the threshold must
be examined further.
Several variations on this formula can be found, such as: (1) inclusion of water and wastewater
charges in the numerator, (2) use of average (mean) household income in the denominator, and (3)
weighting of the measures to capture poverty effects.
The ratio, as shown above, is often used in conjunction with another measure, such as poverty rates
or unemployment rates, that takes into account general socioeconomic conditions. Ideally, these
companion indicators might be measured relative to State or national benchmarks. Obtaining the
necessary data to do these comparisons can be difficult because system service territories do not
always correspond to political boundaries (i.e., counties or census blocks).
12
-------
For the communities exceeding the household ability-to-pay threshold, the second level of analysis
involves a more detailed examination of the financial capacity of communities, including debt
capacity (for example, debt service as a percentage of revenues), access to capital (for example, bond
ratings), and the general socioeconomic condition of the community (indicators of distress).
Officeof Policy, Planning, and Evaluation Panel
EPA's OPPE convened an expert panel to consider the issue of affordability. Members of the panel
included nationally recognized experts in public-sector finance, economics, and community fiscal
decision-making. The panel considered the various factors used in evaluating financial capacity and
affordability and provided a critique of the methodologies previously used by EPA.
The panel observed that the two-stage approach (that is, an analysis of household ability-to-pay
followed by an analysis of municipal ability-to-finance) may have limitations. Namely, the approach
implies that some municipalities for whom an environmental project places a relatively high cost on
households may not obtain financial relief because they do not meet the criteria for relief under the
second-stage analysis.
The panel also found that the appropriate financial tests or methodology used for assessing
affordability will depend on EPA's rationale for providing regulatory relief. The following rationales
were proposed: ,
. • Community's ability-to-finance. Applies most specifically to capital projects where external
financing is required to spread the cost over time. The ability-to-finance can be measured
by assessing either a municipality's bond rating above investment grade or its ability to
obtain a loan from a bank.
• Fairness to households in the community. Considers household ability-to-pay. A reasonable
proxy for the ability-to-pay is the AUC/MHI ratio.
• Fairness to the local government/system. Aims to identify communities that are severely
distressed even in the absence of SDWA mandates. This criterion examines the fiscal
distress of each municipality and compares that measure to some threshold level of fiscal
distress. • , .
• Relative size of the financial cost. Examines the arinualized cost of the project in relation to
some measure of the scale of local government activities, such as the total public spending
by the municipality.
OPPE Panel Conclusions
After evaluating the above rationales, the panel proposed two models for assessing the affordability
of environmental compliance costs. The first modelis a modified two-stage approach. The first
stage is used to screen communities using a very basic measure that is easily available and
applicable. Communities that fail to pass the screen are subject to further analysis to assess whether
13 ". / .- ,
-------
financial or structural considerations alter the results, and whether financing for improvements is
possible, even if it is relatively burdensome. According to this model, analysts must also consider
the overall costs of services that the community provides. The community's cost burden will be
mitigated if substantial aid is received from other sources.
The basic steps in the OPPE Panel's first model are:
1. Model One: Basic Burden Screen - First determine the incremental cost per household
divided by the median household income (or a construct like per capita income times
household size). Then evaluate this result to see if the cost is potentially too high by
performing a statistical fit to determine whether the cost ratios that fall in the top 10 percent
to 5 percent of the tail are high.
2. Model One: Secondary Screen - For the communities that fall on the margin or that display
a high burden, a more extended analysis would examine various measures of ability-to-
finance the improvement. This analysis is based, in most cases, on the need for capital
improvements and access to sources of financing. Some sources of revenue and borrowing
may be accessible to one community but not to others. Intergovernmental flows can also
greatly alter apparent costs.
The second model proposed by the task force emphasizes rationales for financial relief. It begins
with a basic screening test, as in the first approach.
1 • Model Two: Basic Burden Screen - First determine if the residents of the jurisdiction would
be unfairly burdened (that is, whether the annual cost relative to household income is above
a selected threshold which would qualify the community for relief).
2. Model Two: Petition for Relief - If the primary criterion for relief is not met, the
municipality could petition for relief under either of two secondary criteria: 1) the
municipality is unable to finance the project at a reasonable cost; or 2) the compliance cost
is excessively large relative to the level of resources hi the municipality. The burden of proof
then falls on the municipality or system.
14
-------
Finally, the task force also provided a series of general recommendations for developing successful
affordab.ility approaches as follows: •
• Clearly define the economic rationales for granting municipalities relief and discuss the links
between the relevant rationales and the specific methodologies used.
• Utilize financial tests that are simple to-use, even for nori-fmance personnel, and tailored to
the data available for small systems.
• Base financial relief oh: 1) ability-to-finance a capital project; 2) household ability-to-pay;
3) the municipality's relative ability-to-pay; or 4) the size of the financial cost as compared
to the resources available to the local government.
• Clearly and openly communicate the rationale for setting the thresholds since this is a
political decision involving value judgments.
• Use financial tests that account for differences among local governments and their service
responsibilities, access to revenue sources, and institutional relationships with underlying
and overlying jurisdictions. ,
• Use one of two models: 1) a two-part test consisting of a basic household burden screen and
an analysis of the municipality's ability-to-finance the environmental project; or 2) an
approach that would grant relief to municipalities using household costs as the primary
criterion, and the ability-to-finance or the size of the financial cost compared to the resources
available as the secondary criteria. In the, second model, a municipality that did not meet the
primary criterion could petition for relief under the secondary criteria.
The affordability framework developed in this document expands on the alternative approaches to
assessing affordability. Appendix E provides a summary of affordability analyses. Each analysis
makes use of one or more of the affordability indicators and identifies the thresholds used to judge
affordability. States must carefully evaluate whether the thresholds suggested in Appendix E, which
are predominantly used to allocate grant or loan funds or to conduct academic studies, should be the
same ones used in granting variances. Stricter standards may be warranted.
15
-------
4. An Affordability Framework
As noted, a wide variety of indicators have been used in affordability assessment. These indicators,
and the broader issues they represent, can be organized within an affordability assessment
framework. This framework recognizes the flow of resources that affect water systems and the
different resources available to different types of water systems. The framework presented here
expressly recognizes the institutional and ownership diversity of small water systems. Unlike the
affordability assessment reviewed in Chapter 3, this framework is not specifically directed towards
assessing municipal affordability. The framework can be used not only to understand affordability
issues but also to explore options for addressing affordability concerns.
Indicators organized according to the proposed framework can be used to:
• Evaluate the affordability of water service to households;
• Evaluate a water system's general financial capacity;
• Evaluate a water system's access to private capital;
• Evaluate a water system's access to public capital;
• Evaluate a fiscal condition of relevant local governments; and
• Evaluate a community's socioeconomic conditions.
16
-------
1
I.
I
T3
o
"S
.N
O
17
-------
Resource-Flow Models
The generalized flow of resources to, from, and around water systems is depicted above in Figure 2.
This framework can be used to understand the sources of revenue available to different types of systems.
The key elements of the model are:
• Water systems. Includes CWSs and non-community water systems (NCWSs) of different
sizes and ownership.
• Water users. Includes residential and non-residential water customers who support water
systems through rates and other charges but also, in the case of non-community private
systems, through the cost of goods and services.
• Communities. Identifies the lowest level of local government within which the water system
provides service (for example, cities, counties, districts). Although some communities own
and operate systems, the distinction between communities and systems is important.
• Private sector capital. Includes bank loans, equity (stock), and other sources of private
capital or financial support that can be provided to the water system. Private-sector sources
of capital may not improve affordability if they add to debt costs.
• Public sector capital Includes grants, loans, subsidies, and other sources of public capital
or financial support that can be provided to the water system. When it reduces total costs,
public-sector capital can improve affordability.
• Socioeconomic conditions. Income, employment, participation hi welfare or other assistance
programs, and other socioeconomic indicators measure the general ability of households in
the water system's service territory to pay for water service.
Figures 3a and 3b show the primary and secondary resources available to publicly- and privately-owned
CWSs, respectively. Publicly-owned CWSs have access to revenue sources that are generally not
available to privately-owned systems. Publicly-owned systems may be supported by water users, as well
as through community resources and public capital. Municipal governments can assist their own
systems with direct subsidies or financing. However, local communities generally do not provide
assistance to privately-owned systems. Publicly-owned systems also generally have had greater access
to public capital than privately-owned water systems; conversely, privately-owned systems have had
greater access to private capital. Small communities often lack the resources or expertise needed to
obtain private credit, and even when they do have such capability, it is difficult for them to compete with
larger communities.
18
-------
ary
^.Secondary
Figure 3a
Potential resources for publicly-owned
CWSs
fc Primary
...^-Secondary
\ Figure 3b
Potential resources tor privately-owned
CWSs
Figures 3a and 3b. Potential Resources for Publicly- and Privately-Owned Community Water Systems.
19 '...'-
-------
Figures 4a and 4b show the primary and secondary resources available to public (or nonprofit) and
private NCWSs, respectively. In general, resource flows to NCWSs are more limited than those to
CWSs. This is especially true of public or non-profit, non-community systems. For these systems,
water costs cannot be supported through charges for goods and services. However, they may have some
access to private capital, public capital, and local community resources.
Private NCWSs can be supported by water users, but not usually through water charges. Water costs
(like other utility costs) are passed along to users through prices for goods and services. Depending on
their corporate organizational structure, private NC systems may have general access to private capital
through their parent organizations, but probably have limited access to public capital and no access to
community resources.
A key difference between CWSs and NCWSs is that CWSs generally charge customers for water
service. Thus, for CWSs, household affordability is a central focus. For NCWSs, attention shifts to the
financial capacity of the system and the organization responsible for its operations.
General Framework
Table 3 provides a general framework for an affordability analysis that builds on this understanding of
resource flows. Household affordability is perhaps the most basic and essential element of the
framework, along with the assumption that it is desirable to support the true cost of water through user
charges. However, none of the indicators should be used alone to measure affordability. The framework
also suggests a variety of additional indicators for analyzing affordability.
20
-------
Water Usrts
Figure 4a
Potential resources for public or non-profit
NCWSs
' Public
Capital .
• • - - - j
Water !!««•« 1 fc Water
J System
, , , ,. j
Private
Capital
!
1 f Community
1 - ' : 1 •.•'"•" •':'•-.. '^ -
B C^^^M^^pn^fafpS^^j^^B^
^Primary
Figure 4b
Potential resources for private NCWSs
.. '• '-'.'••-•
Figures 4a and 4b. Potential Resources for Public or Non-profit and Private Npn-community Water Systemss.
1 21 -
-------
Household Affordability
Household affordability (or rate impact) indicators focus on the capacity of water users (particularly
residential users) to support the full cost of water service (including debt repayment) through user
charges. Household affordability can be used to assess rate impacts and to screen systems for further
analysis. The level of analysis is households or other water users, sometimes measured in terms of
connections to the water system. Selected indicators of water users' ability-to-pay are:
• Ratio of user charges to income;
• Ratio of user charges to income relative to income levels; and
• Percentage rate increase (rate shock).
The percentage rate increase is frequently used in affordability assessment as a potential measure of rate
shock. However, the impact of the change can be different; a high percentage increase used to correct
past underpricing is more affordable in an affluent community than in a poor community. An important
issue to consider at this level of analysis is how well readily available median household income
information (such as census data) corresponds to actual conditions in the facility service area. Two
principal factors could constitute differences. First, the boundaries of the census data may not match
the boundaries of water systems. Even if the boundaries do match, incomes may have significantly
changed since the last census. If the census data are not believed to offer an accurate picture of income
in the service area, then an income survey could be conducted to gather more accurate data. Also, as
noted earlier, income must be considered in the context of the local cost of living.
22
-------
Table 3. Framework for Affordability Analysis
Category
Household
affordability
Financial
capacity
Access to
private
capital
Eligibility
, for public
capital
' Fiscal
conditions
Socio-
economic
conditions
Focus
Rate impact on the
capacity of water users
(particularly residential
users) to support the full
cost of water service
(including debt repayment)
through user charges.
The financial structure of
the water system including
internal sources of capital,
key financial ratios, and
business planning
capability.
Ability of the water system
to arrange financing
(such as a bank loan)
through private sector
equity and debt markets.
Ability of the water system
to secure financing
(grants or loans)
from local (community)
or nonlocal (SRF and other
programs) public sources.
Fiscal stress on the
community in terms of the
condition of local
government finances and
competing demands for
capital and operating
expenditures.
General socioeconomic
conditions related to _
household affordability,
priority for public funding,
and fiscal distress.
Level of Analysis
Households
' Water system
System
(or parent entity)
and private capital
markets
System
(or parent entity)
and public capital
markets
Relevant local
government
Service territory
Selected Indicators h
• Ratio of user charges to income
• Ratio of user chargesjo income relative
to income levels
• Percentage rate increase (rate shock)
• Ratio of revenues to expenditures
• Ratio of net income to revenues
• Ratio of assets to liabilities
• Debt-service coverage
• Composite indicators of financial health
• Market test for goods and services
(noncommunity systems)
• Credit and bond ratings
• Debt and, debt capacity ' . '
• Market test
• Credit and bond ratings
• Priority rankings • ;
• Eligibility test
• Debt as a percentage of market property
value
.• Tax revenues as a percentage of market
property values
• Property tax collection or delinquency
rate
• Local expenditures per resident
• Opportunity costs associated with water
system expenditures
• Median household income
• Percent below the poverty level
• Percent unemployment
• Composite indicators of distressed I
communities I
•^^•i^MH^^B-— ^— — •
23
-------
Financial Capacity
The financial capacity of a water system depends upon the financial structure of the water system
including internal sources of capital, key financial,ratios, and business planning capability. In other
words, the level of analysis shifts to the water system. Indicators of financial capacity are used for both
general capacity assessment and business planning. Business planning can help identify and correct
financial capacity needs.
The literature on water system financial capacity is extensive. Numerous indicators and composite
indicators are available for analysis and screening purposes. Selected indicators of financial capacity
are:
• Ratio of revenues to expenditures;
• Ratio of net income to revenues;
• Ratio of assets to liabilities;
• Debt-service coverage; and
« Composite indicators of financial health.
In the case of private systems (including private non-community systems) owned by a parent company,
depending on the corporate organizational structure, the analysis of financial capacity may extend to the
parent entity.
Access To Private Capital
Access to private capital refers to the ability of the water system (or its parent entity) to arrange
financing (such as a bank loan) through private markets. Whether or not a water system can raise
financial capital through private markets provides a market test of the water system's financial capacity.
Private markets are not likely to provide resources to systems that are financially unhealthy. The level
of analysis shifts to private debt and equity markets, where water systems must compete for private
capital. Selected indicators of access to private capital are:
• Credit and bond ratings;
• Debt and debt capacity; and
• Market test.
Some analysts have advocated a basic market test when evaluating a water system's access to private
capital. The proof is in the process itself— those who can access capital, will access capital. Systems
that "pass" the market test are those that successfully obtain private financing for needed improvements.
24
-------
Eligibility For Public Capital
Evaluating eligibility for public capital parallels evaluating access to private capital. In this case,
eligibility refers to the ability of the water system (or its parent entity) to secure financing from local or
nonlocal public sources. Financing may be in the form of grants or loans from the SRF or from other
State, and federal sources. Relevant indicators of eligibility for public capital are:
• Credit and bond ratings;
• Eligibility test; and
• Priority rankings.
Credit and bond ratings are. used to evaluate access to public capital as well as private capital. In the
case of municipal systems, ratings of municipal governments may be used: The eligibility test is similar
to the market tests — systems that "pass" the eligibility test are those that successfully obtain public
capital (grants or loans). Some public agencies rank systems in terms of their priority for public funding
through grants or loans! Funding priorities tend to focus on systems with pressing public health
concerns or those located in distressed communities.
Fiscal Conditions of Local Government
Some indicators of affordability consider the fiscal condition of the relevant local government. Fiscal
stress on communities can be assessed in terms of competing demands for capital and operating
expenditures, particularly in the face of limited governmental resources. -This form of fiscal stress is
particularly relevant when considering if resources from the community can be used to support water
system costs. Some indicators of local fiscal conditions are:
• Debt as a percentage of market property value;
• Tax revenues as a percentage of market property values;
• Property tax collection or delinquency rate;
• Local expenditures per resident; and ,
» Opportunity costs associated, with water system expenditures.
Opportunity costs may be relevant for some communities. Resources spent on water system
improvements cannot be devoted to other uses. Evaluating opportunity costs for a given community,
generally requires a qualitative assessment of competing concerns.
Socioeconomic Conditions
As previously discussed, ability-to-pay is largely a function of income and employment. A community's
socioeconomic conditions are closely related to household affordability indicators, the priority rankings
used in determining eligibility for public funding, and the fiscal condition of. local governments.
Income, poverty, and unemployment indicators are often used to measure socioeconomic conditions and
to establish State definitions of distressed or disadvantaged communities.
' 25
-------
Two-step affordability tests often combine socioeconomic indicators with household affordability
indicators. Some of the leading indicators of socioeconomic conditions are:
• Median household income;
• Percentage of population below the poverty level;
• Percentage of population unemployed; and
• Composite indicators of distressed communities.
Accurately measuring income and other socioeconomic indicators can be difficult because data available
from the Census and similar sources may not match water system service territories. For this reason,
some analysts have used income surveys hi conjunction with affordability analyses. These survey data
may be needed to evaluate rate impacts (AUC/MHI) as well.
Appendix E provides a summary of affordability analyses. Each analysis makes use of one or more of
the affordability indicators and identifies the thresholds used to judge affordability.
Affordability for Non-community Systems
Most indicators developed for assessing affordability were designed and implemented with CWSs in
mind. While some indicators may not apply directly to the case of non-community systems, some do.
Specifically, household affordability measures that focus on water user charges relative to income are
irrelevant, while measures focused on the financial condition of the system and the socioeconomic
condition of the community may be useful.
For NCWSs, the nature of ownership has an important bearing on affordability. In the case of systems
run for profit, a market test may be particularly appropriate. If the cost of compliance can be
incorporated into the cost of business (like other expenses) and the entity can price its product
competitively and stay in business, then the compliance technique might be considered affordable. For
some systems, private capital for improvements may be available from a parent corporate entity if the
effect on costs and prices is so extreme as to threaten the existence of the business.
Systems managed by and for public purposes cannot pass costs along through prices of goods and
services, but instead must rely on public sources of funding. Measures of the fiscal stress for the
relevant public entity and access to public capital are applicable to publicly-owned systems. The
difficulty hi applying affordability measures to these systems is due to the intrinsic relationship between
the fiscal health of the water system and the fiscal health of the larger entity.
For both privately and publicly-owned NCWSs, measures of general socioeconomic distress may also
prove useful for assessing affordabilily. Although indirect, these indicators provide a general assessment
of the financial condition of the water service population, and its ability-to-pay for water system
compliance.
26
-------
5. Examples of the Use of Affordability Criteria
Pursuant to the 1996 SDWA, States can develop and use affordability criteria when determining whether
or not to grant variances. Affordability criteria can also be used in conjunction with State funding,
planning, and other decisions.
Section 1415 (e), an excerpt from SDWA as amended in 1996, refers to affordability and variances and
is included as Appendix A. The statutory language provides'the authority for States to issue variances
to water systems. The statute outlines the variance granting process, including the role of the State and
the water system. Criteria for receiving a variance, compliance schedules, the duration of variances,
factors that make systems ineligible for variances, and the role played by the EPA Administrator are also
discussed in Appendix A.
Appendix B contains the portion of SDWA which addresses the relationship between affordability and
SRF. Section 1452 (b) focuses on the lUPs of systems, including what the plans should contain. The
criteria used to judge the appropriate use of SRF funds by a system are also defined in Appendix B.
The policy statement on affordable drinking water of the National Association of Regulatory Utility
Commissioners (NARUC) is attached as Appendix C. NARUC believes that it is essential for EPA to
"affirm a commitment to affordable water rates." To this end, NARUC suggests EPA develop a policy
that establishes universal water service as a national policy goal, considers four economic factors in the
granting of variances or exemptions, and provides State regulatory commission agencies with an
advisory role to EPA and primacy agencies.
Appendix D summarizes a 1993 EPA report entitled "Affordability of the 1986 Amendments to
Community Water Systems." In the report, EPA measured the affordability to households and the
affordability to systems of implementing the 1986 SDWA Amendments.
An overview of selected studies on affordability measures and thresholds is presented in Appendix E.,
For each study, the appendix lists the concept being studied (i.e. household affordability or
socioeconomic conditions), the indicator(s) used, and the chosen threshold levels.
The affordability policies for New York, Pennsylvania, and Idaho are summarized in Appendix F. The
summary of New York includes a description of the State's affordability criteria, how New York projects
annual drinking water service charges, information the State uses to determine hardship, and the criteria
New York uses to determine eligibility for financial assistance. For Pennsylvania, the Pennsylvania
Infrastructure Investment Authority (PENNVEST) conducts a program using a computer model named
PACNIF (FINCAP, or financial capacity, backwards) as the basis for determining affordability. The
affordability assessment tools used by Idaho, including water system revenues, a water system rate
affordability index, and information on water system budgets are also detailed.
27
-------
-------
Appendix A. 1996 Amendments to SDWA on Affordability and
Variances v
1415 (e) Small System Variances.—
(1) In general—A state exercising primary enforcement responsibility for public water
systems under section 1413 (or. the Administrator in non-primacy states) may grant a
variance under this subsection for compliance with a requirement specifying a maximum
contaminant level or treatment technique contained in a national primary drinking water
regulation to —
(A) public water systems serving 3,300 or fewer persons; and
(B) with the approval of the Administrator pursuant to paragraph (9), public water
systems serving more than 3,300 persons but fewer than 10,000 persons, if the
, variance meets each requirement of this subsection.
(2) Availability of Variances.—A public water system may receive a variance pursuant to
paragraph (1), if—
(A) the Administrator has identified a variance technology under section 1412(b)(l 5)
that is applicable to the size and source water quality conditions of the public
water system;
(B) the public water system installs, operates, and maintains, hi accordance with
guidance or regulation issued by the Administrator, such treatment technology,
treatment technique, or other means; and
(C) the state in which the system is located determines that the conditions of
paragraph (3) are met. '
(3) Conditions for Granting Variances.—A variance under this subsection shall be available
only to a system—
(A) that cannot afford to comply in accordance with affordability criteria established
' . by the Administrator (or the state in the case of a state that has primary
enforcement responsibility under section 1413), with a national primary drinking
water regulation, including compliance through—
(i) treatment;
(ii) alternative source of water supply; or
(iii) restructuring or consolidation (unless the Administrator (or the statein the
case of a state that has primary enforcement responsibility under section 1413)
makes a written determination that restructuring or consolidation is not
practicable); and
Appendix- 1 ,
-------
(B) for which the Administrator (or the state in the case of a state that has primary
enforcement responsibility under section 1413) determines that the terms of the
variance ensure adequate protection of human health, considering the quality of
the source water for the system and the removal efficiencies and expected useful
life of the treatment technology required by the variance.
(4) Compliance schedules.—A variance granted under this subsection shall require
compliance with the conditions of the variance not later than 3 years after the date on
which the variance is granted, except that the Administrator (or the state in the case of a
state that has primary enforcement responsibility-under section 1413).may allow up to 2
additional years to comply with a variance technology, secure an alternative source of
water, restructure or consolidate if the Administrator (or the state) determines that
additional tune is necessary for capital improvements, or to allow for financial assistance
provided pursuant to section 1452 or any other federal or state program.
(5) Duration of variances.—The Administrator (or the state in the case of a state that has
primary enforcement responsibility under section 1413) shall review each variance
granted under this subsection not less often than every 5 years after the compliance date
established in the variance to determine whether the system remains eligible for the
variance and is conforming to each condition of the variance.
(6) Ineligibility for variances.—A variance shall not be available under this subsection for—
(A) any maximum contaminant level or treatment technique for a contaminant with
respect to which a national primary drinking water regulation was promulgated
prior to January 1, 1986; or
(B) a national primary drinking water regulation for a microbial contaminant
(including a bacterium, virus, or other organism) or an indicator or treatment
technique for a microbial contaminant.
(7) Regulations and guidance.—
(A) In general.—Not later than 2 years after the date of enactment of this subsection
and in consultation with the states, the Administrator shall promulgate regulations
for variances to be granted under this subsection. The regulations shall, at a
minimum, specify—
(i) procedures to be used by the Administrator or a state to grant or deny
variances, including requirements for notifying the Administrator and
consumers of the public water system that a variance is proposed to be granted
(including information regarding the contaminant and variance) and
requirements for a public hearing on the variance before the variance is
granted;
Appendix - 2
-------
(ii) requirements for the installation and proper operation of variance technology
that is identified (pursuant to section 1412(b)( 15)) for small systems and the
financial and technical capability to operate the treatment system, including
operator training and certification;
(iii) eligibility criteria for a variance for each national primary drinking water
regulation, including requirements for the quality of the source water
(pursuant to section 1412(b)(15)(A)); and
(iv) information requirements for variance applications.
(B) Affordability criteria.—Not later than 18 months after the date of enactment of
the SDWA Amendments of 1996, the Administrator, in consultation with the
states and the Rural Utilities Service of the Department of Agriculture, shall
publish information to assist the states in developing affordability criteria. The
affordability criteria shall be reviewed by the states not less often than every 5
years to determine if changes are needed to the criteria.
(8) Review by the administrator,— ,
(A) Jn general.—The Administrator shall periodically review the program of each '
state that has primary enforcement responsibility for public water systems under
section 1413 with respect to variances to determine whether the variances granted
by the state comply with the requirements of this subsection. Withrespect to
affordability, the determination of the Administrator shall be limited to whether
the variances granted by the state comply with the affordability criteria
developed by the state.
(B) Notice and publication.—If the Administrator determines that variances granted
by a state are not in compliance with affordability criteria developed by the state
and the requirements of this subsection, the Administrator shall notify the state in
writing of the deficiencies and make public the determination.
(9) Approval of variances.—A state proposing to grant a variance under this subsection to a
public water system serving more than 3,300 and fewer than 10,000 persons shall submit
the variance to the Administrator for review and approval prior, to the issuance of the
variance. The Administrator shall approve the variance if it meets each of the
requirements of this subsection. The Administrator shall approve or disapprove the
variance within 90 days. If the Administrator disapproves a variance under this
paragraph, the Administrator shall notify the state in writing of the reasons for
disapproval and, the variance may be resubmitted with modifications to address the
objections stated by the Administrator.
(10) Objections to variances.— .
, - ' • • _ • j
(A) By the Administrator.—The Administrator may review and object to any variance
proposed to be granted by a state, if the objection is communicated to the state not
. Appendix - 3
-------
later than 90 days after the state proposes to grant the variance. If the
Administrator objects to the granting of a variance, the Administrator shall notify
the state in writing of each basis for the objection and propose a modification to
the variance to resolve the concerns of the Administrator. The state shall make the
recommended modification or respond in writing to each objection. If the state
issues the variance without resolving the concerns of the Administrator, the
Administrator may overturn the state decision to grant the variance if the
Administrator determines that the state decision does not comply with this
subsection.
(B) Petition by consumers.—Not later than 30 days after a state exercising primary
enforcement responsibility for public water systems under section 1413 proposes
to grant a variance for a public water system, any person served by the system
may petition the Administrator to object to the granting of a variance. The
Administrator shall respond to the petition and determine whether to object to the
variance under subparagraph (A) not later than 60 days after the receipt of the
petition.
(C) Timing.—No variance shall be granted by a state until the later of the following:
(i) 90 days after the state proposes to grant a variance.
(ii) If the Administrator objects to the variance, the date on which the state makes
the recommended modifications or responds in writing to each objection.
Source: SDWA as amended in 1996. Emphasis added.
Appendix - 4
-------
Appendix B. 1996 Amendments to SDWA on Affordability and the
State Revolving Fund
Sec. 1452. (b) Intended Use Plans.— '
(1) In general.—After providing for public review and comment, each state that has entered
into a capitalization agreement pursuant to this section shall annually prepare a plan that
identifies the intended uses of the amounts available to the state loan fund of the state.'
(2) Contents.—An intended use plan shall include—
, (A) a list of the projects to be assisted in the first fiscal year that begins after the date
of the plan, including a description of the project, the expected terms of financial
assistance, and the size of the community served;
(B) the criteria and methods established for the distribution of funds; and
(C) a description of the financial states of me state loan fund and the short-term and
, long-term goals of the state loan fund. .
(3) Use of funds.—
(A) In general.—^An intended use plan shall provide, to the maximum extent
practicable, that priority for the use of funds be given to projects that—
(i) address the most serious risk to human health;
(ii) are necessary to ensure compliance with the requirements of this title
(including requirements for filtration); and
(iii) assist systems most in need on a per household basis according to state
affordability criteria.
(B) List of projects.—Each state shall, after notice and opportunity for public
comment, publish and periodically update a list of projects in the state that are
eligible for assistance under this section, including the priority assigned to each
project and, to the extent known, the expected funding schedule for each project.
(C) Fund Management.—Each state loan fund under this section shall be established,
maintained, and credited with repayments and interest. The fund corpus shall be
available in perpetuity for providing financial assistance under this section. To the
extent amounts in the fund are not required for current obligation or expenditure,
such amounts shall be invested hi interest bearing obligations.
Appendix - 5"
-------
(D) Assistance for Disadvantaged Communities.—
(i) Loan subsidy.—Notwithstanding any other provision of this section, in any
case in which the state makes a loan pursuant to subsection (a)(2) to a
disadvantaged community or to a community that the state expects to become
a disadvantaged community as the result of a proposed project, the state may
provide additional subsidization (including forgiveness of principal).
(ii) Total amount of subsidies.—For each fiscal year, the total amount of loan
subsidies made by a state pursuant to paragraph (1) may not exceed 30 percent
of the amount of the capitalization grant received by the state for the year.
(iii) Definition of disadvantaged community.—In this subsection, the term
"disadvantaged community" means the service area of a public water system
that meets affordability criteria established after public review and comment
by the state in which the public water system is located. The Administrator
may publish information to assist states in establishing affordability criteria.
Source: SDWA as amended in 1996. Emphasis added
Appendix - 6
-------
Appendix G. Policy Statement of the National Association of
Regulatory Utility Commissioners on Affordable Drinking Water
The National Association of Regulatory Utility Commissioners (NARUC) believes that while
specific affordable dollar amounts of increases in residential water bills cannot be determined, it
is essential that the Environmental Protection Agency affirm a commitment to affordable water
rates. We suggest that this commitment be expressed in a three-point policy: '
1. Universal water service, defined as high quality' drinking water at affordable rates for every
American, should be a national policy goal.
Universal telephone service has long been a national goal. Previously in water utility service, it
had not been necessary to assert a policy.of universal service. With the increased recognition of
environmental dangers to high quality water supplies and the passage of SDWA, a policy of
universal water service is essential. ;•'.'-
2. In addition to health factors, four economic ifactors should be taken into account in
considering whether to grant variances or exemption under SDWA. These are community size,
the impact on water rates, the price of substitutes for centrally-distributed drinking water, and the
financial capability of the water system. If a proposed capital improvement to meet SDWA
standards is judged unaffordable by the primacy agency for any of the four factors, a variance or
exemption should be considered.
(a) Community Size: A proposed capital improvement may be considered unaffordable, taking
into account the size of the community and, thus, the customer base across which costs of the
improvement can be spread. . -
(b) Impact on Water Rates: Rate increases to pay for SDWA improvements may be considered
unaffordable if either the immediate increase in rates or the increase in rates phased in over time
would result in rates that are (1) substantially higher than existing water rates; or (2) substantially
higher relative to rates for other utility Cervices; or (3) substantially higher relative to the average
rates paid by residential customers to other water utilities hi the state.
(c) Price of Substitutes: Rate increases to pay for SDWA improvements may be considered
unaffordable if rates to provide potable water through the central water system would be greater
than the price of alternative means of providing high quality drinking water.
(d) Financial Capability: For commission-regulated water utilities, improvements to meet
SDWA requirements may be considered unaffordable if the utility has demonstrated its inability
to obtain funds to pay for them. Such inability can be shown by the rejection, in writing, of a
bonafide application for a loan to pay for the improvements, accompanied by evidence of the
willingness of the utility, the primacy agency, and the state regulatory commission to work
together to develop a fair and reasonable cost recovery program.
Appendix - 7
-------
3. State regulatory commissions have an advisory role in SDWA implementation by the EPA
and the primacy agencies as SDWA applies to commission-regulated water utilities.
EPA should consider providing guidelines to primacy agencies calling for consultation with the
state regulatory commission when dealing with utilities jurisdictional to the commissions. Such
consultation should be called for in making decisions on the technology required to meet SDWA
standards and the appropriateness of granting a variance or exemption. EPA guidelines to the
primacy agencies should be modeled on the definition of roles laid out in the Memorandum Of
Understanding between the California Department of Health Services and the California Public
Utilities Commission.
The NARUC supports the common objectives stated in the Memorandum of Understanding and
suggests that the state regulatory commissions take action through written agreements with the
primacy agencies to concur with the objectives and to assume responsibility for:
(a) Determination of the type of rate relief, if any, needed to finance system improvement
projects for projects required by SDWA. .
(b) Promptly informing the primacy agency of public meetings with customers and/or
evidentiary hearings where water quality problems will be discussed so that the primacy agency
may prepare and participate.
(c) Providing analyses of the financial impacts, if any, of system improvement projects on both
water utilities and customers' rates.
(d) Encourage public education and awareness of SDWA.
Source: National Association of Regulatory Utility Commissioners, Press Release (November
21,1988).
Appendix - 8
-------
Appendix D. Affordability of the 1986 Safe Drinking Water Act
Amendments
In 1993, the EPA published a report entitled "Affordability of the 1986 Amendments to
Community Water Systems." A threshold of two percent was used to measure affordability for
three different ratios: 1) household costs to median household income; 2) aggregate household
costs to aggregate household income (best case); and 3) household cost as a percentage of
median household income for households earning less than 150 percent of the federal poverty
level (worst case). In a relatively detailed analysis, the report presents several key findings
regarding household affordability and wafer system affordability:
Affordability to Households
• Pre-SDWA drinking water costs are burdensome to about 7.5 percent of households
nationwide—all of which have annual income of less than $10,000.
• Nearly 11 percent of households nationwide may find post-SDWA drinking water costs
to be burdensome, particularly households with less than $10,000 annual income.
• Nationally, average annual household drinking water costs have risen 25 percent, from
$182 to $227, as a result of the 1986 SDWA Amendments, based on this analysis.
Affordability to Systems
• The study estimates that prior to the 1986 Amendments, less than one percent of CWSs
faced affordability problems. " .
• Virtually all systems serving populations of 10,000 or more can afford SDWA-required
costs. Depending on how system affordability is measured, between four and 41 percent
of all CWSs may now face post-SDWA affordability problems, primarily systems serving
10,000 persons or fewer.
• If post-SDWA costs were allocated progressively, according to a household's ability to
pay, post-SDWA water costs would be burdensome to just over four percent of CWSs.
• Small system diseconomies are responsible for much of the affordability problem at both
the household and system levels.
Appendix -9
-------
-------
Appendix E. Affordability Measures and Thresholds: Selected Studies
Appendix- 10
-------
-------
2
"o
CA
1
H
Indicator (s)
-•
1
<3
•5*
1
jy
15
fnafforda
3
eu
.5
co
c
o
'•s
u
6
I
1 Annual user charge (AUC)
^
A
•^
•&>.
3
«n
^
Household income (MHI)
t '
3
ca
1
ca
•O
Househol
Water Utility Financing
S
o
o
tN
A
e
^^
3
o
Percentage rate increase
£
15
C3
*E
1
Househol
Study (1980)
A*
1 Annual user charee ( AUQ
£
"2
ca
•s
•i
T3
Househol
t
i
00
"5.
I
| Median household income (1
oo
oo
0\
v — '
(4-1
,_ j- 0
O .§ s»
it ••' 1.
11 IB.
. cL 0 o e
• '^ «* ' O
!? ^ 5~ Q^
-2 o S ' p
X> -2 ^o o>
c/a w en •£
*^H Q> . •"-' c*
S £ ' 5? °
s *s . . s S
*a ""v "
is g -si
*^ *t_^
o 13 3 53 " -- S
A ^) ^ i ' A -S
• Be' . .
Debt service portion of
annual user charge (AUC)
-and-
Statewide nonmetropblitan
median household income (P
^
S
.•& " "S -
O o
ca • ce -
ca o
"S - -g
5 •• ' ^
1 . i
Rural Development
Administration (Grant
Eligibility)
1
o
en
Water and sewer bills
^
15
P3
"E
ca
T3
Househol
Department of Housing
\
Household income
, •
Iand Urban
Development
-
o
o
cs
A
Water and sewer bills
. > '•
1
Household income
.£ '
o
ca
"2
f
T3
Househol
National Consumer
Law Center "The Poor
and the Elderly -
Drowning in the High
Cost of Water", (circa
1991)
--s
e
•
o ,
1 ' - ' '.
'•b ., •
£2 r*"1 '
•3 is
^
^
c
, c
2
•c
CO
3
•§ .;•.-•
"
o3
"s • . , '
!>
•8 '
n. S
c
o
S2
^
_c
c
Net income + depreciation
. § - .;
1 '•
.s . ' •
1 '
Annual operating revenues
L
Financial
National Regulatory
i
Current assets
Current liabilities
^>
-O
Financial
liquidity
Current stock equity
Total assets
£j»
1
Financial
leverage
'
Retained earnings
Common stock equity
.&
.L
Financial
profit tren
1 .
I'-
ll
Appendix-11
-------
Threshold
tt
Indicator (:
"a.
o
8
•0*
ft
35
en!
cu
3
c
CU
1
cu
.£
1
CO WJ
'O en
"co w
c S
c o
|
p
feb
"3
Financial capa
and efficiency
en en
'o
Financial capa
composite
b
O <1>
*? 1 IT
2^ !S s
1Jj?f
'•s s 2
2 ^ ^
2 _
en a
T3 CU
1 •£ .
rtl *^
<0.8% not expected to creati
=0.8 to 1.5% mid-range
>1 .5% may be unreasonable
(4-1
O
BBB or Baa O Strong
= BBB or Baa "=> Mid-range
< BBB or Baa <$ Weak
Bond rating
0)
O)
1
TJ
D) ^ j^
£ TO
2 ft
CO *-«
CO ^2
CO CH
S 8
u cu
< State average "=> Strong
= State average O Mid-rang^
> State average O Weak
•
1
cu
J2
ex
fli
> State average "=> Strong
= State average O Mid-rangi
< State average O Weak
Z^-
HyH
^2
^>
O
cj
8
.s
2
"o
JS
cu
en
Median hou
I
T3
1
O
o
u
'3
o
00
•*-* *o O
,50 I-, o
.a ^ •§ •§
1^11
" !'•!§§
cu ^ ^y *^ *^
tiJ O
Appendix - 12
-------
hreshold
H
Indicator (s)
•4-^
a.
Q>
U
<5
^.
a
•
CO
c?
rs!
•ts "LT ^
t/3 vfj !>
ft ^ ft
V II A
O
qj
M ' • •
«3
-t->
U
a
S
Property tax as percentage of full
taxable property
O •
S-i
ft S ft
§0 «tt TT
A II V
Property tax collection rate
a
§
i
00 (vj C^
>r> v^ >o
A II V
Composite score
r
CO
.§
"•4— *
^2
8 . • .
1
S_i
G> L.I . -
"KJ w f5
.a ^ "i J
u § _^* ^ ^^
Sllli;
>>•
•c
3
8
en
1— H
§
•"tS
*O
0
12
1 ...
w
3 _•
O . '
A
b ' " -.
a.
e
5
^j,
§> :
Long-ran household impact:
Post-compliance average user chi
household as a percentage of MH
*s
T3
•U , '
3
CO
'"*
O
2
0
3
'p2
1
s
js*
en "-; /-s !
111
en * ,
** ^"^s
3 *>
i "°
60 ^
_0 g
"O u
w
? 2
tS o
0 £
CO ^
-d H
"S Jy
^ =3
CO O
i -
<^ s
community
alyses, it wi
• fa i
i
•g
"to
.w
'^I'S"
S3 i
' cd 60
,
«
o
Q-
J,
1-
ft'
."S
•+->
revenue deb
iue debt
r-. VJ
A -2
£
"O
1
Existing revenue debt plus new n
0
£
•o
&
i
CO
CO
ft
af
Revenues less expenditures
CO
o
«*
.1?
3
CB •
ca
O
."s ,
13-
.s '§•
E S
•a^Sl •. "
tss • -
§ •" "3
< S g .••.....•
Appendix - 13
-------
Threshold
Indicator (s)
•*••
u
c
o
u
•o
2
en
00
o
V
:=
0
1 Debt service of munici
o
V)
V)
u
u
£
&
1
!§
Total revenues of mun
\o
g
o
V
—
o
1 Debt service of munici
^.^
*O
U C
P 0
a
1
Market value of taxabl
S
•3
0
o
en
'"
O
8
^.
3
> debt limit => probs
Existing plus new debl
fil
Q.
Financial ca
jn
"s
o.
"2
"e
S
ss
w
•^* Sft
capital (abili
general oblij
1
•S
g
^k *•"**
JL /">
11
•0
8
't
U
OT
•*— >
*S •"-•
e O
C5
3 0
If less than O&M pi
probably cannot issu
.3
o
CO
g
•S J S -g
•S 'S -SS
B c?O
U O U w
n so
2 c4
(N V
-------
Threshold
Indicator (s)
"n,
fli
i
o
U
55
/I1*
00
fif
ft 1 1>
s: -2 &
v\ . ON
V o\_ A
I Prooertv taxes collected
>.
t
u
S
CO
1
•3
c
8
~a
CO
E
a3
1
C/3
T3
ID
..s
JO
O
U
Property taxes levied
/^—s
0
v^
a
1
JB
"o .
x
•*-
•* *G
!>• &
f> oo
Mid-ra
25% below state averag
Unemployment rate
*73 C
s s
^ 00
. Mid-ra
25% above state averagi
Median household income
CO
a • •
.2
•3
e
o
o
_o •
£3
O
c
1
o
•'§
00
•al '
'I ES ^ '
C ,Q> ^
J3 to O\ .
.s
> 2.0% not affordable
CO
1
S
o
4>
KA
m
*S
g
H
a3
a,
r/l
Pre and post-SDWA costs a:
household income
> 2.0% not affordable
a
Co
IB 43
6 J
O co
0 S
eu 2.0% riot affordable
i*
i
§
CO CO
CO CO
co O
O Strong
2% to 5%^ Mid-range
Above 5% ^ Weaker
S3 '
Overall net debt as a percent
r.
£> '
3 ...
o
s • ' ' .
!a
I
CO
E . • ' •
1
§ " ' •
.ft,
2 f7
•s'S
P .
u "^
f^ LlJ ^
' - ,
Appendix - 15
-------
Threshold
S
Indicator
"a.
O
a
*o
a
•»-
v>
oi>
111
CO .Q. J>
iii
^-« o *— «
111
4>
.1
•3
?s
S*
S
o
*-»
C/l
U
3
S
.2
1
00
oo
60 § "U
|||
iJ ft •&
SO sO SO
oS ix eS
o o o
•
'fr s tt
"> sP O
> VI ^
£ s-§
< o CQ
S
o
^2
^4
o
J2
o 2 J
< ON CQ
1
e
1
1.
CL,
S
p-
CQ
C
•43
*3
c
8
"S
U
CO
(L> ,_
P ' iP
CN os T
o 2 o,
^ *_, U
< T CQ
60
i
•S
c
.2
^
S
!§•
c
c
Below state average O Stron
State average O Mid-range
Above state average O Weal
c
i
f
60
Above $40,000 O Strong
$17,000 to 40,000 0 Mid-rai
Below $17,000 O Weaker
OS*
oo
OS
s2<
1
O
U
2
o
•s
CO
s
i
CQ
.0
•o
c
o
U
U
'§
o
c
8
o
'i
00
oo
.5
o r>
§ ^
c o
iS -ii-
2R
"S <*
o *~^
Appendix -16
-------
I Threshold
3
o
"3
•3
"o.
o
c
0
U
•o
Q> *-<
60 60 M
is Y1 ^
•o- § D-
> ^- * "^
•S OT
Si
' 1 1 1' •
^ ^ 0
> O 4> •
"53 4-t rO
CQ ' *o "^
.
w1
1>
3
.s
. (U
I
o
Sn
S
S3
§
53
OH
'•&
03
1 '
CB
2
o
V3
3
0
a
6O
1 ¥ :
•S 8
tin *•— '
it
(*<- ^
o pj .
O O
' '3 . -'SI
• 0.5% when median household income of
service area is equal to or below 80% of
statewide nonmetropoHtan median househo
income
-and-
• 1% when median household income of sei
area exceeds 0.5% requirement but is not m
than 100% the statewide nonmetropoHtan
median household income
V
1 >
"ea
3 '
S
D
I
cj
1> ' S3 S3
-Q. -1 ? 'S
3
c«
o
03
2
"o
crt
3
0
a • . '
.§ '
£*O
CH '
CO tn w
w cO C
•s ^ o
s •§ -)
| gl |
3 ^ — 2
oi ^ S O
.0 -<"
0 S
May not exceed the very low-income limit
specified in RUS. Limits range from $8,45
$22,050 per household, depending on an ar
median income.
1
.S '
•o
-o
_e
U
W
1
t :
"H
.0
^
2
"o
o>
3
0
a
S | '
(U g I— 1
O *^H
« o oj
«' c3 ex
Rural Utiliti
Very Low Ii
Housing Re
and Grants
CA
T3
' 1
Funds are allocated to States based
upon rural population and number of house
in poverty. The
statistical factor for eligibility is towns or
incorporated areas under
50,000 population.
t '
?"v
ex
.S
CO
T3
l ',•;•'
js
t+-<
,o
a>
1
IS •
(S
"H -
^2
•8 .
2
"3
d>
Appendix- 17
-------
1 Threshold 1
S
u
o
»•*
•S
c
>— 1
D.
0
CJ
C
O
U
•*•*
V)
Demonstrates a poverty rate which is not less
than: (1) 20 percent in each census tract; (2) 25
percent in 90 percent of the
population census tracts within the nominated
area; and 3) 35 percent
for at least 50 percent of the population census
tracts within the
nominated area
4>
e
1
& ?
Pervasive poverty shall be
demonstrated by the nominating entities by
providing evidence that: (1)
Poverty is widespread throughout the nominated
area; or (2) Poverty has
become entrenched or intractable over time
(through comparison of 1980
and 1990 census data or other relevant evidence)
§*1Q i^
1 1-2 S"g
w a i o s
Appendix- 18
-------
•o
"o
ji
H
-
^^
®
b
1
^3
£
u
a
o
U
•w*
3
55
A poverty rate that is not less than: (a) 20
percent in each census tract
3}
E
U
£
or census block numbering area (BNA);
(b) 25 percent in 90 percent of the population
census tracts and BNAs within the nominated
0
area; and (c) 35 percent for at least 50 percent
1
0
the population census tracts and BNAs within
the nominated area
General distress shall be
evidenced by describing adverse conditions .
en
c/3
J-5
'1;3
1
§
•b
within the nominated area
other than those of pervasive poverty and
unemployment. Below average v
or decline in per capita income, earnings per
worker, per capita property tax base, "average
'
years of school completed; out-migration and
population decline from 1980-1990
(U
" —
o
S*
II
trt
tn
^3
C (U
'3
3
S
o
U
o
(4_,
§ e
S |
° "6
13 c3
> ex
P P
I
"3
o
'C
^
-
-
ferences
^^^
K
!U
s
' 1
I '
O
•'•§
i
&>
,3
••^
1 •
°^
c*S
••^
• K^
•§' '
f|\
i
K1 j
£^
•fe
"S'
G) •
1
^
1
- -Q
o
c/a
"w
• "C
O
a*
'&
1 «
d Sewer Rates— The
itory Research Institu
got. 1992. "Water an
!: The National Regulz
1°
11
cd O
oo O
g
S)
_o
g
§
U
£
C
'*o •
u
0
tj5
O
O
P
I
Ic
1
S ••
SM
•^
-.&a
^
•s .
•^
^
OS
CD
1
.0-
ental Protection Agen
. Environm
oo
P -
d ,
„
g
1
'D. ,
PH
1
^
^
•SJ
i
_•&>
c
s
s
•a
--2
•S3
cu
S
"5
1
"^H
'.1986SDWA.
•*s.
V,
.£*
*c»
"5
"^
fe
x §
ro -2
S >
cy. September 30, 19
g Water Standards Di
ental Protection Agen
C: U.S. EPA, Drinkin
o a
a. o
> eb
flj
00 8
P 'C^
o
0
IB •
O
P '
£3*
O
c?
I
•^
Q
1 '
0
.'c
S
1
1
£3
&
^t
*s
a
§<
~,
•S
a
s
s;
o
8|
.^
1
^
Co
*^s
I
-0
5 •
a .
cy. September 1993.
Protection Agency.
ental Protection.Agen
r, U.S. Environmental
. Environm
iking Watei
oo '3,
P P
i
55
a> '
;|
60
' .S
g
fi
'-o
Q
'I
. 60
..— i
1 '
^
- .
cu
•^*
*§>
4;
^s
§
j-3
r***
*i^
&'
n .
O 60
1.2
-- K 'S
•^ ^
§ .2
•+»! C
• s "^
is G
^ S
1 "«
Q "
cy. September 1993.
d Drinking Water, U.
ental Protection Agen
e of Ground Water an
. Environm
ision, Offic
&o >
P S
' •§
OS
o
1
p-l
O
P
ef
1,
j=
1
'
^*-^ ^_
SO*
^
•S 8>
^••^
^ §
"If
.2 ^o
^ *"
S ^**
oo «
•&* 0 '
or Water Quali
U.S. Environm
i> i-T
U Qj
12 ^
^ fc| 1
o °
.0 8 •
§ O^
1 ^
cy. November 1993,
" Science and Techno!
ental Protection Agen
ysis Branch, Office oJ
. Environm
istical Anal
°^ ta
P. 00
Appendix- 19
-------
s
o
a,
8
I
u
a
ef
o
'So
1
CO
1
o
8
§
f
1
§
<5
^
Is
•s
5
I
§
1
IS
o
o
Q
o
on
1
§
6
I
a
£
S
t
"a
§
t
a
0)
•
I
d
w
,«0
^i
.il
•y <
II
11
o re
MS
n
u >
OQ 5
< W
S
1^
1J
O- to
II
Envi
ing,
g>
1
cu
u
I .
vd 5>
CTi c
OS S
- ^0
u, •<
o> _
•8.1
o t>
o a
**
11
< S
I |
o -g
IU >
I"
Oi .-;
I fe"
3 «
.g^
g |>
W 2
w «5
D5
•fl -S
CQ
•§ &
u c
e _o
oo o
c g
.2 &
S 3
S 0
ffi s
ii
.§«?
g^
" S?
on ta
D ^
- Appendix -20
-------
Appendix F. Selected State Policies Using Affordability Criteria
New York State
Affordability Criteria for the
Drinking Water State Revolving Fund (DWSRF)
I. Summary
The purpose of the affordability criteria is to determine which public water systems are eligible
for financial assistance beyond the ordinary benefit available through the Drinking Water State
Revolving Loan Fund (DWSRF). The additional benefits will assist economically disadvantaged
water systems in the construction of eligible drinking water projects. As defined by federal
statute, a disadvantaged community is one in which the service area of a public water system
meets affordability criteria established after public review and comment by the state in which the
public water system is located.
In New York State, drinking water projects will be reviewed to determine eligibility and scored
based on an established priority ranking system. Communities whose water projects are ranked
high enough and whose annual projected service charges for drinking water are above the
DWSRF's target service charge (TSC) may be eligible for additional financial assistance to bring
the projected service charge closer to the TSC.
II- Affordability (Hardship) Criteria '.'
Hardship will be based on the. following percentages of the community' s Median Household
Income (MHI)*:
Median Household Income (MHD Target Service Charge (TSC)
$0to.$24,725 1%MHI
$24, 725 to $39,557 $247 + (MHI - $24,725) x .0235
$39,558 and above • 1.5% MHI
Attached is a table showing sample target service charges at various Median Household Income.
Levels. .
Appendix - 21
-------
> , INCOME
-------
D. Existing annual operation and maintenance (O&M) costs.
E. Estimated project costs.
F. Estimated O&M costs based upon completion of this project.
G. Any other sources of funding anticipated for this project, including the amount, type of
funding (loan or grant), and if a loan, its interest rate, term, and annual debt payment,
V. Criteria for Hardship Financial Assistance
A. Maximum project size will be $10,000,000, Projects may not be segmented in order to
qualify for hardship assistance.
B. Hardship financial assistance is only available for new drinking water projects.
Refinancing of existing long-term debt is not eligible for hardship assistance; however,
debt issued after My 1, 1993 is eligible for refinancing through the regular subsidized
DWSRF loan program.
C. The applicant for DWSRF hardship loah must demonstrate that it can repay its debt
obligation.
. D. Projects which are determined eligible for hardship assistance will receive a written
confirmation of eligibility. . .
E. Confirmation of funding availability will be valid for two consecutive annual Intended
Use Plan periods, provided that the projected service charge does not change
significantly.
^ •.'•'.-. "
F. Confirmation of funding availability may be withdrawn if: the applicant fails to
demonstrate satisfactory progress towards project implementation, the information on
which the determination was made changes prior to loan closing, or the applicant fails to
demonstrate that it can repay the loan.
Appendix - 23
-------
PENNVEST Affordability Determinations
PENNVEST's primary affordability determination is done through, a computer model named
PACNIF (which is FINCAP, or financial capability, backwards). Generally, PACNIF operates
by comparing the projected user rates for a project with a target rate it generates. The target, or
''affordable" rate, is based on a percentage of Adjusted Median Household Income (AMHI).
Median Household Income from the most recent census is adjusted for inflation through the use
of CPL The percentage that the AMHI is multiplied by is on a sliding scale of 1 percent to
2 percent, based on the socioeconomic condition of the community. The theory is that a stronger
community can afford to pay a larger percentage of its AMHI for drinking water rates than a
weaker community.
Where a community sits on the sliding scale is based primarily on its AMHI, but is also
influenced by its Early Warning System (EWS) score as calculated by the Department of
Community and Economic Development. The EWS consists of eighteen variables, including
demographic information, financial condition of the municipality, and burden on the rate payer.
The system was legislatively mandated by another program, and developed by the state through a
stakeholders group. It represents a strong indication of the overall social and economic health of.
a given municipality.
For systems whose service area does not match municipal boundaries, PENNVEST weighs the
AMHI and EWS for each municipality served based on the number of customers in that
municipality.
The PACNIF model starts by comparing the target rate to the projected rate assuming the
maximum interest and fees PENNVEST can charge. If the projected user rate is higher than the
target, the interest rate is lowered until either the target rate is reached, or the interest rate reaches
1 percent, which is the lowest PENNVEST can charge under its enabling legislation. If the
projected rate is still significantly above the target rate, PENNVEST considers a grant.
Conversely, if the projected rate is significantly under the target rate, PENNVEST will consider
requiring the applicant to fund the project from conventional sources, either in whole or in part.
Appendix - 24
-------
Idaho Assessment Tools for SRF Loans
1. Water System Revenues From User Charges Meet or Exceed Expenses
Total User Charge Revenues - Total Water System Expenses > 0
Yes (Go to Question #3)
No (Go to Question #2) ' :
2. If Total Revenues from user charges less the total water system expenses is less than
zero (0), are other funds contributed to water system operations to offset system
expenses?
Yes, If yes, what is(are) the source(s) of these additional other revenue funds?
What is the total amount of these additional -revenues in the current year water system
budget? ' , , '
No (Go to Question #3) ,
NOTE: In some cases water systems may supplement user charges with other revenues. This
practice is usually discouraged because the full costs of operations should be met by
revenues. However, where user fees, are supplemented, the DEQ should obtain
information regarding the specific situation and the dependability of the supplemental
resources. .
3. Water System Rate Affordability Index (current)
For residential customers only, please indicate the following using most current information:
_- Average Residential Water Systern User Charge (in dollars and cents)
- Frequency of Water System Billing (e.g., 12, 6, or 4 times per year)
- Average Median Household Income (AMHI)
(indicate county or local AMHI in dollars)
i.e., U/m = < 1.5% (AMffl/m)
where, U/m = Avg. Residential User Charge per Month x
(AMHI/m) Avg. median Household Income per Month
NOTE: The State of Washington Drinking Water Program uses an affordability range of 1.25 to
1.75%. The disadvantaged community threshold is 2.0% of 80% of the statewide non-
metropolitan average median household income. In any case, a figure above 2.0% should.
be investigated further, especially if the residents are paying additional user charges for
wastewater, solid waste and other utility services!
' • • .
, ' Appendix - 25
-------
4. Water System Rate Affordability Index (future)
For residential customers only, please indicate the following after calculating the expected
Average Residential Water system User Charge inclusive of any new debt expenses related to
capital improvements in the next five years:
- Average Residential Water System User Charge (in dollars and cents)
- Frequency of Water System Billing (e.g., 12, 6, or 4 times per year)
» - Average Median Household Income (AMHI)
(indicate county or local AMHI in dollars)
i.e., U/m = < 1.5% (AMHI/m)
where, U/m = Avg. Residential User Charge per Month
(AMHI/m) Avg. median Household Income per Month
NOTE: This measure considers the affordability of user charges when incorporating additional
capital improvements. Will additional debt be matched by increased rates? Will the rates
be affordable?
5. Does the water system include a cash budget within its annual budget for cash flow and
emergency purposes?
Yes If yes, is the operating cash on hand greater than or equal to one and one-half (1.5)
times the average monthly operations and maintenance plus general and
administration expenses?
i.e., Operating Cash (annual) > 1/8 (O & M + G & A)
where, O = operations expenses
M = maintenance expenses
G = general expenses
A = administrative expenses
No (Go to Question #6)
NOTE: A water system budget that incorporates a cash budget equivalent to one and onerhalf the
monthly O&M and General & Administrative expenses is conscious of the need to be
prepared for emergencies, payment delinquencies, and other short-term cash flow
problems.
6. Water System Rates Review
Does the water system management review the user fee, user charge, or rate system at least once
every two years?
Appendix-26
-------
Yes (Go to Question #7) ,
No If no, what was the date of the most recent water system rates (user fees, charges)
review?
What was the date of the previous water system rates (user fees, charges) review?
NOTE: It is good practice for a water system to review its rates on an annual basis. The longer
the interval between water system rate reviews, the less likely the system will be to adjust
to significant changes in expenses. The higher the interval, the less likely the system will
be able to raise user charges to meet expenses related to new or amended drinking water
' rules. ' .-•'._
7. What resources and guidance does the water system use for setting water user rates,
fees or charges?
(Please List) (then Go to NEXT SECTION)
Sources:- "Financial Viability Manual for New and Expanding Small Water Systems." Bill
Jarocki and Tim Wilkinson, Environmental Finance Center, Boise State University
based on a report by the Washington State Department of Health
"The Small System Guide to Viability." Community Resource Group, Inc., Southern
RCAP
Appendix - 27
-------
Appendix G. Additional References for Information Resources on
Affordability
1994 Catalog of Domestic Federal Assistance. Available on the net at
www.tgci.com/cfda/tocfda/htm.
American Water Works Association. 1986. "Water Rates and Related Charges." American
Water Works Association, Denver, CO. AWWA Manual M26. 44 p.
Author?. 1995. "Water and Wastewater Cost and Rate-Setting Trends." Water Engineering &
Management. MAY 01 1995 v 142 n 540 (The findings of a 1994 survey on utility rates.)
Beecher, J.A. 1994. "Water Affordability and Alternatives to Service Disconnection." Journal
of the American Water Works Association. OCT 01 1994 v 86 n 1061.
Beecher, J.A. 1996. "Avoided Cost: An Essential Concept For Integrated Resource Planning."
Water Resources Update. Summer 1996 n 10428.
Beecher, J.A. 1997. "Water Utility Privatization and Regulation: Lessons from the Global
Experiment." Water International. MAR 01 1997 v 22 n 154.
Beecher, J.A. and P.C. Mann. 1997. "Real Water Rates on the Rise." Public Utilities
Fortnightly (Arlington, VA.): 1 JUL 15 1997 v 135 n 1442.
Beecher, J.A. 1995. "Integrated resource planning fundamentals." Journal of the American
Water Works Association. JUN 01 1995 v 87 n 634.
Bogodon, A.S. and A. Can. 1997. "Indicators of Local Housing Affordability: Comparative and
Spatial Approaches." Real Estate Economics. Spring 1997 v 25 n 143.
Bourassa, S.C. 1996. "Measuring the Affordability ofHome-Ownership." Urban Studies. DEC
01 1996 v 33 n 101 867. _
Department of Housing and Urban Development. 1995. "Small Cities Community
Development Block Grant Program for Fiscal Year 1996; Section 108 Loan Guarantee Program
for Small Communities hi New York State." Federal Register / Vol. 60, No. 249 / Thursday,
December 28, 1995.
Dreese, G.R. and J. Beecher. 1993. "Developing Models for Assessing the Financial Health of
Small and Medium-Sized Water Utilities." Journal of the American Water Works Association
JUN 01 1993 v 85 n 654.
General Accounting Office. [RCED-94-40] Drinking Water: Stronger Efforts Essential for Small
Communities to Comply with Standards. Available on the net from www.gao.gov. in text, PDF
format.
Appendix - 28 /
-------
General Accounting Office. 1984. 1984.07 "Housing Allowances: An Assessment of Program
Participation and Effects." General Accounting Office, Washington D.C. 20548. PEMD 86-3.
General Accounting Office. [RCED-95-61W] "Housing and Community Development Products,
1992-94." Available on the net from www.gao.gov. in text, PDF format.
General Accounting Office. [RCED-95-82] Housing Finance: Improving the Federal Home
Loan Bank System's Affordable Housing Program. Available on the net from www.gao.gov. in
text, PDF format.
General Accounting Office. [RCED-97-109] "Rural Development: Availability of Capital for
Agriculture, Business, and Infrastructure." Available on the net from www.gao.gov. in text, PDF
format. , •, ,
General Accounting Office. [RCED-97-82] "Rural Development: Financial Condition of the
Rural Utilities Service's Loan Portfolio." Available on the net'from www.gao.gov. in text, PDF
format. !
General Accounting Office. [RCED-95-258] "Rural Development: USDA's Approach to
Funding Water and Sewer Projects." Available on the net from www.gao.gov. in text, PDF
format. ,
'General Accounting Office. [RCED-97-82] "Appendix I: Objectives, Type of Assistance, and
Eligibility Criteria of Water and Wastewater Programs for Rural Areas." In "Rural Development:
Patchwork of Federal Water and Sewer Programs is Difficult to Use: Briefing Report to the
Chairman." Washington, D.C. : The Office. .
Hancock, K.E. 1993. "Can Pay? Won't Pay? or Economic Principles of 'Affordability'." Urban
Studies. FEE 01 1993 v 30 n 1 127.
Hulchanski, J.D. 1995. "the Concept of Housing Affordability: Six Contemporary Uses of the
Housing Expenditure-to-income Ratio." Housing Studies. OCT 01 1995 v 10 n 4471.
Hunt, Florine E. 1966. "Public Utilities: Information Sources; an Annotated Guide to Literature
and Bodies Concerned with Rates, Economics, Accounting, Regulation, History, and Statistics of
Electric, Gas, Telephone, and Water Companies." Gale Research Co., Detroit. 200 p.
Magat, Wesley A., Alan J. Krupnick, Winston Harrington. 1986. "Rules in the Making : a
Statistical Analysis of Regulatory Agency Behavior." Resources for the Future, Washington,
D.C. 182 p.
Mann, P.C. and J. A. Beechef. 1996. "Incremental and average cost methods in rate design."
Journal of the American Water Works Association. JUN 01 1996 v 88 n 634;
Appendix - 29
-------
Mann, Patrick C. and Janice A. Beecher. 1990. Monograph. "Deregulation and Regulatory
Alternative for Water Utilities." Columbus, Ohio: The National Regulatory Research Institute,
Ohio State University.
Mann, Patrick C. and Janice A. Beecher. 1991. Monograph. "Cost Allocation and Rate Design
for Water Utilities." Denver, CO: The American Water Works Association Research Foundation.
Mann, Patrick C., Janice A. Beecher and James R. Landers. 1992. Monograph. "Integrated
Resource Planning for Water Utilities." Columbus, Ohio: The National Regulatory Research
Institute.
Mann, Patrick C. 1993. Monograph. "Water-Utility Regulation: Rates and Cost Recovery." Los
Angeles, California: The Reason Foundation.
Mann, Patrick C. and Janice A. Beecher. 1993. Monograph. "Meeting Water Utility Revenue
Requirements: Alternative Financial and Ratemaking Mechanisms." Columbus, Ohio: The
National Regulatory Research Institute.
Meeks, C.B and A.L. Sweaney. 1994. "Assessing Housing Affordability in Rural Georgia."
Southern Rural Sociology. 1994 v 10 n 191.
Meeks, C.B. 1992. "Balancing Regulation and Affordability of "Housing." Journal of Family
and Economic Issues. Winter 1992 v 13 n 4373.
Morganstern, R.D. (Ed.). 1997. Economic Analyses at EPA: Assessing Regulatory Impact.
Resources for the Future, Washington, DC. 480 p.
Native American Housing Assistance and Self-Determination Act of 1996. 104th CONGRESS,
2d Session. Text can be found on the HUD web site.
Noll, P.F., W. O'Dell, and J. Sullivan. 1997. "Florida's Affordable Housing Needs Assessment
Methodology". Journal of the American Planning Association. Fall 1997 v 63 n 4495.
Notani, S. 1997. "Perceptions of Affordability: Their Role in Predicting Purchase Intent and
Purchase." Journal of Economic Psychology, SEP 01 1997 v 18 n 5525.
Singhvi, S. 1996. "Using an affordability analysis to budget capital expenditures."" Healthcare
Financial Management JUN 01 1996 v 50 n 668.
U.S. Dept. of Housing and Urban Development (HUD). Community Planning and Development
Program Guide. The U.S. Department of Housing and Urban Development, San Francisco
Office, San Francisco, CA.
van Rynveld, M.B. 1995. "Costs and Affordability of Water Supply and Sanitation Provision in
the Urban Areas of South Africa." Water South Africa. JAN 01 1995 v 21 n 11.
Appendix - 30
------- |