:^:r^*rii" *'>•.•'•*.:."', ."• '.•••."•:
       United States
       Environmental Protection
       Agency
Office of Water
4606
EPA 816-S-97-001
January 1997
&EFVV INTIL SUMARY OF
           VELOPMENt
       ACTIVITIES

-------

-------
                                       Errata

Page one of the Introduction in the first paragraph under the subheading Background the
sentence "...which serve approximately 240,000." should read 240,000,000.

-------

-------
Table of Contents
                 Introduction

                 Chapter 1:  Ensuring that New Systems have Adequate Capacity

                    Washington
                    Connecticut
                    Pennsylvania
                    Alabama                        .
                    Maryland
                    . California
                    Summary                                        '

                 Chapter 2:  Programs for Existing Systems

                    Washington
                    Connecticut
                    Pennsylvania
                    Maryland
                    Alabama
                    Massachusetts
                    New Jersey
                    Summary                  .
1

3

3
6
8
9
11
12
14

17

17
20
21
22
23
23
24
25
                 Appendix A: Emerging State Capacity Development Programs
27

-------

-------
Introduction
      The Safe Drinking Water Act
       (SDWA) Amendments of 1996
       recognize that some small water
systems do not have the technical, finan-
cial, and managerial capacity to comply
with SDWA requirements. The Amend-
ments include provisions to encourage
States to address the capacity problem and
to assist systems that need capacity
improvements. The statute recognizes two
distinct capacity development issues:

• The need for  State authority to ensure
  that all new community water systems
  (CWSs) and non-transient non-commu-
  nity water systems (NTNCWSs) have
  the technical, managerial, and financial
  capacity for regulatory compliance.

• The need for  State capacity develop-
  ment strategies to assist existing public
  water systems (PWSs) in acquiring and
  maintaining technical, financial, and
  managerial capacity.
grams. Many States, however, have
begun creating programs (e.g., by seeking
statutory authority, by convening stake-
holders' meetings to develop strategies,
etc.).       .

This report reviews State capacity devel-
opment efforts as of August 1996. It
responds to the statutory mandate con-  „
tained in §1420(d)(2) of the SDWA. The
Environmental Protection Agency plans  to
update this report periodically as States
develop and implement capacity develop-
ment programs.   '                .

The Agency looks forward to working in
a collaborative partnership with States,
water systems, and  other stakeholders to
implement the capacity development
provisions of the 1996 SDWA Amend-
ments. Information products such as this
document are an important component of
that effort.
 A few State drinking water programs have   Background
 addressed capacity development concerns
 for many years. Some State drinking
 water agencies have formal programs in
 place to assess and promote adequate
 capacity. Other States have informal
 programs that are just as effective in
 promoting adequate capacity. Most States
 have neither formal nor informal pro-
 There are approximately 187,000 public
 water systems in the United States today.
 Of these, approximately 55,000 are
 community water systems which serve
 approximately 240,000 people. An addi-
 tional 20,000 are non-transient non-
 community systems. These do not serve a

-------
.residential population, but they serve
many of the same people for large parts
of the year (e.g., schools, businesses,
etc.).

States have known for some time that
among the PWSs they regulate are sys-
tems which appear to lack adequate
capacity to supply safe drinking water.
Inadequate capacity may manifest itself in
many ways, but the most serious is
persistent noncompliance with State or
federal drinking water regulations. Capac-
ity development programs seek to prevent
problems  caused by inadequate capacity
long before formal noncompliance with
regulations.

There are many causes of inadequate
capacity.  Common themes, however, do
emerge from State program experiences.
Some systems suffer from the cumulative
burden of years of neglect and under-
investment. Other are faced with funda-
mental institutional weaknesses (lack of a
financial plan, lack of a trained operator,
or even lack of a responsible party).
When neglect is combined with institu-
tional problems, a system faces an enor-
mous task when making incremental
improvements to comply with new State
or federal drinking water regulations.
State capacity development programs
attempt to diagnose the causes of inad-
equate capacity, and work with new and
existing systems to maximize their capac-
ity.

The SDWA distinguishes between State
authority  to ensure adequate capacity of
new systems and State strategies for
capacity development for existing sys-
tems. Some State capacity development
efforts address both new and existing
systems, and others have focused on only
one  aspect of capacity development. Since
the policies and programs required to
ensure adequate capacity for new systems
are often different from those for existing
systems, and since the SDWA distin-
guishes between capacity development for
new and existing systems, our discussion
of State programs is organized around
these two general categories.

-------
                                            *
Chapter!
Ensuring  That New  Systems
Have Adequate Capacity
      Unregulated development of new
      public water systems creates
      the potential that some of these
systems will not have adequate capacity.
In most States, applicants wishing to
create a new public water system must
submit engineering plans and specifica-
tions for review by State or local govern-
ment authorities, but most States do not
review the managerial or financial capac-
ity of these systems. Many new systems
lack plans for long-term management,
operation, and maintenance. They gener-
ally do not have a business plan that
enables their owners to plan for future
financial requirements. A new system that
lacks adequate technical, managerial, or
financial capacity may end up in persistent
noncompliance with State and federal
drinking water regulations.

This chapter reviews State programs
designed to ensure that new systems have
adequate capacity. Generally, these pro-
grams not only contain measures to deter
inappropriate development of systems, but
also provide assistance to ensure new
systems ability to maintain adequate
capacity. The tools used by States are
many and varied, as shown in the State
summaries which follow.
Washington
Central to Washington's capacity devel-
opment program for more than two
decades has been an effort to deter the
creation of new systems that lack ad-
equate capacity. Efforts in this area were
initiated in the early 1970s by the De-
partment of Health (DOH).  The current
program has four component parts that
apply to new systems. They are indi-
vidual water system plans, regional water
system plans, a financial viability pro-
gram, and a satellite management pro-
gram. Each will be discussed below.
Individual Water System Plans

In the 1970s, the DOH created a compre-
hensive water utility planning program.
The goals of the program are to ensure
the orderly growth of water utilities and
efficient use of resources, while main-
taining reliable delivery of high quality
water. Certain types of public water
systems are required to submit an indi-
vidual Water System Plan (WSP) to DOH
for review and approval.1  All new com-
munity water systems (regardless of size)
must prepare WSPs before they receive a
permit to construct the system.
                                   '43.20 RCW, WAC 246-290, and WAC 246-291.

-------
The purpose of the WSP is -to require
systems to perform a comprehensive
evaluation of present and future heeds, and
to determine how those needs will best be
met. An approved WSP helps to ensure
that the system has adequate technical,
managerial, and financial capacity.
Systems required to submit WSPs must do
so every 6 years and must cover a 20-year
planning horizon. DOH requires a WSP
prior to approval of construction unless a
proposed project is needed to correct an
existing public health problem.
Regional Water System Plans

In 1977, Washington adopted the Public
Water Supply Coordination Act
(PWSCA)2, which created a regional
planning process to supplement the
individual water system plans.  The addi-
tional requirements of the PWSCA pro-
vided a coordinated resolution  of drinking
water issues related to planning, reliabil-
ity, and water quality.

The PWSCA approach starts with a
preliminary assessment of water system
problems by the county or State DOH.
Based on this report, the county or State
designates a geographical area, called a
Critical Water Supply Service Area
(CWSSA), where regional planning will
be implemented. The next step is appoint-
ment  of a Water Utility Coordinating
Committee (WUCC), which includes
representatives  from county government,
water utilities, and the DOH. The WUCC
recommends the precise boundaries of the
region and prepares a Coordinated Water
System Plan (CWSP) for review by the
county. The CWSP comprises two parts:
the individual WSPs for systems within
the boundaries of the CWSP, and  an
Area-Wide Supplement. Provisions of the
Area-Wide Supplement (e.g.,,definition of
service areas for future growth) may
require updates of individual WSPs.

The Area-Wide Supplements demarcate
present and future water system service
areas, outline future water system devel-
opment, establish procedures for authoriz-
ing new water systems, arrange for shared
use of facilities, establish minimum design
standards and fire flow performance
standards for the region, and create
satellite support systems to provide
assistance to small systems.

The PWSCA relies on counties to conduct
water supply planning, and some counties
have chosen not to participate.  The
PWSCA was defeated three times before  .
it was adopted in  1977. Success was
achieved by a compromise that gave the
counties substantial authority to imple-
ment the Act. Technically, the  Depart-
ment of Health (DOH) has the authority
to require implementation or to direct the
outcome of the process, but it has never
done so.         '

DOH officials observe that the  lack of
State-wide participation is a limitation of
the PWSCA, but not a serious problem.
Officials note that counties that most need
to participate (because of the problems of
unregulated growth of new systems) have
done so. One limitation on the  participa-
tion of counties has been budgetary; if
more funding were available, more
counties might adopt the PWSCA ap-
proach. The availability of infrastructure
loans under the SDWA's new Drinking
Water State Revolving Loan Fund
(DWSRF) may provide additional
opportunities to create incentives for
participation.
270.116 RWC and WAC 246-293.

-------
Financial Viability Program '

An important component of individual
WSPs (for those systems required to
prepare them) is financial viability.3 This
refers to the system's ability to finance
fully the cost of developing, constructing,
operating, maintaining and managing  a
community water system in.full compli-
ance with federal, State, and local re-
quirements. The DOH financial viability
program assists utility owners and manag-
ers in determining the total  cost of provid-
ing service and ensuring that revenues are
adequate to cover these costs.

All community  water systems under 1,000
service connections that must  submit a
water system plan for approval are also
required to complete a financial viability
test (FVT). The DOH FVT consists of
four tests that examine the utility's bud-
get, operating cash reserve, emergency
reserve, and the affordability  of its water
rates.4 Recognizing that small systems
might have difficulty preparing a com-  .
plete FVT, DOH issued the "Small
System Financial Viability Manual" in
September 1994. This manual is designed
to help all small community water systems
under  1,000 service connections complete
the FVT for review and approval by
DOH.

The FVT  has become an essential element
of the  WSP for new, small  systems. The
systems preparing the WSP are asked to
do the following:

•  Meet with a DOH representative to
   discuss the contents of the WSP.

•  Develop a six-year WSP, including
   capital  and operational improvements

'70.119 RCW, WAC 246-290 and WAC 246-294.
4For more information on each of these tests, see
Chapter 2.
  (as needed) that will become part of'a
  system's budget.

• Fill out the FVT worksheets. If the
  results of the FVT indicate deficien-
  cies, the utility should make adjust-
  ments to its WSP and/or FVT.

• The system should establish its Operat-
  ing, Emergency, and Voluntary Re-
  placement Reserve Accounts. These
  accounts will ensure that the system has
  adequate financial reserves.

• .The WSPs and FVT worksheets must
  be approved by a professional engineer
  registered in the State of Washington.

• Following approval by a professional
  engineer, the DQH must approve the
  WSP and FVT.

• During the life of the WSP", the utility
  should adhere to the requirements of
  the WSP, including making necessary
  improvements in the  system, and make
  any adjustments that may be required
  by changing circumstances  during the
  planning period.

If the system fails to pass the FVT, the
DOH will not approve the WSP. Without
an approved WSP, construction docu-
ments for facility improvements will not
be approved.  Failure to pass the FVT also
means that the DOH may categorize the
system as not financially viable. This
determination may lead to denial of.
building permits or subdivision permits by
local building departments, or denial of
home mortgages by lending institutions.
The DOH may also recommend merger
with, or acquisition by, a nearby system
or an approved Satellite Management
Agency (SMA), formation of a water
district, or contracting for O&M services
from an approved Satellite Management
Agency.

-------
Satellite Management

A Satellite Management Agency (SMA) is
a person or entity that owns or operates
more than one public water system on a  -
regional or county-wide basis, without the
necessity for a physical connection be-
tween such water systems. This concept
has been advocated by DOH since the mid
1970s. Contract services is another form
of satellite management where a person or
entity offers one or more services to small
water systems.

The PWSCA was amended in 1995 to
include new provisions for satellite
management of public water systems.5
This amendment applies State-wide,
regardless of county participation in the
regional planning activities of the
PWSCA. The new provisions include the
requirement that no new public water
system6 may be approved or created after
1995 unless:

• It is owned or operated by a Satellite
  Management Agency approved by the
  DOH, and the SMA complies with the
  financial viability requirements of the
  DOH, or

• An SMA is" not available, and  it is
  determined that the new system has
  sufficient management and financial
  resources to provide safe and reliable
  service.

Approval of any new  system that is not
owned by an SMA is conditioned upon
either:
• Periodic review of the system's opera-
  tional history to determine its ability to
  meet the. DOH financial viability and
  other operating requirements.

The procedures for approval by the DOH
of an SMA require the applicant to submit
a Satellite Management Plan. This plan
includes several of the WSP planning
elements such as the financial viability
requirements discussed earlier.

To date, implementation of the SMA
Concept has been slowed by the absence
of approved SMAs in  some counties.
Also, some SMAs have not been willing
to take on new systems.
Conclusion

Many of the concepts and requirements of
the Washington State Planning Program
apply to existing systems, as well as to
new systems. A discussion of the ap-
proaches taken to existing systems is
found in Chapter 2.
Connecticut       	

Connecticut passed legislation in 1984 and
1985 that established regulatory mecha-
nisms for restricting the creation of. new
public water systems (PWSs).7 Substantial
portions of the  Connecticut program are
based on the PWSCA in Washington;
representatives from Washington State
provided testimony and technical assis-
tance to legislators in Connecticut.
•  Future management or ownership by an
   SMA, if such management and owner-
   ship can be made with reasonable
   economy and efficiency, or    	
570.116 RWC and WAC 246-295.      ~~     ~

6This applies to a new public water system of any
size, down to 2 connections.
7Regulatory authority extends to most, but not all,
noncommunity water systems. A noncommunity
system that has constructed a water system solely
for its own benefit is not covered by this regula-
tory approach.

-------
 The Connecticut program includes the   ;
 following elements:

 • First, the Connecticut Plan establishes
   exclusive service areas for existing
   utilities using an area-wide planning
   approach. The utilities that obtain these
   exclusive service areas accept respon-
   sibility for all new systems in their
   service areas.                     :

 • Second, all new systems serving be-
   tween 25 and 1,000 persons must
   obtain a Certificate of Public Conve-
   nience and Necessity, a permit jointly
   issued by the Department of Public
   Health (DPH) and the Department of
   Public Utility Control (DPUC).8 Proce-
   dures associated with the issuance of
   these certificates are designed to
   minimize the creation of new systems.

 In the following paragraphs, we discuss
. how these program elements are imple-
 mented in a State that is quite different
 from Washington, where the area-wide
 planning approach was first developed.

 Connecticut differs from Washington in
 the following ways:

 • Connecticut's problem was not explo-
   sive growth in the number of new,
   small systems being created. Rather,
   the problem was that many new, small
   systems suffered from .inadequate
   capacity. A 1982 Water Resources
   Task Force found that a large percent-
   age of small  systems  were character-
   ized by polluted sources, deteriorated
   infrastructure, inadequate pressure in
   distribution systems,  breakdowns in
   service, dry wells, part-time and
 If a systefn serving from 25 to 50 consumers does
 not obtain the Certificate from DPH and DPUC, a
 municipality granting a local permit is held
 responsible for its operations if the system fails.
  inexperienced management, and weak  .
  financial conditions.

• In Washington, the State relies heavily
  on county governments; in Connecti-
  cut, the State relies on both publicly
  owned and investor-owned systems.
  The participation by investor-owned
  systems raises  a number of issues that
  were not faced by Washington.  It also
  means that regulatory authority for
  implementation of the Connecticut Plan
  must be shared by the DPH and the
  DPUC.
Certification

The statute requiring a Certificate of
Public Convenience and Necessity re-
stricts the creation of new PWSs by
requiring the consideration of all other
options first.9 It encourages interconnec-
tions with existing utilities wherever
feasible. If interconnection is not feasible,
the regulations implementing the statute
call for consideration of satellite manage-
ment, or withdrawalof the application to
seek zoning for individual wells. If a
Certificate is the only option, the appli-
cant must prove that it has the financial,
managerial, and technical resources to
operate the proposed water system.10 So
that regulations can assess the financial
condition of the system, the applicant
must document that the system's revenues
will cover its costs, that it has a plan for
capital investment over time, and that it
has adequate deposits and reserves.
'The regulations for Certificates of Public Conve-
nience and Necessity are found in 16-262m-l
through 9 of the Regulations of Connecticut State
Agencies.

"Connecticut General Statutes (COS) 16-262m
establishes construction specifications for water
companies;  it controls the development of new
systems.

-------
The Connecticut Plan

This is the area-wide planning component
of the Connecticut approach. On a re-
gional basis, the statute establishes Water
Utility Coordinating Committees
(WUCCs), which create Coordinated
Water System Plans (CWSPs). A major
component of the CWSPs are individual
water system plans that must be prepared
by all medium and large community water
systems. These plans define each utility's
current service area and its anticipated
future service area based on population
growth projections. As is true of
Washington's, the purpose of
Connecticut's area-wide plan is to coordi-
nate the individual plans.  If there are
conflicts between individual plans the
area-wide plan authoritatively establishes
exclusive service areas.11

The certification process when linked
with area-wide plans defining exclusive
service areas, creates accountability for
service to households that might otherwise
be served by new systems. If an existing
privately owned system refuses to provide
water to households in its service area,
the DPUC can force it to serve the house-
holds and establish the rates that will be
charged to the new customers. Taken
together, these two program elements
have helped to discourage the creation of
new systems that lack the capacity to .
provide safe drinking  water to their
prospective customers. - -
Pennsylvania
The heart qf Pennsylvania's approach is
the requirement that each proposed
community water system applying for a
construction permit from the Pennsylvania
Department of Environmental Protection
(DEP) prepare and submit a business plan
as part of the permit application.  This
requirement is specifically designed to
prevent the  creation of new  systems that
lack adequate capacity, and thus become
"problems for everyone—owner,  opera-
tor, customer, community lender, and
regulator—down the line."1? As the DEP
explains, before making an investment in
a new system, owners should identify
their  responsibilities and risks and should
provide assurances that the system will be
able to meet drinking water regulations
and provide a safe, adequate supply of
water for human consumption. The
business plan forces prospective system
owners to think through what they intend
to do, how  they are going to do it, and
the likelihood of long-term success.

The first step in business plan preparation
is a meeting with the DEP regional water
supply engineer and, if applicable, staff
from PENNVEST and/or the Public
Utility Commission (PUC). The purpose
of the meeting is to identify system needs,
perform a pre-feasibility assessment to
identify alternatives to be explored in the
plan, and to discuss plan scope and
procedures.

Emphasis on Considerations of Alterna-
tives. The emphasis on alternatives is
critical. It is consistent with the overall
planning approach required of prospective
 "COS 25-33d through j establishes the Connecticut
 Plan process. CGS 25-32d requires water compa-
 nies to submit water supply plans to the DPH for
 review. Regulations concerning the contents of
 water supply plans and coordinated plans are found
 in 25-32D-1 and 25-33h-l of the Regulations of
 Connecticut State Agencies.
 "Pennsylvania DEP, "How to Prepare a Business
 Plan," 1996, page 1.

-------
 systems. Examples of construction alter- ;•'
-natives that should be considered include:

 • a completely new system

 • a distribution system with supply from
   another system

 • extension of another system to serve
   the area

 Examples of institutional alternatives
 include:

 * incorporating the proposed area into an
   existing system

 • creating a special rate district within an
   existing system    .

 • satellite management

 • contract operations and/or management

 Through this exercise, DEP and PUC
 officials hope to show many prospective
 system owners that the most effective and
 efficient way of meeting the areas' needs
 is by connecting to an existing system,
 rather than starting a new one.

 The next step is that prospective  systems
 prepare a draft business plan. The busi-
 ness plan must contain an analysis of the
 water supply needs of the area, a discus-
 sion of alternatives to meet those needs,
 an evaluation .of alternatives, and a
 recommendation of a specific alternative.
 For any selected alternative, the  applicant
 must demonstrate through a business plan
 that it will have adequate financial capac-
 ity for at least five years. An applicant
 brings the plan to a Preliminary Engineer-
 ing Conference with the DEP regional
 engineer. The purpose of this meeting is
 to ensure that the proposed solution (a
 prospective water system, or tie-in to an
 existing system) is reasonable and ad-
dresses the area's water supply.problems
over a period of time. The prospective
system is required to submit two copies of
the final business plan with its permit
application.                             ,

The Business Plan: A Disciplined Ap-
proach. The concept of a business plan
has its origins in business literature.  The
plan for meeting both expected and
unexpected changes provides, the only  '  .
basis for assessing the future value of any
company. A business plan first focuses on
the risk of failure: what assurances are
there that this entity will survive? A
business plan.also speculates on the
upside potential and asks: is this the  best
plan for  running this business as profit^
ably as possible?

Transferring the business planning disci-
pline to the management of new commu-
nity water systems implies that the State
regulatory agency (on behalf of the
public) is-interested in the same types of
assurances of water system prospects.  The
DEP business plan requires that proposed
systems assure:                    v

•  That the system is strong enough to
   provide an adequate supply of safe
   drinking water even.under the influence
   of adverse changes in the operating
   environment.

•  That the proposed plan for providing
   water service is the best plan for
   providing these services to the commu-
   nity it proposes to serve.      .
 Alabama

 Alabama has an enviable track record in
 terms of small systems. Not only has the
 State Department of Environmental
 Management (DEM) prevented the cre-
 ation of new systems that lack adequate

-------
                   capacity, but they also have-demonstrated
                   a clear reduction in the total number of
                   PWSs (both community and non-commu-
                   nity systems). As shown in Exhibit 1, the
                   number of PWSs has steadily declined
                   since 1978.

                   The Alabama program relies on the au-
                   thority of the DEM to protect the public
                   health. DEM regulations focus on strict
                   design criteria for well construction and an
                   established permitting program that
                   discourages the creation of new systems,
                   particularly if it appears that these systems
                   may not have, the capacity to  provide a
                               Exhibit 1
                  Number of Water Systems in Alabama
• i—
 1»7*
             1582 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992  1993 1994 1995 1996
                             Yenr
                    safe and adequate supply of drinking
                    water to their customers.13

                    Design Criteria for Well Construction.
                    Most new systems, particularly small
                    ones, rely on ground water sources.
                    Stringent well construction standards  .
                    mean that a new well for a community
                    water systems cost from $200,000 to
                    $400,000. Non-community wells can cost
                    as high as $50,000. As a result, according
                    "The statutory authority for the permit regulations
                    is Code of Alabama 1975, §§ 22-23-33,22-23-49.
to DEM staff, rarely is a, new system to
.be developed to serve fewer than 500
persons. The cost of well construction
must be allocated across a large customer
base.

Stringent Permitting Program. State
regulations make it clear that systems
must have adequate capacity to provide
safe drinking water. The regulations say
that proposed systems "must demonstrate
financial, managerial, and technical
capabilities to meet performance require-
ments on a long term basis and be self
sustaining."14 The  application require-
                     ments  include "a
                     .description of the
                     proposed service
                     area, proposed
                     sources of water
                     and a description of
                     treatment processes
                     to be employed, an
                     estimation of
                     minimum and
                     future water de-
                     mands by the
                     system, financial
                     data should public
                     funds be involved
                     and detailed infor-
                     mation regarding
                     the proposed
                     operation and
management of the system."

The distinctive feature of the Alabama
program is the stringent application of the
permitting regulations to all new systems.
The OEM's ability to accomplish this is
the result of a long-term effort by the
Drinking Water Administrator to create
and sustain discretion and authority to
protect the public health by denying
permits to new systems that lack adequate.
capacity. In general, DEM personnel

 14ADEM Admin. Code R. 335-7-4-.06   '

-------
work actively with owners and operators
to explain the benefits (for public health,
and for lower cost water supply) of
interconnection with existing community
water systems.

Non-Community Systems. Exhibit 1 shows
that efforts to discourage the creation of
new systems have been extended to non-
community systems as well as CWSs. One
reason DEM can do this  is because both
types of systems are regulated by the same
Department. This is not the case in all
States.
Maryland	           '  • •.  •

The State of Maryland has legislative
authority to regulate and, where necessary,
prevent the development, of new privately
owned water systems that might lack
adequate capacity to meet their responsi-
bilities under federal and State drinking
water regulations.15 The authority exists
because of a legislative  reaction to the
rapid development of mobile home parks
and apartments in the Post-World War II
era—unregulated development that led to
the creation of many water systems with
capacity problems.1S

Distinctive features of the Maryland
approach to controlling  the development
of new water systems include:

•  Maryland relies heavily oh county
   government. Land use control is a
''Authority for the current program is found in
Title 9 of the Annotated Code of Maryland,
Environmental Article.' •

"The original legislative reaction—new authority
to control the development of privately owned
community water systems—was established by
Article 43 Section 387 of the Annotated Code of
Maryland in 1969. The current statutory authority
for Maryland's program is fh the Annotated'Code
of Maryland, Environmental Article, Titles 9-2
and 9-4.
  .responsibility of the counties, and  '
  controlling new water systems is part of
  that responsibility.

• Maryland uses area-wide planning.
  Counties are responsible for submitting
  county-wide plans for water-and sewer
  services.               .

• The Maryland Department of the
  Environment (MDE) has substantial
  authority to review the adequacy of
  plans for new water-systems before
  allowing them to be constructed.
  Reviews of proposed privately owned
  systems have much more stringent
  controls. These reviews—both by
  county governments and by the MDE—
  include not only plans and specifica-
  tions, but also financial and operating
  plans for the systems.

• New, small privately owned systems
'  must deposit money in an escrow
  account to protect against interruption
  of service if the system later has
  financial problems.

Taken together, these program elements
have served the State well. There has been
a low rate of creation of new water sys-
tems.

Role of Counties. Other States (e.g.,
Washington) delegate significant responsi-
bility to counties and rely, on them for land
use control, land use planning, and area-
wide planning for water systems. Mary-
land is similar, though it lacks a compre-
hensive planning statute for State-wide
control of new system development.
Counties governments are strong in
Maryland and have substantial budgets and
responsibilities.  Given these characteris-
tics and the traditional authority to control
land use, reliance on counties in Maryland
is consistent with State-local relations.

-------
Area-Wide Planning. Like Washington
and Connecticut, Maryland is divided into
units, and sub-State organizations are.
responsible for water system planning.
Like Washington, the responsible govern-
mental unit is the county; and like pro-
grams that are emerging in Washington,
area-wide water system plans are a sub-
set of larger land use and development
plans. Indeed, all housing and commercial
development envisioned by a county must
have accompanying plans for wastewatef
and drinking water.

County plans, as required by Title 9-5,
must identify present and future water
systems, including schedules and financ-
ing methods for construction of new
systems. The plans also must provide for
the development, extension,  or expansion
of water systems to meet county popula-
tion growth  over a 10-year period.  The
water system component of area-wide
plans must be approved by the MDE. The
requirements for long-range planning for
system expansion or development to meet
population growth ensures that new
systems are not developed ad hoc. The
county plan  is the first  step in ensuring
that new systems will have adequate
capacity.

Construction and Operating Permits. To
construct or operate a new water system,
the owner must submit  plans to, and
obtain a permit from, the county. To get a
permit, the owner must submit, with the
concurrence of county  officials, a finan-
cial management plan to the MDE outlin-
ing estimated costs and revenues. The
owner must  also submit, again with
county concurrence, an operation and
maintenance plan to the State. If the
system is to  use a ground water source,
developers must obtain a  well construc-
tion permit from the MDE; and before
water system construction can begin, the
owner must  obtain a water system con-
struction permit from the MDE. During
the process of obtaining permits, State
and county personnel use their authority
to discourage construction of new pri-
vately owned systems that appear to lack  •
adequate financial, technical, or manage-
rial-capacity.

Escrow Accounts. Privately owned sys-
tems must establish a binding "public
works agreement" with the county that
may require any or all of the following:

•  Depositing sufficient funds in an
   escrow account to cover repair or
   replacement of the highest-cost system
   component.

•  Establishing a separate escrow account
   with sufficient funds to ensure success-
   ful initial operation and maintenance.
   (This account may expire once the
  "system is successfully operating and
   self-supporting with customer reve-
   nues.)

•  Establishing a sinking fund sufficient to
   replace the system 20 years after
   construction. Continued support of the
   sinking fund should be provided within
   the rate structure of the proposed
   system.

Publicly owned systems are exempted
from these  requirements by MDE regula-
tion (COMAR 26.04.03). When county,
or other public, takeover of a new system
is anticipated, developers may be ex-
empted from these requirements.
California	-

California's approach to preventing the
creation of new systems lacking adequate
capacity relies on.the permit process for
new systems and systems with ownership
changes. As revised in 1992, the State's

-------
authority includes the following language::
"No public water system which was not in
existence on January 1,  1991 shall be
granted a permit unless the system
demonstrates to the department that the
water supplier possesses adequate finan-
cial capability. This section shall also
apply to any changes in ownership of a
public water system which occurs after
January  1, 1991.""

The Permitting Process. The California
Department of Health Services (DHS)
requests the following technical informa-
tion about  each proposed new public.
water system:

•  Service  area     -
               !                 - .     '
•  Source(s) of supply

*•  Monitoring plans

•  Operation and maintenance plans

•  A master plan addressing growth,
   anticipated expansion needs, and plans
   for addressing existing arid anticipated
   regulatory requirements

•  Construction plans, specifications, and
   schedules
•  A summary of supervisory and operat-
   ing personnel experience (including
   State certifications)               .

According to the Interim Guidelines18 for
the permit process, the application for a
permit to operate a water system "should
provide sufficient information related to
financial planning for the system to
demonstrate adequate financial viability."
The most important type of financial
information requested from the applicant
is a projected 5-year cash flow schedule
prepared by a qualified accountant pro-
viding detailed  yearly anticipated costs for
operating, system improvements and
maintenance, monitoring, and administra-
tion;  and a projected revenue schedule. If
a revenue schedule is inapplicable (e.g.,
for some non-community water systems),
the applicant is asked to demonstrate how
funding to meet projected costs will be
ensured.19

When reviewing cash flow schedules
submitted by applicants, DHS personnel
use the following guidelines. The cash
flow  schedule must include costs for:

•  Regulatory compliance (monitoring and
   necessary improvements)
California also requests managerial
information such as:

•  The legal basis for system organization

•  Current or anticipated activities other
   than the purveying of drinking water

•  A description of the management
   structure and.procedures
 "California Health and Safety Code § 116540.
 "California Department of Health Services,
 "Interim Guidance for Evaluating Financial
 Capability of Public Water Systems," June 1991.

 "Some small systems are regulated by other
 agencies, in addition to the DHS. The DHS allows
 these systems to submit approved applications from
 those agencies in lieu of the financial information
 required in this paragraph. Examples of systems
 that may follow this approach are privately owned
 systems regulated by the Public Utilities Commis-
 sion and mutual water systems regulated'by the
 Department of Corporations. Since both the PUC
 and Department of Corporations perform a
 thorough financial review for all,systems that they
 regulate, an approved application is equivalent to
 the financial review performed by the DHS. All "
 submittals, however, still  are subject to review and
. approval by DHS, and DHS may require additional
 information from any applicant.

-------
• On-going operations and. administrative
  costs

• Maintenance costs including repair and
  replacement estimates that reflect the
  useful life of components of the system

• A sinking fund for anticipated upgrad-
  ing of the system .

• An annual amount set aside as a reason-
  able reserve for unforeseen contingen-
  cies

The cash flow schedule also should
demonstrate that its rates:
Summary
The programs described above represent a
broad range of different approaches to
achieving a common goal—preventing the
creation of new water systems that appear
to lack adequate capacity to provide,safe
drinking water to the public. While the
previous discussion shows that some
States have adopted similar programs, the
case studies also show that a variety of
different approaches have proven success-
ful. Exhibit 2 summarizes key character-
istics of these programs.
• Will result in the accumulation and
  maintenance of a sinking fund (as.
  described above)

• Will generate revenues that exceed
  costs of system operation

To the extent that the cash flow schedule
depends on forecasts of customer growth,
these forecasts should be supported by
projected population growth figures
prepared by a recognized planning organi-
zation.
By collecting and reviewing technical,
managerial, and financial information,
California officials have a basic picture of
the capacity of the systems. If a proposed
new public water system does not possess
(or cannot demonstrate) "adequate finan-
cial capability to assure the delivery of
pure wholesome and potable drinking
water," as defined by Departmental
guidance, its permit application will be
denied.

-------
Exhibit 2 1
State Capacity Development Programs for New Systems 1
State
Alabama
California
Connecticut
Maryland
Pennsylvania
Washington
Statutory Authority
Establishes broad public water supply
permitting, review, and supervision
authority
Code of Alabama, 1977:
§22-23-33 §22-23-35 §22-23-44
J22-23-49 §22-22A-5 §22-22A-6
CA Health and Safety Code:
§116530 - Technical requirements for
jermits
}1 16540 - Issuing and denying permits
CGS 16-262m - Construction '
specifications for water companies that
serve to control the development of
new systems
CGS 25-32d - Water supply plans
CGS 25-33d through } - Establishes
the Connecticut Plan
Annotated Code of Maryland
Environmental Article:
Title 9-206 - provides discretionary
authority to determine scope of plans
required by systems
Title 9-2 - authorizes requirement of
escrow accounts
Title 9^4 - general authority allowing a
broad range of actions to protect public
health'
Title 9-5 - requires each county to
submit a plan for water service
P.L. 206, No. 43 - PA Safe Drinking
Water Act
70.1 16 RCW- The Public Water
Supply Coordination Act (PWSCA)
provides an ordered process to utility
planning and authorizes Satellite
Management
70.119A RCW- authority for Financial
Viability Program under the WA Safe
Drinking Water Act
43.20 RCW - sets up state drinking
water program
Regulatory Authority
Regulations implementing broad
public water supply, permitting,
eview, and supervision authority
ADEM Admin. Code R. 335-7-4
None
16-262m-1 through 9 of the
Regulations of CT State Agencies -
Certificates of Public Convenience
and Necessity
25-32d of the Regulations of CT
State Agencies - requirements for
contents of water supply plans .
COMAR 26.04.03 - authorizes
requirement of escrow accounts
25 PA. Code Ch. 109.503
WAC 246-293 - regulatory
authority for PWSCA
WAC 246-290 and WAC 246-291 -
set requirements regarding WSP
WAC 246-290 and WAC 246-294 -
authority for Financial Viability
Program ,
w .
WAC 246-295 - authority for
Satellite Management
Systems
Covered
All public water
systems
Public water
systems.
All public water
systems (with
exceptions, noted
n the text)
Community water
systems,
non-transient
non-community
water'systems
Community water
systems
All public water
systems for the
satellite
management
program.
Coverage varies
for other program
components (see
text).
Summary of Approach
Rigorous well construction
standards raise costs of
construction
Stringently applies permitting
egulations to all systems
Uses permitting process
• Applicants must submit
echnical and managerial data
•'Applicants must demonstrate
adequate financial capability
• Water Utility Coordinating
Committees establish area-wide
>lans.
• Establishes exclusive service
areas for existing utilities
• Selected utilities responsible for
entire service area • ;
• Issues a Certificate of Public
Convenience and Necessity
• For permit, applicant must
prove adequate capacity
•Counties use land-use controls
to control growth
• Counties submit area-wide
alans
• State authority to review/deny
financial and construction plans
• Escrow accounts must be
established by small privately ,
owned systems
• Applicant must prepare a
business plan
• Emphasis on consideration of
alternatives
• Regional Water System Plans
• Individual Water System Plans"
for selected systems
• Satellite Management Program
• Financial Viability Program

-------

-------
                                                                                           17
Chapter  2
Programs for
Existing  Systems
     State programs for capacity develop-
      ment of existing systems are
      designed to prevent noncompli-
ance. The State programs in this chapter
show that capacity development can be
used to prevent problems and to ensure
public health protection for customers of
public water systems. As these programs
demonstrate, States are helping existing
systems to maximize their capacity.
Washington

The State of Washington's capacity
development program was described in
detail in Chapter 1. The discussion in-
cluded information about four basic
components of the Washington State
approach: individual  water system plans,
regional water system plans, the financial
viability program, and the satellite man-
agement program. These four compo-
nents, plus the water utility operating
program, comprise the Washington State
approach to capacity  development for
existing systems.

Individual Water System Plans

The water systems that are required to
"submit WSPs include:
 • All new community water systems
  (CWSs), regardless of size

 • All expanding CWSs, regardless of size"

 • All CWSs designated by the DOH as
  "problem water systems," regardless of
  size   ;

 • Ail CWSs serving more than 1,000
  connections

 Existing systems must validate the ad-
 equacy of their technical, managerial, and
 financial capacity at least once every 5
 years in the form of a WSP update.  DOH
.financial viability requirements must also
 be addressed at  the time the WSP is  ,
 updated.

 Non-expanding  community water systems
 not required to submit a WSP are still
 required to develop a  Small Water System
 Management Program. The management
 program focuses on evaluating the techni-
 cal, managerial, and financial capacity of
 the water system. This is  a less compre-
 hensive planning document than the WSP,
 and it does not require the services of a
 registered professional engineer.

 DOH officials are working to remedy
 several limitations of the WSP approach.
 These include: WSPs  are not required of

-------
pr-
                             noncommunity'systems, the criteria for
                             "problem'water systems" are not well-
                             defined, and many small systems are not
                             submitting their Small Water  System
                             Management Programs.

                             Regional Water System Plans

                             Central to the PWSCA is the  authority,
                             delegated to county Water Utility Coordi-
                             nating Committees (WUCCs), to develop
                             county-wide water system plans (subject
                             to approval by DOH) that demarcate
                             present and future exclusive service areas
                             arid plan future water system  develop-
                             ment. Systems that are granted exclusive
                             service areas are expected to  provide
                             water to all new residential and commer-
                             cial development in that area, or to work
                             with the county planning agency to
                             develop procedures for authorizing new
                             water systems. Existing community water
                             systems that participated in the prepara-
                             tion of the regional plan are bound by
                             these'exclusive service area determina-
                             tions and requirements. Requests for new
                             systems located in the future service area
                            ,of an existing system must obtain service
                             from the existing system if it  can be
                             provided in a timely and reasonable
                             manner.

                             As discussed in Chapter i, an important
                             part of the area-wide planning process is
                             the Area-Wide Supplement. This docu-
                             ment specifies the types of support sys-
                             tems that will be created by large systems
                             for smaller systems within the jurisdiction
                             of the plan. These services can be used to
                             help small systems maintain adequate
                             technical, managerial, and financial
                             capacity. The support system  created by
                             the plan is a formal agreement whereby a
                             large or central utility in a county per-
                             forms direct, contract, or support services
                             for smaller utilities.
Financial Viability Program

Financial viability is an essential part of
the individual water system plan (WSP).
DOH requires that financial viability be
evaluated as part of a WSP.1

DOH has financial program guidelines to
assist CWSs serving more than 1,000
connections in preparation of their WSP.2
Certain CWSs serving fewer than 1,000
connections also are required to prepare
WSPs (new systems, expanding  systems,
or problem systems). To address financial
viability in their WSPs, these smaller
systems must past a Financial Viability
Test (FVT). The FVT  is comprised of
four separate tests of financial condition.

•  Test 1: develop an operating budget
   showing that its revenues will meet all
   incurred expenses over a six-year
   period.

•  Test 2; create and fund an operating
   cash reserve account at a level equal to
   or greater than one-eighth  of its operat-
   ing budget (O&M plus G&A expenses).
   This reserve account can be funded by
   a one-time charge, by a transfer of
  funds from an existing reserve, or from
   funds accumulated in the first year of
   the six-year budget from Test 1.

•  Test 3: create and fund an emergency
   reserve account to coveY the cost of an
   emergency or failure of its most vul-
'Por examples of exceptional cases, see Washing-
ton State Department of Health, "Financial
Viability," fact sheet prepared in 1994.

2If a CWS serves more than 1,000 connections and
is regulated by the Utilities and .Transportation
Commission (UTC), DOH-and UTC have jointly
developed financial viability guidelines. These
guidelines are used by both agencies in making
financial viability determinations. DOH retains the
authority to approve or reject WSPs from these
systems.

-------
                                                                                                      19
  nerable system component (for small
  systems,  usually a well or pump).
  This reserve account can be funded
  by a one-time  charge, a transfer of
  funds from existing reserves, a plan
  to accumulate  the fund in the six-year
  budget from Test 1, or an alternative
  financing arrangement (e.g., an
  insurance mechanism).

• Test 4: conduct a median household
  income index analysis. The system
  must demonstrate that the rates
  required to meet the budget from Test
  1 and to  fund the reserves in Tests 2
  and 3 do not exceed 1.5 percent of
  the annual median household income ,
  for its county.

Failing any of the first three tests of
FVT could lead to denial of a permit for
new construction, or a determination by
the  DOH that the water system is "inad-
equate." Under Washington's Financial
Viability Program, this could result in
denial of building permits or subdivi-
sions by local building departments,
denial of home mortgages by lending
institutions, and  possible receivership
action by DOH.  For systems that fail
any of the first three tests, the DOH
may recommend merger with an adja-
cent system, acquisition by an adjacent
system or an approved Satellite Manage-
ment Agency (SMA),  formation of a
water district, or contracting for O&M
services (probably with an approved
SMA), The data from the FVT can be
used to compare the cost of restructur-
ing options, or to compare the cost of
restructuring to the cost of remaining an
independent system.

If the system fails the fourth test, it must
investigate restructuring options and
provide public disclosure of the rates
and restructuring option findings.3 To  '
assist systems in complying with the FVT
requirements, the DOH has produced .a
guidebook and worksheets to assist
systems in their calculations. Data from  .
the FVT worksheets will give the DOH
sufficient information to identify systems
with financial problems, and to take
appropriate action, as summarized above.
Satellite Management Agencies

As a result of the PWSCA, several coun-
ties in Washington created satellite
management programs as part of their
Coordinated Water System Plans
(CWSPs).4 With the PWSCA amendments
of 1995, the State endorsed the satellite
management concept on a State-wide
basis, regardless of a county's participa-
tion in the overall regional  planning
process. As explained in Chapter 1, two
different types of Satellite Management
Agencies (SMAs) may be approved by the
DOH:

• SMAs may own/operate, and manage
  the small system, or

• SMAs may operate and manage,,but
  , not own, the small system.

Lists  of approved SMAs are provided to
counties. The county, or the State DOH,
may refer small systems with capacity
problems to an approved SMA for assis-
tance.

DOH also has a requirement-that man-
dates a county to resolve problems of
failing.existing systems  if no other re-
ceiver can be obtained under the State's
receivership provisions. The language has
'Washington State Department of Health, Small
Water Utilities Financial Viability Manual,.
September 1994, pp. 4-6.        •
                                       "70.116RCW.

-------
compelled SMAs and county governments
to work closely together in resolving
small water system issues.         _  .   ,
Annual Operating Permit

All public water systems serving 10 or
more connections or 25 or more people
must obtain an annual operating permit
from the DOH.5 This permit provides a
status report on each system's capacity to
protect the health of consumers. In 1995,;
over 98, percent of all systems covered by
this requirement obtained an operating
permit. Those that did not receive a
permit did not pay the fee associated with
the permit, and enforcement actions were
initiated against them.

The annual operating permit gives the
DOH a chance to track performance of all
systems covered by the requirement in
terms of their compliance histories, their
WSPs,  and the financial viability compo-
nent of WSPs. Systems are classified
according to their compliance and capac-
ity. A color coding system is used;
• systems classified as "green" have ad-
equate capacity and compliance histories;
systems coded as "red" have inadequate
capacity and/or compliance histories.
 Connecticut        	'

 Modeled on Washington's PWSCA, the
 Connecticut Plan6 establishes a long-range
 area-wide planning process similar to that
 in Washington. The State has designated
 seven water management areas, and
 Water Utility Coordinating Committees


 570.119ARCW.

 'Passed in 1985, "An.Act Concerning a Connecti-
 cut Plan for Public Water Supply Coordination," •
 was incorporated into the Connecticut General
 Statutes (COS) as COS 25-32d and 25-33e-j.
(WUCCs) are developing plans for the
area's. As in Washington, the planning
program is.voluntary, however, and not
all areas have plans. The essential ele-
ments of the PWSCA and the Connecticut
Plan are similar; exclusive service areas
are established by the WUCCs, and
systems that obtain exclusive service
areas are responsible for water plans and
service in their areas.

In addition to the area-wide planning
process, all privately owned water compa-
nies serving more than 1,000 persons or .
more than 250 consumers are required to
submit a water supply plan. These plans
must be updated at least every 5 years.
The purpose of the plans is to  ensure that
the systems  can meet the water supply
needs of their customers. By requiring a
comprehensive analysis of the  current
system, future water supply demands,
alternative water supply sources, emer-
gency contingency plans, and conserva-
tion measures, the DPH updates its
assessment of the adequacy of water
system capacity. DPH evaluates and
approves these plans with the.concurrence
of DPUC and the Department  of Environ-
mental  Protection (DEP).

One unique aspect of the Connecticut
program is that any privately owned
community water system with  a record of
repeated violations of State drinking water
regulations or non-compliance with
enforcement actions (e.g., administrative
orders) may be subject to takeover.7 After
proper notice and hearing, the DPH and
DPUC  may order the acquisition of a
p water company by the most suitable
public or private entity. The acquiring
entity is entitled to recover, through its
rates to customers, all reasonable costs of
acquisition and improvements  to bring  the
system into compliance with regulations.

'Connecticut General Statutes, Sec.  16-262n and o.

-------
                                                                                                         21
In the event of an emergency (e. g., a
water company is unable or unwilling to
provide service to its customers), the
DPUC may petition the court to attach the
assets of the company and put it under the
sole control and responsibility of a re-
ceiver. Receivership sometimes is a
temporary step on the way to acquisition.

Investor-owned utilities have acquired
small systems under the takeover law.
Potential issues during acquisition by an
investor-owned utility include: (1) assur-
ances that the acquiring utility will truly
be-compensated for all reasonable ex-  .
penses (which may be substantial if the
system being acquired has not made
repairs or improvements for many years),
and (2) allocation of the costs of upgrad-
ing an acquired system (e.g.,  should they
be borne solely by the customers of the
failed system, or shared by all customers
of the acquiring entity?).

In January 1996, the DPUC submitted a
report to the General Assembly on issues
that have arisen as the DPUC works with
the DPH and the Department of Environ-
mental Protection to implement the State
program on small water systems. The1
report urged passage of measures that
would streamline the process  and improve
coordination among the various regulatory
agencies. It also looked forward  to the
passage of the SDWA and the establish-
ment of the Drinking  Water State Revolv-
ing Fund (DWSRF). According to the    .
report, the SRF could be used to:

• Support currently viable systems  in
  meeting existing or future regulatory
   capital improvement requirements

• Provide resources to viable entities that
   have acquired failed systems through
   consolidation
  Provide resources for system improve-
  ments that could assist in regional
  consolidation of systems (including.
  forced takeovers)          .
Pennsylvania	•

At the present time, Pennsylvania's focus
is on pilot testing enhanced evaluation
techniques (such as Comprehensive
Performance Evaluation) together with
onsite outreach and technical assistance to
enhance system capacity.
In 1992, the Pennsylvania legislature
passed the Small Water Systems Assis-
tance Act8, which authorized several
activities to enhance existing system
capacity. These include:

•  Increased technical, financial, and
   management assistance to small systems

•  A Small Systems Regionalization grant
   program

•  A Small Systems Technical and Man-
   agement assistance program

•  Authority for the DEP to coordinate
   with PENNVEST (the agency that
   administers the State's infrastructure
   grant and loan program) to link infra-
   structure funding to system capacity

As suggested by this list of activities, the
emphasis of the program is two-fold: (1)
technical  assistance,  and (2) use of State
grant and loan funds as  an incentive to
improve capacity. Two  aspects of its
grant and loan funds are particularly
noteworthy.

First, the statute specifically authorizes
grants to  fund-"regionalization feasibility
studies."  According to a report prepared
    j             '
'"Small Water Systems Assistance Act of 1992,"
P.L. 10, No. 5.

-------
for DEP prior to passage of the Act, the    Maryland
absence of planning and feasibility funds
had been a serious roadblock to taking the
first step toward regionalization or con-
solidation.9 This grant program directly
addresses this problem.
Second, DEP has a memorandum of
understanding (MOU) with the Pennsylva-
nia Public Utility Commission (PUC) that
explicitly links regulatory action to
improvements in system financial and
managerial capacity. The MOU includes
the following objectives:

•  Encourage comprehensive planning at
   the local, county, and regional level to
   ensure water system viability

•  Foster and coordinate the restructuring
   of contiguous and non-continuous
   public water systems, some of which
   are non-viable, to form .viable water
   systems

•  Provide financial assistance and exam-
   ine alternative rate-making policies for
   projects that comply with these objec-
   tives

•  Identify policies  and procedures that
   present barriers to small system re-
   structuring and seek solutions to these
   institutional barriers

In addition to these initiatives, DEP
would like to extend its business plan
concept (described in Chapter 1) to
existing  systems. The State expects that
extending the business plan concept to
existing  systems could have the same
beneficial impact that it has had on new
systems.
Like Washington and Connecticut,' Mary-
land has a program for existing systems
which is largely an outgrowth of the
overall approach that the State has taken
regarding capacity issues, as outlined in
Chapter 1. Maryland has a well-estab-
lished program of county-wide develop-
ment and infrastructure planning that
includes water systems. The counties
adopt long-range plans and identify
expansion and new construction of water
systems needed to serve new commercial
or residential development. This planning
process, therefore,  includes oversight of
existing systems to ensure that they are
meeting their responsibilities under the
area-wide plan.  The existence of escrow
accounts (also explained in Chapter 1)
provides an additional layer of financial
assurance that privately owned systems
will have the financial capacity to ensure
adequate service for the long term.

If the State drinking water program in the
Maryland Department of the Environment
(MDE) determines  that a system is ineffi-
ciently operated or is potentially threaten-
ing the public health, MDE may appoint a
new manager or order water system
alterations and extensions. Alternatively,
MDE may appoint  the Maryland Environ-
mental Services (MES), a State agency, to
manage a poorly operated system.10  MES
also is authorized to provide contract
operations and management (O&M)
services for systems in the State. Finally,
MDE may order the construction of all or
part of a new water system, necessary to
protect the public health."
 9See "State Initiatives to Address Non-Viable
 Small Water Systems in Pennsylvania," Report
 prepared for the Pennsylvania Department of  •
 Environmental Resources, August 1991.
 10The Annotated Code of Maryland, Title 9-207
 and Title 9-208.

 "Annotated Code, Title 9-209.

-------
                                                                                                          23
Maryland also has,a financial assistance ;•'
program that provides funding to small,
disadvantaged water systems. Whenever
feasible, funding is  used to construct
extensions to consolidate water systems.
To participate in the program, in addition
to other eligibility requirements, a system
must provide documentation of financial
stability.
Alabama           	.

Alabama is best known for its stringent
permitting program. Exhibit 1 (on page
10) shows that .Alabama has aggressively
encouraged the consolidation, acquisition,
and merging of existing water systems.
From a high of almost 800 community
water systems in 1978, Alabama's inven-
tory has dropped to approximately 600.
Even more striking is the reduction in the
number of non-community systems, from
600 in 1978 to approximately 200 in
1996. These reductions could not be
achieved simply by denying permits to
new systems.     .

According to Alabama permitting regula-
tions,12 all facility permits for public
water systems in Alabama have term
limits. The permits for community water
systems are issued for 6 years; the non-
community permits are issued for 10
years.  Permits may be re-issued, but it is
clear that the Alabama DEM has exer-
cised considerable influence to discourage
some systems from seeking renewal, or to
deny renewal if the system fails to display
the capacity required to provide safe
drinking water. The regulations explicitly
identify the system characteristics that
will be evaluated before approving (or
denying) a permit: "Existing and  pro-

12The statutory authority for these permit regula-
tions is'Code of Alabama 1975, §§ 22-23-33,22-
23-49. The regulations are found in ADEM
Admin. Code R. 335-7-4.         !
posed systems must demonstrate financial,
managerial, and technical capabilities to
reliably meet performance requirements
on a long term basis and be self sustain-
ing
"13
According to DEM staff, physical inter-
connection is encouraged whenever it is
feasible. This is particularly true for non-
community systems that are within the
service areas of existing community ,
systems.

DEM also has the authority to .revoke the
permit of any public water system for
cause. The regulations cite seven types of
cause that would justify permit revoca-
tion, including provision of water that
does not meet drinking water standards,
failure to comply with any general or
special condition of the permit, and
failure to comply with the provisions of a
Department Administrative Order or
regulations.

Using this authority, DEM staff have
been effective in persuading owners  and
operators of the weakest public water
systems that the best way to protect the
public health is to interconnect with
existing community water systems.
Massachusetts        	___

The Department of Environmental Protec-
tion (DEP) in Massachusetts has devel-
oped a program for "viability assessment
and assurance" for all community water
systems and non-transient non-community
water systems serving fewer than 1,000
persons.14 The program begins with a
Comprehensive Compliance Evaluation

13ADEM Admin. Code R. 335-7-4-.06.       ~~
MThe legal authority for the Massachusetts "~
program is established by the Massachusetts
Drinking Water Regulations: 310 CMR 22.04.

-------
 (CCE) Sanitary:Survey, and all systems
 must be surveyed at least once every 6
 years.  Depending on the results of the
 CCE, systems may be referred, or as-
 signed, to a Mobilization Partner (a non-
 profit organization in the State that
 specializes in technical assistance  to small
 systems) for viability assessment and
 follow-up technical assistance. A referral
 is likely if the system does not have a
 certified operator, has not conformed to
 previous sanitary survey recommenda-
 tions, has monitoring and reporting
 violations, has source protection issues,
 or has Maximum Contaminant Level
. (MCL) violations. If a referral is made,
 the public water system must attend the
 viability assessment meeting.  DEP  staff
 evaluate the findings and recommenda-
 tions of the Mobilization Partner and may
 impose requirements on the system, such
 as completion of a business plan,  estab-
 lishment of emergency funds, establish-
 ment of an emergency  plan, training
 programs for staff, and restructuring.

 DEP does not mandate the procedures
 used during the viability assessment
 performed by the Mobilization Partners.
 During a CCE Sanitary Survey follow-up,
 however, DEP staff will consider the
 following issues relating to managerial
 and financial capacity:

 •  Whether sufficient funds are on hand to
    meet current and future expenses, or  a
    plan exists  to obtain such funds

 •  Whether ah emergency plan exists,
    including funding,, or a plan for fund-
    ing characterized by enterprise ac-
    counting, records of O&M costs, and
    rates affordable (less than or equal  to
    1.5% of median household income)
                i
 •  Whether the PWS has trained and
    certified staff
•  Whether the PWS understands current
   and future regulatory requirements.15

The philosophical underpinnings of the
Massachusetts approach are similar to the
business plan concept used in Pennsylva-
nia and other States.  As explained in the
DEP Policy 94-01, the Department has
found  that "many small systems do not
recognize the importance of planning
ahead  before'they are established to
ensure continued compliance with the
SDWA."16 The unique aspects of the
Massachusetts approach include:

•  Viability assessment of systems identi-
   fied during the CCE sanitary survey
   process       '  "

•  Leveraging the resources of non-profit
   organizations who serve as "Mobiliza-
   tion Partners"
 New Jersey      	.

 New Jersey has developed an approach to
 facilitate the takeover of systems that fail
 to supply safe  drinking water. In 1981,
 the legislature passed the Small Water
 Company Takeover Act.17 In its first 10
 years, the authority provided by the
 statute has been used to take over ap-
 proximately 20 systems.

 The purpose of the statute is to deal with
 problems caused by housing developers
 who created water systems as part of their
 development and then abandoned those
 systems once the development process

 "Bureau of Resource Protection, Division of
 Water Supply Policy 94-01 Procedures, "Viability
 Assessment and Assurance: DWS Procedures for
 Existing Systems."

• "Department of Environmental Protection,
 Division of Water Supply, Policy 94-01, August 1,
 1996.

 "New Jersey Annotated Code. 7:19-5.1 et seq.

-------
                                                                                                        25
was complete. This is a common problem
in many States. In such cases, ownership
of the water system may be transferred to
a homeowners association, and it is
possible that no one becomes responsible.
The lack of a responsible party creates
problems for regulation and enforcement.

Whenever a small water company fails to
comply with a Department of Environ-
mental Protection (DEP) order to provide
adequate service, DEP and the Board of
Public Utilities (BPU) may, after notice
and hearing, order a takeover of the
system by the "most suitable" privately
owned or publicly owned community
water system. The term "adequate ser-
vice" refers to availability  of water, .
potability of water, and adequacy of
volume and pressure. The  Act makes
provides compensation for the acquisition
and increases in rates for the acquiring
entity (including provision for differential
rates for customers of the acquired com-
pany). In general, the intent and structure
of this Act is quite similar  to that of
Connecticut, described above.
Summary
As with Chapter 1, the programs de-
scribed above represent a broad range of
different approaches to achieving a
common goal. Exhibit 3  summarizes key
characteristics of these programs.

-------
Exhibit 3 1
State Capacity Development Programs for Existing Systems 1
State
Alabama
Connecticut
Maryland
Massachusetts
New Jersey
Pennsylvania
Washington
Statutory Authority
Establishes broad public water supply
permitting, review, and supervision
authority
Code of Alabama, 1977:
§22-23-33 §22-23-35 §22-23-44
§22-23-49 §22-22A-5 §22-22A-6
CGS 25-32d - Water supply plans
CGS 25-33d through j - Establishes
tha Connecticut Plan process
[coordinated system plan)
CGS 16-262n and o - Aquisition of
water companies (takeover process)
Annotated Code of Maryland
Environmental Article:
Title 9-206 - provides discretionary
authority to determine scope of plans
required by systems
Title 9-2 - authorizes requirement of
escrow accounts.
Title 9-4 - general authority allowing a
broad range of actions to protect public
health
Title 9-5 - requires each county to
submit a plan for water service
•
The Small Water Company Takeover
Act facilitates the takeover of problem
systems
NJSA 58:11-58 et seq. and 58-12A-1
etseq.
P.L 10, No. 5 - The Small Water
Systems Assistance Act
P.L. 206. No. 43 -PA Safe Drinking •
Water Act
70.1 16 RCW- The Public Water
Supply Coordination Act (PWSCA)
provides an ordered process to utility
planning and authorizes Satellite
Management
70.119A RCW- authority for Financial
Viability Programand the Water Utility
Operating Permit under the WA Safe
Drinking Water Act
43.20 RCW- sets up state drinking
water program
Regulatory Authority
Regulations implementing broad
>ublic water supply permitting,
eview, and supervision authority
ADEM Admin. Code R. 335-7-4
25-32d of the Regulations of CT
State Agencies - requirements for
contents of water supply plans
25-33h-1 of the Regulations of CT
State Agencies - requirements for
contents of coordinated plans
COMAR 26.04.03 - authorizes
requirement of escrow accounts
310 CMR 22.04 - Drinking Water
Regulations: Construction,
Operation and Maintenance of
Public Water Systems
Small Water Company Takeover
Act Regulations
NJAC 7:19-5
25 PA. Code Ch. 109
WAC 246-293 - regulatory
authority for PWSCA
WAC 246-290 and WAC 246-291 -
set requirements regarding WSP
WAC 246-290 and WAC 246-294 -
authority for Financial Viability
Program
WAC 246-295 - authority for
Satellite Management
Systems
Covered
All public water
systems
All public water
systems (with
exceptions, noted
n the text)
Community water
systems,
non-transient
non-community
water systems
All public water
systems
All privately
owned
community water
systems serving
fewer than 1,000
service
connections
Community water
systems,
non-transient
non-community
water systems
Selected
community water
systems -
coverage varies
among program
components (see
text)

Strict permitting program
All facility permits for public water systems have
erm limits
Special permit conditions requiring corrective
action for systems having problems
Regulatory authority to revoke the permit of any
)ublic water system for cause
Water Utility Coordinating Committees establish
area-wide plans
Selected systems obtain exclusive service areas,
accept responsibility for service
State can order the acquisition of any water system
acking adequate capacity
County-wide planning program oversees existing
systems
• Escrow accounts ensure financial capacity of small
privately owned systems
- Authority to restructure problem systems
• Financial assistance program for smaller,
disadvantaged systems
• Comprehensive Compliance Evaluation Sanitary
Surveys every six years
• Mobilization Partners provide viability
assessment/technical assistance
• DEP evaluates findings; can impose requirements
• Can order the takeover of nonrcomplying systems
by most suitable system
• Makes provision for compensation for the
acquisition
• Pilot testing enhanced evaluation techniques
together with onsite technical assistance
• Authorizes grants to fund regionalization feasibility
studies
• MOU links regulatory action to improvements in
capacity
• State reviews capacity during all requests for
PENNVEST funds
* Business plan concept extended to existing
systems with problems
• Regional Water System Plans
• Individual Water System Plans for selected
systems
• Satellite Management Program
• Financial Viability Program
• Water Utility Operating Permit Program provides
status report on systems

-------
                                                                                                               27
                               Appendix A
         Emerging  State Capacity  Development
                                Programs*
    State
                                           Description
 Seorgia
               Some statutory authority (e.g., Trust Indenture requirement for some privately
               owned systems). Working on obtaining additional statutory authority.
owa
               Statutory authority established by Chapter 4556.173(3) and 174 ofthe Iowa
                 ode. Working with stakeholders to finish viability manual for small water
               supplies to use. Focus is on business plan approach with a financial
               self-assessment guide.
Massaschusetts
               State is fine-tuning its capacity development program for new systems. State
               personnel refer a new water system applicant to a "Mobilization Partner."  •--'
                Mobilization Partner provides information and technical assistance to the new
               system. The Mobilization Partner's assessment of the applicant's viability is  •
               forwarded to the Department of Environmental Protection for consideration.
               Statutory authority established by Senate Bill 407,1991. Rule-making will
               Degin soon.
Montana
New York
                State believes it has sufficient statutory authority. Working on coordinating
                with other State agencies and establishing partnerships with training and
                technical assistance providers.
North Carolina
                Has statutory authority. After working with stakeholders' committee, State will
                propose amendments to include the business plan concept as a method of
                ensuring adequate capacity of all permitted systems. A draft Memordum of
                Understanding with North Carolina Public Utilities Commission has been
                developed.
South Carolina
                After working with stakeholders' committee, State will propose amendments to
                its Primary Drinking Water Regulations to include the business plan concept
                as a method of ensuring adequate capacity of all new and permitted systems.
Texas
                Some existing statutory and regulatory authority for both new and existing
                systems. Proposing changes in 1997 to develop a more comprehensive
                program based on the business plan concept.
Virginia
                Building on existing statutory authority (Virginia Code § 32.1-172) that enables
                the State to require a comprehensive business plan with permit applications.
                State plans to expand business plan requirements to systems in significant
                non-compliance and to applicants for SRF assistance. Working on
                implementation and expansion to non-transient non-community water
                systems.
 Taken in part from "Enhancing Drinking Water System Viability," prepared by the Association of
 State Drinking Water Administrators,

-------

-------