Public Review Draft
-------
-------
Small Systems Working Group Members
Kevin Brown
Division of Drinking Water
Utah Department of Environmental
Quality
Jack Bryck
Dayton & Knight, Ltd.
Judy Chambers
Borough Manager, Mercersberg, PA
Mary Gaiski
Pennsylvania Manufactured Housing
Association
Jason Gray
Virginia Water Project, Inc.
Robert Hinton
Public Staff
North Carolina Utilities Commission
Diane Riesling
Commissioner
Florida Public Service Commission
Ted Michaels
Natural Resources Group
National Governors' Association
David Monie
SB Water Company, NJ
Gary Morgan
Rural Utilities Services, USDA
Bridget O'Grady
Association of State Drinking Water
Administrators
Yvette dePeiza
Division of Water Supply
Mass. Dept. of Environmental Protection
Teresa Rissmiller
Mount Joy Township Authority, PA
John P. Scheltens
City of Hot Springs, SD
Peter E. Shanaghan
Office of Groundwater and Drinking
Water, U.S. EPA
Jim Sheldon
Cedar-Knox Rural Water Project, NE
Donna Shell
Environmental Information Center, VA
Rich Siffert
Drinking Water Division
Washington Department of Health
Gerald Smith
Drinking Water Protection
Minnesota Department of Health
William A. VanDeValk
Lament, VanDeValk Engineers, P.C.
Julie Ward
Great Lakes Rural Community Assistance
Program
Rita Wayco
U.S. EPA, Region 4
-------
Table of Acronyms
Acronym
AHERA
AMHI
AMWA
ASDWA
AUC
AWWA
BAT
CCE
CCN
CCP
CCR
CERCLA
CFR
CO
CIP
CPE
CWS
DEP
DOH
DWRSF
EDU
EPA
EWS
FVT
G&A
QODebt
IRS
IUP
LIHEAP
MABEL
MCL
Mm
Meaning
Asbestos Hazard Emergency Response Act
Adjusted Median Household Income
Association of Metropolitan Water Agencies
Association of State Drinking Water Administrators
Annual User Charges
American Water Works Association
Best Available Technology
Comprehensive Compliance Evaluation
Certificates of Convenience and Necessity
Composite Correction Program
Consumer Confidence Report
Comprehensive Environmental Response,
Compensation, and Liability Act
Code of Federal Regulations
Capitalization Grant
Capital Improvement Plan
Comprehensive Performance Evaluations
Community Water System
Department of Environmental Protection
Department of Health
Drinking Water State Revolving Fund
Equivalent Dwelling Unit
Environmental Protection Agency
Early Warning System
Financial Viability Test
General and Administrative
General Obligation Debt
Internal Revenue Service
Intended Use Plan
Low-Income Home Energy Assistance Program
Municipality's Ability to Pay Model
Maximum Contaminant Level
Median Household Income
Acronym
MOU
NARUC
NAWC
NCWS
NDWAC
NETA
NPDWR
NRRI
NRWA
NTNCWS
orNTNC
O&M
OGWDW
PACNIF
PIPPS
POTW
PUC
PWS
RCAP
RCRA
RCW
RUS
S&P
SDWA
SDWIS
SRF
TNCsor
TNCWS
TNRCC
TSC
WAC
WQS
WUFS
Meaning
Memorandum of Understanding
National Association of Regulatory Utility
Commissioners
National Association of Water Companies
Noncommunity Water Systems
National Drinking Water Advisory Council
National Environmental Training Association
National Primary Drinking Water Regulations
National Regulatory Research Institute
National Rural Water Association
Nontransient, Noncommunity Water System
Operations and maintenance cost
Office of Ground Water and Drinking Water
a financial capabilities model used by PENNVEST
Percentage-of-income payment plans
Publicly Owned Treatment Works
Public Utility Commission
Public Water System
Rural Community Assistance Programs
Resource Conservation and Recovery Act
Revised Code of Washington
Rural Utility Service
Standard & Poors
Safe Drinking Water Act
Safe Drinking Water Information System
State Revolving Fund
Transient Noncommunity Water Systems
Texas Natural Resource Conservation Commission
Target Service Charge
Washington Administrative Code
Water Quality Standards
Water Utility Financing Study
-------
Table of Contents
Chapter 1: Introduction to Technical, Managerial,
and Financial Capacity of Water Systems 1-1
Chapter 2: Information for States on Ensuring that All
CWSs and NTNCWSs Demonstrate Technical,
Managerial, and Financial Capacity n-1
Chapter 3: Information for States on Preparing
Capacity Development Strategies EH
Chapter 4: Information for States on Assessment of Capacity IV-1
-------
-------
CHAPTER 1:
Introduction to Technical, Managerial,
and Financial Capacity of Water
Systems
-------
-------
INTRODUCTION
The 1996 Safe Drinking Water Act (SDWA) Amendments bring significant improvements to
the national drinking water program. Capacity development is an important component of the
Act's focus on prevention. The capacity development provisions offer a framework within which
States and water systems can work together to ensure that systems acquire and maintain the
technical, financial, and managerial capacity needed to achieve consistently the public health
protection objectives of the SDWA. In short, capacity development is about helping systems
uniformly provide safe drinking water.
The 1996 Amendments emphasize technical, managerial, and financial capacity as integral
components of the implementation strategies of the Act. By enhancing and ensuring the
technical, financial, and managerial capacity of water systems, States will promote compliance
with National Primary Drinking Water Regulations (NPDWRs). To avoid a reduction in its
Drinking Water State Revolving Fund (DWSRF) allotment, each State is required to obtain legal
authority or other means to ensure that new systems have adequate capacity, and to develop and
implement a strategy to assist existing systems in acquiring and maintaining capacity. This
requirement is specified in the Act as follows:
Section 1420(a): STATE A UTHORITYFOR NEW SYSTEMS- A State shall receive only 80
percent of the allotment that the State is otherwise entitled to receive under section 1452
(relating to State loan funds) unless the State has obtained the legal authority or other
means to ensure that all new community water systems and new nontransient,
noncommunity water systems commencing operation after October 1, 1999, demonstrate
technical, managerial, and financial capacity with respect to each national primary
drinking water regulation in effect, or likely to be in effect, on the date of commencement
of operations.
Section 1420(c): CAPACITY DEVELOPMENT STRATEGY- (1) IN GENERAL- Beginning
4 years after the date of enactment of this section, a State shall receive only-(A) 90
percent in fiscal year 2001; (B) 85 percent in fiscal year 2002; and (C) 80 percent in each
subsequent fiscal year, of the allotment that the State is otherwise entitled to receive under
section 1452 (relating to State loan funds), unless the State is developing and implementing
a strategy to assist public water systems in acquiring and maintaining technical,
managerial, and financial capacity.
The Act also provides that the Environmental Protection Agency (EPA) will assist State
capacity development efforts by providing information and guidance:
Section 1420(d): FEDERAL ASSISTANCE-(l) IN GENERAL- The Administrator shall
support the States in developing capacity development strategies. (2) INFORMATIONAL
ASSISTANCE- (A) IN GENERAL- Not later than 180 days after the date of enactment of
this section, the Administrator shall(i) conduct a review of State capacity development
efforts in existence on the date of enactment of this section and publish information to
assist States and public water systems in capacity development efforts.... (4)
GUIDANCE FOR NEW SYSTEMS- Not later than 2 years after the date of enactment of
1-1
-------
this section, the Administrator shall publish guidance developed in consultation -with the
States describing legal authorities and other means to ensure that all new community
water systems and new nontransient, noncommunity -water systems demonstrate technical,
managerial, and financial capacity with respect to national primary drinking water
regulations.
Aiding the technical, financial, and managerial capacity of small water systems offers great
potential for correcting and preventing their noncompliance with NPDWRs and for ensuring their
provision of reliably safe drinking water. The capacity development provisions in the Act offer a
simple, flexible framework within which States can organize their efforts to address the
challenges facing small systems. Each state has extraordinary flexibility to implement a capacity
development program that is uniquely tailored to its circumstances.
The statute specifies that new systems must demonstrate technical, managerial, and financial
capacity prior to commencing operation, and States must develop and implement strategies to
assist public water systems in acquiring and maintaining technical, managerial, and financial
capacity. The statute lists several specific issues which a State must consider and solicit public
comment on when preparing its capacity development strategy. The statute does not dictate what
a State strategy must contain.
This chapter presents the background information necessary to understand the information
documents that are provided in Chapters 2 through 4 to assist states in implementing the capacity
development provisions of the Act.
Included in this introductory chapter are a discussion of the demographics of systems affected by
the provisions, and working definitions of technical, managerial, and financial capacity that will
be used throughout this document.
1-2
-------
SYSTEM DEMOGRAPHICS1
The capacity development provisions of the SDWA apply to several types of public water
systems. Several provisions apply to all public water systems (PWSs), which include: 1)
community water systems (CWSs); 2) nontransient, noncommunity water systems (NTNCWSs);
and 3) transient, noncommunity water systems (TNCWSs). Other provisions apply only to
community water systems and nontransient, noncommunity water systems.
A public water system is a "system for the provision to the public of piped water for human
consumption, if such system has at least fifteen service connections or regularly serves an
average of at least twenty-five individuals daily at least 60 days out of the year." (40 CFR
§141.2) There are approximately 172,000 public water systems nationwide.
A community water system is "a public water system which serves at least 15 service
connections used by year-round residents or regularly serves at least 25 year-round residents."
(40 CFR §141.2) There are approximately 55,000 community water systems serving over 246
million people. Approximately 20 percent of these systems (serving over 157 million people)
use as water sources either surface water or ground water under the direct influence of surface
water. The remaining 80 percent of systems (serving almost 89 million people) receive their
water from a ground water source.
Slightly more than 86 percent of CWSs are classified as 'Very small" (serving fewer than 500
persons) or "small" (serving from 501 to 3,300 persons). Although the small and very small
systems comprise a significant majority of CWSs, they serve just over 10 percent of the
population served by CWSs. Community water systems can be classified into two major
ownership typesprivately owned and publicly owned. Within the privately owned category, a
substantial number of systems are "ancillary systems," i.e., they provide water as an ancillary
function of their principal business or enterprise. An example is mobile home parks (Figure 1).
Like NTNCWSs, they provide water to their customers, but provision of water is not their
principal business. The incidence of ancillary systems varies significantly by system size. In
small CWSs serving between 25 and 100 persons, over half (53 percent) are ancillary systems.
In larger CWSs serving more than 10,000 persons, only 0.1 percent are ancillary systems.
A nontransient, noncommunity water system is defined as "a public water system that is not a
community water system and that regularly serves at least 25 of the same persons over 6 months
per year." (40 CFR §141.2) Examples of establishments served by nontransient, noncommunity
water systems include schools, factories, office/industrial parks, and major shopping centers.
Many are privately owned. The approximately 20,000 NTNCWSs across the nation serve
approximately 6 million people. Over 96 percent of NTNCWSs use ground water as their
primary source. They typically are small systems; 99 percent of NTNCWSs are classified as
'Very small" or "small."
1 Data Source: Safe Drinking Water Information System (SDWIS)
1-3
-------
FIGURE 1
Ownership of Systems Serving Population 25 - 500
(Percent of Systems)
Homeowners Association
14.1%
Other Privately Owned
4.8%
Mobte Home Park
27.5%
Investor Owned
17.9%
Other Government
18.6%
Institution
38% Other Ancillary Special District
9.6% 3.3%
Ownership of Systems Serving Population > 500
(Percent of Systems)
Special District 6.2%
Mobie Home Park
1.8% other Privately Owned 3.4%
Ottter Government
67.4%
Homeowners Association 6.8%
Investor Owned
13.0%
Institution 0.1%
Other Ancillary 1.2%
1-4
-------
DEFINING CAPACITY
Water system capacity is the capability to function as a water system in accordance with
accepted performance criteria. Capacity encompasses the technical, managerial, and financial
capability of the water system to plan for, achieve, and maintain compliance with applicable
drinking water standards given available water resources and the characteristics of the service
population.
Technical, managerial, and financial capacity are three general, highly interrelated areas of
water system capacity:
Technical capacity refers to the physical infrastructure of the water system, including but
not limited to the adequacy of the source water, infrastructure (source, treatment, storage,
and distribution), and the ability of system personnel to implement the requisite technical
knowledge.
Managerial capacity refers to the management structure of the water system, including but
not limited to ownership accountability, staffing and organization, and effective linkages.
* Financial capacity refers to the financial resources of the water system, including but not
limited to revenue sufficiency, credit worthiness, and fiscal controls.
KEY QUESTIONS
Technical, managerial, and financial capacity are individual yet highly interrelated areas of a
system's capacity, as illustrated in Figure 2. A system cannot sustain capacity without
maintaining adequate capability in all three areas. Indicators of capacity within each area can be
framed by key sets of issues and questions, including but not limited to the following:
Technical capacity
Source water adequacy. Does the finished water meet the provisions of the SDWA? Does
the system have access to a reliable source of drinking water? Is the source adequately
protected?
Infrastructure adequacy. Can the system provide water that meets SDWA standards?
What is the condition of the system's infrastructure, including well(s) and/or source water
intakes, treatment, storage, and distribution? What is the life expectancy of the system's
infrastructure? Does the system have a capital improvement plan?
1-5
-------
-------
Technical knowledge and implementation. Does the system have a certified operator? Is
the system operated with technical knowledge of applicable standards? Are personnel able
to implement this technical knowledge effectively? Do the operators understand the
technical and operational characteristics of the system?
Managerial capacity
Ownership accountability. Are the system owner(s) clearly identified? Can they be held
accountable for the system?
* Staffing and organization. Are the system operators) and managers) clearly identified?
Is the system properly staffed and organized? Do personnel understand the management
aspects of regulatory requirements and system operations? Do personnel have adequate
expertise to manage water system operations? Do personnel have the necessary licenses
and certifications?
Effective external linkages. Does the system interact well with customers, regulators, and
other entities? Is the system aware of available external resources?
Financial capacity
» Revenue sufficiency. Do revenues cover costs? Are rates and charges for water service
adequate to cover the cost of service?
* Credit worthiness. Is the system financially healthy? Does it have access to financial
capital throughpublic or private sources?
Fiscal management and controls. Are adequate books and records maintained? Are
appropriate budgeting, accounting, and financial planning methods used? Does the system
manage its revenues effectively?
Many aspects of water system operations involve more than one kind of capacity. A program
of infrastructure replacement and improvement, for example, requires technical knowledge,
management planning and oversight, and financial resources. In other words, a water system
with adequate capacity draws on strengths in all three capacity areastechnical, managerial, and
financial.
CONCLUSIONS
The concepts of technical, managerial, and financial capacity figure prominently in the 1996
SDWA. In accordance with the Act, the States will have substantial flexibility in designing and
implementing capacity development programs that best suit the needs of their citizens and water
systems. The framework provided here is designed to assist that endeavor by identifying several
key criteria for assessing water system capacity.
-------
CHAPTER!:
Information for States on Ensuring that All
New CWSs and NTNCWSs Demonstrate
Technical, Managerial, and Financial
Capacity
-------
INTRODUCTION
Section 1420(a) of the Act directs the Administrator to withhold a portion of a State's
allotment under §1452 unless the State "has obtained the legal authority or other means to ensure
that all new community water systems and new nontransient, noncommunity water systems...
demonstrate technical, managerial, and financial capacity with respect to each national primary
drinking water regulation in effect, or likely to be in effect, on the date of commencement of
operations."
Under this provision, States must demonstrate legal authority or other means to ensure the
capacity of new water systems. "Legal authority or other means" typically is demonstrated by
reference to statutes, regulations, rules, or policies adopted by the State. This authority typically
is implemented at control points in the process of new system development (e.g., the issuance of
a permit for construction). At each control point, the State has the ability to ensure that creating
a new water system is the most appropriate alternative for providing water service, and that
newly created systems will have adequate technical, financial and managerial capacity.
The next section of this chapter, entitled "Control Points," provides an overview of these
control points and the statutory or regulatory basis for this authority. The third section discusses
strategies that can be used to enhance State authority. The final section presented in the chapter
reviews additional issues that arise when dealing with proposed nontransient, noncommunity
systems.
CONTROL POINTS
Table 1 (p.I-10) provides a summary of the control points where States can intervene in the
development process to ensure new system capacity. Columns hi the table provide the following
information:
A. Basis of Authority. Statutes, regulations, rules, or policies typically are the primary bases
authority for government agencies to ensure the technical, managerial, and financial
capacity of new water systems.
B. Agency Vested with Authority. The governmental agency with jurisdiction to make
authoritative determinations about new water system capacity.
C. Control Points. The specific points in the process of developing a new water system
where agencies can exercise authority to ensure capacity.
D. Type of Capacity Assessed. Agencies can assess technical, financial, or managerial
capacity of proposed new water systems. This column generalizes about the type of
capacity assessed at each control point.
The authority vested in State and local governments varies substantially from State to State.
Not every jurisdiction may find that it has adequate authority to ensure new water system
n-i
-------
capacity. Some may find it necessary to seek more explicit or additional authority from State
legislatures.
The types of authority considered in this paper are:
State Authority for Drinking Water Quality
State Authority for Economic Regulation of Public Utilities
State Authority for Water Resource Management
State Authority for Revolving Loan Funds
State Authority for Planning and Growth Management
State Enabling Authority for Local Government
State Authority for Public Safety
Local Governmental Authority For Land-Use, Planning, And Finances
Federal Rural Utilities Authority
Interstate Authorities and Compacts
* State Authorities to Regulate Related Businesses
The following discussion provides an overview of each of these types of authority and the
agencies and control points associated with each type of authority.
State Authority for Drinking Water Quality
State Drinking Water Primacy Agency
Implementation of the provisions of the SDWA, as well as the implementation of State
statutes, generally is vested in State primacy agencies. Then: comprehensive jurisdiction makes
State primacy agencies critical for ensuring new system capacity. Some States provide only the
minimal authority required to carry out the SDWA (e.g., Alabama and Pennsylvania), while
others define the primacy agency's mission in terms of broader public health objectives (e.g.,
Montana, Colorado, and North Carolina). In recent years, some States have added capacity
concepts (e.g., Virginia and Iowa) to their statutes.
Within the broader function of water quality regulation, the State primacy agencies exercise
authority related to certification, technical standards, and planning. Control points implemented
by the State primacy agencies are:
Plan and specification review and/or construction permit. State SDWA primacy agencies
generally require a review of plans and specifications and/or a construction permit before
construction can begin on a new public water system. The plan approval or permit process
itself presents the major control point in any new system capacity assurance program,
affecting all public water systems and providing an opportunity to impose additional
requirements and guarantees.
Construction requirements for springs and wells. Some States may require new systems
using ground water resources to meet construction requirements for springs and wells.
Meeting well-construction requirements may be a signal of technical capacity.
H-2
-------
Operating permit In addition to approving plans and specifications and issuing
construction permits, primacy agencies may grant a renewable operating permit. Primacy
agencies also may grant licenses to operate a facility such as mobile home parks, nursing
homes, and other supervised living facilities.
Operator certification. A facility operator generally must be certified as technically
competent. States vary in certification requirements for different categories of systems, as
well as the requirements related to the on-site presence of the operator.
Approval of source water protection plan. Primacy agencies may require new systems to
submit a source water protection plan and the ability to do so may signal technical as well
as managerial capacity.
System planning requirements. Primacy agencies also can require a comprehensive
business plan or multi-year operating plan from new water systems above and beyond the
basic facilities plan.
State Authority for Economic Regulation of Public Utilities
State Public Utility Commissions
Forty-five State public utility commissions (PUCs) regulate water utilities (the commissions
in Georgia, Michigan, Minnesota, North Dakota, and South Dakota do not have this authority).
Commission authority usually is comprehensive for investor-owned or private water systems,
although commissions in several States have some authority for publicly owned systems.
Several State commissions have addressed water system capacity by: 1) conducting a formal
proceeding on small system policies (New York); 2) developing and issuing policy statements
(California, Connecticut, and Pennsylvania); and 3) engaging in memoranda of understanding
with sister agencies (Connecticut, Missouri, Pennsylvania, North Carolina, and Washington).
Within the broader function of economic regulation, the State PUCs exercise authority related
to certification, ratemalting, and planning. Control points implemented by the State commissions
are:
Issuance of certificate of convenience and necessity. Most PUCs require new jurisdictional
water utility systems to obtain a certificate of convenience and necessity (or need) that
establishes the service territory and places other conditions on service. PUC approvals or
certificate modifications also may be required for extensions of service to new
developments outside the original franchise area or the boundaries of municipal systems.
PUC certificates can be conditioned by the requirement of a performance bond or other
financial guarantees.
* Approval of system's investments (ratebase). As part of the certification process, or
separately, many PUCs can review the new water system's ratebase investments. Some
II-3
-------
commissions use informal benchmarks (e.g., investment per customer) to evaluate whether
the investment in the system is sufficient to maintain financial health.
Approval of financial structure. Many PUCs can review the new water system's financial
structure, including use of debt and equity instruments and the ratio of debt to equity.
Commissions also may require a business or financial plan focused on cost-of-service,
financing, and rate issues.
Approval of initial rates and rate design. Whether or not the PUC certifies a new system,
initial rates must be approved for all systems subject to ratemaking jurisdiction.
Commission review generally focuses on whether rates adequately reflect the cost of
providing service and properly balance the interests of investors and ratepayers. Rate
design refers to the differentiation of rates based on class of service, amount of water
usage, period of usage, and other factors.
System planning requirements. The PUC role in planning varies and may be somewhat
limited, even for investor-owned systems. Increasingly, however, commissions require
some form of capital planning, as well as other types of system planning. Commissions
also often play a review and advisory role in conjunction with planning processes required
by other State agencies. In some cases, commissions may be asked to review financial
aspects of plans prepared by nonjurisdictional utilities.
State Authority for Water Resource Management
State Water Resource Agency
The authority for water quantity regulation generally rests with State natural resource agencies
(which in some cases may be identical to the primacy agencies). The authority of the water
resources agency may be embedded within general environmental laws or in separate statutes.
The nature of authority over water quantity issues varies by geographic region and by State, as
do the instruments of water resource policy (e.g., rights, permits, and registration systems).
The State water resource agencies exercise authority related to permitting, planning, and
environmental resource management. Control points at which State authority is implemented by
water resource agencies are:
Withdrawal and source development permits. Access to a reliable water source is an
obvious prerequisite for drinking water systems. Water resource agencies may have
authority to approve a proposed development and withdrawals, as well as water markets
(sales and transfers) and supply management measures.
Approval of water rights. In some States, a system of water rights governs access to and
use of water resources. The State water resource agency may be involved in legal review
and approving water rights or transfers of water rights from one party to another.
II-4
-------
System planning requirements. Water resource agencies may be responsible for
developing, encouraging, or overseeing development of Statewide, regional, or river basin
plans for water use. Some resource agencies may require demand management, as well as
supply management measures.
Approval of environmental impact assessment. Substantial developments may require an
environmental impact assessment. Impacts considered include ecological and social
systems, and the benefits and costs of the proposed project. In this context, better planning
and regional solutions also could be encouraged to address some environmental goals.
State Authority for Revolving Loan Funds
State Financial Assistance Agency
The State financial assistance agency responsible for administering a State revolving fund
(SRF) or other grant and loan programs can exert substantial authority to ensure new system
capacity. Some States have established independent agencies for this purpose (e.g., PENNVEST
in Pennsylvania). The focus of attention in general is financial capacity because of the need to
assure the prudent use of grant funds or the timely repayment of loans. The control point for
State financial assistance agencies is:
Deciding eligibility and approving grants and loans. Eligibility criteria used by the State
financial assistance agencies can incorporate capacity provisions. State financial agencies
also can obtain information needed to assess capacity as part of the loan/grant application,
review, and approval process.
State Authority for Planning and Growth Management
State Planning or Development Agency
Water systems play a role in the larger context of growth and development. Some States have
planning, development, or growth management agencies authorized to promote better planning
and growth management strategies. A few States have implemented Statewide regional planning
processes for water supply (e.g., Maryland). The control point for State planning and
development agencies is:
Review and approval of plans. State planning agencies may be authorized to review
development plans that include new water systems.
Regional Planning Councils (Intrastate)
Regional entities exist in some States both as comprehensive planning organizations and as
special-purpose water resources planning bodies. In many instances, these bodies do not have
significant authority to affect new system development, but they may have effective influence on
H-5
-------
the local and county governments within the region. The control point for regional planning
councils is:
Review and approval of plans. Regional planning agencies may be authorized to review
development plans that include new water systems.
State Enabling Authority for Local Government
Secretary of State (or Other Agency)
State enabling laws define the powers and responsibilities of local government and can
provide local government with an important role in the process. Enabling legislation may affect
the formation of a new water system in a variety of contexts. Control points in this area include:
Authorization of local governments and special districts. Formation of a new local
governmental entity, including special districts formed to provide water service, requires
State authorization. Some States also have planning statutes of various types that confer
special powers to local jurisdictions.
» Subdivision and platting regulations. In many States, subdivision and platting laws define
more specifically the powers of local government with respect to approving land
development.
Authorization of funding (debt, bonds). Local governments generally must have State
approval to issue debt instruments, such as bonds, which may be needed to fund new
system operations.
State Authority for Public Safety
State Fire Marshal (or Other Agency)
The State Fire Marshal or another agency vested with public safety authority may require
water systems to meet fire protection standards. Therefore, potential control points at which
authority is exercised by the State Fire Marshall are:
* Permits and approvals related to fire protection codes. Water distribution systems for new
systems typically should be designed to meet fire protection codes. New systems might be
required to submit engineering specifications related to water storage, pressure, fire
hydrant locations, and various building codes.
Local Governmental Authority for Land-Use, Planning, and Finances
Municipalities, Counties, and Special Districts
H-6
-------
Local governments (municipalities, counties, and special districts) play an important role in
the creation of new water systems. Local governments can intervene very early in the conception
of new systems. Specific procedures for approval of new development are defined in local
ordinances.
Control points where local governments can exercise authority to ensure new system capacity
include:
Subdivision, zoning, and land-use approvals. Developers usually must obtain preliminary
and final approval for subdivisions. The preliminary approval process is a more important
control point because it usually occurs before the developer has made significant fixed
commitments. Active local or county governments require sufficient planning information
to evaluate needs for utilities, roads, and other services. Performance bonds also may be
required.
Construction permits and approvals. Local government can exercise some authority
through requirements such as building permits.
Franchise approval. For many utility services, providers must obtain a franchise that
defines the service territory and the terms of service. The franchise agreement can be
negotiated and conditioned as to various terms.
Local planning approvals. Capacity-related questions are often raised in the context of
local planning processes. The extent to which local authority for planning is exercised can
be highly variable. Some States have adopted a strategy of encouraging local water supply
planning processes where they are acceptable and developing other means of addressing
new systems in other parts of the State (for example, Pennsylvania, North Carolina).
Authorization of local government financing. A new publicly owned system will require
local approval of financing arrangements, such as the issuance of debt instruments.
Federal Rural Utilities Authority
Rural Utilities Service
Like grants and loans from State financial assistance agencies, grants and loans from the
federal Rural Utilities Service (formerly the Fanners' Home Administration) are a critical control
point where the capacity issue can be addressed.
Approval of grants and loans. Capacity issues may be embedded with the eligibility
criteria and approval processes for grants and loans. Use of grants and loans also may be
affected by various provisions and conditions.
H-7
-------
Interstate Authority
River Basin Commissions
In a few river basin regions, interstate authority may be relevant to the development of new
water systems. For example, the Delaware River Basin Commission has authority comparable to
State water resource agencies. Federal interstate compacts, however, carry the force of federal
law and thus can preempt the States with respect to certain policies. Interstate institutions and
authorities may become more important as the potential for conflict over interstate water resource
allocation rises. Control points exercised by river basin commissions include:
Basin withdrawal permits. An interstate commission can require a withdrawal permit from
water resources common to more than one State. These permits may be conditioned on a
variety of terms.
Basin planning and resource management requirements. An interstate commission also
can require supply management planning and practices, as well as demand management to
ensure that only necessary withdrawals are permitted.
State Authority to Regulate Related Businesses
Banking Regulators
The States regulate the banking industry, which in turn makes loans to water systems and
developers. A control point exercised by banks is:
Loan approval. Loan eligibility and approval process are used to assess the financial
capacity of applicants.
Insurance Regulators
The States regulate the insurance industry, which in turn provides insurance to water systems
and developers. A control point exercised by insurance companies is:
Insurance approval. Insurance eligibility and approval processes can be used to assess the
financial capacity of applicants.
II-8
-------
J
I
I
I
u
I
I
i
I
1
CO
>,
3
«"
Q
U
n
-
i
g -S
£
M -3
§ -g
1 a
43 *ea
1*
S
a
R
CO
»
Control Points for Ensuring N
Capacity
^s.
*lH
WC!
3
3§
I
09
^
§*
S
00
^
^j d5
iisof Authori
tutory or Otto
3 S
« $2.
^*
1 Facility plan review and permi
Operating permit
Operator certification
n
T3
S
1
1
B
"3
g
JS
Q.
I
i
i
System planning requirements
X
u
13
U
8P
1
'ji,
s
C9
c
i
c
a
1
a
||
|1
if
*rt
1
j Certificate of convenience and
?
_O
i
EA
1
CO
(tH
O
3
g
1
Approval of system's financial s
§>
1
Approval of initial rates and rate
System planning requirements
i
.2
"so
CO
o
|
s
J
s ,-^
1 £
co Si
a <»
I*
O ;fi
IS
U u
11
II
u "3
** QQ
-------
1 "
to
8
!
$
\^
U
03
^
^
c __
S '5
S3
1 s>
SI'S
[** "a
B
?.
CO
%
Control Points for Ensuring Nei
Capacity
g
Jlj*
9
S
Vested wi
I
fi
5 °
ffl CO,
g
e
Withdrawal and source develop
permits
Approval of water rights
1
S
"o.
I
Approval of environmental impac
g-
i
ta
i
s
ll
,2 §
(0
CO
60
n
'>
"5
£
BS
k«
***
£
'§43
15 §
o
CO iJ
Review and approval of plans
1
I*
s
E ^
If
If
«> ^
55 o
i
"5.
o
13
0>
=
1
u
s
ll
"Sb £
&*
o
i
bl)
J
^ i
^> oo
il
1 s
coO
g
a
Authorization of local governmen
districts
2
B
| Subdivision and platting regulatio
S
CO
1
o
f
CO
o
ll
CO 03
.S
0
ia
Authorization oflocal governmen
(public systems)
§"^»
8?
:ial control
1C
S
S
CO
rt
I
la
< s
s 1
3 >
i I
CO J
s
.»a
Permits and approvals related to fi
protection codes
*£
i
CQ
1
1
1
j>
CO
-&*
V
_S
.a
1
PH
O
t*^
i1
'C
1
S
CO
o
I-*
t
-------
"O
|
"G
Qta
Q
U
0
<
A-
a -a
S3 U
11
,
*§ 5
H '3
to
CO
U
2
« "u
B (9
fTl ft.
~ «
C
"5
Or
1
5
£
1
3
*c
.£
'5
1
>
V
"^
1 Basis of Authority
(Statutory or Other) |
-------
ACTIONS TO ENHANCE OR ENABLE STATE AUTHORITY
This section provides an overview of actions that States can take to establish the necessary
authority or other means to ensure new system capacity (if these do not already exist) or to
enhance the effectiveness of existing authority.
Ensuring the capacity of new water systems can be facilitated by the use of a two-part
approach, represented by two basic and sequential questions:
1. Is authorizing a new water system the **best" option compared with the available
alternatives in terms of technical, managerial, and financial capacity, as well as other
relevant considerations pursuant to applicable authorities?
2. If creating the new water system is the best option, how can technical, managerial, and
financial performance be strengthened and assured for the future?
As discussed below, these questions lead logically to specific actions that States can take to
establish or enhance their authority. These actions can be used with several different types of
authority and control points. The actions are not mutually exclusive, but mutually reinforcing.
The challenge is in designing a comprehensive and coordinated set of actions that best meets
each State's institutional arrangements and capacity development needs.
The following actions are described below:
Expand authority to add, strengthen, or coordinate control points.
Coordinate agency capacity efforts.
Enhance system approval processes.
Promote awareness of capacity issues.
Encourage interconnection, consolidation, or regionalization.
* Strengthen new system capacity.
Require guarantees and assurances.
Expand Authority to Add, Strengthen, or Coordinate Control Points
Enact Legislation Regarding Authority or Jurisdiction
Some States may want to evaluate whether existing statutory or other authority provides
adequate capability to intervene prior to new system development in order to obtain assurances
of technical, managerial, and financial capacity. State authority and the specific control points
derived from it can be added, strengthened, or coordinated statutorily for the purpose of ensuring
new system capacity. Another potential use of legislation is expanding the jurisdiction of
agencies to provide greater coverage. Legislation also can be used to further goals of interagency
coordination by specifying when and how agencies will collaborate in joint efforts. Ultimately,
in order for the State capacity evaluation to have the desired effect on the front end of the
development process, the statute or other authority must be strong enough for the State to say
"no."
H-12
-------
Issue Rules, Regulations, and/or Policies.
Some States may find that existing statutory authority provides a sufficient basis for
developing and clarifying new water system capacity policies through rules, regulations, and/or
policy statements. Where adequate statutory authority exists, new elements can be added to
application requirements with either amended regulations or, more simply, with revisions to
guidance manuals or application forms.
Enhance Capacity Assessment Resources
State agencies must rely on their own capability to implement a capacity development
strategy. This may include expanded responsibilities for engineering analysis and financial
analysis. Staff may need additional tools and training to conduct business planning and other
activities. New staff functions might be created or outsourced. Memoranda of Understanding
(MOUs) can address sharing of personnel among agencies. In some States, for example, PUCs
perform financial reviews for primacy agencies.
Agency resources devoted to capacity development should translate into future resource
savings from avoided capacity problems.
Coordinate Agency Capacity Efforts
Conduct Regular Meetings
A useful approach for coordination that many States use is to conduct regular meetings that
include representatives from the different agencies with authority for water systems. These
meetings can facilitate informal means of coordination (such as information sharing) and more
formal means (such as executive memoranda of understanding). Through regular meetings,
agency personnel can craft and implement more effective capacity policies.
Formulate Interagency Policies and MOUs
State agencies can formulate joint policies to direct their capacity development activities.
These policy statements convey common goals and activities among agencies. Coordination
among State agencies can be greatly enhanced through the development of a formal MOU.
MOUs typically include a joint policy statement or statement of objectives, a description of the
specific areas where collaboration is envisioned, and the mechanics of the collaboration.
Some of the major mechanical issues addressed in MOUs are: 1) coordinating information
required of applicants to avoid duplication, streamlining application requirements, and providing
consistency in evaluations by ensuring that the multiple agencies are examining the facts in the
same framework; 2) sharing analytical resources and capabilities (e.g., one agency may have
engineering capabilities while another has financial capabilities); 3) coordinating decisionmaking
to clarify which agency decides first, whether one agency's decision is contingent upon that of
another, or whether the multiple agencies need to act concurrently; and 4) describing the protocol
H-13
-------
to be employed in monitoring and evaluating the collaboration defined in the MOU and adapting
the agreement as needed.
In several States, primacy agencies and public utility commissions have developed MOUs. In
some cases, natural resource agencies also have engaged in the development of MOUs. These
agreements also could be drafted to include State financial assistance agencies, the RUS, and
local governments.
Hold Joint Proceedings and/or Provide Testimony
Regulatory and administrative hearings provide more formal means of coordinating policy
actions. Government agencies often have authority to conduct joint hearings among agencies
with common missions and interests. This type of authority could be used, for example, to
conduct a consolidated approval process among the agencies responsible for water quality, water
quantity, and economic regulation.
Another means of procedural coordination is to have personnel in one agency provide
testimony at the hearings of another agency.
Share Data and Information Resources
One important barrier to effective review of new water systems is the inaccessibility of
relevant information. Economic regulators may have access to key financial information, while
primacy agencies may have access to key technical information. Sharing information and
developing a holistic picture may be difficult. New information-sharing technologies, including
computer mapping, can greatly enhance interagency communications and policymaking.
*
Clarify State and Local Roles
An important challenge in capacity development is the clarification of State and local roles.
While States are responsible for ensuring the capacity of new water systems, many critical
control points for creating new systems are at the local level. Well informed and active local
governments will both achieve more efficient development practices and reduce the need for
State intervention.
Where allowed by State law, the States can, consistent with 1420(a), delegate some of the
responsibility for ensuring capacity of new systems to local government, provided that the
arrangement is guided by clear written agreements. A key to making local control points
effective in assuring capacity is making sure they are coordinated with local approval processes
and known and understood by new system applicants.
More generally, improving information flows among State and local governmental bodies
would be a positive attribute of a capacity development initiative. State and local governments
can share information resources and coordinate various activities, perhaps using field staff of
State agencies.
H-14
-------
Enhance System Approval Processes
Conduct Preliminary Feasibility Meetings With Applicants
Some States have adopted a practice of encouraging informal pre-feasibility meetings between
developers, their engineers, and State plan review and permitting staff. The objective is to talk
through alternative approaches for providing service in light of State requirements at the earliest
possible phase. Additional control points at the local or county government level include
applications for building permits or business licenses.
Develop a Standard Operating Procedure (SOP) for Approvals and Denials
The fragmented approval process for new water systems could be coordinated through the
development of a standard operating procedure (SOP) identifying critical authorities and control
points, and an optimal sequence of approvals. A SOP could be drafted with input from relevant
stakeholders in the State. Memoranda of Understanding could be drafted to recognize the SOP.
The SOP could be offered to the counties and municipalities in a State for implementation of
local components. Development of a SOP is one way to coordinate State and local activities.
A credible and effective capacity initiative will include denials of permit applications when
capacity criteria cannot be met. States may also want to develop a "disapproval" SOP whereby
alternatives to creating the new system and implementation steps are recommended to applicants.
Denial of an application does not preclude the State from providing the advice or technical
assistance necessary to move a new system applicant from "no" to "yes."
Promote Awareness of Capacity Issues
Form a Stakeholder Group
State capacity development efforts, and communications about those efforts, can be greatly
enhanced by a formal process for stakeholder involvement. The key groups involved in new
system formation are represented in each State by builders associations, realty associations,
mobile home park operators associations, county associations, municipal associations, planning
associations, consulting engineers associations, water industry groups (AMWA, AWWA,
NAWC), consumer advocates, environmental interests, operators associations, and technical
assistance providers (NRWA, RCAP). While such organizations do not represent everyone, their
communication networks reach a large percentage of the target audience.
Several States have convened an advisory committee or task force consisting of all of the
relevant stakeholder groups plus the relevant agencies of State government. Some of these
groups have opted to continue to meet regularly in order to monitor and manage the
implementation process. Some States have developed a written communications plan to support
program implementation. The plan identifies objectives, specifies the individual segments of the
target audience, outlines the messages and information to be conveyed to each segment, and
itemizes the tactical options for delivering these messages.
11-15
-------
Educate New System Applicants
New system applicants may be unfamiliar with State authority for water systems and unaware
of capacity development policies. Clear and early communications with new water system
applicants, such as property developers, provides an important approach to capacity
development.
It is possible to include property developers as partners in ensuring capacity. One of the most
important profit/loss issues in development is minimizing uncertainty. At the point where
property developers begin to commit significant investment dollars, they need to have some
confidence that they will be able to complete the development within a reliably estimable time
period. Many developers will trade assurances of capacity for minimizing uncertainty. This
process can be made easier as consulting engineers and local officials become aware of the
importance of considering capacity in making decisions about development.
Educate Consumers and Communities
Educating consumers and communities can help bring market forces to bear on new system
capacity. If home buyers knew what to look for and how to tell a well-conceived and planned
community water system, market forces could provide substantial pressure to ensure capacity.
State and local governments could provide consumers with information resources, as well as
opportunities for public hearings related to key approval processes.
Educate the Technical Community
Property developers may rely on a myriad of technical consultants to design and build
infrastructure facilities. Ideally, engineering and other consultants will be made aware of
capacity development issues and policies. Consultants can play an especially important role in
identifying alternatives to new system capacity.
Educate the Financial Community
New water systems probably will require various supports from the private sector, including
the lending and insurance industries. Bankers and insurers can be given a fuller understanding of
water system capacity to help avoid potential liabilities. Better informed providers can exert a
degree of market power on the water industry to enhance capacity development efforts.
Encourage Interconnection, Consolidation, or Regionalization
Require Consideration of Regional Alternatives
Consideration of regional alternatives can be made a part of the State approval processes.
State primacy agencies and PUCs often can require a demonstration that alternatives have been
II-16
-------
considered which might provide a more reliable supply for the proposed service area. Regulators
sometimes require a new system applicant to demonstrate why the proposed service area cannot
be absorbed within a larger system or served by a line extension of reasonable length from a
nearby system. Regional options could be considered for all or part of utility operations. Some
new systems, for example, might run only distribution facilities and purchase wholesale water
from a regional supplier. Others might maintain ownership but contract for operations services
with a nearby utility. Washington State's water system plan requirement is one example of a
state-sanctioned regional alternative.
Promote Regional Planning
Regional water system planning can ensure capacity by providing more efficient alternatives
to serve new real estate developments and by heading off new systems before they are ever
conceived. Regional planning can link capacity development to other planning processes and
provide opportunities for interaction among local governments. Maryland officials, for example,
direct all new development to county planning processes. The States can promote regional
planning through grants and other incentives.
Establish an Interconnection Policy
Through policy statements, memoranda of understanding, and other vehicles, State agencies
can establish an interconnection policy for guiding approvals and other determinations. A
coordinated interconnection policy at the State level requires attention to a variety of existing
policies that may or may not be consistent with regionalization goals. These policies, which may
differ greatly, include State natural resource agency determinations about water transfers, State
public utility commission orders regarding acquisitions by investor-owned utilities, and local
annexation policies and practices. Some State regulations provide for serious consideration of
interconnection with a nearby system if one exists within a certain distance of a proposed system.
Minimize Bypass Opportunities
Policies vary as to whether customers within an enfranchised service territory must connect to
the water system and stay connected, versus self-supply through individual wells. A policy that
mandates interconnection, and prohibits opportunities for bypass, can enhance capacity by
reducing uncertainty and enlarging the customer base, making it possible to achieve economies
of scale. Minimizing bypass also can improve regional environmental management by making it
easier to monitor and control withdrawals, supply management, and source protection practices.
Modify Annexation Policies
Local annexation policies and practices may encourage inefficient growth and development
practices. State statutory and other policies that guide annexation might be modified to consider
implications for new system capacity. The States can work with local government to use
annexation practices to promote regional solutions to water utility services.
H-17
-------
Strengthen New System Capacity
Require a Comprehensive Business Plan
Requiring new water systems to provide a comprehensive business plan may be one of the
most important means of ensuring capacity. Planning requires applicants to demonstrate
technical, managerial, and financial capacity. Planning is a diagnostic tool as well as a capacity
development tool. Planning can be used to generate more reliable information about costs and
other issues needed to make sound decisions about a water system's future.
In a number of instances, States have found that existing statutes and regulations already
provide authority for such things as requiring financial data (Colorado, Montana, and North
Carolina). Some States have amended statutes and/or regulations to clarify authority to gather
and use planning information (California, Connecticut, Iowa, Massachusetts, Montana,
Pennsylvania, South Carolina, Virginia, and Washington). Several States have used such
authority to develop processes for the evaluation of business plan or water system plan
information (Connecticut, North Carolina, Massachusetts, Pennsylvania, South Carolina,
Virginia, and Washington). Several States have now produced technical guidance manuals for
completing water Systran plans.
One issue in the implementation of a water system plan approach is the need for review
capability at the State level. There are two dimensions to this: engineering analysis and financial
analysis. Engineering staff would typically be called upon to evaluate the engineering elements
of die water system plan, and additional training may be needed. One clear need is a method for
validating cost estimates to be submitted in the plans against standard cost estimating practices
and actual operating experience. Some work was initiated in this area with the development of
the PAWATER cost model by Pennsylvania and EPA. PAWATER provides a tool for validating
cost estimates. Additional tool development is necessary in this area.
In the case of SDWA primacy agencies, the rationale for incorporating business planning into
State approval processes is that public health protection, as well as safe, adequate, and reliable
service, cannot be assured unless all of these elements are present. From the State PUC
perspective, the rationale is that without all the elements of a sound business plan, service
reliability and affordability will suffer. From a local government perspective, the elements of the
water system plan are essential to assure that new infrastructure is conceived in a sustainable
manner, providing a stronger footing for economic development. From the consumer's
perspective, it means safe and reliable drinking water in a cost effective manner.
Require a Technical Operations Plan
This approach expands on the use of engineering standards, relying on inherent public health
authority to set such standards. This involves such things as well construction standards
(Minnesota), requirements for approval of surface water sources for small systems (Missouri),
requirements for the frequent presence of a certified operator on the premises (Florida and South
Carolina), specific operator certification requirements, requirements for system water rates, and
management certification requirements.
n-18
-------
A principal benefit of the engineering/operations approach is that it can be implemented with
the type of staff already in place in State primacy agencies. The trade-off is that while the level of
assurance of technical and managerial capacity is great, the assurance of financial capacity is
indirect. In conducting engineering reviews, clear standards are available but the State also has
considerable room to exercise judgment if it is not fiilly satisfied with the adequacy of proposed
plans. In most cases, the basis for exercising this judgment is the State's legal authority to
protect public health.
Develop Benchmarks or Minimum Standards
Under various authorities, agencies can develop benchmarks or minimum standards for
screening proposed systems. For assuring financial capacity, for example, systems may be
required to make a minimum per-customer investment or achieve a specified coverage ratio.
While standards usually are developed formally, benchmarks often emerge from practical
experience. Benchmarks and standards also can be used to monitor system performance over
time.
Require Guarantees And Assurances
Provide Performance Guarantees
Performance guarantees provide specific remedies for a system's failure. Guarantees can be
required of either the system developer or the local government authorizing the system's
creation. Guarantees tend to emphasize financial protection and may take the form of a
performance bond, a letter of credit, a guarantee from a parent company or affiliated
organization, and an operations contract with a reputable provider that includes performance
criteria. Some States require developers of new water systems to establish escrow accounts or
reserves (Maryland and Washington).
Ensure Takeover by Another Entity in Case of Failure
Ensuring the takeover of a failed water system should help to guarantee that newly created
systems have adequate capacity, while also providing a solution if they do not meet performance
expectations. Ensuring a takeover involves appointing a local government or another system as
trustee or securing a commitment from the local government to annex, assimilate, or interconnect
the system. A road-based assurance approach is to give some unit of sub-state (municipal or
county) government responsibility for all water service within its purview. Therefore, if a new
system fails, the sub-state unit is required to provide water to the customers served by the failed
system.
New Jersey approves only municipal or investor-owned water systems, which forces local
government to accept responsibility to provide service for new development unless an investor-
owned provider seeks to provide the service. In Connecticut and Washington, a local
government issuing approval for a new system prior to the State's viability review can be
H-19
-------
designated as the receiver if the system fails. The idea of strengthening capacity in the first
place, of course, is to avoid receivership and mandatory takeovers of failed systems.
H-20
-------
Table 2: Actions to Establish or Enhance Authority to Ensure the Capacity of New
Water Systems
Objectives
Expand authority to add, strengthen,
or coordinate control points
Coordinate agency capacity efforts
Enhance system approval processes
Promote awareness of capacity issues
Encourage interconnection,
consolidation, or regionalization
Strengthen new system capacity
Require guarantees and assurances
Actions
Enact legislation regarding authority or jurisdiction
Issue rules, regulations, and/or policies
Enhance capacity assessment resources
Conduct regular meetings
Formulate interagency policies and M OUs
Hold joint proceedings and/or provide testimony
Share data and information resources
Clarify State and local roles
Conduct preliminary feasibility meetings with applicants
Develop a protocol for approvals and denials
Form a stakeholder group
Educate new system applicants
Educate consumers and communities
Educate technical community (consultants)
Educate financial community (lenders and insurers)
Require consideration of regional alternatives
Promote regional planning
Establish an interconnection policy
Minimize bypass opportunities
Modify annexation policies
Require comprehensive business plan
Require a technical operations plan
Develop benchmarks or minimum standards
Require performance guarantees
Assure takeover by another entity in case of failure
H-21
-------
ENSURING CAPACITY OF NEW NONTRANSIENT, NONCOMMUNUY WATER
SYSTEMS
Nontransient, nonconununity water systems (NTNCs) provide service to schools, factories,
office/industrial parks, major shopping centers, resort hotels, and other such establishments that
may be physically isolated from central water supply systems. Many NTNCs are private,
investor-owned establishments; some are publicly owned (e.g., schools). Water service is
developed in these instances as an ancillary function. The water system is not the principal
business or focus of the organization that is running it.
Because of their unique character, ensuring of capacity in new NTNCs must be approached
somewhat differently than the approach taken in community systems. Many elements of the
approach are still the same, however, hi this section, the major program elements are reviewed
in the same order as presented in the preceding three sections. To avoid repetition, this
discussion highlights the exceptions, or the places where the approach to new NTNCs needs to
be developed differently.
Legal Authority or Other Means
All of the local and county government sources of legal authority discussed for community
water systems (CWSs) are relevant also to NTNCs, but NTNCs may become more involved in
zoning approval than subdivision approval processes. At the State level, the authority of the
State water resources agency and SDWA primacy agency still pertain, but the authority of the
State PUC is unlikely to be involved. State authority through a technical operations plan review
may be an effective means of ensuring capacity for NTNCs.
Adding the capacity assurance dimension for NTNCs to the traditional authority of State
primacy agencies may require the same effort in developing regulations, guidance, or new
legislation as for CWSs, depending upon existing statutory language and existing practices.
Control Points in the New System Development Process
Many of the control points relevant to new CWSs do not apply to NTNCs (e.g., home buyers,
developers, mortgage lenders), but local government and State agencies (except the PUC) still
play an important role in NTNC approval processes. In addition, the local government control
point may be less effective with NTNCs than it is with community water systems, leaving greater
reliance on the State to ensure capacity.
n-22
-------
Actions to Ensure Capacity of New Systems
In ensuring the capacity of new NTNCs, the full range of communication, coordination, and
consolidation discussed for CWSs are also relevant to NTNCs. Technical assistance by States,
the water industry, and the private sector also can be an effective tool to enhance the process for
new system capacity development in NTNCs. However, the methods used for capacity
evaluations must be viewed differently because the nature of the service provided by CWSs and
NTNCs is different.
The fact that an NTNC is an ancillary service of a larger business or public enterprise could be
interpreted to imply a performance guarantee by that larger business or enterprise. There is, in
effect, more capacity implicit in the fact that the system will not have to stand on its own
financially. Rather than attempt to obtain authority sufficient to probe the finances of private
businesses or school districts, a simpler approach would be to formalize the implied guarantee,
making it an explicit condition of the approval and stressing to the applicant that performance
shortfalls can result in revocation of a permit, shutting the entire facility down. In this context,
the State drinking water regulator is no different than the food service inspector, the building
code inspector, or the fire marshall. This approach could be coupled with the engineering and
operating standards approach to provide a high level of capacity assurance in approving new
NTNCs.
n-23
-------
CHAPTER 3:
Information for States on Preparing
Capacity Development Strategies
Under §1420(c)(2) of the Safe Drinking
Water Act
-------
INTRODUCTION
Section 1420(c)(2) of the Safe Drinking Water Act (SDWA) Amendments of 1996 (Public
Law 104-182) addresses State capacity development strategies to ensure the technical, financial,
and managerial capacity of public water systems. A State not developing and implementing a
strategy receives only 90 percent of the Drinking Water SRF allotment in Fiscal Year 2001, 85
percent of its allotment in 2002, and 80 percent in each subsequent fiscal year.2
In developing and implementing a capacity development strategy, the Act requires a State to
"consider, solicit public comment on, and include as appropriate" five specific elements. These
five elements, which are listed in §1420(c)(2)(A-E) of the statute, require the State to consider
the following:
Methods or criteria to prioritize systems [§ 1420(c)(2)(A)]
Factors that encourage or impair capacity development [§1420(c)(2)(B)3
How the State will use the authority and resources of the SDWA [§ 1420(c)(2)(C)]
How the State will establish the baseline and measure improvements [§1420(c)(2)(D)J
Procedures to identify interested persons [§ 1420(c)(2)(E)]
In addition to considering the elements listed in §1420(c)(2)(A-E) as part of the capacity
development strategy, §1420(b) requires States to "prepare, periodically update, and submit to
the Administrator a list of community water systems and nontransient, noncommunity water
systems that have a history of significant noncompliance and, to the extent practicable, the
reasons for noncompliance." States are also required within five years of the date of enactment
to "report to the Administrator on the success of enforcement mechanisms and initial capacity
development efforts in assisting [those systems]... to improve technical, managerial, and
financial capacity." The list and the report must be included as part of the State's capacity
development strategy for the purposes of the withholding requirements of §1452(a)(l)(G)(I).
A natural extension of the State's task of prioritizing individual water systems in need of
improving capacity is to look beyond these individual systems and analyze capacity issues on a
regional basis. This would promote the creation of a coordinated capacity development strategy
which, through greater economies of scale, could result in more efficient capacity development
State-wide.
This document identifies some of the tools and resources that States could use to address
elements A through £. To best assist the States in choosing tools, the discussion in this
information document will highlight some of the ways in which the five elements can be
valuable for carrying out other parts of the drinking water program. When relevant, this
document will offer some options for assembling the tools to form a functioning strategy.
Because of the nature of the five elements, it is likely that the tools and strategies employed
by States will vary. For this reason, the document discusses separately each of the five elements
of a capacity development program. In addition to discussing the tools and examples of their
2 See EPA, Office of Water, Drinking Water State Revolving Fund Program Guidelines (EPA 816-R-97-005,
February 1997).
ffl-1
-------
uses, Appendix A provides a list of resources where a State can obtain more information on the
tools.
Capacity DevelopmentA Broader Perspective
Like source water protection and operator certification, capacity development introduces an
extraordinary new focus on prevention and sustainability. Capacity development seeks to
prevent compliance problems and associated health risks by ensuring that public water systems
have the capability to provide safe drinking water now and into the future.
With its focus on prevention, capacity development also offers many new regulatory
flexibilities under the 1996 SDWA. The success of any State capacity development effort will
hinge on how a State chooses to capitalize on this new flexibility. Therefore, this prevention
approach has two key elements:
1) A clear State lead, with flexibility and resources to achieve results. This is necessary
because prevention is ultimately about land use and water management, which are State
and local issues.
2) A strong effort to provide information to the public and involve stakeholders in the
decision-making process. A consistent theme in the new law is that States have both new
flexibility and resources to tailor programs to State needs and conditions, especially in
prevention, and the obligation to provide public information and involvement to ensure
that States' choices respond to their constituents' needs and conditions.
Under the 1996 SDWA, capacity development seeks to improve a public water system's
ability to meet the challenging tasks of the SDWA by requiring States to ensure technical,
managerial, and financial capacity in water systems, and to create capacity development
strategies for existing systems to ensure future compliance. These strategies are intended to
enhance the technical, financial, and managerial capability of public water systems to deliver safe
drinking water. Chapter 1 of this document provides a thorough discussion of the definitions of
technical, managerial, and financial capacity.
The tools and approaches that States develop as part of their capacity development strategy
will help them make implementation of demanding and complex parts of the law more workable,
consistent, and effective. For example, the Amendments' variance and exemption provisions
require States to evaluate the affordability of restructuring and water supply alternatives for the
systems that apply. In making these evaluations, States can use the information and analytic
methodologies for source water management and water system management, both of which they
can build in framing their capacity development strategies. These tools will also help evaluate
problems of system non-compliance and target technical assistance to systems most in need of
help.
m-2
-------
Building a Strategy
As noted in the previous sections, the Amendments say that each State must consider, solicit
public comment on, and include as appropriate five potential elements of a capacity development
strategies:
Methods or criteria to prioritize systems. [§1420(c)(2)(A)] This refers to methods or
criteria that could be used to identify and prioritize public water systems most in need of
improving technical, managerial, and financial capacity. Section 1 provides examples of
tools that could be used by States to address this element. Appendix A provides
descriptions of these tools.
Factors that encourage or impair capacity development [§1420(c)(2)(B)] This element
refers to the "institutional, regulatory, financial, tax, or legal factors" at the federal, State,
or local level that encourage or impair capacity development in water systems. Section 2
offers a discussion of potential factors that could impact capacity development efforts and
refers States to work previously completed on this issue.
* How the State will use the authority and resources of the SDWA. [§1420(c)(2)(C>] For
this element, States should describe how they will use the authority and resources of the
SDWA or other means to: 1) assist public water systems in complying with national
primary drinking water standards; 2) encourage the development of partnerships between
public water systems to enhance technical, managerial, and financial capacity; and, 3)
assist public water systems in the training and certification of operators. Section 3
discusses the tools that could be used by States to accomplish these goals. Appendix A
provides descriptions of the tools.
How the State will establish the baseline and measure improvements. [§1420(c)(2)(D)]
This element asks States to provide a description of how the State will establish a baseline
and measure improvements in capacity in their State. This element provides the tools that
State primacy agencies must have to produce and submit a report to their Governors on the
efficacy of their capacity development strategy and progress made toward improving the
technical, managerial, and financial capacity of public water systems in their State. Section
4 discusses tools that could be used by States to establish a baseline and measure
improvement. Appendix A provides descriptions of the tools.
* Procedures to identify interested persons. [§ 1420(c)(2)(E)] This element asks States to
describe stakeholders that have an interest in or are involved in the preparation and
implementation of the capacity development strategy. Section 5 provides examples of
interested parties and discusses tools for identifying additional stakeholders.
m-3
-------
Exhibit 1 shows how these five elements lay out a comprehensive capacity development
strategy that consists roughly of four steps:
Information collection and analysis (e.g. prioritizing systems needing improvement,
[Element A] and identifying and addressing factors that encourage or impair capacity
[Element B]).
Planning for implementation (e.g. using SOW A resources to plan strategies to help
systems with compliance or encourage partnerships [the planning aspects of Element CJ).
Implementation actions (e.g. using SDWA resources to implement strategies to help
systems with compliance or encourage partnerships [the implementation aspects of C]).
Collecting and evaluating information for feedback on capacity development strategies
(e.g. establishing a baseline and evaluating improvements [Element D]).
Throughout each of these steps, States are encouraged to identify and involve stakeholders
[Element E]).
m-4
-------
Exhibit 1
Building a Capacity Development Strategy
(Information Gathering, Planning, and Action)
Gather Information to Prioritze
Systems for Capacity
Development Efforts
I§1420(c)(2)(A)]
Gather Information on Factors
that Encourage or Impair
Capacity Development
[§1420(c)(2)(B)]
Gather Information, Plan Strategies, and Implement Action* to Use SDWA
Resources to Build Capacity
[§1420(c)(2)(C)I
- Assist Water Systems in Complying with Regulations
Encourage the Development of Partnerships Between PWSs
Assist PWSs in the Training of Operators
Gather Information to Establish
a 'Baseline and Measure
Improvements in Capacity
[§1420(c)(2)(D)]
Gather Information, Plan Strategies, and Implement Action* to Involve Interested
Parties
[§1420(c)(2)(E)]
(throughout process)
-------
Relationship Between Tools and die Five Elements of a Capacity Development Strategy
While the Act requires that a State consider each of the five elements in its capacity
development strategy, it does not require the State to use specific tools. Each State is unique.
Some States have access to many of the tools described above, while others have access to only a
few. In addition, these tools are used differently in each State.
Systems are unique, too. A tool that is useful in one State for developing capacity for
privately owned, ancillary systems may be different from the tools to develop capacity in
municipal systems.
The matrix on the following page provides a framework for reviewing the applicability of
each tool to preparing a capacity development strategy. The cells in the matrix have been left
blank, to be used by the States as a means of shaping their strategy given their unique situation.
The tools and examples of their use are described in detail in Appendix A.
m-6
-------
i
I
I
I
.S
I
I
«
u
I
*
* J»i
O
i
t3
a
I
3
5:
|£?
SSS;
ill!
if
i*
i
1
*
it!
55!
C
-------
ELEMENT A: METHODS OR CRITERIA TO PRIORITIZE SYSTEMS
There are a variety of methods or criteria that might be used to identify and prioritize systems
most in need of improving technical, managerial, and financial capacity. In many cases, a
combination of tools could be used effectively in collecting the information needed to prioritize
systems. As a State develops its own method, it may want to consider the following:
Do the State's methods or criteria for prioritizing systems allow it to consider all systems
in the State? (Compliance data review would meet these criteria. Tools such as sanitary
surveys or simplified budgeting worksheets would meet these criteria if required of all
systems over a certain period of time.)
Do the methods or criteria for prioritizing systems provide the State with a ranking
scheme? (Some of the tools discussed below provide an obvious ranking scheme. For
example, States could prioritize systems currently in significant noncompliance. In other
cases, States must adopt a ranking scheme that fits the tool available.)
Are the methods or criteria for prioritizing systems easy to implement? (States should
consider the resources required to develop the prioritization scheme relative to the
resources required to implement its capacity development strategy.)
What are the data requirements of the prioritization procedure? Does the State have an
existing database, can an existing database be modified, or can a new data system be
developed, given available resources? (It would be helpful to develop a careful analysis
plan for any new prioritization database, so that one can be assured of easy maintenance,
user-friendly data retrieval, and, most important, the availability of the correct data. A
State might also coordinate its data needs with other, similar data needs, such as a State
disadvantaged-community program.)
Examples of States that have systems in place for identifying and prioritizing systems in need
of capacity development include Washington and Massachusetts:
Washington State has developed a system to track performance of all systems in terms of
their compliance histories, their water system plans, and the financial viability component of
their water system plans. Systems are classified according to then- compliance and capacity.
A color coding system is used; systems classified as "green" have adequate capacity and
compliance histories; systems coded as "red" have inadequate capacity and/or compliance
histories.
«
Massachusetts has developed a program for "viability assessment and assurance" for all
community water systems and nontransient noncomnuinity systems serving fewer than 1,000
persons. The program begins with a Comprehensive Compliance Evaluation (CCE) Sanitary
Survey, and all systems will be surveyed at least once every six years. Depending on the
results of the CCE, systems may be referred to a Mobilization Partner for viability assessment
and technical assistance.
m-8
-------
The following table lists some tools that States might use in developing a method or criteria
for prioritizing systems. The table is meant only as a starting pointStates may be able to take
advantage of other tools to help prioritize systems. A full description of each tool and examples
of its uses are provided in Appendix A.
Methods or Criteria to Prioritize Systems
Potential Tools
Tool
Sanitary Surveys
Compliance Data
Water System Plans or Business Plans
Self-Assessments/Peer Reviews
SRF Loan Applications
State or Federal Infrastructure Needs Surveys
Comprehensive Performance Evaluations (CPE)
Operator Certification
Annual Financial Reports
Capital Improvement Plans
Permitting Requirements
Statewide Studies of Water Quality or Quantity
Source Water Assessment Programs
Consumer confidence reports
m-9
-------
ELEMENT B: FACTORS THAT ENCOURAGE OR IMPAIR CAPACITY
DEVELOPMENT
The statute asks States to consider developing a description of the "institutional, regulatory,
financial, tax, or legal factors at the Federal, State, or local level that encourage or impair
capacity development." The broad categories of factors included make this description
potentially quite comprehensive for each State. Examples of factors that impair capacity
development include:
The State does not have the legal (or regulatory) authority to develop and implement a
capacity development strategy.
There are institutional barriers to developing a capacity development strategy.
* Legal and financial issues associated with water rights are a barrier to developing a
capacity development strategy.
* Federal tax law poses some barriers to capacity developmente.g., limitations imposed on
the use of tax-exempt bond proceeds for private activities.
State and local governments cannot afford to implement a capacity development strategy.
There is a lack of reciprocity for operator certification.
Systems are unable to obtain variances or exemptions reasonably.
State statutes or regulations hinder consolidation, regionalization, and interconnection.
The 1996 Amendments add regulatory flexibilities such as more streamlined provisions for
variances and exemptions, as well as DWSRF resources to help states overcome some of these
barriers.
Examples of factors that encourage capacity development include:
Statewide growth management legislation encourages capacity development by checking
the unrestricted growth of poorly-planned water systems. Any statewide planning statute
has similar beneficial effects.
Statutes on privatization or procurement allow systems to contract for operations and
maintenance or other services more easily.
Statutes on mergers and acquisitions make consolidation more attractive by allowing
adjustments to the rate base.
Statutes that require renewable operating permits for water systems, Certificates of
Convenience and Necessity, or periodic sanitary surveys encourage capacity development
by enabling the State to assess capacity periodically.
ffl-10
-------
One type of document that could be of assistance is State reports to legislatures on the subject
of capacity development. Many of these reports include discussions of the factors that encourage
or impair capacity development. Examples are reports by Washington, Connecticut, California,
and Pennsylvania. While each State's report will have some aspects that are unique to that State,
the process that was followedincluding issues that were discussedshould be helpful to other
States that are considering these issues.
Another type of product is reports of stakeholders' workgroup deliberations as States prepare
capacity development plans. Examples of these include reports from North Carolina and South
Carolina.
The following table describes institutional factors (tools) in many State programs that can
impair or encourage capacity development. This table is meant only as a starting point as States
build their capacity development strategies. States are likely to find other institutional factors
(tools) that encourage or impair capacity. The tools and examples of their use are described in
Appendix A.
IH-11
-------
Factors that Encourage Capacity Development:
Potential Institutional Factors (Tools)
Tool
Sanitary surveys
Water system plan or business plan
SRF loan applications
Training and technical assistance
Regional plans
Memoranda of Understanding with PUCs
Operator Certification
Permitting requirements
Capital improvement plans
Comprehensive performance evaluations
Coordination with other agencies
Cooperation with non-governmental organizations
Restructuring
Satellite management agency
Rate reviews and approvals
Consumer confidence reports
Source water assessment programs
Water conservation plans
HI-12
-------
ELEMENT C: A DESCRIPTION OF HOW THE STATE WILL USE THE AUTHORITY
AND RESOURCES OF THE SDWA
Under §1420(c)(2)(C), States must describe how they will utilize the authority and resources
of the SDWA to improve capacity in public water systems. Specifically, the State is asked to
describe how it will accomplish three goals central to a sound capacity development strategy:
Assist public water systems in complying with national primary drinking water regulations,
Encourage the development of partnerships between public water systems to enhance the
technical, managerial, and financial capacity of the systems, and
Assist public water systems in the training and certification of operators.
This is the core element of the capacity development strategy, in which the State describes
how it will use the new resourcesfinancial and programmaticof the 1996 SDWA
Amendments, and any other statutory or programmatic means, to help water systems deliver safe
drinking water reliably. This element encompasses a wide variety of joint, cooperative, or
coordinated activities meant to provide assistance to individual water systems and build
partnerships among systems.
The activities set forth in Element C are at the heart of the linkages between capacity
development and other parts of the law. Not only are the authority and resources in other parts of
the SDWAand the "other means" that may be available in other State and federal programs
vital to developing capacity; the development of greater system capacity through compliance,
including technical assistance and multi-system partnerships, is essential for other important
parts of SDWA to work.
For example, variances and exemptions are key parts of the new flexibility for small systems
in recognition of their limited resources. Before States can give variances or exemptions, the
new law requires them to evaluate whether restructuring and water supply alternatives are
affordable for the water systems to enable them to comply with a standard. Because both of
these alternatives include, by definition, multi-system partnerships, the State's database and
methodology for analyzing that data will need to look well beyond the options that lie in the
reach of the individual system seeking a variance or exemption.
Because this information has not been required for the drinking water program in the past,
many States may not have the database or analytic capabilities to perform these needed
functions. But through the opportunity to formulate a capacity development strategy and use
new resources from the DWSRF, the new SDWA also offers States the means to assemble this
database and workable analytic methodologies that will help them make these decisions.
A State drinking water program should, in formulating its capacity development strategy,
locate and learn about the characteristics (including limitations) of these data sources, and to
prepare itself to apply these data to assess water supply alternatives for small system variance
and exemption applicants. The source water assessments required of States under SDWA
Section 1453 (also funded through the DWSRF) can be an important means to assemble
m-is
-------
information for water sources currently used by public water systems. States should, to the
extent practicable, design their assessments with this use in mindor capacity development
strategies and State decision-making needs on variances, exemptions, technical assistance, and
compliance options.
If States apply their DWSRF resources for SDWA's "prevention" activitiesespecially
capacity development and source water protectionin this manner, they may be able to apply
then* DWSRF set-aside funding for capacity to develop management tools that can offer
substantially more effective help and options to small systems. Advances in computing
technology have led to powerful (and widely available) analytic tools for solving complex water
resource problems. These tools operate on the principle that substantial efficiencies can be
gained through better integrated management of water resources and massive "sunk cost"
investments in water infrastructure. They have demonstrated their potential to solve difficult
supply conflicts in every region of the country, within the constraints of existing systems of
water rights and independence of individual water systems. In other words, they do not require
changes in water rights or consolidation of systems for their success or effectiveness.
Many tools could be used by States to assist public water systems in complying with national
primary drinking water standards, to encourage the development of partnerships between public
water systems in order to enhance technical, managerial, and financial capacity, and to assist
public water systems in the training and certification of operators. These tools fall into roughly
three categories: (1) information collection and analysis; (2) planning for implementation; and
(3) implementation actions. Having appropriate tools from each of these categories is essential
for a strategy that expends public funds on capacity-building activities efficiently and promotes
the greater effectiveness of the State's entire drinking water program to improve drinking water
safety. In addition, certain tools act to address systems individually (e.g., with prioritization or
technical assistance efforts) or in appropriate groups (e.g., by encouraging partnerships). The
discussion of individual tools will highlight those that address individual systems, and those that
may be used as building blocks in order to assess system information and develop options for
multi-system partnerships. The following table identifies many of the tools that could be used by
States. Complete descriptions of these tools and examples of their uses can be found in
Appendix A.
m-14
-------
How the State Will Use the Authority
and Resources of the SDWA
Tool
Training and Technical Assistance
Sanitary Surveys
Compliance Data
Self-Assessments and Peer Reviews
Water System Plan or Business Plan
Comprehensive performance evaluations
Regional plans
Memoranda of Understanding with PUCs
Operator certification
Capital improvement plans
Coordination with other agencies
Rate reviews and approvals
Permitting requirements
Statewide Studies of Water Quality or Quantity
SRF loan applications
Cooperation of Industry Groups, Lenders
Public Education and Information
Cooperation with non-governmental organizations
Big Brother and Buddy System Programs
Restructuring
Satellite management
Emergency Response Plans
Certificates of Convenience and Necessity
Water conservation plans
Review of Audit Reports
Bond Issue Reviews
Enforcement
m-15
-------
ELEMENT D: ESTABLISHING A BASELINE AND MEASURING IMPROVEMENTS
The purpose of this element is to encourage States to "establish a baseline and measure
improvements in capacity with respect to national primary drinking water regulations and State
drinking water law." This element is crucial to completing State responsibilities under
§1420(b)(2) and §1420(c)(3). The first provision requires State reports to the Administrator; the
second requires State reports to the Governors. As part of both reports, States must provide an
evaluation of the success of their capacity development efforts.
As States measure improvements in capacity, they need to understand that capacity building is
an incremental process. In some cases, it may take years before changes result in measurable
improvements in capacity.
Several approaches can be considered.
Volume of outreach activity (sanitary surveys conducted, CPEs conducted, technical
assistance provided). A State could assess its program on the basis of its effectiveness in
reaching water systems. This could include the number of sanitary surveys conducted, the
number of CPEs conducted, or the number of systems receiving technical assistance. In
order to make this more than a bean-counting exercise, however, States would need to
ensure that the quality of its outreach was helping systems achieve and maintain capacity.
* Completion of Water System Plans or Self-Assessments. A State could also assess its
program on the basis of its effectiveness in encouraging systems to complete water system
plans or self-assessments. But again, the State would need to ensure that the water system
plans or self-assessments and any related technical assistance helped systems achieve and
maintain capacity.
Operator certification. States could identify the number of systems with certified
operators and the number of operators receiving the training necessary to improve the
capacity of the systems they operate.
States could use the results of water system self-assessments, water system plans,
"Dozen Questions" approach, annual financial reports, or simplified budgeting
worksheets to measure "improvements in capacity." This process would require a
baseline measure of all systems at the time when the capacity development efforts began,
and a method to update system assessments on a regular basis.
Compliance data. Since the statute explicitly mentions capacity "with respect to national
primary drinking water regulations," information on compliance trends could be useful. A
State could use compliance data to measure improvements in capacity. The "baseline"
would be compliance records as of the calendar quarter when the capacity development
efforts began. If compliance data were used, variables such as number of systems in
significant noncompliance, number of exceedences, number of M/R violations, and time
required to achieve compliance would be candidate measures.
In some cases, however, measuring improvements solely on the basis of compliance might
yield an analytical framework that is too limited. Outside factors such as new regulations or new
m-16
-------
enforcement tools could influence compliance rates. In addition, trends in compliance data may
not yield sufficient data over the short term because capacity development is an incremental,
long-term process.
111-17
-------
ELEMENT E: IDENTIFYING INTERESTED PERSONS
The purpose of this final element is to identify "persons that have an interest in and are
involved in the development and implementation of the capacity development strategy." The
overall purpose of identifying and involving interested persons is to inform multiple parties that
interact with water systems so they will be better able to contribute to capacity assurance in their
actions.
One approach for a State to use in identifying interested parties is to use resources available
for other, related outreach programs. Groups of interested persons may include:
Advisory panels for new system development. Foremost among the methods for
informing key target groups within a State is the creation of a formal stakeholder
involvement process in the development of a new system capacity assurance program.
Such panels should include governmental organizations as well as community-based
organizations, many of which work in rural areas on community, economic development,
and housing development issues. States could take advantage of such a panel to
disseminate information on existing system capacity. The key groups involved in new
system formation are well represented in each State. While such organizations do not
represent everyone, their communication networks do reach a large proportion of the target
audience. Such organizations include:
Builders' associations
Realtors' associations
Mobile home park operators' associations
County associations
Municipal associations
Planners' associations
- Consulting engineers' associations
- Associations of utilities (AWWA, NAWC, NRWA)
- Consumer advocates
Environmental interests
Operators associations
- Technical assistance providers (NRWA, RCAP)
Community action agencies
Community development corporations
Homeowners' associations.
Chambers of Commerce
Regulated community
Citizens who have registered an interest
Bankers and lenders.
Operator Certification Advisory Boards. For those States that have them, operator
certification advisory boards can be key resources in disseminating information to help
with capacity issues. States might work with operator certification boards to develop a
curriculum mat would help ensure capacity.
m-18
-------
Tools that may identify additional stakeholders include:
* Regional plans. Regional planning can serve to promote communication and information
sharing between water systems located within the geographic boundaries of the planning
area. In Washington State, the regional planning document explicitly specifies the types of
support that large systems will provide to assist smaller systems within the jurisdiction of
the plan. The support system created by the plan is a formal agreement whereby a large or
central utility in a county performs direct, contract, or support services for smaller utilities.
Memoranda of Understanding with Public Utility Commissions. Some State PUCs are
involved in regulating public water districts or authorities and even municipal water
systems, in some cases. PUC approvals also may be required for extensions of service
from existing investor owned systems to new developments outside the original franchise
area, or from municipal water systems to new developments outside the municipal
boundaries. The statutory authority for the PUCs' actions are defined in their governing
statutes that broadly empower them to promote the general public interest by regulating the
manner in which monopoly services are provided to assure safe and reliable service at
reasonable cost.
These statutory authorities make PUCs logical partners in capacity development strategies.
Several state commissions have adopted more expanded roles in small water system capacity
by means of: 1) opening a formal proceeding on the matter and requesting public comment
(New York); 2) developing and issuing a new policy statement adopted by the commissioners
(California, Connecticut); and 3) entering into Memoranda of Understanding with other
agencies stating the broad objectives of small system capacity development and itemizing
specific commission responsibilities (Connecticut, Pennsylvania, North Carolina).
Permitting requirements. The permitting process alerts permittees to the capacity
development process and helps the State identify affected stakeholders.
Cooperation of Industry Groups, Lenders, and Non-governmental Organizations.
Developing relationships with these important groups helps ensure their participation in the
capacity development process.
Public Education. Public education plays an essential role in identifying interested
persons by informing the public of the issue and the opportunity to participate, hi addition,
public education empowers the general public to participate as an informed party in the
preparation of the capacity development strategy.
Coordination with Other Agencies. Coordinating with all involved agencies helps
ensure that the capacity development process runs smoothly across all agencies. This is
particularly important in those States where the primacy agency is not the only agency
participant in the SRF process.
HI-19
-------
NONCOMMUNITY WATER SYSTEMS
Noncommunity water systems (NCWSs) are stand-alone public water systems located in
entities like schools, day care centers, factories, offices, and highway rest stops. NCWSs that
serve nontransient populations (e.g., schools and offices where the same people are served each
day) are called nontransient noncommunity water systems (NTNCWSs). NCWSs that serve
transient populations (e.g., highway rest stops) are called transient noncommunity water systems
(TNCWSs). Unlike community water systems, most of these NCWSs were not designed
specifically to serve water to the public. Instead, water service is an ancillary function that is not
the principal business or focus of the organization.
Unlike community water systems, NCWSs generally do not charge for their water. Instead,
the cost of operating the system is built into the cost of their product or service (if the system is a
business), or is part of the cost of public services (in the case of public schools).
Because of their unique characteristics, a capacity development strategy for NCWSs must be
approached somewhat differently than the approach taken hi most community systems. Many
elements of the approach are still the same, however. Indeed, it is likely that many of the
strategies that apply to NCWSs also apply to ancillary community water systems, such as mobile
home parks.
In this section, the major program elements are reviewed in the same order as presented in the
preceding five sections. To avoid repetition, this discussion highlights the exceptionsthe
places where the approach to new NCWSs needs to be developed differently.
Methods or criteria to prioritize systems
Many of the tools that are discussed for CWSs could also be used for NCWSs. For example,
States are likely to have information that could be used for prioritization of NCWSs from permit
applications, compliance data, or sanitary surveys (since these types of data collection generally
apply to both NCWSs and CWSs). NCWSs are less likely, however, to employ tools such as
water supply plans and capital improvement plans. In addition, only non-profit NCWSs are
eligible to apply for DWSRF funding. Finally, because many are privately owned, they may also
resist disclosing financial data.
Factors that encourage or impair capacity development
Many of the factors that impair or encourage capacity development for CWSs also are likely
to apply to NCWSs. Operator certification may be less relevant for NCWSs hi many States
because the requirement to have access to a certified operator may not extend to NCWSs.
Dedicating resources for training and technical assistance may be an important step that will
encourage capacity in NCWs.
In some States, regulatory, statutory, or policy requirements that encourage capacity may not
apply to NCWSs. States should recognize these limitations when they meet Element B of their
capacity development strategies.
ffi-20
-------
How will die State use the authority and resources of the SDWA
States can use the programmatic and funding resources of the SDWA to help NCWSs, as well
as CWSs, achieve compliance, build partnerships, and have access to trained operators. In some
cases, States will want to work with individual NCWSs. In other cases, partnerships between
CWSs and NCWSs may be appropriate.
States should recognize some of the limitations of the SDWA with regards to NCWSs. For
example, consumer confidence reports will be required only from CWSs and the operator
certification requirements will apply only to CWSs and NTNCWSs, but not TNCWSs.
However, the Act's important source water protection provisions apply to both NCWSs and
CWSs.
How the State will establish a baseline and measure improvements
Assuming that the States may rely most heavily on traditional data sources to establish their
baselines and measure improvements, States are likely to have data on both CWSs and NCWSs.
Data sources such as compliance data, sanitary surveys, and permit applications are likely to
have information on all public water systems.
There is one difference between data collected on CWSs and that collected on NCWSs:
States collect information on NCWSs less frequently than CWSs. Assuming that improvement
in capacity for all systems will be an incremental process, and assuming that data collected from
NCWSs occurs infrequently, it may be more difficult to measure improvements in NCWSs.
Another characteristic of NCWSs is that ownership may change frequently, particularly for
small businesses that provide water as an ancillary function. This may make it more difficult for
States to measure improvement in these systems.
Procedures to identify persons that have an interest in and are involved in the development
and implementation of the strategy
The State should identify representatives of NCWSs and of the communities served by
NCWSs to participate in the preparation of the State capacity development strategy. These
stakeholders can be identified using the tools discussed in Section 5.
States have been trying to conduct outreach to NCWSs for many years, and some States have
perfected methods for doing so. One important step will be to identify some of the largest
categories of NCWSse.g., public schools, day care centers, offices, factories, and so forth.
Interest groups representing these various types of entities can be helpful vehicles for conducting
outreach and identifying interested persons.
Some States feel that it is difficult to reach the public associated with transient noncommunity
systems. Yet, there are many organizations representing the public most affected by water
quality at these systems. For example, consider highway rest stops. The American Automobile
Association, a large mass-membership organization, has an interest in water quality on the
highways. Similarly, organizations representing the tourism industry have a keen interest in
in-zi
-------
avoiding outbreaks of acute waterborne illnesses. In States like Colorado, Florida, and
California, which rely heavily on tourism, the tourism industry has mobilized public attention on
water quality in highway rest stops.
The statute recognizes not only persons with an interest in the strategy, but also those who
will be involved in implementation of the strategy. This is useful because some drinking water
regulators may need to coordinate with other agencies, particularly for NCWSs. For example,
for transient noncommunity systems such as food, beverage, and lodging establishments, the
drinking water regulators may need to work closely with other State agencies that license these
establishments. A memorandum of understanding with the licensing authority may substantially
enhance the likelihood that a capacity development strategy will work.
m-22
-------
CHAPTER 4:
Information for States on Assessment of
System Capacity
-------
-------
INTRODUCTION
Section 1452(a)(3) of the Safe Drinking Water Act (SDWA) Amendments of 1996 (Public
Law 104-182) establishes that no assistance from the Drinking Water SRF shall be provided to a
public water system that "does not have the technical, managerial, and financial capability to
ensure compliance with the requirements of this title" or is in significant noncompliance with a
national primary drinking water regulation or variance. Section 1452(a)(3) further specifies that
a system without adequate capacity or in significant noncompliance may receive SRF assistance
if the following provisions are met:
For those systems that are in significant noncompliance, the use of the assistance ensures
compliance;
For those systems without adequate capacity, "the owner or operator of the system agrees
to undertake feasible and appropriate changes in operations (including ownership,
management, accounting, rules, maintenance, consolidation, alternative water supply, or
other procedures) if the State determines that the measures are necessary to ensure that the
system has the technical, managerial, and financial capability to comply with the
requirements of this title over the long term."
Specifically, States are required to address the following question:
Which systems lack technical, managerial, and financial capability, thereby rendering
them ineligible for SRF assistance (under §1452(a)(3))?
This chapter identifies the tools and resources that States might use to fulfill the capacity
assessment requirement under §1452 (a) (3).
METHODS OF ASSESSING CAPACITY
The Drinking Water SRF is a lending operation. Therefore, discussions of capacity that relate
to the SRF should keep in mind the perspective that a lender brings to lending decisions. First, a
lender must be convinced that the borrower has the financial capacity to repay the loan. Second,
the lender expects assurance that the borrower has the technical, managerial, and financial
capacity to maintain the system over the life of the loan. This requires a comprehensive view of
capacity, with an emphasis on financial capacity.
States have known for some time that among the water systems they regulate there are
systems 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.
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. Others are faced with fundamental institutional weaknesses (e.g., lack of
IV-1
-------
a financial plan or lack of a trained operator). When neglect is combined with institutional
problems, a system faces an enormous task when making incremental improvements to comply
with new State or federal drinking water regulations, or when faced with loan repayment
The SDWA does not define "technical, managerial, and financial capability." In Chapter 1 of
this document, however, we have provided some working definitions of these terms. These
definitions may help States think about what is generally meant by the term "capacity".
Tools for Assessing Capacity
There are several tools that might be helpful for assessing a system's technical, managerial,
and financial capacity. These include:
Compliance data
Sanitary surveys
Water system plans or business plans
Self-assessment/peer reviews
* Regional plans
Criteria used by lenders
* Financial viability assessment methods
Operator certification
Financial and managerial training
Permit application data
* Capital improvement plans
Comprehensive performance evaluation
Consumer complaint records.
State-wide studies of water quality or quantity
* SRF loan application
Budgeting worksheets
Annual financial reports
Source water assessment programs
Water conservation plans
Emergency response plans
Certificates of Convenience and Necessity (CCN)
IV-2
-------
Review of audit report
* Bond issue reviews
Rate reviews and approvals
Credit rating services
Financial assurance mechanisms
Consumer confidence reports
Interviews with personnel familiar with the system.
Relationship Between Available Tools and the Elements of Capacity
It is impossible to draw firm conclusions about which tool is most appropriate for evaluating
which element of capacity. Each State is unique. Some States have access to many of the tools
described above, while others have access to only a few. In addition, these tools are used
differently in each States. States' abilities to access different tools also vary.
Systems are unique, too. A tool that is useful in one State for assessing the capacity of a very
small system may not be useful for assessing the capacity of a large system. Tools to assess
privately owned, ancillary systems may be different from the tools to assess municipal systems.
The matrices on the following pages provides a framework for reviewing the applicability of
each tool to various aspects of capacity. The cells in the matrix have been left blank, so that each
State can use it as a framework for identifying tools that address its unique situation. The tools
and examples of their uses are described in detail in Appendix A.
IV-3
-------
I
1
I
I
I
I
-------
t«*Wd INK 3»Qlld MBBUUI
-------
APPLICATION OF THE ASSESSMENT TOOLS FOR NONTRANSIENT
NONCOMMUNTTY WATER SYSTEMS
Nontransient noncommunity water systems (NTNCs) are stand-alone water systems located in
schools, day care centers, factories, offices, and other establishments with non-transient
populations. Unlike community water systems, most of these systems were not designed to serve
water to the public. Instead, water service is an ancillary function that is not the principal busi-
ness or focus of the organization.
Unlike community water systems, non-transient noncommunity systems do not charge for
their water. Instead, the cost of operating the water system is built into the cost of their product
or service (if the system is a business), or is part of the cost of public services (in the case of
publicly owned systems like schools).
Nontransient noncommunity systems often have simpler infrastructure than community water
systems. For example, the distribution component of most NTNCs consists of plumbing inside a
single building.
Because of these unique characteristics, assessment of capacity may need to be approached
differently for NTNCs than for community water systems. In general, it appears that most of the
tools described in the preceding sections will work for both community water systems and
NTNCs. The results of a sanitary survey, for example, can be used to assess the technical and
managerial capacity of NTNCs just as well as it can be used to assess the technical and
managerial capacity of community water systems. Nevertheless, there may be some areas where
the tools may need to be modified for the unique characteristics of NTNCs.
Technical Capacity
The three elements of technical capacity are adequacy of source water, adequacy of
infrastructure, and technical knowledge. These three elements can be assessed in both
community and nontransient noncommunity water systems. Clearly, NTNCs are simpler in
design and construction, but most State regulations nevertheless require a review of plans and
specifications before construction, just as they do for community water systems. Indeed, the plan
review and inspection prior to construction is an important step in ensuring technical capacity of
NTNC systems.
A State could review source water adequacy and adequacy of infrastructure for both CWSs
and NTNCs. A State also could assess the technical knowledge of personnel in both types of
systems, but it will be more difficult in NTNCs. The problem with NTNCs is that the person re-
sponsible will not be a water system professional.
Still, when one looks at the questions raised under the discussion of technical knowledge in
Section 2 of this document, the questions seem relevant to NTNCs. One could investigate, for
example, whether the system complies with all applicable monitoring requirements, whether the
system has access to adequately trained personnel, and so forth. Therefore, it would appear that
IV-6
-------
the materials presented in the preceding pages can be used for NTNCs as well as community
water systems.
Managerial Capacity
The three elements of managerial capacity are ownership accountability, staffing and
organization, and effective external relations. NTNCs are smaller and simpler hi organizational
structure, but this would not preclude using the same type of approach to managerial capacity as
one might use for community water systems. For ownership accountability, one would want to
see if one could clearly identify the system owners and determine whether they can be held
accountable for the system. For staffing and organization, one should examine staff
qualifications. For external relations, one would ask whether the system's management is aware
of all applicable rules and regulations.
Clearly, there are some questions that would not be applicable to all NTNCs. These
questions, however, can simply be skipped. The tools presented in this chapter and discussed in
Appendix A still are relevant. They simply must be adjusted for the size and complexity of
system, just as they would be revised before application to a very small community water
system.
Financial Capacity
Of all the dimensions of system capacity, this is where most observers believe that NTNCs
differ from community water systems. As discussed above, NTNCs generally do not charge for
their water. Instead, the cost of operating the water system is built into the cost of their product
or service. Therefore, when one tries to assess financial capacity, it is likely that these systems
will not be able to readily produce data that would be essential to that assessment.
While it is clear that NTNCs are fundamentally different from medium-sized community
water systems in terms of their financial structure, are they different from very small community
water systems? Very small community water systems generally are ancillary systems such as
mobile home parks, institutions, and some stand-alone multi-family housing units. These
systems have financial characteristics that are similar (if not identical) to many NTNCs. They do
not charge for water. The cost of water operations is built into the cost of their service. A
majority of these systems is privately owned. States have developed the assessment tools de-
scribed in this chapter for all community water systems, including small, ancillary systems.
States have adapted the tools for the unique financial structure of these systems. It therefore
would appear that the materials presented in Section 3 could be used for NTNCs. For these tools
to be effective for NTNCs, however, States will need to adapt them in the same way that they
have adapted tools for the very small, ancillary, community systems.
IV-7
-------
-------
Appendix A:
The Tools
-------
-------
Compliance Data
Compliance data refer to records of system compliance with State and federal drinking water
regulations. These records are maintained by State primacy agencies, and much of the data is
routinely uploaded to EPA's Safe Drinking Water Information System (SDWIS). Review of
these data can be a simple first step in assessing certain elements of a system's technical and
managerial capacity. At a minimum., States can review which systems are in significant non-
compliance with regulations. In addition, States can review the details of system non-
compliance. For example, if there is non-compliance, is it for monitoring and reporting, or are
systems failing to comply with maximum contaminant levels or with required treatment
techniques? If there is non-compliance, is it an isolated event, or a long-term pattern? A
system's monitoring and reporting data also may provide information that does not result in a
violation, but which nevertheless is interesting for purposes of assessing capacity (e.g.,
monitoring data on unregulated contaminants).
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use compliance data as part of a capacity
development strategy.
* To prioritize systems for capacity development efforts. The review involves examining
the system's monitoring and testing results and other compliance assurance data available
to the State. This information resides in the Safe Drinking Water Information System
(SDWIS) and in States' compliance databases.
As a prioritization tool, compliance data can be used to:
Identify systems that are in significant noncompliance. Before providing funds to these
systems, the State must be assured that the use of any SRF assistance will ensure
compliance.
Identify systems that are experiencing exceedences.
Identify systems that may experience compliance problems in the future.
* Identify systems that do not appear to understand applicable monitoring and reporting
requirements or have the resources it needs to meet monitoring and reporting
requirements.
To establish a baseline and measure improvements in capacity. Since the statute
explicitly mentions capacity "with respect to national primary drinking water regulations,"
information on compliance trends could be useful. A State could use compliance data to
A-l
-------
measure improvements in capacity. The "baseline" would be compliance records as of the
calendar quarter when the capacity development efforts began. If compliance data were
used, variables such as number of systems in significant noncompliance, number of
exceedences, number of M/R violations, and time required to achieve compliance would be
candidate measures.
In some cases, measuring improvements solely on the basis of compliance might yield an
analytical framework that is too limited. Outside factors such as new regulations or new
enforcement tools could influence compliance rates. In addition, trends in compliance data
may not yield sufficient data over the short term because capacity development efforts
result in incremental changes hi capacity, some of which may not be measurable for years,
if at all. This is especially true for small systems and for NCWSs, both of which are
generally required to submit compliance data less often than larger systems.
Examples of Use of the Tool as a Means of Assessing Capacity
The following describes how a State might use compliance data to review certain elements of
a system's technical and managerial capacity.
To ensure that the system is not in significant noncompliance, or that SRF assistance
will assure compliance. Under Section 1452(a)(3) of the SDWA, SRF assistance cannot
be provided to a water system that "is in significant noncompliance with any requirements
of a national primary drinking water regulation or variance," unless "the use of the
assistance will ensure compliance." Because of this provision, a review of a water
system's compliance information is an essential step in making a decision for the SRF.
The definition of "significant noncompliance" varies by regulation, but it generally refers
to long-term, repeated violations and/or violations that constitute a threat to public health.
If the system is in significant noncompliance, the State must be assured that the use of any
SRF assistance will ensure compliance. For example, if a water system is in significant
noncompliance because it exceeded the MCL for nitrate, the State might opt to fund a
project for a new source if the State is assured that water from the new source would meet
the nitrate standard, given any treatment planned by the water system.
To identify exceedances of safety standards for systems not yet in significant
noncompliance. In some cases, a system's compliance data can reveal violations that do
not lead to significant noncompliance, but may nevertheless highlight problems with the
system's facilities. For example, intermittent violations of bacteriological standards may
indicate a problem with the system's treatment facilities or distribution system. If the State
identifies events that appear to indicate problems with the system's facilities, it should use
other tools (e.g., a sanitary survey, peer review, or self-assessment) to determine if the
system is taking steps to identify or address any deficiency.
A-2
-------
To identify levels of contaminants that may be regulated in the future. EPA's guidance
on assessing capacity directs the State to ensure that the system has the capacity to comply
with current and future SDWA requirements. A review of a system's compliance data can
help States understand how future SDWA requirements might affect a system. For
example, a system that serves more than 10,000 people might report a level for total
trihalomethanes of 90 parts per billion, which meets the current standard of 100ug/{. but
would exceed the standard in EPA's proposed Disinfectants and Disinfection Byproducts
Rule of 80ug/f. Other tools would help a State understand if the water system has a plan
for addressing the future requirement.
To ensure that the system operators understand and implement the State's monitoring
and reporting requirements, and that the system has the resources it needs to meet
monitoring and reporting requirements. If compliance data reveal a history of monitoring
and reporting violations (e.g., failure to report or sampling from an incorrect location), it
may indicate that the system operator does not fully understand applicable requirements
(including requirements added since the operator was first trained or certified). Monitoring
and reporting violations may also indicate that the system does not have the resources it
needs to meet the requirements. Resource deficiencies may include lack of:
Personnel trained to perform the monitoring,
Availability of funds to support sampling and analysis activities, or
Availability of a sufficient management information system to schedule and track
monitoring.
If monitoring and reporting issues exist, States can use other tools to determine how a
system plans to address deficiencies in its knowledge or in its ability to collect the
necessary data.
Sources of Additional Information
For definitions of Significant Non-Compliance, see U.S. Environmental Protection Agency,
Water Supply Outdance Manual. Relevant sections of this document are available from the
Internet on the Office of Ground Water and Drinking Water (OGWDW) home page. You can
access these documents at www.epa.gov/OGWDW.
Note to Readers: The OGWDW home page does not yet have these documents. This
reference is included only as an example of how access to the Internet might be used.
If you do not have access to the Internet, call the Safe Drinking Water Hotline at 800-426-4791.
A-3
-------
Sanitary Surveys
In 40 CFR 141.2, a sanitary survey is defined as an on-site review of the water source,
facilities, equipment, operation, maintenance, and monitoring compliance of a public water
system for the purpose of evaluating the adequacy of such source, facilities, equipment, operation
and maintenance for producing and distributing safe drinking water. The survey provides the
opportunity to review many facets of the system's overall operation and management with the
intent of identifying and documenting actual and/or potential problems that might lead to
noncompliance and/or degradation of drinking water quality.
Bach primacy State must establish a systematic program for conducting sanitary surveys. In
its program, a State may consider the following factors in determining which systems will be
evaluated by a sanitary survey: compliance history of the system; source type, including whether
a new source was recently added; treatment technology, including recent changes; system size;
system type; whether the system has received a monitoring waiver; and whether the system has a
new operator.
Distribution System and Storage Tank Maintenance and Cross-Connection Control
During sanitary surveys, there are a few subjects that require special attention. Inspectors or
field engineers must ensure that distribution and storage components of water systems are
properly maintained and that all regulations related to cross-connection control are followed.
Evaluation of these components requires inspectors: 1) to perform a physical inspection of the
relevant system components; and 2) to discuss with system personnel the standard procedures
used for operation and management of these components. For example, if an inspection reveals
fecal contamination of a finished water storage tank, it is important to identify the proximate
cause (e.g., a loose-fitting cover over the storage tank) and also to identify the procedural
breakdown that allowed the problem to occur.
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use this tool as part of a capacity development
strategy.
* To prioritize systems. Sanitary surveys demonstrate mat there are systems with ongoing,
recurring deficiencies. These deficiencies often do not require compliance or enforcement
action, but do constitute a basis for capacity development.
The barrier to using sanitary survey data is that many States have not assembled the data
into a database that facilitates easy data retrieval. The benefits of using these data, -
however, are substantial. For example, sanitary survey data are constantly being updated.
Also, sanitary survey procedures can be structured to provide data that are most relevant to
A-4
-------
capacity issues. Finally, by tying sanitary surveys to a capacity development strategy,
States can begin to break the cycle of recurring, uncorrected deficiencies.
To assess its program on the basis of its effectiveness in reaching water systems,
including number of sanitary surveys conducted. In order to make this more than a bean-
counting exercise, States would need to ensure that the quality of its outreach was helping
systems achieve and maintain capacity. In addition, States must recognize that capacity
development is an incremental process and that improvements in capacity may not be
immediately apparent on sanitary surveys.
Examples of Using the Tool as a Means of Assessing Capacity
The following describes how a State might use this tool as a means of assessing system
capacity.
To evaluate the reliability of the system's overall infrastructure, including the source
protection, treatment, distribution system, and storage. Under Section 1452(a)(3) of the
SDWA, SRF assistance cannot be provided to a water system that "is in significant
noncompliance with any requirements of a national primary drinking water regulation or
variance," unless "the use of the assistance will ensure compliance." Knowledge of the
condition of the system's infrastructure, including its age and maintenance history, is
extremely useful in assessing the system's ability to continue to provide high-quality
drinking water at an affordable cost. Sanitary surveys provide an opportunity to collect
and review detailed information about and directly observe the operation of this
infrastructure. Some components of the technical evaluation might include:
Review of treatment process schematic diagrams and determination of the
appropriateness of the treatments(s) given the source(s) used and raw water quality;
* Examination of distribution system map and plan, including flushing schedules and
procedures; and
* Assessment of pump operating condition, including the presence of reserve pumps.
To determine the technical competence of the system operator. Sanitary surveys provide
an opportunity to confirm technical competence of the system operator by interviewing the
operator and directly observing his or her performance. The State professional or designee
conducting the survey can interview the operator about monitoring schedule requirements,
technical protocols and practices, and monitoring equipment maintenance and calibration.
They can also question the operator about technical aspects of treatment while touring the
facility and assess the operator's ability to respond to changing water quality or emergency
conditions. They can request copies of professional certifications or accreditations to
verify overall job fitness and confirm any claims of auxiliary training.
A-5
-------
To assess overall management and operations of the system. Sanitary surveys provide an
opportunity to assess the overall management and operations of the system. Direct
observation of the competence of staff interviewed during the survey provide one measure
of the system's management capability. Other more formal measures include review of the
existence and adequacy of documents such as Operations and Maintenance manuals and
plans, emergency contingency plans, management information system documentation,
general personnel, purchasing, and accounting policies, and bylaws or articles of
incorporation documenting the utility's decision-making structure.
To transfer knowledge that promotes compliance. The on-site component of the sanitary
survey, which involves a third-party field presence, itself results in capacity building.
Specifically, State drinking water officials or approved inspectors meet with system
owners and operators and other support staff. These meetings provide the opportunity to
transfer knowledge about sampling and monitoring procedures, technical treatment
advancements, and proposed regulatory changes. These surveys also provide both an
opportunity for owners and operators to cultivate an ongoing working relationship with
State personnel and information about where to turn in an emergency or what conditions
warrant immediate State notification/assistance.
To ensure that the system is not In significant noncompliance, or that SRF assistance
will assure compliance. Under Section 1452(a)(3) of the SDWA, SRF assistance cannot
be provided to a water system that "is in significant noncompliance with any requirements
of a national primary drinking water regulation or variance," unless "the use of the
assistance will ensure compliance." Because of this provision, a review of a water
system's compliance information is an essential step in making a decision for the SRF.
Sanitary surveys provide an opportunity to confirm compliance history by reviewing
monitoring data logs and reports maintained by the system to ensure that these logs
accurately reflect data reported by the systems. Additionally, they also allow an
independent party to conduct on-site monitoring to verify the integrity of monitoring data
recorded and reported by the system.
Sources of Additional Information
For more information on sanitary surveys, see "EPA/State Joint Guidance on Sanitary
Surveys," December 1995.
Call the Safe Drinking Water Hotline at 800-426-4791, or call the Association of State
Drinking Water Administrators (ASDWA) at 202-293-7655.
A-6
-------
Water System Plans or Business Plans
The water system plan (also called a business plan in some States) is a comprehensive
document which attempts to capture the true cost of building and operating a water system by
projecting costs and revenues over time. The plans can be used for both new and existing water
systems.
The water system plan, in contrast to the sanitary survey, covers not only the physical
condition of the system's source, infrastructure, and operations, but it also covers managerial and
financial issues. In addition, the water system plan is a forward-looking document that forces
system owners and operators to think about, and plan for, future operation of the system.
The water system plan is a formal process that provides comprehensive and forward-looking
data on financial conditions, technical ability, condition of facilities, and managerial proficiency.
The water system plan attempts to capture the true cost of building and operating a water system
and projects costs and revenue over time. The water system plan includes a Facilities Plan
Checklist that contains a description of required infrastructure and resources, a Management Plan
Checklist that describes the system's proposed (or existing) management strategy, and a
Financial Plan Checklist that requires systems to provide a complete financial plan.
In order to evaluate business plans submitted in its State, the Pennsylvania Department of
Environmental Protection (DEP) has developed a series of benchmarks and indicators that
examine various aspects of drinking water systems and provide an overview of where a proposed
system fits in relation to other existing systems. DEP uses its PAWATER cost model to perform
this function. This process also provides statistically significant information on the capacity of
the system. Used in this manner, the information taken from the water system plan could be an
effective means of prioritizing water systems.
Washington State has a water system planning program that is based on the capacity and size
of the system. It also is applied to both expanding and non-expanding water systems. It includes
a comprehensive analysis of the system's capacity, and it seeks to ensure and document system
capacity for the future.
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use this tool as part of a capacity development
strategy.
To assist public water systems in complying with national primary drinking water
regulations; and encourage the development of partnerships between public water
systems to enhance the technical, managerial, and financial capacity of systems. Water
supply plans, by requiring a planning process for all systems, assist systems in complying
A-7
-------
with all Federal and State regulations. Also, since the planning process typically involves
consideration of regional solutions to system problems, it encourages the development of
partnerships among systems.
To assess its program on the basis of its effectiveness in encouraging systems to
complete water system plans. The State would need to ensure that the water system plans
and any related technical assistance helped systems achieve and maintain capacity.
To measure "improvements in capacity." This process would require a baseline measure
of all systems at the time when the capacity development efforts began, and a method to
update system assessments on a regular basis.
Examples of Use of the Tool as a Means of Assessing Capacity
The following describes how a State might use this tool as a means of assessing system
capacity.
* To evaluate the system's technical capacity. The water system plan typically covers
issues such as:
* Characteristics of the service area (description of current service area and proposed or
future service areas, description of neighboring water systems, current and future
population estimates, current and future land use information).
Adequacy of source (description of source[s], evaluation of long-term source capacity
given assumptions of future water demand, and assessment of water rights [if
necessary]).
Water quality (assessment of source water quality, evaluation of potential for
contamination, description of source water protection activities).
Facilities (assessment of system components other than sourcetreatment,
transmission, storage, distribution, buildings, and so forth in terms of State criteria for
construction and operation). For example, the distribution system should meet fire flow
requirements; a hydraulic analysis should predict system pressures and flows under
various situations, such as peak daily flows; the basic design should include redundancy
to ensure reliable service; and so forth.
Operations (does the system's operations comply with applicable State and professional
standards?)
Maintenance (are the system's components adequately maintained?)
A-8
-------
Emergency (does the system have back-up power and equipment to enable it to respond
to emergencies?)
To evaluate the system's managerial capacity. The water system plan typically would
cover the following managerial issues:
Ownership (clear identity of owner).
Personnel (certified operator; adequacy of personnel procedures to ensure that trained
personnel operate the system).
Organization chart
Understanding of regulations (owner/operator's understanding of current regulations
and professional practice; owner/operator's awareness of proposed future regulations
that may affect the system).
Management information systems (management's ability to monitor operations)
To evaluate the system's financial capacity. The water system plan typically covers the
following issues related to financial capacity.
* Accounting (system's adherence to standard accounting practices)
Infrastructure replacement (plan for capital improvements as components end their
useful life; recognition of useful life of infrastructure through accounting practices [if
applicable]; maintenance of reserve account for replacement and contingencies).
Adequacy of resources (access to resources required for current and future operations;
rates and other charges cover the cost of service).
Adequacy of financial condition (financial ratios; bond ratings [if applicable]; access to
credit).
A financial viability test. In Washington State, a Financial Viability Test (FVT) is
required of all community water systems serving fewer than 1,000 service connections that
must submit a water system plan. The FVT consists of four financial tests:
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 operating 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
A-9
-------
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 cover the cost of an emergency
or failure of its most vulnerable 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.
In addition to all of these elements of the water system plan, systems typically submit relevant
documents that support the plan, e.g., maps of service areas, maps of facilities, and so forth.
Sources of Additional Information
For more information on water system plans, see:
Washington State Department of Health, "Planning Handbook: A Guide for Preparing
Water System Plans," August 23,1993.
Washington State Department of Health, "Financial Viability Manual for New and
Expanding Small Water Systems," March 1995.
Pennsylvania Department of Environmental Protection, "Pennsylvania Water System Self-
Assessment Guide," September 1996.
As a cross-reference to related tools, we suggest that readers review information on the tool
called "The Dozen Questions" which is described elsewhere in this document. This simple, easy-
to-understand guide to evaluating system capacity can be used by systems in the development of
business plans.
A-10
-------
Self-Assessment/Peer Reviews
Self-assessment has been used in several States to help small water system owners assess their
system's capacity. Typically, to assist the system owner or operator in conducting the
assessment, a self-assessment manual will be provided. The manual provides a structured system
of yes/no questions which follow the major elements of a complete business plan or water system
plan. Thus, the questions are organized by categories that cover issues related to technical,
managerial, and financial capacity. Within each category, questions are grouped according to
overall topic areas. Each topic represents an important area where there may be hidden costs in
store for the water system. The manual may contain simple budget worksheets that assist the
water system in using its estimates of future costs to develop an assessment of projected revenue,
capital requirements, and water rates.
The "Dozen Questions" approach is one self-assessment tool. It groups important questions
regarding system capacity into twelve categories. States have used these questions as part of a
business plan approach or as a self-assessment exercise.
The Dozen Questions approach can be used to assist public water systems in complying with
national primary drinking water regulations; encourage the development of partnerships between
public water systems to enhance the technical, managerial, and financial capacity of systems; and
assist public water systems in the training of operators.
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use this tool as part of a capacity development
strategy.
To prioritize systems. In some States, systems have the option of forwarding the results of
the self-assessment to the State. States can also encourage systems torequest technical
assistance if their self-assessment reveals vulnerability. However, self-assessments and
peer-reviews are most effective as tools for the system to identify its strengths and
weaknesses, not as tools for States to use to prioritize systems.
To assess its program on the basis of its effectiveness in encouraging systems to
complete water system plans or self-assessments. However, the State would need to
ensure that the water system plans or self-assessments and any related technical assistance
helped systems achieve and maintain capacity.
* To measure "improvements in capacity." This process would require a baseline measure
of all systems at the time when the capacity development efforts began, and a method to
update system assessments on a regular basis.
A-ll
-------
Examples of Use of the Tool as a Means of Assessing Capacity
Functionally, the self-assessment operates in a manner that is very similar to the water system
plan or business plan. The self-assessment usually covers the same subjects. It simply is done in
a more user-friendly manner. In a planning context (either water system plan or business plan),
the system is required to submit a plan for approval by the State. In a self-assessment context,
the State is more interested in a system's consideration of the issues. Plans often require the
services of professional engineers or accountants. A self-assessment can be done by the system
owner or operator. In fact, a self-assessment usually includes some simplified budgeting
worksheets that enable the system owner or operator to perform quick financial analyses.
Sources of Additional Information
For more information on self-assessment and peer reviews see:
Cromwell, Schmidt and Albani, "A Dozen Questions to Assess Small System Viability,"
Proceedings of the 1993 AWWA Annual Conference, San Antonio, Texas.
Pennsylvania Department of Environmental Protection, "Pennsylvania Water System Self-
Assessment Guide," September 1996.
Iowa Department of Natural Resources, "Self Assessment Manuals for Iowa Water System
Viability," September 1996.
RCAP-Community Resource Group, "The Small System Guide to Viability."
RCAP-Community Resource Group, "The Self-Evaluation Guide for Decision-Makers of
Small Community Water Systems."
Rural Water Association and American Water Works Association, Georgia Section, .
"Georgia's Small System Peer Review Program."
You can obtain more information by calling the RCAP-Community Resource Group at 501-
443-2700, the Georgia Rural Water Association at 770-358-0221, the National Rural Water
Association at 405-252-0629, or the American Water Works Association at 303-799-7711.
A-12
-------
Regional Plans
Regional planning is a strategic management process used to coordinate resolution of drinking
water issues related to population demographics, new system development, and overall water
quality. The process often involves the consolidation and integration of individual water system
plans and allows conflicts that might exist among individual plans to be identified. These plans
are usually examined by a committee comprised of representatives of county governments, water
utilities, and the State drinking water program. The committee structure also provides a forum to
resolve identified conflicts.
Each State approaches regional planning differently. In many States, planning occurs at the
county level and may be augmented with State oversight assistance or formal regulatory control
derived from enabling laws. For example, in Maryland, counties are responsible for submitting
county-wide plans for water and sewer services; the water system component of the plan must be
approved by Maryland Department of the Environment. These plans must identify present and
future water systems, including schedules and financial methods for new system construction.
They also must provide for the development, extension, and expansion of water systems to meet
county population growth over a 10-year period.
Typically, the planning committee delineates the exact boundaries of the geographic area
where planning will be implemented. The committee often integrates the plans of individual
water utilities located within the planning area and develops a detailed document that may
include some of the following components:
- demarcation of present and future service areas;
- outline of anticipated water system development;
- itemization of procedures for authorizing new water systems;
- delineation of arrangements for shared use of facilities;
- description of minimum design and fire flow performance standards; and
- creation of satellite support systems to provide assistance to small systems.
Other States that use regional planning as an important tool for capacity development are
Connecticut and Washington State.
A-13
-------
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use compliance data as part of a capacity
development strategy.
To assist public water systems in complying with regulations and to encourage the
development of partnerships between public water systems to enhance the technical,
managerial, and financial capacity of systems. Regional water supply plans, by requiring
a planning process for all systems in a region, assist systems in complying with all Federal
and State regulations. Also, since the planning process is regional, it encourages the
development of partnerships among systems.
* To promote communication and information sharing between water systems located
within the geographic boundaries of the planning area. In Washington State, the
regional planning document explicitly specifies the types of support that large systems will
provide to assist smaller systems within the jurisdiction of the plan. The support system
created by the plan is a formal agreement whereby a large or central utility in a county
performs direct, contract, or support services for smaller utilities.
Examples of Use of the Tool as a Means of Assessing Capacity
The following describes how a State might use this tool as a means of assessing system
capacity.
To identify and address growth and development issues. Regional planning provides an
opportunity to address issues related to a utility's current service area and anticipated
future service area based on population projections. The first step hi this process usually
involves compilation of individual water system plans, which typically include information
about current and anticipated service plans. Washington State, for example, requires
individual water system plans to address a 20-year planning horizon.. With review of these
plans, committees can identify and resolve any conflicts that may exist between individual
water systems.
To delineate specific service areas. Regional planning often involves granting exclusive
service areas to systems. Such systems are expected to provide water to all new residential
and commercial developments contained within their respective service area, or to assist
A-14
-------
the planning agency in developing procedures to authorize a new water system. In
Connecticut, existing privately owned systems can be forced by the Department of Public
Utility Control to provide water to new households in its service area. The DPUC also has
the authority to establish the rates that will be charged to the new customers.
Granting exclusive service areas acts as a deterrent to unnecessary new system
development. For example, with a clear delineation of a water system's current and future
service areas, requests for a new water system in a yet unserviced area can be coordinated
with the growth and expansion plans of the system granted the right to service the area.
Ensuring inter-system information sharing and technical assistance. Regional planning
can serve to promote communication and information sharing between water systems
located within the geographic boundaries of the planning area. In Washington State, the
regional planning document explicitly specifies the types of support that large systems will
provide to assist smaller systems within the jurisdiction of the plan. The support system
created by the plan is a formal agreement whereby a large or central utility in a county
performs direct, contract, or support services for smaller utilities.
Sources of Additional Information
For more information on regional planning, see:
Washington State Department of Health, "Planning Handbook: A Guide for Preparing
Water System Plans," August 23,1993.
A-15
-------
Criteria Used by Lenders
All lenders have criteria that they use to evaluate loan applications. Some lenders have
experience lending to small water systems, e.g., the Rural Utilities Service (RUS) and Co-Bank.
The criteria used by these institutions, therefore, may have utility for assessment of the financial
capacity of systems. Both RUS and Co-Bank provide financial assistance to small water
systems. In the course of making decisions about providing that assistance, both institutions
review the financial capacity of the systems that have applied for loans. Thus, a State might
review the criteria used by these institutions and use these criteria to assess a system's financial
capacity.
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use this tool as part of a capacity development
strategy.
To prioritize systems for capacity development efforts. States may wish to develop
measures that could be used to prioritize systems. Criteria used by lenders might provide
examples of measures that could serve this purpose.
Examples of Use of the Tool as a Means of Assessing Capacity
The following describes how a State might use this tool as a means of assessing system capacity.
Ensuring that the system has demonstrated that there is an adequate source of
revenue for repayment of the loan. A basic concern of both RUS and Co-Bank is that
the loan be repaid. Therefore, both will look for system policies and procedures that will
ensure an adequate source of revenue to repay the loan. For small systems, this generally
refers to a level of fees (or taxes from publicly owned systems) that will generate an
appropriate revenue stream. This may be complemented by sound financial planning,
including separate accounts for debt service payments.
Evaluating other elements of a system's financial capacity. Both lending institutions
request several types of financial information from systems that have applied for loans.
A-16
-------
Since the information requested has been tailored to the unique conditions of small
systems, they may be particularly useful for States as they evaluate systems' financial
capacity.
Evaluating the systems managerial capacity. RUS looks at more than simply financial
capacity. It also assesses the managerial capability of the system as an important aspect of
the system's overall capacity.
Sources of Additional Information
For more information on lending criteria see:
"Financial Viability Manual for New and Expanding Small Water Systems." Washington
State Department of Health, Environmental Health Programs, March 1995.
A-17
-------
Financial Viability Assessment Methods
State SDWA primacy agencies and public utility commissions (PUCs) have developed
methods to assess the financial viability/capacity of public water systems. Typically, these
methods focus on a few key financial ratios that are predictive of overall financial health. These
methods may be useful for States as they assess the financial capacity of systems.
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use this tool as part of a capacity development
strategy.
To prioritize systems for capacity development efforts. States may wish to develop
measures that could be used to prioritize systems. Like criteria used by lenders, the
financial ratios that are used in financial viability assessment methods might serve this
purpose.
Examples of Use of the Tool as a Means of Assessing Capacity
Since the assessment methods are focused primarily on financial capacity, they could be
considered as an adjunct to other assessment tools. The following describes how a State might
use this tool as a means of assessing system capacity.
Financial Ratios and Ratings. One of the problems that States may have when trying to
apply financial ratios is deciding which ratios to use. Financial analysis typically is the
strength of public utility commissions rather than SDWA primacy agencies. An advantage
of these viability/capacity assessment methods is that they have been applied and tested on
financial results from many utilities. The ability of each ratio to predict financial health
has been assessed empirically.
Adequate rates, charges, and revenues. One of the conclusions from the research
underlying the assessment methods is that many small systems do not have adequate rates
or other charges to support their current cost of service. The viability/capacity assessment
methods provide mechanisms to assess the adequacy of rates and revenues.
A-18
-------
Sources of Additional Information
For more information on regional planning, see:
»
Beecher and Dreese, "Financial Distress Models for Small Water Utilities," Proceedings of
the Eighth NARUC Biennial Regulatory Information Conference, Vol. IV, pp. 175-195
(Columbus, OH 1992).
A-19
-------
Operator Certification
One method of assessing aspects of technical and managerial capacity is to determine whether
or not a system has (or has access to) the services of a certified operator.
Currently, EPA, in conjunction with a State working group and a National Drinking Water
Advisory Council (NDWAC) working group, is developing guidelines for State operator
certification programs. The final guidelines for States will be published not later than February
1999. Under §1419 of the SDWA, States are required to adopt and begin implementing operator
certification programs for community and nontransient, noncommunity public water systems by
February 2001.
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use this tool as part of a capacity development
strategy.
To target systems without certified operators or with underquatified operators for
capacity development efforts. Many States have data on the number of systems with
certified operators and, in some cases, the qualifications of those operators.
To assist public water systems in complying with national primary drinking water
regulations; encourage the development of partnerships between public water systems to
enhance the technical, managerial, and financial capacity of systems; and assist public
water systems in the training, certification, and continuing education of operators.
Many States believe that having access to a certified operator will increase the ability of
systems to comply with national primary drinking water regulations. Also, States could
identify the number of systems with certified operators and the number of operators
receiving the training and continuing education necessary to improve the capacity of the
systems they operate.
* To disseminate information to help with capacity issues through operator certification
advisory boards. States might work with operator certification boards to develop a
curriculum that would help ensure capacity. Such a curriculum might include continuing
education requirements to help ensure capacity with regards to new regulations and new
technologies.
A-20
-------
Examples of Use of the Tool as a Means of Assessing Capacity
The following describes how a State might use information on the operator's qualifications to
review certain elements of a system's technical and managerial capacity.
* To assess a system's managerial and technical capacity. States generally agree that
systems that have, or have access to, a certified operator have more adequate managerial
and technical capacity.
Sources of Additional Information
For more information on operator certification, see:
Association of Boards of Certification, "Operator Certification Program Standards,"
January 1997.
Association of Boards of Certification, "ABC Survey of Water Treatment Certification
Requirements: Preliminary Results," December 12,1996.
"American Water Works Association White Paper on Operator Certification Programs," no
date
Association of State Drinking Water Administrators, "Final Position Statement-Operator
Certification," #96-03, October 30, 1996.
National Rural Water Association, "Operator Certificationthe NRWA Position," Fourth
Quarter 1996.
If you do not have access to the Internet, you can obtain more information by calling the
Association of Boards of Certification at 515-232-3623, the American Water Works Association
at 303-799-7711, the Association of State Drinking Water Administrators at 202-293-7655, or
the National Rural Water Association at 405-252-0629.
A-21
-------
Financial and Managerial Training
In 1990, EPA, ASDWA, AWWA and NRWA joined together to form the National Drinking
Water Training Coalition. The purpose of this Coalition was to establish State staff and operator
training programs. The Coalition was expanded in 1991 to include RCAP and the National
Environmental Training Association (NETA).
One lesson learned from the work of the Coalition is that existing training programs, while
adequate in addressing technical issues, are less well-developed in financial and managerial
training. The 1996 SDWA Amendments emphasize that system capacity has three dimensions.
It is not limited to technical capacity, but also includes managerial and financial capacity.
Training programs for operators need to address all three aspects of capacity. Indeed, training on
financial and managerial issues need to be given a priority that is equivalent to training on
technical issues.
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use this tool as part of a capacity development
strategy.
» To assist public water systems in complying with national primary drinking water
regulations; encourage the development of partnerships between public water systems to
enhance the technical, managerial, and financial capacity of systems; and assist public
water systems in the training, certification, and continuing education of operators.
Many States believe that managerial and financial training are essential in helping systems
to comply with regulations. Such training also assists public water systems in the training
and continuing education of their operators.
To assist public water systems in complying with national primary drinking water
regulations; encourage the development of partnerships between public water systems to
enhance the technical, managerial, and financial capacity of systems; and assist public
water systems in the training, certification, and continuing education of operators.
A-22
-------
Examples of Use of the Tool as a Means of Assessing Capacity
The following describes how a State might use information from management and financial
training programs to review certain elements of a system's managerial and financial capacity.
To assess system capacity. Most training programs do needs assessments prior to
development of curricula and implementation of courses. Most programs also do
evaluations of the effectiveness of their training courses.
Sources of Additional Information
For more information on financial and managerial training see:
National Training Coalition, "Final Report on Training Needs and Providers," July 1997.
Andrew A. Holton, GET, "Introduction to Utility Management." This is a management
training course designed for small and very small water systems.
RCAP-Community Resource Group, "The Small System Guide to Financial
Management," "The Small System Guide to Planning, Financing and Constructing Facility
Improvements."
You can obtain more information by calling the Association of State Drinking Water
Administrators at 202-293-7655, or RCAP-Community Resource Group at 501-443-2700.
A-23
-------
Permit Application Data
Permitting is a process designed to help ensure that public water systems are complying with
all applicable environmental and public health regulations and that they will have adequate
technical, managerial and financial capacity to reliably provide safe drinking water. The State's
authority to issue a permit establishes an opportunity for the State to assess system capacity. The
requirement to renew operating permits ensures that this assessment of system capacity will be
repeated periodically.
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use this tool as part of a capacity development
strategy.
* To prioritize systems. Permitting requirements can provide a wide range of data that could
be used by States to prioritize systems. Since permitting requirements vary across States
and the availability of existing data in accessible databases will differ, the ability to use this
tool will be State-specific.
To identify affected stakeholders by alerting permittees to the capacity development
process.
Examples of Use of the Tool as a Means of Assessing Capacity
The following describes how a State might use this tool as a means of assessing system
capacity.
To assess overall management and operation capabilities of the system. Permit
applications collect information that can be used to evaluate the overall management and
operation capabilities of a water system. The permit applications of most States have
components that include, to varying degrees, technical, managerial, and financial support
documentation. Typical subjects that may be covered in permit applications include:
A-24
-------
Technical. Service area information, sources) of water supply, monitoring plans,
operation and maintenance plans, growth plans, regulatory compliance plans, and
construction plans.
Managerial. Legal basis for system organization, management structure and procedure
description, summary of supervisory and operating personnel experience.
Financial. Projected short- and long-term revenue and cash flow projections, including
detailed yearly anticipated costs for operations, system improvements and maintenance,
monitoring, and administration.
To promote system compliance with drinking water regulations. Permitting can be used
to promote system compliance with drinking water regulations by requiring periodic
renewal of permits. The renewal process gives the permit issuer either a State or county
government entitythe opportunity to review the system's compliance history and identify
any potential infrastructure problems that might lead to possible violations of drinking
water standards. Information obtained through the renewal process also could be used to
assess system capacity.
Sources of Additional Information
For more information on permitting see:
U.S. Environmental Protection Agency, "Initial Summary of Current State Capacity
Development Activities," EPA Document # 816-S-97-001, January 1997. This report
reviews State capacity development efforts as of August 1996. It responds to the statutory
mandate contained in §1420(d)(2) of the SDWA.
A-25
-------
Capital Improvement Flans
A Capital Improvement Plan (CIP) is a document produced by a local government, utility, or
water system that thoroughly outlines, for a specified period of time, all needed capital projects,
the reason for each project, and their costs. Often, it will also provide the source of funding.
Almost all large water systems develop CIPs, but only a limited number of small systems use
this tool. Investor-owned small systems and small systems in States with a strong emphasis on
planning are more likely to develop CIPs.
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use this tool as part of a capacity development
strategy.
* To prioritize systems. Capital improvement plans provide outstanding forward-looking
financial and technical data for a system. Typically, the capital improvement plan will
provide information on all capital projects planned by a system for five, ten, or twenty
years into the future. Capital improvement plans are generally completed only by larger
water systems.
Examples of Use of the Tool as a Means of Assessing Capacity
The following describes how a State might use contents of a CIP to review certain elements of
a system's capacity.
To evaluate the system's ability to identify needed capital improvements. Often, CIPs
include a description and assessment of the system's existing infrastructure. They always
include information on infrastructure needs. States can use a CIP to ensure that the system
has accurately evaluated its capital improvements needs. States can compare the needs
listed in the CIP with needs listed in other sources, such as a recent sanitary survey or CPE.
The State can check to see if the system has budgeted adequately for equipment
replacement and refurbishment in addition to new equipment. Reviewing the system's
A-26
-------
plan for infrastructure replacement helps ensure the State that the rate of infrastructure
replacement is sufficient, given the expected life of the equipment For example, if the
system has 200 miles of distribution piping and plans on replacing only 1 mile per year
(0.5%), it would take 200 years to replace the entire system.
Finally, the State can use the CUP to help determine if the system has an adequate plan for
the future. Many CIPs contain 5-year plans, but, in some cases, a 20-year plan may be
more appropriate. Longer term plans may be contained in separate documents, which the
State should also review.
To evaluate the estimates of infrastructure needs. Usually, CIPs include cost estimates
developed by certified professional engineers, often as part of a contractor's bid for
specific infrastructure. States can review the reasonableness of these estimates, based on
similar projects in other water systems.
To evaluate the system's strategy for financing infrastructure improvement. The
system's CIP can be used to determine if the system has identified adequate funds for the
capital improvements. States can also use the CIP to determine if the system maintains
adequate reserve accounts. Moreover, the CIP might include a cost-of-service analysis,
which helps the State understand the basis for the water system's rate structure.
To evaluate the managerial capacity of the system. A well-managed system will develop
a CIP that helps customers and local regulatory authorities understand and appreciate the
need for infrastructure improvements and rate increases. Therefore, a review of the CIP
could help the State understand the system's capacity in this important aspect of
managerial capacity. In addition, the quality or quantity of information in a CIP could
provide insight into a system's management information system (MIS).
Sources of Additional Information
For more information on CIPs see:
The "PAWATER Model." This model validates cost estimates and provides comparative
information between proposed and existing water systems. Contact the Pennsylvania
Department of Environmental Protection, 400 Market Street, Hamsburg, PA 17105. (717)
783-2300.
A-27
-------
Comprehensive Performance Evaluation
The Comprehensive Performance Evaluation (CPE) is the first of two formal procedures
developed as part of the Composite Correction Program (CCP) approach to optimizing surface
water treatment plant performance. A CPE is a thorough review and analysis of a surface water
treatment plant's design capabilities and associated administrative, operation and maintenance
practices. It is conducted to identify factors that may be adversely impacting a plant's capability
to achieve optimal performance.
A CPE involves several activities: evaluation of the major unit processes, assessment of plant
performance, identification and prioritization of performance limiting factors, assessment of the
applicability of a follow-up Composite Technical Assistance program (the second phase of the
CCP approach), and reporting of the results of the evaluation. The recommended CPE format
utilizes a series of detailed interview/investigative forms and defined evaluation procedures to
provide consistent and comparable results. A significant aspect of this is the list of definitions
for assessing performance limiting factors in administrative, maintenance, design and operations
areas. Completion of all activities would be necessary to apply findings of a CPE to an
assessment of small water system capacity.
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use this tool as part of a capacity development
strategy.
To prioritize systems. A CPE is a thorough review and analysis of a surface water
treatment plant's design capabilities and associated administrative, operation and
maintenance practices. Completion of a detailed list of activities would be necessary to
apply the findings of a CPE to an assessment of water system capacity. However, the tool
is only appropriate for surface water systems and is thus limited for the purpose of
statewide prioritization.
To assess its program on the basis of the number ofCPEs conducted. In order to make
this more than a bean-counting exercise, however, States would need to ensure that the
A-28
-------
quality of its outreach was helping systems achieve and maintain capacity by monitoring
the results of the evaluation.
Examples of Use of the Tool as a Means of Assessing Capacity
The following describes how a State might use results of a CPE to review certain elements of
a system's technical and managerial capacity.
To ensure that the system is well-operated. The results of a CPE provide an evaluation of
the major unit processes, an assessment of plant performance, a list of performance
limiting factors, and a recommendation on the need for follow-up. Each of these distinct
activities will help the State and the system understand if the system is using appropriate
treatment technology, operating the plant for optimal performance, and implementing an
effective maintenance program. From a managerial perspective, the evaluation also helps
ensure that system operators understand the plant.
To ensure that the system operators understand the most effective course for obtaining
or maintaining technical capacity. A primary objective of the CPE is to determine if
significant improvements in treatment performance can be achieved without major capital
expenditures. Comparing the results of a CPE to the planned infrastructure improvements
outlined in the SRF application can help the State determine if the system has the capacity
to understand its needs and allocate its'budget appropriately.
To ensure that the system has implemented appropriate administrative and management
policies. During a CPE, system staff are evaluated for the manpower allotted to the
treatment facility, workload distribution, aptitude, qualifications, knowledge, personnel
turnover, familiarity with plant needs, and level of supervision.
To understand administrative and managerial factors that may impede compliance and
capacity. The evaluation of administrative performance-limiting factors is a subjective
effort, primarily based on management and staff interviews. It also requires a thorough
understanding of the design, operations and maintenance issues impacting the plant so that
the evaluator is better equipped to ask insightful questions about the plant and policies.
* To understand the system's financial planning strategy. A CPE utilizes records and
discussion of a system's budget and financial planning to illustrate a plant own-
er/administrator's objectives. The extent of bond indebtedness, the rate structure and
A-29
-------
resultant revenue, and projects planned by administrative officials reveal their priorities
and desire to create and maintain a self-supporting utility.
To evaluate the system's knowledge of technical needs and the funds available to meet
these needs. Technical problems identified by plant staff or the CPE evaluator, and the
potential costs associated with these problems, often serve as the basis for assessing
administrative factors. Both sides of the story, operational and administrative, are
necessary to determine the nature of existing policies. Implemented CPEs have revealed
several instances where inadequate communications have resulted in under funding or
expenditures which did not result in plant performance improvement.
Sources of Additional Information
For more information on CPEs see:
U.S. Environmental Protection Agency, Summary Report: Optimizing Water
Treatment Plan Performance with the Composite Correction Program, EPA/625/8-
90/017, March 1990.
A-30
-------
Consumer Complaint Records
This tool refers to a State's record of consumer complaints regarding the water system. These
records may reside with the State primacy agency or with regional or local authorities. State
housing commissions may receive information on water systems operated by developers,
neighborhood associations, or communities of manufactured housing. The State public utility
commission receives complaints regarding investor-owned utilities and other utilities within its
jurisdiction.
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use this tool as part of a capacity development
strategy.
To prioritize systems. This is one criterion that States could use to develop a system of
prioritization. It is not likely to be the most important criterion, particularly when
compared with compliance and financial capacity. Nevertheless, it might be considered.
Examples of Use of the Tool as a Means of Assessing Capacity
The following describes how a State might use consumer complaint records to review certain
elements of a system's technical and managerial capacity.
To identify technical problems in the water system. Sometimes, consumer complaints
might help identify problems with the water system. The most common consumer
complaints usually concern taste, odor, or low pressure. The State can use follow-up
information on the complaint or other tools to determine if the system is taking steps to
identify the source and find a solution to any problem.
To identify problems in the system's bitting and collection procedures. If there are
problems with a system's billing and collection procedures, consumers are likely to
complain. Consumers may complain that they were over-billed, or that the water system
fails to recognize receipt of their payments.
A-31
-------
To evaluate a system's efforts at customer outreach and service. When a large number of
complaints is received about a specific system, it can indicate that the system does not have
an adequate outreach program. States can evaluate the complaints to determine: if the
system is failing to provide the service it promises, if it is providing insufficient
information on the quality of drinking water, if it has failed to explain the reasons for rate
increases, or if it is not addressing other customer concerns.
Sources of Additional Information
As mentioned above, States have different methods of recording consumer complaints but
most have records at either the State, regional or local level.
A-32
-------
State-Wide Studies of Water Quality or Quantity
This group of tools includes studies dealing with topics such as contaminant occurrence,
ground water subsidence or other quantity issues, and/or pesticide usage or other watershed
management concerns. Such studies may be produced by the State primacy agency, regional or
local authorities, large water systems, academic institutions, or they may appear in trade journals.
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use this tool as part of a capacity development
strategy.
* To prioritize systems based on the adequacy of a system's water quality or quantity. In
some cases, particularly systems with bad raw water quality, quality may be a very
important factor in assessing priorities. Water quantity problems also may be a criterion,
particularly in western States.
To encourage the development of partnerships between public water systems to enhance
the technical, managerial, and financial capacity of systems. Systems with water
quantity problems may present situations that are best resolved through partnerships
between and among systems to optimize the use of scarce water resources. Quantity
problems often are amenable to regional solutions.
Examples of Use of the Tool as a Means of Assessing Capacity
The following describes how a State might use State-wide studies to review certain elements
of a system's technical and managerial capacity.
To identify potential water quality or quantity issues. Often, States or institutions within
the State will conduct studies to estimate the impact of future regulations. Such studies
may indicate that the system is located in an area where a future standard may pose a
problem. Studies may also indicate that the system is located in a watershed where
activities such as fertilizer or pesticide use may affect the quality of the system's source.
Further, a study may show that a system is in an area affected by source depletion issues.
A-33
-------
The State could use other tools to ensure that the system is prepared to deal with potential
water quality and quantity problems identified in State-wide studies.
Sources of Additional Information
Examples of State-wide studies of water quantity or quality are conducted by a variety of
different organizations and thus can be found hi an equally wide variety of sources. Two
examples of such studies are:
Kolpin, Dana, Stephen I. Kalkhoff, Donald A. Goolsby, Debra A. Sneck-Fahrer, and E.
Michael Thurman. "Occurrence of Selected Herbicides and Herbicide Degradation
Products in Iowa's Ground Water, 1995." Ground Water. 35.4 (July-Aug 1997): 679-688.
Stuart, Maureen A., Frederick J. Rich and Gale A. Bishop. "Survey of Nitrate
Contamination in Shallow Domestic Drinking Water Wells of the Inner Coastal Plain of
Georgia." Ground Water. 33.2 (Mar.-Apr. 1995)284-290.
Information on the Targeted Watershed Approach in Illinois can be accessed on the Internet at
www.epa.state.il.us/org/bow/targeted-watershed. Additional information on State-wide water
quality and quantity studies can be found on a variety of State home pages.
A-34
-------
SRF Loan Applications
Much of the review of a system's SRF loan application occurs during the development of the
State Priority List. However, reviewing the SRF application can also help the State assess the
system's technical, managerial, and financial capacity. In particular, the State should examine
the system's ability to identify a dedicated source of funds for repayment (or loan security, in the
case of private systems).
Examples of Using the Tool as Part of a Capacity Development Strategy
The following describes how a State might use this tool as part of a capacity development
strategy.
To prioritize systems. Under the 1996 SDWA, States must provide assurances that water
systems receiving SRF assistance currently have the technical, managerial, and financial
capacity to meet SDWA requirements, or that the SRF assistance will help them attain
capacity. As a result, SRF loan applications should be tailored to elicit from systems the
data most relevant to prioritization.
Examples of Use of the Tool as a Means of Assessing Capacity
The following describes how a State might use an SRF application to review certain elements
of a system's technical and managerial capacity.
To ensure that the system has identified a dedicated source of revenue for repayments
(or in the case of a privately-owned system, demonstrates that there is adequate security).
In accordance with the SRF guidelines, the State must adopt policies and procedures to
assure that borrowers have a dedicated source of revenue for repayment (or adequate
security). Generally, loan applicants work with the County Council (or similar body) to
pass a resolution to reserve revenues from user fees, taxes, or other sources for this
account. The system's ability to accomplish this helps demonstrate its ability to engage in
sound financial planning, establish appropriate user fees, work with local regulators, and
obtain the necessary political support for its system.
A-35
-------
To evaluate other elements of a system's financial capacity. Many States are requesting
basic financial data of SRF applications or pre-applications. The types of data requested
are modeled after the information requested in the Clean Water SRF program. They are
aimed at determining municipal financial conditions and can often be used in conjunction
with a State's disadvantaged community program. Information requested often includes
debt information (e.g., debt level, debt per capita, debt as a percentage of full market
property), financial operations (e.g., property tax collection rates), socioeconomic
indicators (e.g., median income, employment, and poverty level), and information to assess
user fee impact (e.g., user fees as a percent of median household income). States should
note, however, that the financial capacity of the municipality does not necessarily correlate
with the capacity of the water system. System-level indicators, such as cost-of-service
analyses, should also be examined.
To evaluate a system's knowledge of its current and future infrastructure needs.
Generally, a system's application, pre-application, or letter of interest will contain
justification for the needed infrastructure improvement. Based on the quality of the
justification, a State may be able to draw conclusions about the system's understanding of
its infrastructure needs.
Sources of Additional Information
For more information on SRF applications see:
U.S. Environmental Protection Agency, "Drinking Water State Revolving Fund Program
Guidelines," EPA 816-R-97-005, February 1997. This document was developed to provide
a description of guidelines that will apply in the operation of the DWSRF program.
A-36
-------
Annual Financial Reports
Contents of annual financial reports will vary depending on the size of the system, the
sophistication of the system, and on the accounting system adopted by the system. Hie major
variable affecting accounting structure is whether the system is publicly or privately owned, but
there also are variations within publicly owned systems, depending on whether the system has
adopted an enterprise fund method of accounting. At a minimum, annual financial reports
include: itemizations of operating expenditures and capital expenditures, revenues and other
sources of income, debt service expenditures, and the status of reserve accounts. For investor-
owned systems and some publicly owned systems, the financial reports also will include balance
sheet information (assets and liabilities). In some cases, systems may provide cost-of-service
analyses, comparisons with previous years' expenditures, information on stock value and
dividends (for investor-owned systems) discussions of the system's investment strategy, and
predictions of future years' revenues and expenditures.
The most systematic source of annual financial reports is public utility commissions (PUCs)
for systems that they regulate. These reports generally follow the same format, use a uniform
system of accounts, and are reviewed by commission staff. Annual reports to commissions
always contain data on operating and capital expenditures, revenues, and they usually contain
information on operations, service area, customer base, source of supply, pumpage rates, and
other information on system finance and operations. Annual reports to PUCs are not likely to
have much forecasting information; instead, they provide a good baseline of current operations.
Examples of Using the Tool as Part of a Capacity Development Strategy
To prioritize systems most in need of improving technical, managerial, and financial
capacity. Annual financial reports are an excellent source of current financial information.
If collected uniformly, this data source could provide important financial data as part of a
State prioritization method. For example, one method for establishing priorities for a
capacity development strategy would be to assign highest priority to those systems in the
worst financial condition. One could use one or more of the standard financial ratios that
are used to assess the financial health of water suppliese.g., the operating ratio, the debt
service coverage ratio, the net takedown ratio, and so forth.
* To establish a baseline and measure improvements in capacity. If improvement in the
financial health of water systems was a top priority of a capacity development strategy, and
A-37
-------
if data were available from all systems, one could measure improvement in terms of
changes in the financial ratios described in the previous paragraph. One should keep in
mind, however, several caveats about this approach:
- Capacity development is an incremental process. It may not result in improvement in
financial ratios in one, or even several, years.
- Financial ratios may get worse, not better, if systems are improving their overall capacity.
If, for example, a major problem facing systems was the lack of investment in
infrastructure., then the State capacity development strategy may recommend such
investment That may require additional debt, and (other things being equal) this may
cause the debt service ratio to get worse, not better.
- One must remember that annual financial reports are "snapshots" of financial conditions
at a single point of time each year. Depending on the timing of rate increases, this
"snapshot" may not be a good measure of the financial health of systems. A better
approach would be to track financial data longitudinally and look at trends over time for
each system.
Examples of Use of die Tool as a Means of Assessing Capacity
The following describes how a State might use annual financial reports to review certain
elements of a system's technical and managerial capacity.
To evaluate the system's operating and capital expenses. In evaluating expenses, the
State might consider the following:
Ability to specify expenses. Is the system able to provide complete information on its
expenses? Does it differentiate between operating and capital costs?
- Adequacy of expenses. Are the expenses consistent with other utilities in the area? Do
they appear reasonable and adequate?
A-38
-------
To evaluate the system's revenues. In evaluating revenues, the State might consider the
following:
- Ability to specify revenues. Is the system able to provide complete information on its
revenues (e.g., water-related revenues, contributions/connection fees, grant proceeds,
etc.)?
Appropriateness of water rates. Does the system include a Cost-of-service analysis?
Are rates set to reflect the true cost of providing water? Are they consistent with rates
of nearby systems?
Budget deficit/surplus. If the system has accurately identified its expenses and
revenues, States can easily review the system's budget, surplus or deficit. (A budget
deficit, say in one year, does not necessarily indicate that the system is not financially
viable. For example, the system could be phasing in a rate increase.) States can also
review the revenue per number of connections and total revenue per gallons sold to
determine if these values fall within regional averages.
To evaluate the system's reserves. Does the system differentiate between operating
accounts and reserve accounts? Does it provide annual contributions to a reserve account?
To evaluate the system's future expenditures. In some cases, the financial report may
include predictions of future revenue and expenditures. In evaluating this information, the
State might consider the following:
Completeness of listed capital improvements. Is there evidence that the system has
identified a complete list of capital improvements? Has the system budgeted for
equipment replacement and refurbishment in addition to new equipment? Are all items
on a recent sanitary survey addressed? Has the system anticipated infrastructure
improvements needed to comply with future regulations, if applicable?
Reasonable predictions of operating expenditures and revenues. Has the system
provided reasonable estimates of future revenues and expenditures? Are expenses and
revenues in line with current expenditures and revenues, or, if not, are deviations
explained? Are revenues and expenses in line with other water systems in the area?
Capital sources. (This evaluation will depend on whether the worksheet funds for the
capital improvements?
A-39
-------
Sources of Additional Information
For more information on annual financial reports see:
National Association of Regulatory Utility Commissioners, Uniform System of Accounts
for Water Utilities (by class).
A-40
-------
Cooperation of Industry Groups, Lenders
An effective capacity development strategy will rely extensively on cooperation between the
SDWA State primacy agency and other groups that can help to implement the strategy. For
example, if the primacy agency wants to implement a strategy that relies on public education of
potential home buyers, then cooperation of the mortgage lender community can be an important
asset. Mortgage lenders can assist in public education by telling prospective home buyers of the
value of reliable water systems. Similarly, the primacy agency might need the cooperation of
organizations that represent the water supply industry. Organizations like the American Water
Works Association (AWWA) and the National Rural Water Association (NRWA) are important
allies in the development of public education programs, technical assistance programs, and other
efforts that may be part of the capacity development strategy.
Examples of Using the Tool as Part of a Capacity Development Strategy
Developing relationships with industry groups and with lenders can be used to develop and
implement a State's capacity development strategy. These relationships are important in two
ways.
To identify factors that encourage or impair capacity development, Relationships with
industry groups and lenders can be factors that encourage capacity development. They
assist, for example, in helping systems comply with regulations by informing and training
system owners and operators. They also encourage the development of partnerships
between public water systems to enhance the technical, managerial, and financial capacity
of systems. In addition, developing relationships with lenders helps ensure their
participation in the capacity development processe.g., to help educate prospective
homebuyers about the value of safe drinking water.
To identify stakeholders who have an interest in or are involved in the preparation and
implementation of the capacity development strategy. Relationships with industry groups
are essential to identification of some of the most interested parties, the owners and
operators of public water systems.
A-41
-------
Sources of Additional Information
For more information on cooperation with industry groups and lenders see:
A Guidebook of Financial Tools. Environmental Finance Program.
This document is available through the EPA home page. You can access this document at
www.epa.gov/efinpage/guidebk/guindex.htm.
Information on organizations can be found at:
American Water Works Association: www.awwa.org
National Rural Water Association: www.nrwa.org
Rural Community Assistance Program: www.rcap.org
A-42
-------
Public Education and Information
Public education and information is at the heart of many capacity development strategies. The
theory behind these strategies is that if the public (including system owners and operators) is
fully informed of the costs associated with operation of a reliable water system, the options
available for meeting the water supply needs of the public, and the association between public
health and sound drinking water infrastructure, then responsible citizens will generally choose
the least-cost option that protects public health. Similarly, if prospective home buyers were
aware of the risks and potential costs associated with joining a homeowners association that
owns its own water system, then there would be pressure on developers to rely more extensively
on professionally managed water systems.
Examples of Using the Tool as Part of a Capacity Development Strategy
Public education could be applied to several elements of the capacity development strategy in
the following ways:
To assist public water systems in complying with national primary drinking water
regulations; and to encourage the development of partnerships between public water
systems to enhance technical, managerial, and financial capacity. Public education can
be used to assist public water systems in achieving both of these objectives.
To identify stakeholders who have an interest in or are involved in the preparation and
implementation of the capacity development strategy. Public education could play a
role in identifying interested persons by informing the public of the issue and the
opportunity to participate. In addition, public education empowers the general public to
participate as an informed party in the preparation of the capacity development strategy.
A-43
-------
Sources of Additional Information
For more information on public education see:
Powell, John R., David J. Allee and Charles McClintock. "Groundwater Protection
Benefits and Local Community Planning: Impact of Contingent Valuation Information."
American Journal of Agricultural Economics." 76 (Dec. 1994): 1068-1075.
Public Involvement Strategies: A Manager's Handbook. AWWAKF. Denver: 1996.
For a case study mat offers a model of integrating public involvement with water supply
planning see*:
Plank, R. David, Roddy Rogers, Frank L. Shorney, David J. Novak and Robert R. Zion.
"Public Involvement Helps Supply Project Succeed." Journal of American Water Works
Association. (May 1997): 40-54.
"This case study focuses on a large water system but is included here because the utility
involved was extremely successful in educating and involving the public in the water supply
project.
A-44
-------
Rate Reviews and Approvals
Public utility commissions (PUCs) periodically review the rate structures of the public water
systems that they regulate. The theoretical ideal is to set rates equal to the cost of service plus a
reasonable return on investment. Since the cost of service changes periodically, it is useful to
review costs and rates and determine whether systems are, in fact, recovering their full cost of
service. Approval of the rate application is largely contingent on having adequate records to
determine cost-of-service and the valuation of rate base.
For medium and large systems, rate reviews are undertaken at the initiative of the system. For
small systems, however, PUCs may order a "staff-assisted rate case," where professional staff
from the PUC provide technical assistance to the small system for rate review. This can be an
excellent way for small systems to examine their financial capacity.
The review of a rate application requires the collection of substantial information that may be
relevant to issues of capacity development. For example, PUCs routinely consider the results of
sanitary surveys. There also may be an on-site inspection of the facilities to determine whether
deficiencies noted on the sanitary survey have been addressed.
The volume of water purchased or pumped by the utility is compared with the water billed to
customers. Significant differences are noted and the utility may be advised to initiate a leak
detection program. The rate review process also identifies those systems which are not metered
or which use flat rates. The utility may be ordered to meter customers or to set rates based on
usage. This process encourages conservation and helps to identify systems with significant
leaks.
Customers are notified of the rate change application and have an opportunity to protest the
rates or the service provided by the utility. Customer complaints during the rate approval process
could be another source of information indicating system deficiencies that should be addressed.
Examples of Using the Tool as Part of a Capacity Development Strategy
Rate reviews provide another source of data that can be used to develop and implement a
State capacity development strategy. In States where the number and percentage of PUC-
regulated systems is large, the information obtained during the rate review can help the State in
two ways:
A-45
-------
To prioritize systems most in need of improving technical, managerial, and financial
capacity. Data from rate reviews can be used to help prioritize systems. This depends, of
course, on the quality and urn'fortuity of information obtained. If data from rate reviews
are not of uniform quality, or if the number and percentage of systems with reviews is
small, the data could be used to supplement other data sources.
To establish a baseline and measure improvements in capacity. The data from rate
reviews may be used to measure progress. A longitudinal analysis of the technical,
financial, and managerial capacity of systems, as measured by information obtained during
rate reviews, could be used to supplement information on these subjects gathered from
other sources.
Examples of Use of the Tool as a Means of Assessing Capacity
To assess Technical Capacity: The review of a rate application considers the sanitary
survey and possibly an on-site inspection of the facilities. The volume of water purchased
or pumped by the utility is compared with the water billed to customers. Significant
differences may indicate the need for a leak detection program. These types of information
provide substantial insights into the technical capacity of the system.
To assess Managerial Capacity: All systems submitting a rate application will be subject
to an inspection of the records by PUC staff. Accounting procedures, as well as billing and
collection procedures, are evaluated. The utility must have adequate records to determine
cost-of-service and the valuation of rate base. These are indicators of managerial capacity.
To assess Financial Capacity: The PUC reviews cost-of-service, valuation of rate base,
depreciation expense and the debt/equity ratio to ensure appropriate rates. This
information could assist in assessing financial capacity of systems regulated by the PUC.
Sources of Additional Information
For more information on rate reviews see:
Public Utilities Commission, State of California, Proceeding No. 1.90-11-033, "Staff
Report on Issues Related to Small Water Utilities," June 10,1991.
AWWA Research Foundation, "Meeting Future Financial Needs of Water Utilities."
A-46
-------
A-47
-------
Cooperation with Non-Governmental Organizations
Non-governmental organizations have an important role to play in the implementation of
capacity development strategies. Non-governmental organizations that are active in the field of
public water supply are organizations like the American Water Works Association, the National
Rural Water Association, the Association of Metropolitan Water Agencies, the National
Association of Water Companies, the Association of Boards of Certification, the Rural
Community Assistance Program, and others.
These organizations offer a non-governmental and non-regulatory resource for technical
assistance and training services for public water systems. Developing relationships with non-
governmental organizations helps ensure then* participation in the capacity development process.
In addition, because they are non-governmental and non-regulatory, their assistance is more
likely to be effective for many small water systems.
Examples of Using the Tool as Part of a Capacity Development Strategy
Cooperation with non-governmental organizations can assist the State in developing a
capacity development strategy in several ways.
* To assist public water systems in complying with national primary drinking water
regulations; encourage the development of partnerships between public water systems to
enhance technical, managerial, and financial capacity} and assist public water systems
in training, certification, and continuing education of operators. Cooperation with non-
governmental organizations could assist the State in achieving all of these objectives.
* To identify stakeholders who have an interest in or are involved in the preparation and
implementation of the capacity development strategy. Non-governmental organizations
such as those listed in the paragraphs above are important stakeholders.
A-48
-------
Sources of Additional Information
For more information on Non-Governmental Organizations see:
American Water Works Association: www.awwa.org
Association of Metropolitan Water Agencies: www.amwa-water.org/water
National Rural Water Association: www.nrwa.org
Rural Community Assistance Program: www.rcap.org
A-49
-------
Big Brother and Buddy System Programs
Several State SDWA primacy agencies, working cooperatively with organizations
representing utilities (e.g., American Water Works Association or National Rural Water
Association) have experimented with "big brother" or "buddy system" programs. These
programs encourage partnerships between water systems, pairing a well-managed system with
one that needs help. The idea is that the well-managed system can train and provide technical
assistance to the system that is less well-managed.
In a "big brother" program, the well-managed system usually is a large system, and the system
that needs help usually is small. In some respects, this arrangement begins to look somewhat
like a satellite management program. The "buddy system" arrangement pairs two systems of
equal size, generally two small systems. The theory is that matching systems of relatively equal
size will offer a better understanding of the problems to be resolved and a better acceptance of
peer-level assistance and training.
Examples of Using the Tool as Part of a Capacity Development Strategy
Big brother and buddy programs can be used in the following ways to assist in the
development and implementation of a State capacity development strategy.
To prioritize systems most in need of improving technical, managerial, and financial
capacity. The identification of systems being assisted by big brother and buddy programs
could be one type of information that can be used to identify and prioritize public water
systems most in need of improving technical, managerial, and financial capacity.
* To assist public water systems in complying with national primary drinking water
regulations; encourage the development of partnerships between public water systems to
enhance technical, managerial, and financial capacity; and assist public water systems
in training, certification, and continuing education of operators. Big brother and buddy
programs are examples of partnerships between public water systems to enhance technical,
managerial, and financial capacity.
A-50
-------
Sources of Additional Information
For more information on buddy system programs see:
Association of State Drinking Water Administrators, Enhancing Drinking Water System
Viability: Options for States, December 15, 1995, p. 19.
A-51
-------
Restructuring
One approach to improving system capacity is to consider restructuring. This is a broad term
referring to a wide range of changes a system could make its operations, management, or
institutional structure. Restructuring means changing the way a system does business in order to
ensure its customers the best possible service at the lowest possible cost.
Experts who have written about restructuring often categorize restructuring strategies into two
broad categories: internal and external. Internal strategies seek to provide greater access to
capital financing and operating efficiency. External strategies involve collaboration with
neighboring systems to achieve the advantages of economies of scale.
An example of internal restructuring would be raising rates, thereby improving the financial
condition of the system and providing greater access to capital markets. External restructuring
may be categorized into two types: consolidation (e.g., physical restructuring, mergers, and
acquisitions), or cooperation (a variety of methods including contract operations and
maintenance agreements). Thus, external restructuring could include a wide range of changes,
from mergers and acquisitions to satellite management, contract O&M, and even "big brother"
arrangements.
Examples of Using the Tool as Part of a Capacity Development Strategy
Restructuring can be used in the following ways to assist in the development and
implementation of a State capacity development strategy.
To assist public water systems in complying with national primary drinking water
regulations; and to encourage the development of partnerships between public water
systems to enhance technical, managerial, and financial capacity. Restructuring is a tool
that could be used in the consideration of this element of the strategy. It is designed to
improve compliance and encourage partnerships.
A-52
-------
Examples of Use of the Tool as a Means of Assessing Capacity
Restructuring also could be used in a general way to assess all aspects of capacity of systems
applying for SRF assistance. A State might, for example, require that States requesting
assistance demonstrate that they have considered restructuring options prior to proposal of any
major infrastructure improvements. Restructuring is a means of ensuring that water system
customers obtain the best possible service at the lowest cost, and it may help States and systems
to consider least-cost alternatives to new construction.
Sources of Additional Information
For more information on restructuring see:
U.S. Environmental Protection Agency, Restructuring Small Drinking Water Systems:
Options and Case Studies, 1996.
Castillo, Eloise Trabka, Scott J. Rubin, Sally Keefe and Robert S. Raucher. "Restructuring
Small Systems." Journal of the American Water Works Association. (January 1997): 65-
74.
A-53
-------
Satellite Management
Satellite management generally refers to an arrangement whereby a large community water
system (e.g., a municipal or county system) agrees to become responsible for specified
management tasks for nearby smaller systems. The smaller systems therefore become
"satellites" of the larger system. A variation on this arrangement is satellite ownership where the
assets of the smaller system are transferred to the larger system.
The generic concept of satellite management is applied in many different ways across the
country. In Washington State, for example, satellite management was a central concept in
regional water supply plans. Counties, in particular, were urged to offer satellite management
services to small water systems in their service area. More recently in Washington, a new statute
has enlarged the role of satellite management and seeks to provide incentives for large systems to
become certified satellite management agencies.
Each State will want to shape the concept of satellite management to fit its unique
circumstances. In Washington State and many other States, the most likely candidates to become
satellite managers are large publicly owned systems like counties. In States where large
investor-owned utilities are predominant, however, it may be useful to encourage these systems
to engage in satellite management.
Examples of Using the Tool as Part of a Capacity Development Strategy
Satellite management, like restructuring, can be used in the following ways to assist in the
development and implementation of a State capacity development strategy.
To assist public water systems in complying with national primary drinking water
regulations; and to encourage the development of partnerships between public water
systems to enhance technical, managerial, and financial capacity. Satellite management
is one tool that could be used in the consideration of this element of the strategy. It is
designed to improve compliance and encourage partnerships.
A-54
-------
Examples of Use of the Tool as a Means of Assessing Capacity
Satellite management could be used in a general way to assess all aspects of capacity of
systems applying for SRF assistance. A State might, for example, require that States requesting
assistance demonstrate that they have considered satellite management options prior to proposal
of any major infrastructure improvements.
Sources of Additional Information
For more information on satellite management programs, see:
Washington State Department of Health, "Satellite Management Program," "Satellite
Management," and "Impacts of Engrossed Second Substitute Senate Bill... on Satellite
Management of Public Water Systems."
A-55
-------
Training and Technical Assistance
The SDWA provides new resources for capacity development efforts by outside
organizations. These tools are likely to play a vital role in capacity development strategies. One
common theme in systems that lack adequate capacity is a lack of trained, professional personnel
to operate and manage the system. Training and technical assistance can remedy that deficiency.
These tools also can be used to educate and persuade system owners and operators to adopt
practices and methods that will enhance capacity and reliability.
Examples of Using the Tool as Part of a Capacity Development Strategy
Training and technical assistance can be an important part of a State capacity development
strategy.
* To prioritize systems most in need of improving technical, managerial, and financial
capacity. Training and technical assistance providers could be one source of information
in prioritization. Systems that need training or technical assistance but have not sought out
that assistance are probably those most in need of improving technical, managerial, and
financial capacity.
To assist public water systems in complying with national primary drinking water
regulations; encourage the development of partnerships between public water systems to
enhance technical, managerial, and financial capacity; and assist public water systems
in training, certification, and continuing education of operators. Training and technical
assistance providers can be important assets in the development of this aspect of a strategy,
particularly with respect to training, certification, and continuing education.
Examples of Use of the Tool as a Means of Assessing Capacity
There are a wide variety of providers of training and technical assistance. These include:
Rural Community Action Project (RCAP) and then- regional affiliates,
National Rural Water Association (NRWA) and their State associations,
A-56
-------
American Water Works Association (AWWA) and their State sections,
State drinking water regulatory agencies that may also provide training and technical
assistance to facilitate compliance,
Other State agencies designed to help small entitiese.g., departments of commerce or
community affairs,
State public utility commissions,
International City Managers Association (ICMA), and
National Environmental Training Association (NETA).
Sources of Additional Information
For more information on training and technical assistance providers see:
National Training Coalition, "Final Report on Training Needs and Providers," July 1997.
You can obtain more information by calling the Association of State Drinking Water
Administrators at 202-293-7655, RCAP-Community Resource Group at 501-443-2700, the
National Rural Water Association at 405-252-0629, or the American Water Works Association
at 303-799-7711.
A-57
-------
Coordination with Other Agencies
Effective design and implementation of capacity development strategies requires the
coordination of a large number of governmental agencies. At the State level, these may include
the State SDWA primacy agency, the public utility commission (PUC), the SRF development
financing agency, and the water resources management agency. In some States, several of these
may be authorized by a single statute and be in the same overall agency. In other States, there
may be substantial fragmentation.
Public utility commissions (PUCs) play an important role in the regulation and oversight of
public water systems in many States. While the jurisdiction of PUCs varies from State to State,
the commissions often regulate investor-owned utilities and a variety of other non-investor-
owned utilities. PUC approvals also may be required for extensions of service from existing
investor owned systems to new developments outside the original franchise area, or from
municipal water systems to new developments outside the municipal boundaries. These statutory
authorities make PUCs logical partners in capacity development strategies. Several state
commissions have adopted more expanded roles in small water system capacity by means of: 1)
opening a formal proceeding on the matter and requesting public comment; 2) developing and
issuing a new policy statement adopted by the commissioners; and 3) entering into Memoranda
of Understanding with other agencies stating the broad objectives of small system capacity
development and itemizing specific commission responsibilities.
The State financing agency, if different from the primacy agency, also is an important actor.
This agency will administer grant and loan programs that can provide incentives for capacity
development efforts. Establishing coordination between the primacy agency and the financing
agency is an essential part of a capacity development strategy.
The State agency responsible for administering water supplies through water rights or user
permits is likely to have data on water allocations that are necessary for evaluating the supply
options in an area. Similarly, a State's water quality agency will have some data on the quality of
those surface or ground water supplies to assess whether treatment costs or contamination
problems may be associated with a particular supply alternative. University geology
departments, or federal agencies such as the U.S. Geological Survey or the Army Corps of
Engineers, may for certain areas in a State have done studies that include either or both types of
useful information.
At the sub-State level, the primacy agency must coordinate with all regional, county, and
municipal governments that may play a role in capacity development. Agencies concerned with
land use development, land use planning, and growth management are likely candidates for
A-58
-------
coordination in an effort to develop a State-wide effort to ensure that systems with adequate
capacity serve all new residential and commercial development. In most States, primary
responsibility for land use planning is a sub-State responsibility, performed by municipal
governments, county governments, or regional planning agencies.
Coordination between agencies usually is accomplished through memoranda of
understanding. These could be implemented in several different ways.
Primacy agencies and PUCs could jointly issue renewable operating permits. The primacy
agency could focus on technical areas where it has strong engineering and operations
expertise, while the PUC could focus on financial areas where it has special expertise.
Together, the two agencies could perform a more thorough development assessment than
either agency could perform
* The memoranda of understanding could, include both the PUC and the State financing
agency, thereby ensuring that prospective use of grant and loan funds are reviewed by both
the primacy agency and the PUC.
Primacy agencies could sub-contract assessment of public water systems' financial capacity
to PUCs or the State financing agency, thereby bringing the expertise of these other
agencies to bear on this critical element of capacity assessment.
Examples of Using the Tool as Part of a Capacity Development Strategy
Coordination with other agencies can be used in the following ways to assist in the
development and implementation of a State capacity development strategy.
To prioritize systems most in need of improving technical, managerial, and financial
capacity. Coordinating with all other agencies that routinely assess capacity of water
systems would improve the ability of the primacy agency to prioritize systems.
* To identify factors that encourage or impair capacity development Coordination with
other, relevant agencies encourages capacity development, and absence of coordination
will impair the implementation of a capacity development strategy.
A-59
-------
To establish a baseline and measure improvements in capacity. Creation of coordination
with other agencies, particularly through memoranda of understanding, would be one
indication of improvement in the State program.
To identify stakeholders who have an interest in or are involved in the preparation and
implementation of the capacity development strategy. The other agencies described
above are essential to implementation of the strategy.
Examples of Use of the Tool as a Means of Assessing Capacity
Coordination with other agencies is an important procedural step for accurate assessment of
the technical, financial, and managerial capacity of systems. As demonstrated throughout this
document, each of these agencies may have a unique perspective on technical expertise that
would not be available from the primacy agency alone. For example:
PUCs have information on financial aspects of the capacity of systems that they regulate.
Their staff also include professionals who are trained to assess financial capacitya type
of expertise that may not be found in the primacy agency.
State financing agencies have a unique database comprised of applications for grants and
loans, plus agency evaluation of the capacity of systems making these applications.
Also, like PUCs, financing agencies have trained professionals who are expert in
assessment of financial capacity.
Sources of Additional Information
For more information on coordination with other agencies see:
A Guidebook of Financial Tools. Environmental Finance Program.
This document is available through the EPA home page. You can access this document at
www.epa.gov/eflnpage/guidebk/guindex.htm.
A-60
-------
Source Water Assessment Programs
Section 1453 of the SDWA Amendments of 1996 contain provisions for State Source Water
Assessment Programs. Source water and capacity development have two fundamental links.
One link is to the DWSRF, which allows States to set funds for prevention activities. The
Amendments require the States to prepare the source water assessment program and capacity
development strategy once. States need to be sure that the actions they propose are those
necessary to equip them to make the link to the DWSRF and the other SDWA requirements
work.
The second link is to public participation. A consistent theme in the Amendments is for
States to have both flexibility and resources in adjusting programs to meet State needs, especially
in the prevention area, and the obligation for public information and involvement to ensure that
States' choices respond to their constituents' needs and conditions.
The capabilities States can develop in their capacity development strategies are essential to
make other parts of the SDWA work. Like source water protection, achieving increased capacity
through improved management of the water resources and/or physical infrastructure, can head off
compliance problems that will cost far more to fix than the cost of the management
improvements. The Amendments also require States to make decisions on whether restructuring
and water supply alternatives are affordable for small systems that apply for variances and
exemptions. To make these decisions States will need an information base and analytic methods
for water and system management, both of which States can build into framing their capacity
development strategies. These tools are equally valuable for evaluating the problems of systems
in noncompliance, and for targeting technical assistance to systems that require the most help.
Wellhead Protection Programs (for ground water) and Watershed Control (or Protection)
Programs (for surface water) are types of source water assessment programs that many States
have implemented for years. Wellhead Protection Programs can include requirements that a
public water system determine the susceptibility of its source water(s) to surface activities;
delineate wellhead protection area(s); inventory for potential contaminant sources; notify
owners/operators/regulators/land use planners/emergency responders of the findings; and
develop contingency plans in the event of a contamination incident.
A-61
-------
Examples of Using the Tool as Part of a Capacity Development Strategy
Source water protection can be used in the following ways to assist in the development and
implementation of a State capacity development strategy.
To prioritize systems most in need of improving technical, managerial, and financial
capacity. Source water protection programs can provide useful information on potential
sources of contamination that could help in prioritization.
To assist public water systems in complying with national primary drinking water
regulations; and encourage the development of partnerships between public water
systems to enhance technical, managerial, and financial capacity. Source water
protection, encouraged by the 1996 Amendments to SDWA, assists in both of these efforts.
To establish a baseline and measure improvements in capacity. Given the potential
importance of source water protection and its links to capacity development, one measure
of improvement in capacity development could be the extent to which the State and its
systems have implemented source water protection.
Examples of Use of the Tool as a Means of Assessing Capacity
Developing a sound source water protection or wellhead protection program involves all three
components of capacity: the technical ability to determine hydrogeologic data, the management
skills to develop and implement the plan; and also the financial capacity for financing any
needed facilities or activities. The presence of a source water protection program or wellhead
protection program therefore can help States to assess these aspects of system capacity.
Similarly, developing a watershed control program requires all three components of capacity:
the technical ability to determine watershed data, the management skills to develop and
implement the plan, and also to financial capacity for financing any needed facilities or activities.
A-62
-------
Sources of Additional Information
For more information on source water assessment programs, wellhead protection programs
and watershed protection programs, see:
U.S. Environmental Protection Agency. "State Source Water Assessment and Protection
Programs Guidance" EPA Document # 816-R-97-007, April 1997.
Washington State's Department of Health has an administrative mandate for requiring
watershed control programs (WAC 246-290-135) and provides guidance in the "Water
System Planning Handbook."
Washington State has also mandated wellhead protection programs for ground water
systems (WAC 246-290-135A). The State has a guidance document available, Washington
State Wellhead Protection Program Guidance Document, April 1995.
A-63
-------
Water Conservation Plans
Some States use Water Conservation Plans to help boost water systems' technical capacity, as
well as the systems' managerial and financial capacity. Typically, these plans include three
components:
water conservation program: various conservation measures are evaluated and those that
are cost effective are scheduled for implementation (description, budget, monitoring
program, etc.);
» water demand forecasting: systems are required to forecast 6- and 20-year water demands
considering projected population, historic water use, land use, projected conservation
savings, and other appropriate factors; and
water use data collection and reporting: various parameters of water use are required to be
collected and reported to the State annually.
Requirements for water conservation plans will vary, depending upon the size of the water
system. The larger the system the more detailed and complex the requirements.
Examples of Using the Tool as Part of a Capacity Development Strategy
Conservation plans can be used in the following ways to assist in the development and
implementation of a State capacity development strategy.
To encourage the development of partnerships between public water systems to enhance
technical, managerial, and financial capacity. Existence of conservation programs,
particularly those that require long-term forecasting of water demands, could facilitate
partnerships between water systems to deal with water quantity issues.
To establish a baseline and measure improvements in capacity. For those States where
water quantity is an important public policy issue, implementation of water conservation
plans can be used to measure improvements in capacity.
A-64
-------
Examples of Use of the Tool as a Means of Assessing Capacity
Conservation plans also can be used to assess the technical, financial, and managerial capacity
of water systems. Each of the three components of capacity (technical, managerial and financial)
are related and addressed in various sections of a water conservation plan. Knowing future water
demands and current water usage provide a technical basis for making managerial decisions to
ensure adequate physical capacity. Knowing when additional system component capacity will be
needed based upon projected water conservation savings and water demand forecasts will enable
sound financial decisions related to needed system expansions and improvements.
Sources of Additional Information
Washington requires water conservation plans under RCW 43.20.230,43.70.310, and WAC
246-290-100. Additional authorities from the Department of Ecology related to water
conservation are found in RCW 43.27A.090,90.03.005,90.54.020, and 90.54.180. DOH and
Ecology's "Water Conservation Planning Requirements" provide detailed guidelines and
requirements for water conservation for public water systems.
Readers may wish to cross-reference water conservation plans with other tools, specifically
the water supply plan or business plan. Some States require that water conservation plans be
included with other planning documents.
A-65
-------
Emergency Response Plans
One element of capacity development is the development of an Emergency Response Plan
that will define how systems will respond to emergency situations. These plans cover "routine"
emergencies as well as "disaster" emergencies. The plan lists procedures a system should follow
when emergencies occur. The concept is for the system to develop the capacity to handle routine
emergencies so if a disaster emergency occurs, the system will be better capable of protecting
public health.
Examples of Use of the Tool as a Means of Assessing Capacity
* To assess the technical, financial, and managerial capacity of water systems.
Identifying how a system will respond to routine and disaster emergencies could apply to
all aspects of capacitytechnical, managerial, and financial. For purposes of assessing
capacity of systems, however, the tool probably is most applicable to technical capacity,
particularly technical knowledge and infrastructure adequacy. Secondarily, the tool could
be applied to assessments of managerial capacity for the element of staffing and
organization.
Sources of Additional Information
Washington State requires an emergency response plan as an element of a system's Water
System Plan. Washington State Department of Health, "Planning Handbook: A Guide for
Preparing Water System Plans," August 23,1993.
National Rural Water Association, "Emergency Response Manual for Small Systems.".
For more information on emergency-response plans, the National Rural Water Association at
405-252-0629, or the American Water Works Association at 303-799-7711.
A-66
-------
Certificates of Convenience and Necessity (CCNs)
A CCN is a license that allows certain public utilities to operate as regulated monopolies
within a defined area. The focus of review before granting or transferring CCN's is to assess the
utility's ability to provide continuous and adequate service. This may involve a review of the
utility's debt/equity ratio, ability to provide continuous service, the feasibility of obtaining
service from another utility, the effect on the consumers of granting the CCN and other technical,
managerial and financial capabilities.
Investor-owned utilities, water supply corporations and border counties are required to obtain
a CCN. Cities and districts must obtain a CCN only if they wish to serve in an area lawfully
served by another utility. The order to grant, amend, or transfer a CCN may include
requirements to improve the utility's ability to provide continuous service. The orders are
monitored for compliance. If a utility is being transferred, the new owner must State in the
application how the facilities will be maintained or improved to meet minimum State standards.
Examples of Using the Tool as Part of a Capacity Development Strategy
A CCN is one of the important control points that permit State agencies to ensure system
capacity. As such, it can be used in the following ways to assist in the development and
implementation of a State capacity development strategy.
To assist public water systems in complying with national primary drinking water
regulations; and encourage the development of partnerships between public water
systems to enhance technical, managerial, and financial capacity. The availability of a
CCN requirement is one method that States can use to assist systems in maintaining
compliance. Also, the nature of the CCN review process, particularly since it permits other
nearby systems to comment on the application for renewal of a CCN, can assist in the
development of partnerships between water systems.
To identify stakeholders who have an interest in or are involved in the preparation and
implementation of the capacity development strategy. The process for issuance or
renewal of a CCN provides explicit procedures for involving water system customers in
the process. PUCs that issue or renew CCNs could assist State primacy agencies in the
identification of stakeholders.
A-67
-------
Examples of Use of the Tool as a Means of Assessing Capacity
The process for issuance or renewal of a CCN involves an assessment of the capacity of the
system applying for the CCN. It therefore can be used to supplement the primacy agency's
assessment of the technical, financial, and managerial capacity of water systems.
To assess technical capacity: The review of an application for a CCN considers the
sanitary survey and possibly an on-site inspection of the facilities. Deficiencies noted on
the sanitary survey are addressed. The utility may be ordered to correct deficiencies
before awarding the CCN. In the CCN application, the utility typically must verify the
availability of a certified operator for the system.
The application to transfer a CCN requests information on the utility's physical capacity
to provide adequate water service. If the demand for water has reached at least 85% of
the utility's physical capacity, the applicant must submit a plan to increase its capacity or
otherwise ensure continuous and adequate water service.
* To assess managerial capacity: The CCN application and the application to transfer a
CCN requests information on the owner or governing board, including the owner's
experience and qualifications to manage the utility. The procedure to obtain or transfer a
CCN ensures that customers are notified of the new service or the transfer in ownership.
Any objections to the new utility or change in ownership are resolved during the
process.
To assess financial capacity: The CCN application and the application to transfer a
CCN requests information on the rates, the existing debt of the utility, and how the
utility will be funded hi the future. Investor-owned utilities must provide information on
the purchase price and rate base of the utility. The utility is given notice that it will be
responsible for supporting the amount of the original cost hi a rate proceeding.
Sources of Additional Information
NARUC, Annual Report on Utility and Carrier Regulation, Washington, DC.
Beecher, Janice. 1995 Inventory of Commissions of Regulated Water and Wastewater
Utilities, Indianapolis Center for Urban Policy and the Environment.
A-68
-------
Review of Audit Reports
Some States require that utilities submit an annual audit report to the State for review. One
rationale for this requirement is that States have oversight responsibility for political subdivisions
that may issue municipal bonds and levy taxes. This oversight responsibility requires audit
information. The State may require supplemental information to be included with the audit
report to assist the State in evaluating the water system's capacity.
Examples of Using the Tool as Part of a Capacity Development Strategy
A review of audit reports can be used in the following way to assist in the development and
implementation of a State capacity development strategy.
To prioritize systems most in need of improving technical, managerial, and financial
capacity. As with many other types of financial reviews conducted by State agencies, the
review of audit reports provides additional information about these systems. This
information can be used to supplement information routinely available to primacy agencies
as they establish priorities.
Examples of Use of the Tool as a Means of Assessing Capacity
A review of audit reports can be used in the following ways to assess the technical,
financial, and managerial capacity of water systems.
To assess managerial capacity: The Auditor's management letter submitted with the
annual audit report discloses the results of the auditor's review of internal controls. If
internal controls are deficient, or basic record keeping standards are not being met, the
independent auditor will note the deficiency in the management letter. The independent
auditor will also evaluate personnel policies and the billing and collection procedures.
All systems covered by the audit requirement are required by generally accepted
accounting standards to include a budget with their general purpose financial statements.
The budget must include a comparison between the budget and actual operating results.
A-69
-------
The independent auditor must also disclose significant non-compliance with the rules and
regulations that apply to water systems.
* To assess financial capacity: The annual audit report is analyzed to ensure its rates,
charges and revenues are sufficient to cover debt service and operating expenditures. If
a bankruptcy application is filed, then the audit report is reviewed in terms of the
necessity for bankruptcy and potential avenues of recourse that the system has not
pursued.
The supplemental schedules submitted with the annual audit report include information
on rates, investments, insurance, and contact information on the governing board. The
schedules for current and future debt service payments are included, as well as the
historical trends in the assessed valuation of property and property taxes. A five-year
comparative operating statement is provided with total water pumped versus total water
billed to customers.
Sources of Additional Information
For more information on audit reports, see:
Texas Natural Resource Conservation Commission, "Annual Audit Report Requirements
for Texas Districts and Authorities."
A-70
-------
Bond Issue Reviews
Some States require publicly owned water systems to obtain State regulatory approval before
issuing general obligation bonds. The bond approval process includes an engineering review of
the facilities to be purchased with the bond proceeds and a financial review of the feasibility of
the system to make the debt service payments. Like the audit report (discussed above), this
review reflects the State's responsibility to ensure that political subdivisions with taxing authority
act responsibly when incurring debt.
Examples of Using the Tool as Part of a Capacity Development Strategy
Bond issue reviews can be used in the following ways to assist in the development and
implementation of a State capacity development strategy.
To prioritize systems most in need of improving technical, managerial, and financial
capacity. As with the review of audit reports, bond issue reviews provide additional
information about these systems. This information can be used to supplement information
routinely available to primacy agencies as they establish priorities.
Examples of Use of the Tool as a Means of Assessing Capacity
Bond issue reviews can be used in the following ways to assess the technical, financial, and
managerial capacity of water systems.
To assess technical capacity: The application for bond approvals includes an engineering
report which explains why the technology for the infrastructure was selected. The
engineering report provides a justification for the facility costs included in the bond issue,
including redundant facilities and other engineered components of the system.
The engineering review of the proposed bond issue ensures that the infrastructure is
appropriate for the development, that professional engineering standards are maintained,
and that the costs are appropriately allocated between private and public interests.
A.-71
-------
To assess managerial capacity: The application for approval of a bond issue includes
various resolutions of the governing board of the system to indicate that the board has
reviewed and approved the application and the terms of the bond issue. The consultants
working for the system have a professional obligation to explain to the board the applicable
regulations and obligations of their office.
To assess financial capacity: The financial review of a bond issue analyzes the potential
tax revenues for the development based on current and future assessed valuations of die
property over the life of the bonds, usually a 20-year period. The tax revenues must be
sufficient to cover debt service payments and maintain a specified level of reserve. Tax
increases may be limited by State statutory limits on indebtedness by political
subdivisions.
Sources of Additional Information
NARUC, Annual Report on Utility and Carrier Regulation, Washington, DC.
Beecher, Janice. 7995 Inventory of Commissions of Regulated Water and Wastewater
Utilities, Indianapolis Center for Urban Policy and the Environment.
A-72
-------
Credit Rating Services
There are several different credit rating services. These institutions rate the credit-worthiness
of different types of public water systems. Two institutions, Standard & Poor's and Moody's,
rate the credit of some public water systems that have issued bonds. (Not all systems that issue
bonds are rated.) Both publicly owned and privately owned systems are included in these
ratings. Dun & Bradstreet, another credit rating service, issues reports on the credit-worthiness
of millions of investor-owned businesses. All of these services use a variety of financial ratios to
compare the financial condition of the entity being rated with comparable publicly owned or
privately owned entities. Dun & Bradstreet also uses a history of accounts payable to assess
whether the entity promptly pays its vendors.
Many small public water systems do not have the type of financial history that is required to
obtain a credit rating from institutions like Moody's, Standard & Poor's, or Dun & Bradstreet.
This generally is a reflection on their small size. Inability to get a credit rating from these
services is not a good indicator of capacity for very small systems.
Examples of Use of the Tool as a Means of Assessing Capacity
All of the credit rating services focus primarily on an evaluation of the financial condition of
water systems. Therefore, they are most useful in assessing the financial capacity of systems. It
is likely that most small systems will not be rated by any of these services. Nevertheless, the
procedures and techniques used by the services may provide some insights to States as they
develop methods for assessing financial capacity.
To assess financial capacity. The credit rating services described above provide insights
into variables that are of most interest to creditors. The bond rating services focus
primarily on variables that are related to the ability of a water system to establish and
maintain a revenue stream that will repay the institutions that purchased the bonds. Dun &
Bradstreet, in contrast, is more interested in day-to-day credit worthiness, e.g., the ability
of a system to pay its vendors. The type of analysis used by Dun & Bradstreet is
particularly useful for the smallest systems that are unlikely to ever issue debt instruments.
A-73
-------
Sources of Additional Information
For more information on credit rating services see:
AWWA Research Foundation, "Meeting Future Financial Needs of Water Utilities."
A-74
J
-------
Financial Assurance Mechanisms
Several States have authority to require that system owners provide some form of financial
assurance prior to construction of a new water system or expansion of an existing system. While
the types of financial assurance mechanisms vary from State to State, the intent generally is the
same: to ensure that sufficient funds are available to repair and/or operate the system in the event
that the owner is unable to do so. Typically, these requirements are more often imposed on
small, privately owned systems.
Examples of the types of financial assurance mechanisms that might be required include:
Escrow accounts (Maryland),
An emergency reserve account to cover the cost of emergency or system component failure
(Washington),
Surety bonds (North Carolina),
Letters of credit,
Trust funds, or
* Financial tests (e.g., an analysis of financial statements that demonstrates the financial
health of the water system)
Examples of Using the Tool as Part of a Capacity Development Strategy
Financial assurance mechanisms can be used in the following ways to assist in the
development and implementation of a State capacity development strategy.
To prioritize systems most in need of improving technical, managerial, and financial
capacity. Systems that already have requirements for financial assurance mechanisms
might be candidates for higher priority.
A-75
-------
To identify factors that encourage or impair capacity development, Legal authority to
require financial assurance mechanisms may be one factor that encourages (or has
encouraged) the development of system capacity.
Examples of Use of the Tool as a Means of Assessing Capacity
To assess financial capacity. These financial assurance mechanisms are a quick test of
system capacity. Put simply, if the system cannot afford one of these financial assurance
mechanisms, then it may not have the financial capacity to provide safe drinking water.
Sources of Additional Information
For more information on credit rating services see:
U.S. Environmental Protection Agency, "Ensuring the Viability of New, Small Drinking
Water Systems: A Study of State Programs," EPA-570/9-89-004, April 1989.
A-76
-------
Consumer Confidence Reports
Section 1414(c)(4) of the Amendments to the SDWA requires that all community water
systems inform all of their customers about the levels of contaminants in the drinking water
provided by that system. Systems serving more than 10,000 persons are required to inform their
customers by mail. The Governor of a State may allow systems serving fewer than 10,000
persons to inform their customers through notice in newspapers plus making the report available
upon request.
Examples of Use of the Tool as a Means of Assessing Capacity
The consumer confidence reports discuss both technical and managerial capacity. Their
results could be used by States in an effort to assess capacity.
Technical capacity. The levels of contaminants in finished water provided to customers
certainly reflects on thee adequacy of source water (from a qualitative standpoint). It also
reflects infrastructure capacity and technical knowledge. Weaknesses in each of these
elements could contribute to levels of contaminants that exceed standards.
* Managerial capacity. The levels of contaminants in finished water also could reflect
problems with the management of a system. From the standpoint of capacity development,
the existence of contaminant levels that exceed standards is most likely linked to the
staffing and organization element of managerial capacity.
Sources of Additional Information
For more information on consumer confidence reports see:
The Nov. 8,1996 "Water Quality Reports Update" on Consumer Confidence Reports.
This document is available on the Internet from the American Water Works Association home
page. You can access this document at www.awwa.org/ccrupdat.htm
A-77
-------
"Consumer Confidence Reports: Opportunity's Knocking." Journal of the American
Water Works Association. (Apr. 1997): 12.
Two recommended AWWA examples of Consumer Confidence Reports are available on the
Internet for Davis, CA and Denver, CO. These documents can be accessed at:
www.city.davis.ca.us/city/pworks/wqrept95 .htm
www.water.denver.co.gov/dwbwq96.htm
A more complete listing of utilities with Consumer Confidence Reports is also available from
AWWA and can be accessed at www.awwa.org/utility.htm.
A-78
-------
Enforcement
Many States consider enforcement a tool that can be used for improving system capacity. As
one State representative put it, "this is the last tool in the toolbox." In other words, enforcement
(or the threat of enforcement) can assist in capacity building.
Compliance assurance programs also may involve a number of activities that are not strictly
enforcement. In Massachusetts, for example, the Division of Water Supply has several "tools"
that can be used to promote compliance. These include:
A database on system compliance status,
A comprehensive training program for all public water systems,
Training for third parties such as consultants and laboratory staff,
CCPs and optimization surveys,
Water system awards, and
A PWS mentoring program.
Examples of Using the Tool as Part of a Capacity Development Strategy
Enforcement can be used in the following way to assist in the development and
implementation of a State capacity development strategy.
To assist public water systems in complying with national primary drinking water
regulations. Enforcement is one tool that can be used (as a last resort) to ensure that
systems are complying with the national primary drinking water standards.
Sources of Additional Information
For more information on enforcement, see:
"In the Main." Massachusetts Division of Water Supply. Spring 1996.
"Enforcement Program." Washington Division of Drinking Water.
This document is available on the Internet at 198.187.0.42/ehp/dw/dwenf.htm.
A-79
-------
State or Federal Surveys of Infrastructure Needs
Several States (e.g., Washington, Pennsylvania, Oregon, and New York) conducted surveys of
infrastructure needs during the first half of this decade. In 1995, EPA began the first national
survey of infrastructure needs, and all States participated in this effort to survey a national
probability sample of community water systems. In 1999, EPA will conduct as second national
survey of infrastructure needs, as required by Section 1452 of the Act. One limitation of the
EPA survey is that it was limited to community water systems. Some States, however, also
included noncommunity systems' needs.
Examples of Using the Tool as Part of a Capacity Development Strategy
To prioritize systems most in need of improving technical, managerial, and financial
capacity. Federal or State Surveys of infrastructure needs could be used to prioritize
systems in need of assistance in capacity development. Indeed, a capacity development
strategy might prioritize its activities toward systems that had a large backlog of unfunded
infrastructure needs. In this way, these surveys could assist in the development and
implementation of a State's capacity development strategy.
Sources of Additional Information
For more information on surveys of infrastructure needs, see:
U.S. Environmental Protection Agency, Drinking Water Infrastructure Needs Survey:
First Report to Congress, January 1997, EPA 812-R-97-001.
A-80
-------
Interviews with Personnel Familiar with the Systems
States should not overlook the obvious step of talking with individuals who are familiar
with the system.
Examples of Use of the Tool as a Means of Assessing Capacity
In assessing capacity for the purposes of SRF decisions, States could obtain valuable
information from the following sources:
Sanitarians, engineers, or regulatory staff at the State, county, or local level who are
familiar with the system. These individuals often know the inner-workings of the
system, the system owners or operators, and the problems faced by the system. They
may have files on the system in their desks. These individuals can offer information that
is not contained in the standard tools discussed above, or they can help answer questions
that may arise in the review of the other documents.
* Local planning boards, operator certification boards, or developers' associations.
These individuals may also have information on the specific system, as well as general
information on system capacity in the area.
Technical assistance personnel. Circuit riders or other technical assistant staff often
possess a firm understanding of a system (sometimes better than the operator's) and are
able to offer information about a system's capacity or answer State questions. In some
cases, the State will want to seek confirmation of the information provided by technical
assistance staff.
Staff at the system itself. Interviews with the system owners or operators would also
help the State review capacity. States could use this opportunity to perform a mini
capacity assessment using tools such as the Dozen Questions, sanitary survey proce-
dures, or CPE interview guides.
A-81
-------
------- |