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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF THE INSPECTOR GENERAL FOR AUDITS
WESTERN DIVISION
211 Main Street, Suite 220
San Francisco, CA 94105
415 974-7O84
October 26, 1938
MEMORANDUM
SUBJECT:
FROM:
TO:
Evaluation of Proposed Costs for CERCLA Funding
of Drinking Water Treatment Plant
Lidgerwood, North Dakota
Audit Report No. E5cG8-08-0019-9100034
Truman R.
Divisional
Inspector General for Audit
James J. Scherer
Regional Administrator
EPA, Region 8
Attached is a copy of our report entitled Lidgerwood, North
Dakota Treatment Plant Proposal, Audit Report No. E5cG8-08-0019-
9100034. This report provides important findings and
recommendations regarding the reimbursement of costs incurred and
proposed to build and repair Lidgerwood1s water treatment plant.
As the action official you are required under EPA Directive 2750
respond to the recommendations in this report within 90 days.
Should your staff have any questions or need additional
information, please contact Allen Grand at FTS 454-7084.
Attachment
HEADQUARTERS LIBRARY
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF THE INSPECTOR GENERAL FOR AUDITS
WESTERN DIVISION
2^ 1 Main Street, Suite 220
San Francisco, CA 94105
415 974-7084
October 26, 1988
SUBJECT:
FROM:
TO:
Evaluation of Proposed Costs for CERCLA Funding
of Drinking Water Treatment Plant
Lidgerwood, North Dakota
Audit Report No. E5aG8-08-0019-9l00034
Truman R.
Divisional Inspector General for Audit
James J. Scherer
Regional Administrator
EPA, Region 8
SCOPE AND OBJECTIVES
A review was performed of the City of Lidgerwood, North Dakota's
(the City) application for funding of costs associated with
constructing and repairing its drinking water treatment plant.
The City requested that these costs be allowable under the
Comphrensive Environmental Response, Compensation and Liability
Act (CERCLA) through the award of a cooperative agreement.
Since the plant was already constructed and partially operational
at the time of our review, support for the City's proposal
included some incurred costs. The City's proposal for the
plant's construction and its repair amounted to $433,034 (EPA
share $248,962). The City had made a request for CERCLA funding
of the plant several years earlier (before its construction); but
it was denied.
The review included an examination of records maintained by EPA
Region 8 relating to the : (i) history of water problems in the
Lidgerwood area; (ii) City's proposed costs; and, (iii) water
treatment plant operations. We contacted officials from Region
8's Water and Waste Management Divisions as well as officials
from North Dakota's State Department of Health to discuss these
and other issues related to the plant's construction and
operation. In accordance with the request for audit we did not
evaluate the City's accounting, procurement or management
systems. The results of this review were not discussed with City
officials because of the preaward nature of the review and the
policy matters presented requiring EPA attention.
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E5AG*8-08-0019-9100034
The objectives of this review were to determine the allowability»
under the- provisions of CERCLA, of costs incurred for plant
construction and the reasonableness of proposed additional costs
tor repairs needed to make the plant fully operational.
This review was performed in accordance with the Standards for
Audit of Governmental Organizations, Programs, Activities, and
Functions as prescribed by the Comptroller General of the United
States and included such tests of the accounting records and
other auditing procedures considered necessary under the
circumstances. The financial records reviewed were limited to
those costs relating to the water treatment plant's construction
and first year of operation between-July 1984 and April 1987.
Audit field work was conducted between March 7, 1988 and
September 22, 1988.
SUMMARY OF FINDINGS
In our opinion, the City's proposed costs of $433,034 (EPA Share
$248,962} are unallowable under CERCLA. The financial related
results of audit are detailed in Exhibit A. As detailed in
Exhibit A, certain costs are questioned because they were
unsupported or otherwise unallowable in accordance with 40CFR
30.410 (a). The balance of costs are questioned because (i) the
plant was not built solely for the purpose of addressing an
environmental problem considered fundable under CERCLA and (ii)
the plant was not working.
The City built the drinking water treatment plant in response to
a North Dakota State order to bring their water supply into
compliance with the Safe Drinking Water Act's (SDWA) standards.
Agency policy is not to use funds from CERCLA for actions
required solely to comply with an order issued .pursuant to the
SDWA. This policy was stated in a September 19, 1986 letter to
Senator Mark Andrews from J. Winston Porter, Assistant
Administrator for Solid Waste and Emergency Response. Thus, this
proposed cooperative agreement is inconsistent with Agency
policy. In addition, any decision by the Agency to fund the
City's plant under CERCLA should consider the precedent it might
set for other cities with similar circumstances.
According to records reviewed, the City's water treatment plant
was built with an emphasis on removing iron and manganese from
its water supply; not arsenic. Arsenic however,is the
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E5AG*8-08-0019-9100034
contaminant upon which the City is citing as its justification to
obtain CERCLA funds. Correspondence discussing the plant's design
illustrates the emphasis on iron and manganese removal. It
stated that "it was decided to investigate the feasibility of
building an iron-manganese removal plant to treat the existing
City water supply. The reasoning for this decision was that: 1)
the City needed iron-manganese removal whether or not there was
an arsenic problem? and, 2) all available information indicates
that if the iron and manganese are oxidized and removed, a
substantial portion of the arsenic-will also be removed."
The public meeting to present the State Health Department's
findings on the ground water arsenic study relating to the
Lidgerwood area also noted the City's emphasis on iron and
manganese removal; not arsenic. To illustrate, the comments
included the statement that: "It was the City's decision to build
a water treatment plant to remove iron and manganese. There is
evidence that arsenic in the ionic form will co-precipitate with
iron and manganese. The State approved this solution on an
experimental basis with the proviso that the city will reduce the
arsenic concentrations by other methods if this treatment process
does not do a satisfactory job." {emphasis added). Since the
plant was not built solely to remove a CERCLA related
contaminant, questions are raised whether the facility should be
100 percent eligible for CERCLA funding or whether cost recovery
actions with principal responsible parties could be affected for
the costs of such a project.
The water treatment plant has not operated properly since its
completion in April, 1986 and there have been periods where it
was inoperable. We consider it inappropriate to use CERCLA funds
for a plant that does not operate properly. There have been
numerous periods when the plant was completely shut down. For
example, at various times between May, 1986 and November, 1986,
and then again for the entire period between December 29, 1986
and June 10, 1987, the plant was not operating. During these
periods, the plant was by-passed and the community received water
of an unknown quality. No specific reason was ever given as to
why or what problems the City was experiencing with the plants
operation. We also noted that records maintained at the plant did
not demonstrate that removal of arsenic was occurring even on
days when the plant was operating.
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E5AG*8-08-Q019-910003'
It is noted that the City has included $50,000 in its proposal
for CERCLA funding for repairs to the plant. However, we
questioned the $50,000 as unsupported because the City did not
provide any details on the basis for the estimate or the type of
repairs required. It is further noted that an engineer from the
State of North Dakota has estimated that repair costs would be
$420,000. Accordingly, there is increased doubt about the
validity of the City's estimate and the potential cost to CERCLA
if the plant is funded. In addition, any decision to provide
CERCLA funding should require performance criteria on the removal
of arsenic.
Four other points relating to the CERCLA funding of the City's
water treatment plant came to our attention; however, we did not
pursue them. They are presented for information in assessing the
appropriateness of making a cooperative agreement awards
1. The City is seeking 90 percent CERCLA funding of the cost of
the plant on the basis that the contamination was not caused by
the State or local organizations. However, correspondence dated
March 30, 1980 from the Mayor of Lidgerwood to the North Dakota
Department of Health noted that the arsenic problem "came from
grasshopper arsenic poisoned bait distributed by the Federal
Government." It is our understanding that such agricultural
pesticide control programs were managed by states. Accordingly,
the State of North Dakota may be partly responsible for the
contamination. If so, any CERCLA funding may be limited to 50
percent.
2. The facility proposed for CERCLA funding will be an operating
water treatment plant. This may be a revenue generating facility
with revenue coming from customers who use the treated drinking
water. Under the provisions of 40CFR 30.525, EPA may be entitled
to share in such income. Since CERCLA funds are limited, it may
be appropriate that projected revenues from operation of the
plant be considered an offset of any cooperative agreement costs.
3. The City's application may not represent the cost-effective
solution to the arsenic contamination of their water supply. A
field report prepared by an engineer from the Farmers Home
Administration { the City initially sought funding for its water
treatment plant from FmHA) in 1983 indicated that the City could
solve its arsenic problem for an estimated $200,000 by connecting
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E5AG*8-Q8-C019-9100034
to another available water supply system in the area. It would
appear the cost-effectiveness of the City's system should be
reaffirmed as part of any CERCLA funding decision.
4. In order to meet certain CERCLA eligibility requirements {ie
preaward expenses), EPA correspondence related to the application
indicated that a deviation from Section 300.25(d)(1) of the
National Contingency Plan would be necessary. We did not see any
evidence that such a deviation had been obtained.
RECQMMENDATIONS
We recommend that the Regional Administrator:
1. Advise the City that a cooperative agreement using CERCLA
funds cannot be'awarded for their water treatment plant because '
certain of the costs they propose are unallowable, the plant was
not built solely to treat a CERCLA ^related' contaminant and .the
plant is not working properly.
2. In the event that the Region decides to pursue CERCLA funding
of the plant, we recommend that:
a. A legal opinion be obtained on the use of CERCLA funds
to remediate SDWA violations;
b. The City be required to determine the repairs needed to
make the plant fully operational in removing arsenic and to
provide a detailed cost estimate for evaluation.
c. The Region make a technical evaluation whether: (i) the
City's arsenic removal process is the cost-effective alternative;
(ii) the proposed repairs will result in a fully operational
plant that removes arsenic; and (ii) the repair costs duplicate
any costs already incurred by the City.
d. Performance criteria relating to the removal of arsenic
be a special condition in the cooperative agreement award.
ACTION REQUIRED
In accordance with EPA Order 2750, the action official is
required to provide this office with a copy of the proposed
determination on the findings within 90 days of the audit report
date.
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E5AG*8-08-0019-910003-
BACKGROUND
State Order. In 1979, North Dakota's monitoring/sampling of
municipal water supplies detected elevated levels of arsenic in
the City of Lidgerwood's water supply. Arsenic is a hazardous
substance commonly used as a pesticide or weed killer. The State
ordered the City to take appropriate measures to provide drinking
water that met the Maximum Contaminant Level (MCL) for arsenic as
established by the SDWA.
Plant Studies. Acting upon the State's order, the City reviewed
its options to determine which alternative they felt would best
meet their needs and resources. One option was to connect to a
county water supply. This was rejected because of the estimated
user expenses for Lidgerwood residents and the lack of control
they would have over the systems future use.
The City also explored the possibility of locating a new water
source. A suitable supply was found that appeared to meet the
SDWA's arsenic standards, however, it had too high a levels of
iron and manganese; two elements that were of prime concern to
Lidgerwood. This alternative was rejected because sludge
resulting from the treatment process would contain high
concentrations of arsenic that would still need to be disposed
of.
Selected Method Of Treatment. The City's final decision was to
build a new water treatment plant, using ozone as an oxidizing
agent, to remove iron and manganese from its water supply. Using
ozone however, was not recognized by EPA as a method for arsenic
removal. While the use of ozone was studied to determine its
feasibility as a treatment method, the intent of the study was to
determine methods to remove the high levels of iron and manganese
inherent in the City's supply and at the same time coprecipitate
the arsenic. The engineer who conducted the study stated that
"hopefully", arsenic could be removed to a level below that which
is considered harmful.
Two test runs indicated the use of ozone reduced arsenic to
levels below the SDWA MCL standards. However, another toxic
substance was produced as a by-product of the treatment process.
This toxic by-product may have resulted from the over oxidation
of the raw water. A reduction in the amount of ozone used to
eliminate the by-product, would in-turn reduce the amount of
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E5AG*8-08-0019-9100034
arsenic removed. Although the City was cognisant of several
circumstances, the City built the plant using ozone as their
water treatment method. The circumstances were: (i) the
uncertain test results; (.ii) EPA's position that CERCLA funding
was not available; and, (iii) and the State's warning that by
using ozone, they must demonstrate the consistent removal of
arsenic to SDWA MCL standards. The State also informed the City
that if the standards were not met, they would have to install
additional treatment equipment or develop an alternative water
source.
Plant Operation. The plant was put into operation in April, 1986,
however, it has not been fully operational. There have been
numerous periods when the plant was completely shut down. For
example, at various times between May, 1986 and November, 1986,
and then again for the entire period between December 29, 1986
and June 10, 1987, the plant was not operating. During these
periods, the plant was by-passed and the community received water
of an unknown quality. No specific reason was ever given as to
why or what problems the City was experiencing with the plants
operation. We also noted that records maintained at the plant did
not demonstrate that removal of arsenic was occurring even on
days when the plant was operating.
Prior Requests For Aid. The inability of the City to find a
suitable and approved solution to their drinking water problem
also affected their ability to obtain construction financing.
Requests for aid to the Farmers Home Administration, the
Department of Housing and Urban Development and, EPA were all
denied. The City requested reimbursement from EPA under CERCLA.
The request was initially turned down because the City had
independently initiated the plant's construction before EPA had
made final decisions on the appropriate remedial actions.
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E5AG*8-08-0019-91Q0034
EXHIBIT A
COSTS PROPOSED, ACCEPTED AND QUESTIONED
WATER TREATMENT PLANT
LIDGERWOOD, NORTH DAKOTA
PER AUDIT
CATEGORY PROPOSED ACCEPTED QUESTIONED NOTE
Personnel $ 6,214 $ -0- $ 6,214 1,7
Benefits 645 -0- 645 2,7
Equipment 961 -0- 961 3,7
Supplies 888 -0- 888 7
Engineering 50,032 ' -0- 50,032 4,7
Construction 316,149 -0- 316,149 7
Repairs 50,000 -0- 50,000 5,7
Other 8,145 -0- 8,145 6,7
Total $433,034 $ -0- $433,034 8
Funding Source:
HUD Block
Grant $156,410 $ -0- $156,410 8
10% local
share $ 27,662 $ -0- $ 27.662 8
EPA Share $248,962 $ -0- $248,962 8
Note 1. We have questioned proposed personnel costs of $6,214
because they were not supported by time distribution records.
Records maintained at the water treatment plant for two employees
showed their time chargeable to the project amounted to about
twelve percent. However, in its proposal for CERCLA funding, the
City claimed between 54 and 63 percent of the employees' time.
Accordingly, we consider the differences unsupported, and
questioned the personnel costs in accordance with 40CFR
30.410(a).
Note 2. Employee benefit costs of $645 were questioned as
applicable to questioned personnel costs in note 1.
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E5AG*8-08-OQ19-9100034
Note 3. Proposed equipment costs of $961 were questioned because
they related to the process of superflushing (cleaning the water
lines). Superflushing is a process that is undertaken due to
deteriorating water lines. CERCLA Section 104 (a) (3) (c)
prohibits repairs necessitated by deterioration.
Note 4. Engineering costs proposed of $50,032 are questioned
because the services were non-competitively procured and there
was no documentation justifying this method of procurement. EPA
regulations in part 33 and OMB Circular A-102 generally require
competition to the maximum extent possible. Specifically, 40CFR
33.605 cites reasons why non-competitive procurements may be
made. We did not see any evidence to indicate any of the cited
reasons were applicable under this procurement. The records
available showed that ,on.. July .2,.. 1984 Lidgerwood .entered, into a
contract with an engineering firm on the basis of prior
experience with the firm. Justification for the award was that
"The firm ... had been the engineers for the City of Lidgerwood
on various projects so therefore they were hired as engineers
when we constructed the water plant".
Note 5. The City proposed $50,000 to repair the water treatment
plant because it has not operated as expected. On numerous
occasions the plant has been shut down and the system has been
by-passed; leaving the consumers with untreated water or water of
an unknown quality. To remedy this problem, the City proposed
that EPA provide CERCLA funds to make the plant fully
operational. The City however, has not explained the problems
they are encountering nor have they provided a detailed plan of
action that will correct those problems. There was no stated
basis for these repairs nor were there any cost estimate details
that we could evaluate. We have questioned the entire amount as
unsupported in accordance with 40CFR 30.410(a). As an additional
observation, during the course of our review, we were also
advised that State of North Dakota officials estimated the repair
costs to be about $420,000. Thus, the actual repair cost may be
substantially understated.
Note 6. Proposed other costs amounted to $8,145. We have
questioned $5,437 in this note and the balance in Note 8. The
$5,437 questioned is detailed as follows:
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E5AG*8-08-0019-9100Q3-
$3,832 -- land not approved in the statement of work
250 — legal services associated with the land
400 — bond issuance fees.
98 — printing notices of receipt of fund from
another federal agency.
616 -- publishing notices of assessment
241 — associated legal fees
All of the above costs are considered unallowable under the
provisions of 40CFR 30.410 (a).
Note 7. In addition to the specific basis stated for questioning
costs in other notes, all proposed costs have been questioned
because the plant was not built solely for the purpose of
addressing an environmental problem considered fundable under
CERCLA and the plant was not working. These points are discussed
further in the Summary of Findings section of this report.
Note 8. The proposed costs are based on the Federal Assistance
Application attached to a letter dated April 11, 1988 to the
Mayor of Lidgerwood from Region 8's Office of Policy and
Management, Grants Management Branch. The funding sources cited
are also from the Application.
Certain information about the HUD Block Grant and Local share
funding came to our attention which the Region should be aware of
in the event the proposed project proceeds for CERCLA funding.
With respect to the HUD Block Grant, if the legislation
authorizing the Block Grants does not preclude such funds from
being used as local matching share, the City maybe be able to use
part of the Block Grant funds to meet its local share. Our
preliminary discussions with HUD officials indicated they were
not aware of any language in the Block Grant legislation that
precluded using the funds for matching other Federal program
costs. It is suggested that Regional Counsel to review this
point if CERCLA funding proceeds.
The City proposes that the local share will be $27,632, or 10
percent, of the net (minus HUD Block Grant) cooperative agreement
costs. Section 104(c)(3) of CERCLA states "... the state will
pay or assure payment of (i) 10 per centum of the costs of the
10
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E5AG*8-08-0019-9100034
remedial action ..." (emphasis added). The CERCLA language
suggests that the state (the City in this case) may be required
to share 10 'percent of the total remedial action costs; not 10
percent of the net costs. This could raise the local share to
$43,303 based on total estimated costs of $433,034. Regional
Counsel should review this point if CERCLA funding proceeds.
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DISTRIBUTION
REGION 8 .
Regional Administrator
Director, Waste Management Division
Audit Followup Coordinator
HEADQUARTERS OFFICES
Director, Grants Administration Division (PM-216)
Comptroller (PM-225)
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