United States
       Environmental Protection    Office of Water   EPA 816-D-97-001
       Agency           46O6       November 1997



&EPA  Information for States on


       Developing Affordability


       Criteria for Drinking


       Water
        Public Review Draft

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Small Systems Working Group Members
Kevin Brown Yvette dePeiza
Division of Drinking Water Division of Water Supply
Utah Department-of Environmental Mass. Dept. of Environmental Protection
Quality
Teresa Rissmiller
Jack Bryck Mount Joy Township Authority, PA
Dayton & Knight, Ltd.
John P. Scheltens
Judy Chambers City of Hot Springs, SD
Borough Manager, Mercersberg, PA
Peter E. Shanaghan
Mary Gaiski - Office of Groundwater and Drinking
Pennsylvania Manufactured Housing Water, U.S. EPA
Association -
Jim Sheldon
Jason Gray Cedar-Knox Rural Water Project, NE
Virginia Water Project, Inc.
Donna Shell
Robert Hinton Environmental Information Center, VA
Public Staff
North Carolina Utilities Commission Rich Siffert
Drinking Water Division
Diane Kiesling Washington Department of Health
Commissioner -
Florida Public Service Commission Gerald Smith
Drinking Water Proteciion
Ted Michaels Minnesota Department of Health
Natural Resources Group
National Governors’ Association William A. VanDeValk
Lamont, VanDeValk Engineers, P.C.
David Monie
SB Water Company, NJ Julie Ward
Great Lakes Rural Community Assistance
Gary Morgan - Program
Rural Utilities Services, USDA
- Rita Wayco
Bridget O’Grady U.S. EPA, -Region 4
Association of State Drinking Water
Administrators

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Contents
Tables, Figures, and Boxes .
Preface
2

Appendix A
Affordability Measur s and i’hresholds: -
Selected Studies
Appendix B
Selected State Policies Using Affordability Criteria
References
I. Affordable Paths to Compliance...,
2. Drinking Water and Affordability..
3. Affordability Assessment
4. An Affordability Framework
5. Using Affordability Criteria -.
4
12
19
28
38.
41
49
57
I

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Tables, Figures, and Boxes
Tables
Table 1 Decision Framework for Variances Pursua t to the 1996 SDWA
Table 2 - Annual Consumer Expenditures for U i+ities and Other Items, 1995
Table 3 Relationship Of-Water-Prices to Housèhdld Ability-to-Pay
Table 4 Framework for Affordability Analysis
Table 5 Affordability As é sment and P ths to Cómj,liance
Figures
Figure 1 Paths to Compliance for Small Water Systems Pursuant to the 1996 SDWA
Figure 2a Illustration of a Regressive Effect of User Charges
Figure 2b Illustration of a Progressive Approach to User Charges
Figure 3 Generalized Resource Flows To and From Water Systems
Figure 4a Potential Resources for Publicly Owned Community Water Systems
Figure 4b Potential Resources for Privately Owned Community Water Systems
Figure 5a Potential Resources for Public or Nonprofit Nontransient Noncommunity Water
Systems
Figure Sb Potential Resources for Private Nontransient Noncommunity Water Systems
Boxes
Box 1 1996 Safe Drinking Water Act on Affordability and Variances
Box 2 1996 Safe Drinking Water Act on Affordability and the State Revolving Fund
Box 3 Policy Statement of the National Association of Regulatory Utility Commissioners on
Affordable Drinking Water
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Preface
Pursuant to the 1996 Amendments to the Safe Drinking Water Act (SDWA), small water
systems can follow one of several paths to compliance, including a variance path. The Act
provides the conditions under which the states (or the U.S. Environmental Protection Agency for
States that do not liave primary enforcement responsibility) can grant a variance to water systems
unable to comply with federal drinking water quality standards.
Factors affecting eligibility for variances include system size, compliance alternatives,the
nature of contamination and the risk to public health, and affordability. The states can formulate
their own affordability criteria for use in granting variances.
The Act requires the United States Environmental Protection Agency (EPA) to publish,
within eighteen months of the statute’s enactment, information to assist the states in formulating
affordability criteria. According to the statute, this information is to be developed by the EPA in
consultation with the states and the Rural Utilities Service (RUS) of the U.S. Department of
Agriculture.
The EPA enlisted the Small Systems Working Group of the National Drinking Water
Advisory Council (NDWAC) to develop this information document for consideration by the full
NDWAC and ultimately publication by the EPA. Publication of this document fulfills the Act’s
requirement to provide the states with information for use in developing affordability criteria.
3

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1. Affordable Paths to Compliance
The 1996 Safe Drinking Water Act (SDWA) provides small water systems with
alterhative paths to compli nce, as depicted in Figure 1. Each path incorporates consideration of
affordability, the ability a la water system and its customers to support the cost of compliance.
The first path leads to compliance via technologies considered affordable according to
federal criteria. This path is generally outside the scope of this information document. The
second and third paths involve the application of state-developed affordability criteria, which are
the focus of this document. The second path leads to compliance via alternative water sources
and structubl changes in utility operations (such as interconnection with another system). The
third path leads to compliance throughá conditional variance.
Section 1415 of the 1996 amendments to the SDWA allows states with primary
enforcement responsibility (or the EPA for states that do not have pri aky enforcement
responsibility) to grant variances for compliance with requirements specifying a maximum
contaminant level (MCL) or treatment technique.
Variances can be granted by the states to:
• Public water systems serving 3,300 or fewer persons.
• Public water systems serving more than 3,300 but fewer than 10,000 persons with
the approval of the EPA Administrator. -
A system is eligible for a variance f it cannot afford to comply with a national primary
drinking water regulation through:
• installing a water treatment method,
• developing an alternative water supply, or
• restructuring or consolidating with another water system.
Granting variances is further subject to public health considerations. When granting a
variance, the primacy agency must be satisfied that:
• the variance does not apply to microbial or pre-1986 SDWA contaminants.
• the terms of the variance will ensure’ adequate protection of human health.
Finally, where an affordable technology that achieves compliance cannot be identified,
the EPA must identify variance technologies. Variance technologies will be affordable but they
will not necessarily achieve the quality staqdard set by the (MCL). Variance technologies must
achieve the maximum reduction that is affordable, considering system size and source water
quality. Again, the variance must protect the public health.
4

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The list of variance technologies must be reviewed by the EPA every seven years, or
following a petition supported by substantial information.
Water systems must comply with the conditions of the variance within three years. Two
additional years may be allowed at the state’s discretion.
The SDWA specifies that “affordability criteria shall be reviewed by the states not less
often than every 5 years to determine if changes are needed to the criteria” ( 1415 (e)(7)(b)).
The Act also provides for a periodic review of state programs by the EPA to ensure that
variances comply with the provisions of the Act. The EPA’s review with regard to affordability
is limited to adetermination that variances granted comply with the state-determined
affordability criteria. The state and the public will be notified if the EPA finds that variances
granted are not in compliance with the state’s affordability criteria (Section 1415 (e)(8)(A) and
(B)).
In addition to the variance provisions, affordability is also addressed in. the SDWA
provisions related to the State Revolving Fund (SRF) (see Box 2) under § 1452 (b). States that
enter the capitalization agreement are required to prepare an annual Intended Use Plan (TUP) that
includes a list of assistance projects, the criteria and methods established for distributing funds,
and a description of the financial statutes and goals of tile state fund.
According to the Act ( 1452 (b)(3)(A):
An IUP shall provide, to the maximum extent practicable, that priority for the use of
funds be given to projects that—
(i) address the most serious risk tohuman health;
(ii) are necessary to ensure compliance with the requirements of this title
(including requirements for flifration); and
(iii) assist ystems most in need on a per household basis according to state
affordability criteria.
hi addition, states may provide up to 30 percent of their capitalization grant to
- “disadvantaged communities,” which according to the Act “means the service area of a public
water system that me,ets affordability criteria established after public review and comment by the
state in which the public water system is located.”
State development of affordability criteria, and the use of these criteria in furthering the
goals of compliance, clearly are important challenges under the SDWA.
5

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Figure 1
Paths to Compliance for Small Water Systems
Pursuant to the 1996 SDWA
Affordable Treatment
Technology
( Federal criteria )
May include:
Pac agcd• Modular -
Pointof entry
Point of use (no mzcrobial)
1412(b) (4 )
SYSTEM OUT OF System
SYSTEM IN
I COMPLIANCE I IJ-J J NCE
Affordable Alternatives -
( State criteria )
Source of supply
Restructuring
Consolidation - (j)
— Yes
1415( i)
NoQ ____ ____
Affordability Variances
Variance System Does Not
Systems serving C 3,300
Systenis serving 3,300 to io,ooo Technology- Meet MCL But
with EPA approval Installed Does Not Pose a
No micvobial contaminants
No pre-1986 SDWA violation, — Risk to Health
1412 (b)(IS) ——
1415 (.)(7) 1415 (i)(S)
1415 (e)(6) ______________________ _______________________
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Boxi
1996 Safe Drinking Water Act on Affordability and Variances
1415 (e) Small System Variances.—
(1) In general—A state exercising primary enforàement responsibility for public water systems under
section 1413 (or the Administrator in nonprimacy states) may grant a variance under this subsection for
compliance with a requirement specifying a maximum contaminant level or treatment technique contained
in a national pnmary drinking water regulation to —
(A) public water systems serving 3,300 or fewer persons; and
(B) with the approval of the Administrator pursuant to paragraph (9), public water systems serving more
than 3,300 persons but fewer than 10,000 persons, if the variance meets each requirement of this
subsection.
(2) Availability of Variances.—A public water system may receive a variance pursuant to paragraph (1),
if—
(A) the Administrator has identified a variance technology.under section 141 2(b)(15) that is applicable-
to the size and source water quality conditions of the public water system;
(B) the public water system installs, operates, and maintains, in accordance with guidance or regulation
issued by the Administrator, such treatment technology, treatment technique, or other means; and
(C) the state in which the system is located determines that the conditions of paragraph (3) are met:
(3) Conditions for Granting Variances.—A variance under this subsection shall be available only to a
system—
1
(A) that cannot afford to comply in accordance with affordability critOrla established by the
Administrator (or the state in the case of a state that has primary enforcement responsibility under section
1413), with a national primary drinking water regulation, including compliance through—
(i) treatment;
(ii) alternative source Of wéter supply; or -
(iii) restructuring or consolidation (unless the Administrator (or the state in the case of a state that
has primary enforcement responsibility under section 1413) makes a written determination that
restructuring or consolidation is not practicable); and
(B) for which the Administrator (or the state in the case of a state that has primary enforcement
responsibility under section 1413) determines that the terms of the variance ensure adequate protection
of human health, considering the quality of the source water for the system and the removal efficiencies
and expected useful life of the treatment technology required by the variance. -
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Boxi
1996 Safe Drinking Water Act on Affordability and Variances (cont..)
(4) Compliance schedules.—A variance granted under this subsection shall require compliance with the
conditions of the variance not later than 3 years after the date on which the variance is granted, except
that the Administrator (or the state in the case of a state that has primary enforcement responsibility under
section 1413) may allow up to 2 additional years to comply with a variance technology, secure an
alternative source of water, restructure or consolidate if th Administrator (or the state) determines that
additional time is necessary for capital improvements, or to allow for financial assistance provided
pursuant to section 1452 or any other federal or state program.
(5) Duration of variances.—The Administrator (or the state in the case of a state that has primary
enforcement responsibility under section 1413) shall review each variance granted under this subsection
not less often than every 5 years after the compliance date established in the variance to determine
whether the system remains eligible for the variance and is conforming to each condition of the variance.
(6) Ineligibility for variances.—A variance shall not be available under this subsection for—
(A) any maximum contaminant level or treatment technique for a contaminant with respect to which
a national primary drinking w ter regulation was promulgated prior to January 1, 1986; or
(B) a national primary drinking water regulation for a microbial contaminant (including a bacterium,
virus, or other organism) or an indicator or treatment technique for a microbial contaminant.
(7) Regulations and guidance.—
(A) In general.—Not later than 2 years after the date of enactment of this subsection and in consultation
with the states, the Administrator shall promulgate regulations for variances to be granted under this
subsection. The regulations shall, at a minimUm, specify—
(i) procedures to be used bythe Administrator or a state to grant or deny variances, including
requirements for notifying the Administrator and consumers of the public water system that a
variance is proposed to be granted (including information regarding the contaminant andY
variance) and requirements for a public hearing on the variance before the variance is granted;
(ii) requirements for the installation and proper operation of variance technology that is identified
(pursuant to section 141 2(b)(1 5)) for small systems and the financial and technical capability to
operate the treatment system, including operator training and certification; -
(iii) eligibility criteria for a variance for each national primary drinking water regulation, including
requirements for the quality of the source water (pursuant to section 1412(b)(15)(A)); and
(iv) information requirements for variance applications. -
(B) Affordability criteria—Not later than 18 months after the date of enactment of the Safe Drinking
Water Act Amendments of 1996, the Mmini trator, in consultation with the states and the Rural UtilitieS
Service of the Department of Agriculture, shall publish information to assist the states in developing
affordability criteria. The affordability criteria shall be reviewed by the states not less often than every
5 years to determine if changes are needed to the criteria.
.
8

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Boxi
1996 Safe Drinking Water Act on Affordability and Variances (cont.,)
(8) Review by the-administrator.— -
(A) In general—The Administrator shall periodically review the program of each state that has primary
enforcement responsibility for public water systems under section 14i3 with respect to variances to
determine whether the variances granted by the state comply with the requirements of this subsection.
With respect to affordability, the determination of the Administrator shall be limited to whether the
variances granted by the state comply with the affordability criteria developed by the state.
I
(B) Notice and publication.—lf the Administrator determines that variances granted by a state are not
in compliance with affordability criteria developed by the state and the requirements of this subsection,
the Administrator shall notify the state in writing of the deficiencies and make public the determination.
(9) Approval of variances. —A state proposing to grant a variance under this subsection to a public water
system serving more than 3,300 and fewer than 10.000 persons shall subhiit the variance to the
Administrator for review and approval prior to the issuance of the variance. The Administrator shall
approve the variance if it meets each of the requirements of this subsection. The a dministrator shall
approve or disapprove the variance within 90 days. If the Administratordisapproves a variance under this
paragraph, the Administrator shall notify the state in writing of the reasons for disapproval and the
variance may be resubmitted with modifications to address the objections stated by the Administrator.
(10) Objections to variances.—
(A) By the Administrator.—The Administrator may review and object to any variance proposed to be
granted by a state, if the objection is communicated to the state not later than 90 days after the state
proposes to grant the variance. If the Administrator objects to the granting of a variance, the
Administrator shall notify the state in wr;ting of each basis for the objection and propose a modification
to the variance to resolve the concerns of the Administrator. The state shall make the recommended
modification or respond in writing to each objection. If the state issues the variance without resolving the
concerns of the Administrator, the Administrator may overturn the state decision to grant the variance if
the Administrator determines that the state decision does not comply with this subsection
(B) Petition by consumers.—Not later than 30 days after a state exercising primary enforcement
responsibility for public water systems under section 1413 proposes to grant a variance for a public water
system, any person served by the system may petition the Administrator to object to the granting of a
vanance. The Administrator shall respond to the petition and determine whether to object to the variance
under subparagraph (A) not later than 60 days after the receipt of the petition.
(C) Timing.—No variance shall be granted by a state until the later of the following:
(i) 90 days after the state proposes togrant a variance.
(ii) If the Administrator objects to the variance, the date on which the state makes the recommended
modifications or responds in writing to each objection. -
Source: 1996 Safe Drinking Water Act. Emphasis added.
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Box2
1996 Safe Drinking Water Act on Affordability and the State Revolving Fund
Sec. 1452. (b) Intended Use Plans.—
(1) In general.—After providing for public review and comment, each state that has entered into a capitalization
agreement pursuant to this section shall annually prepare a plan that identifies the intended uses of the amounts
available to the state loan fund of the state.
(2) Contents.—An intended use plan shall include—
(A) a list ofthe projects to be assisted in the first fiscal year that begins after the date of the plan, including a
description of the project, the expected terms of financial assistance, and the size of the community served;
(B) -the cnt ria and methods established for the distribution of funds; and
(C) . a description of the financial status of the state loan fund and the short-term and long-term goals of the state
loan fund.
(3) Use of funds.— -
(A) In gener I.—M intended use plan shall provide, to the maxims extent practicable, that priority for the use
of funds be given to projects that—
(i), address the most serious risk to human health;
(ii) are necessary to ensure compliance with the requirements of this title (including requirements for filtration);
and
(iii) assist systems most in need on a per household basis according to state affordabIlIty criterta.
• (B) List of projects.—Each state shall, after notice and opportunity for public comment, publish and periodically
update a list of projects in the state that are eligible for assistance under this section, including the priority assigned
to each project and, to the extent known, the expected funding schedule for each project.. -
(C) Fund Management.—Each state loan fund nder this section shall be established, maintained, and credited
with re ayments and interest. The fund corpus shall be available in perpetuity for providing financial assistance
under this section. To the extent amounts in the fund are not required for current obligation or expenditure, such
amounts shall be invested in interest bearing obligations.
(0) Assistance for Disadvantaged Communities.—
(i) Loan subsidy.—Notwithstanding any other provision of this section, in any case in which the state makes
a loan pursuant to subsection (a)(2) to a disadvantaged community or to a community that the state
expects to become a disadvantaged community as the result of a proposed project, the state may provide
additional subsidization (including forgiveness of principal).
(ii) Total amount of subsidies.—For each fiscal year, the total amount of loan subsidies made by a state
pursuant to paragraph (1) may not exceed 30 percent of the amount of the capitalization grant received
by the state for the year. -
(iii) Definition of disadvantaged community.—ln this subsection, the term disadvantaged community means
the service area of a public water system that meets affordabIlity criteria established after public review
and comment by the state in which the public water system is located. The Administrator may publish
information to assist states in establishing affordability criteria. -
SouIce: 1996 Safe Drinking Water Act. EmphasIs added.
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Table 1
Decision Framework for Variances Pursuant to the 1996 SDWA
General Eligibility
1. Systems serving fewer than 3,300 persons;
2. Systems serving more than 3,300 but fewer than
10,000 persons (with the approval of the EPA
Administrator).
Affordability Conditions of
Variance
- I
,
-
,
‘
.
3. Compliance through installing a treatment method
(including “affordable technologies”) is considered
unaffordable.
4. Compliance through development of an alternative
water supply is considered unaffordable,
5. Compliance through restructuring or consolidating
with another water system is considered -
unaffordable.
‘Health Conditions of Vanance


6. The variance cannot apply to microbial or pre-1986
SDWA contaminants.
7. The terms of the vanance must ensure adequate
protection of human health. -
Technology Conditions of
Variance
8. The system must install a variance teèhnology.
.
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2. Drinking Water and Affordability
- One of the central challenges of modem environmental management is the provision of
clean and safe drinking water at an affordable price to citizens. On average, as seen in Table 2,
water seems to be a bargain among both essential utility services and other consumer
expenditures. Consumers generally pay far less for water seivices than for energy and
telecommunication services, although the available statistics may mask water costs for customers
who pay through taxes or rents.
Rising costs and prices for water may force achange in x$nsumef expenditure patterns.
The cost of compliance witl drinking watã tãiidards- is on of several factors contributing to
rising water prices; Wateipriëes’ send customeiS a cru i l-signa1 about the value of quality water
service, but for some communities; higher prices may strain water system and household
budgets.
The history of federalenvironmental protection policy includes attention to the dual
issues of cost and affordability. With each enactment of’ major environmental legislation,
policymakers and other key stakeholders have endeavored to understand the cost impact of
regulations on systems and households and to design methods for mitigatmg the affordability
problem.
Affordability is intrinsically related to water system capacity, that is, the financial,
techniàal, and managerial capability of systems to provide safe, adequate, and reliable water. If a
water system cannot afford to make improvements necessary for compliance with the SD WA, or
if the households in the community cannot afford to support the cost of compliance (along with
other costs), a system may quali for a variance. However, a variance cannot be provided to
systems where noncompliance poses an unreasonable risk to health. In these cases, finding
affordable solutions may be particularly challenging.
Willingness-to-Pay v. Ability-to-Pay
I
A critical distinction when considering affordability is the difference between ability-to-
pay and willingness-to-pay. Willingness-to-pay reflects consumer preference about purchasing a
quantity of goods or services relative-to prices.’ In the willingness-to-pay perspective,
responsiveness to price changes can be measured by the price-elasticity of demand (that is, the
percentage change in usage induced by a percentage change in price). As prices rise, particularly
for essential goods and services, consumers may demonstrate a reluctance or unwillingness to
pay.
I Willingness-to-pay can be measured m a technical sense by movements along the downward sloping demand curve
(which is a cQllectlon of consumer preference functions). At lower prices, higher quantities are consumed; at higher prices,
lesser quantities are consumed. -
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A price-responsive consumer, for example, might reduce water usage in response to a rate
increase. A large percentage increase in rates sometimes induces rate shock, or a significant
change in usage (at least in the short term). Rate shock also might induce some customers to
omplain about price increases to ratemaking authorities (local governing bodies or state public
utility commissions), even zj’those price increases are cos:jusqfled.- Higher prices, along with
customer education about the cost of service, heighten perceptions of water’s value. But at some
point, if alternatives are available, customers may be unwilling to support the water utility
through high rates. Large customers, for example, may be able to bypass the system through
self-supply or interconnection with another provider.
- Concerns about how customers will react to price increases can discourage some water
systems from recovering actual costs and sending customers an accurate price signal about
water’s value. A widely held view in the water sector is that water in many areas has been
underpriced. Artificially low prices lead to inaccurate perceptions about the cost of water and
inefficient water use. Raising prices, no matter how well justified, can trigger, an apparent
unwillingness to pay. In the realm of willingness-to-pay, consumers can make choices.
Ability-to-pay raises another host of issues. Ability-to-pay focuses not on whether
consumers will pay for water service, but whether consumers can pay for water service. In the
ability-to-pay perspective, responsiveness to price changes can be measured by the income-
elasticity of demand (that is, the percentage change in usage induced by a percentage change in
income). As a general proposition, households with higher incomes can consume
proportionately more quantities of goods and services; this relationship generally holds for water
consumption.
At lower income levels, choices are far more constrained and at times very painful. The
ability-to-pay issue is especially acute for services essential to health and well-being, including’
food, medicine, arid drinking/wastewater service. Moreover, utility bills have a regressive effect
with respect to the distribution of household incomes: households at lower income levels must
devote a greater percentage of their income to utilities than households at-higher income levels
(Figure 2a). It can be argued that at higher income levels, consumers can afford to pay not only a
higher total water bill but a higher percentage of their income toward water utility payments.
This progressive approach to the affordability issue is illustrated in Figure 2b;’
In the context of the SDWA the affordability issue concerns the ability of consumers to
support the cost of water service that is compliant with federal standards. The SDWA focuses
attention on the incremental cost of water treatment associated with federal standards.
Segregating SDWA-driven treatment costs from other types of costs can be difficult.
In the ideal case, for reasons of economic efficiency, customers would be able to support
the full or true cost of compliant water service. Also, the least-cost means of compliance would
be implemented in order to help achieve both efficiency and affordability goals. - Concerns about
efficiency focus on, costs, but concerns about affordability necessarily focus on prices.
Affordable water service might require subsidies to the water system from revenue sources other
than rates (to reduce water bills), or assistance to some customers (to make it easier to pay water
bills).
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Table 2
Annual Consumer Expenditures for Utilities and Other Items, 1995
Item
.Ainount
Per
cent of Pre-Tax
Income
Income before taxes
$36,948
100.00%
Average annual expenditures -
.
$33,610
,
90.97%
Utilities -
.
••
•
Electricity
$854
-
••
2.31%
Telephone
‘
$710
1.92%
Natural gas
: -
269•
0.73%
Water and other public services
“
-
$262
0 71%
Fuel oil and other fuels
,•
- $86
0.23%
Other Items -
.
.
Housing
$10,577
28.63%
Food at home
$2,886
7 81%
Food away from home
$1,805
4.89%
Health care
-
$1,747
4.73%
Entertainment
$1,687
4.57%
Gasoline and motor oil
$1,014
2.74%
Alcoholic beverages
-
$302
0.82%
Tobacco products and smoking supplies
$272
0.74%
Nonalcoholic beverages
$250
0.68°?
Source: Bureau of Labor Statistics, 1995 Consumer Expenditure Survey.
[ gopher://liopi2.bls.gov:70/00/Special%2oRequests/ce/standardl l995/income.prfl]
* Probably includes wastewater service and may include trash collection service. Total expenditures also may
reflect expeilditures by renters who do not pay directly for water service and by homeowners who pay for some or
all of their water service through taxes.
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Figure 2a
Illustration of a Regressive Effect of User Charges
Figure 2b
Illustration of a Progressive Approach to User Charges
a)
CG)
II
Low Income Moderate Income High Income
3%
2%
1%
0%
3%
2%
1%
0%
a)
C)
Co
Ca)
a)
0
C ’ )—
(flG)
Wcn
C)
C O -
0
C l)
L
Moderate Income
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Affordability and Water Prices
Affordability is a function both of the price of water service and the ability of households
(and other water users) to pay for this service (see Table 3). High prices (or large rate increases)
alone do not necessarily indicate an affordabi1it ’ problem; similarly, low ability-to-pay may not
present an affordability problem if water prices are very low. The combination of low prices and
high ability-to-pay is the best-case scenario; the combination of high prices and low ability-to-
pay is the worst case scenario.
Table 3
Relationship of Water Prices to Household Ability-to-Pay
Water Prices’
Selected factors that Selected factors
can raise that can lower
water prices water prices
• Compliance costs -
• Infrastructure
improvement costs
• Demand growth
costs
• Debt costs
• Correction of historic
underpricing
• Economies of
scale
• Affordable:
technologies
• L ow—vosr loans
• Grants
• Subsidies
Household
Ability-to-
Pay.
Selected
factors
that lower
ability-to-
pay
• Low income levels
• Unemployment
• Nondiscretionary
obligations
• No income or
payment assistance
• Regressive rate
structures
High prices and low
ability-to-pay
Low prices and
low ability-to-pay
-Selected-

that raise
• ability-to-
pay
• Hgh income levels
- • Employment
• Discretionary
expenditures
• income or payment
assistance
• Progressive rate
- structures
High prices and high
ability-to-pay
Low prices and
high ability-to-pay
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Water prices primarily are a function of water costs. Factors that increase water costs
include compliance with drinking water standards, replacing and improving the water delivery
infrastructure, and meeting demand growth. Debt costs associated with financing projects over
time also put pressure on rates. Another factpr that can play a significant role in contemporary
rate increases is historic underpricing. For some water systems, the loss of subsidies and the
need to begin pricing water more accuratelytG reflect costscan accOunt for substantial but
necessary rate increases.
Other faètórs can help wa èi système lower the cost of service. Economies of scale offer
the moss promising meanscof4owering.the unit . cost of production, and thus consumer bills.
Economies of scalp are particularly relevant for source-of-Supply and treatment functions, and
can be achiev ed’throu hrnergers acquisitions, interconnection, and wholesale water markets.
Some ecónomi s can beachieved through common ownership or management, even without the
benefit of physical interconnection. Affordable treatment technologies also provide an important
means of lowering costs. The 1996 SDWA includes, point-of-use and point-of-entry technologies
among the possible options. Finally, low-cost loans, grants, and subsidies can help lower the
costs that must be recovered from customers. 2
Ability-to-pay is primarily a function of income, which in turn is primarily a function of
employment. Income and employment measures often are used m estimating a community’s
socioeconomic conditions and thus the-ability of consumers to support utility costs. For low-
income households, the level of nondiscretionary obligations (housing, property taxes, utilities,
and other necessities) can make paying bills more difficult. The availability of income assistance
or bill-payment assistance programs can mitigate this problem. Noñdiscretionary obligations
take a smaller share of household income for households with higher income levels.
Finally, rate design by utilities can affect the ability of individual households to pay for
basic Services... Some rate structures, such as lifeline rates, are specifically designed to keep a
basic block of usage affordable. A “progressive” rate, like a progressive tax or an increasing-
block rate structure, charges a higher unit price for higher levels of usage (which presumably
occurs with higher levels of income as well). Other rate structures, such as single-tariff pricing,
are designed to spread coCts over a wider service population so that service to high-cost areas.
(such as those with a very small customer base) is more affordable.
- Varying- assumptions al,out ratedesign. can affect the results of an affordability analysis
in important ways. In other words,the effect.ofrising.costs on-affordability can be exaggerated
or mitigated through the rate structure. Thu anal ’sts mãywant tóë q kre the availability and
acceptance of rate design opt o Wh -
increases.
2 A drawback of these options is that they undermine the efficiency of price signals.
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Generally, ability-to-pay is considered at the household level. However, a community’s
ability-to-pay can be thought of in terms of the aggregation of household ability-to-pay. This
issue is relevant because of variations in income distribution from community to community.
Communities with isolated pockets of poverty but healthy overall income levels are in a better
position to provide payment assistance or use progressive rate structures to provide affordable
water service to those in need.
Affordability is often assessed at the water iystemlevel in terms of thecapacity of
systems (or the communities that o erate ’ them) to finance system capital improvements and
operations. Water system financial capacity is depe id ñ ‘to a large degree on househol4 ability-
to-pay within the servi e. teiiitory.. Some.qommunities may.qualify for low-cost capital or other
assistance pi graws on, thc basis. of. ability±tQ pay measures or, oth .er indicators of socioeconomic
or fiscal distress.
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3. Affordability Assessment
In the 1970s, the concept of affordability was introduced as an issue in the EPA’s Office
of Water as it sought to protect investments in wastewater treatment facilities under the
Construction Grants Program. Specifically, the EPA wanted municipalities with Publicly Owned
Treatment Works (POTWs) to demonstrate their capability to finance and manage the
construction and operation of facilities.
At the same time, the Office of Drinking-WateIrwasdeveloping ts o)vn. concepts of
affordability. The 1980 Water Utility Financing Study (WUFS), was prepared in response to a
1977 Congressional requirement thatEPA’study the cost ofcomplying-withnew drinking watë .
regulations and investij iéiltérriafl ë et 1a iceë o ts (mcliiding
construction grants and ióiñs).’ ñtio i bt tó si-1 v i
affordability and hq budget pressures,in the 1980s caused the
postponement of proposals tconstmctiorrgraths andIoans; -
Pursuant to the 1986 St)WA amendthents, the Office of Drinking Water continued to
develo p affordability meã tfres In particular, affordability cntena were needed to determme
what cànstitutesthe -Best Available Technologies (BAT) for var ances under §1415 of the
SDWA. In addition to system-level financial variables, analysts also began to consider the role
of household affordability in determining system viability or capacity.
State regulator) agencies, including both primacy agencies and public utility
commissions, expressed concerns about the systems that could not meet standards at prices
considered “affordable” to residential customers (see Box 3). The public utility commission
perspective should be placed in the context of rapidly rising energy prices in the 1970s and early
I 980s which precipitated the federal Low-Income Home Energy Assistance Program (LIHEAP),
utility percentage-of-income payment plans (PIPPs), and least-cost energy planning.
Concerns about funding for federally mandated standards continued to bring attention to
the issue of drinking water affordability. In the 1990s, the EPA’s Office of Policy, Planning, and
Evaluation worked to develop a consistent agency-wide affordability policy. In 1995, the
Congressiçnal•Budgót Office reviewed EPA methodologies for estimating SDWA impacts as a
case study in the context of the “unfunded mandates” debate. Enactment of the 1996 SDWA has
refocused attention on affordability issues by specifically recognizing the need for the states to
develop affordability criteria.
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Box 3
Policy Statement of the National Association of
Regulatory Utility Commissioners on Affordable Drinking Water
The National Association of Regulatory Utility Commissioners (NARUC) believes that while specific affordable dollar amounts of
increases in residential water bills cannot be determined, it is essential that the Environmental Protection Agency affirm a
commitment to affordable water rates. We suggest that this commitment be expressed in a three-point policy:
1 Universal water service, defined as high quality drinkIng water at affordable rates for every American, should be a national
policy goal
Universal telephone service has long been a national goal. Previously in water utility service, it had not been necessary.to assert
a policy of universal service. With the increased recognition of environmental dangers to high quality. water...supplies and the
passage of the Safe Drinking Water Act, a policy of universal water service is esserttial. - - -
2. In addition to health factois, four economic factors should be taken into account in considering whether to grant vanances or
exemption under the SDWA. These are community size; the rmpacton water rates, the price of substitutes for centrally-distributed
dnnking water, a d the financial capability of the water system. If a proposed capital Improvement to meet SDWA standards is
judged unaffordable by the primacy agency for any of the four. factors, a variance or exemption should beconsidered — -
(a) Community Size A proposed capital improvement may be considered unaffordable, taking into account the size of the
community and, thus, the customer base across which costs of the improvement can be spread.
(b) Impact on Water Rates: Rate increases to pay for SDWA improvements may be considered unaffordable if either the
immediate increase in rates or the ihcrèàse9fl’ratès phased In avertime Would result in rates that are (1) substantially higher than
existing water rates; or (2) substantially higher retative to rates for other utility servIces; or (3) substantially higher relative to the
average rates paid by residential customers to other water utilities in the state.
(C) Pnce of Substitutes: Rate !fl eases -to pay for SDWA improvements may be considered unaffordable If rates to provide
potable water through the central water system would be greater than the pnce of alternative means of providIng high quality
drinking wát r.
(d) Financial Capability: For commission-regulated water utilities, improvements to meet SDWA requirements may be considered
unaffordable if the utility has demonstrated its inability to obtain funds to pay for them.’ Such inability can be shown by the
rejection, in writing, of a bonafide application for a loan to pay for the improvements, accompanied by evidence of the willingness
of the utility, the primacy agency, and the state regulatory commission to work together to develop a fair and reasonable cost
recovery program. , -
3. State regulatory commissions have an advisory role in SDWA implementation by the EPA and the pnrnacy agencies as the
SDWA applies to commission-regulated water utilities.
EPA should consider providing guidelines to primacy agencies callIng for consultation with the state regulatory commission when
dealing with utilities jurisdictional to the commissions. Such consultation should be called for in making decisions on- the
technology required to meet SDWA standards and the appropriateness of granting a variance or exemption. EPA guidelines to
the primacy agencies should be modeled on the definition of roles laid out in the Memorandum Of Understanding between the
California Department of Health ServIces and the California Public Utilities Commission.
The NARUC supports the common objectives stated in the Memorandum of Understanding and suggests that the state regulatory
commissions take action through written agreements with the primacy agencies to concur with the objectives and to assume
responsibility for
(a) Determination of the type of rate relief, if any, needed to finance system improvement projects for projects required by the Safe
Drinking Water Act.
(b) Promptly informing the primacy agency of public meetings with customers and/or evidentiary hearings where water quality
problems will be discussed so that the pnmacy agency may prepare and participate:
(c) Providing analyses of the financial impacts, if any, of system improvement Projects on both water utilIties and customers” rates.
(d) Encourage public education and awareness of the SDWA. -
Source National Association of Regulatory Utility Commissioners, Press Release (November 21. 1988).
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Affordability Assessment Methods
Affordability assessment typically involves two different levels of analysis. The first
measures household affordability or ability-to-pay, and is often used for screening purposes. In
other words, systems falling below a specified level are subjected to further tests of affordability.
A conventional household affordability test is the ratio of annual user charges to median
household income:
Total annual user charges (AUC )
Annual median household income (MIII) = Xpercent
where:
X= a household affordability threshold
Several variations on this formula can be found, such as: (1) -ih liisióIi of wãléhjntf
wastewater charges in the numerator, (2) use of average (mean óuis liöldTi 6ffle in the
denominator, and (3) weighting of the measures to capture poverty effects.
The AUCIMHI ratio can be used to evaluat thp teñtia effects of rate increases
associated with SDWA compliance or other iniprcwetnents. The ratio is often used in -
conjunction with another measure (such as metii ii hniicehnld income , poYerty rates, or
unemployment rates) that takes into account general-socioeconomic conditions. These
companion indicators might be measured relative to state or national benchmarks. The basic
affordability ratio is used primarily as a screening tool; communities,with ratios above the
specified level are usually subjected to additional evaluation tests at the *ater-system level.
Another conventional type of affordability analysis shifts attention from the household s
ability -to-pay to the water systems capacity-to-finance system operations. Financial ratio
analysis is often used to assess the financial health of the water system for lending and other
purposes.
The distinction between household affordability and water system affordability becomçs
blurred-for a number of reasons. A system’s ability to secure financing from external sources,
for example, may depend on general indicators ofthe financial health of the community (that is,
household income measures). Thus, household-level indicators sometime are used to measure
water system financial capacity.
- The affordability framework developed in this document expands on the alternative
approaches to assessing affordability.
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EPA Methodologies
EPA has adopted or considered approximately two dozen methodologies for assessing the
financial burdens municipalities face under federal environmental laws and regulations. Federal
mandates requiring consideration of affordability include the SD WA, the Clean Water Act, the
Toxic Substances Control Act, AHERA, CERCLA, and RCRA.
Methodologies for assessing affordability have been developed by several EPA offices,
including the Office of Water, the Office of Solid Waste, the Office of Compliance Monitoring,
- and the Office of Policy, Planning, and Evaluation. Affordability methodologies have been used
by the EPA in conjunction with:
• evaluating compliance
• assessing financial responsibility
• establishing penalties and fines
• setting standards
• allocating grants and credit assistance -
• providing guidelines to states and communities
The methodologies used in assessing affordability tend to use the methodological
foundation described above. Most rely on a set of ratios and a two-stage analysis. .The first stage
typically screens out communities where the household impact ofwaei systemcosts is relatively
low. The most prevalent household cost measure is annual-user charges-as a percentage of
median household income (AUC/MHT). The second stage involves a more detailed analysis of
the financial capacity of communities, including debt capacity (for example, debt service a
percentage of revenues), access to capital (for example, bond ratings), and the general
socioeconomic condition of the community (indicators of distress).
An example of a comprehensive affordability model advanced by the EPA for the
purposes of assessing compliance capacity is the Municipality’s Ability to Pay Model (MABEL),
summarized in Figure 3
Affordability of the 1986 SDWA
In 1993, the EPA published a report entitled “Affordability of the 1986 Amendments to
Community Water Systems.” A threshold of 2 percent was used to measure affordability for
three different ratios: 1) household costs to median household income; 2) aggregate household
costs to aggregate household income (best case); and 3) household cost as a percentage of
median household income for households earning less than 150 percent of the federal poverty
level (worst case).
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INPUT -
• New capital cost
‘New O&M cost
• Penalty to be pa d
1’
ABILITY TO ISSUE REVENUE BONDS
• Revenue bond limit check
• Long-run considerations
— user charge/income test
• Short-run considerations
— percentage increa se in user fees
— performance history test
.1
ABILITY TO ISSUE GENERAL OBLIGATION BONDS
‘General obligation debt limit check
‘Revenue capacity check -
‘Financial health check
— debt service/revenues
— debt service propcrty value
IMPACT ON MUNICIPAL BUDGETS
‘Required percentage increase in revenue to
cover new costa
ABILITY TO PAY PENALTY
Amounts payable through
‘short-term revenue note
‘ short-term G.O. note
Figure 3
- Municlpality’s Ability to Pay Model (MABEL)
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In a relatively detailed analysis, the report presents several key findings regarding
household affordability and water system affordability:
Affordability to Households
• Pre-SDWA drinking water costs are.burdensometo abçut 7 5.percent ofhouseholds
nationwide—all of which have annual income of less than $10,000.
• Nearly-I-i--percent-of-households-nationwide may find post-SD WA drinking water costs
• to be burdensome, particularly households with less than $10,000 annual income.
‘• ‘Nationally, average annual household drinking water costs have risen 25 percent, from
$182 to $227, as a result of the 1986 SDWA Amendments, based on this analysis.
Affordability : t0 Systems
• The study estimates that prior to the 1986 Amendments, less than 1 percent of CWSs
faced affordability problems.
• Virtually all systems serving populations of 10,000 or more can afford SD WA-required
costs. Depending onhow system affordability is measured, between 4 and 41 percent of
all CWSs may now face post-SD WA affordability problems, primarily systems serving
10,000 persons or fewer. -
• If post-SD WA costs were allocated progressively, according to a household’s ability to
• pay, post-SD WA water costs would be burdensome to just over 4 percent of CWSs.
• Small system diseconomies are responsible for much of the affordability problem at both
the household and system levels.
OPPE Task Force
The EPA’s Office of Policy, l 1annmg, and.Evaluatioñ convened an expert panel to
considerthe issueofaffdrd biiity.- Members of the panel included nationally recognized experts
in public-sector finance, economics, and ommuthty fiscal decision-making. The panel
considered the various factors used in evaluating financial capacity and affordability and
provided a critique of the methodçlogies.
The task force observed that the two-stage approach (that is, an analysis of household
ability-to-pay followed by an analysis of municipal ability-to-finance) may have limitations.
Namely, the approach implies that some municipalities fot, whom an environmental project
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places a relatively high cost on households may not obtain financial relief because they do not
meet the criteria for relief under the second-stage analysis.
The task force also found that the appropriate financial tests or methodology used for
assessing affordability will depend on EPA’s rationale for providing regulatory relief. The
following rationales were proposed:
Task Force Recommendations
The task force also proposed two models for assessing the affordability of environmental
compliance costs. The first model is a modified two-stage approach. The first stage is used to
screen communities using a very basic measure that is easily available an4 e.
Communities that fail to pass the screen are subject to further analysis to ther financial
or structural considerations alter the results and whether financing for im Z is possible,
even if it is relatively burdensome. According to this model, analysts mt _sider the
overall costs of services the community provides. The mznunity’s costbjt ll be
mitigated if substantial aid is received from other sou
• Community ‘s ability-to-finance. Applies most specifically to capital projects where
external finanoi iired to spread the cost over time. The ability to finance can
be measured either a municipality’s bond rating above investment grade
or its ability oan froma bank.
• Fairness to I j n the commw j jiders-household ability-to-pay A
reasonable p _____ abilityto of annualized cost of compliance by
residents to ii i i a specified üi T
Fairness to the 1o i . ernment/system MipA to identify communit e that are
severely distres e liveigin the absence of SD’ k mandates This cñt on exammes
the fiscal distress Ot 4 mumcipality an iares that measi e threshold
level of fiscal disti J ry large task)
- - . ;_ _
• Relative size of the financial cost. Examines the annualized cost of the project in
relation to some measure of the scale of local government activities, such as the total
public spending by the municipality.
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The basic steps in the model are:
Basic Burden Screen
• Determine the incremental cost per household divided by the median household income
(or a construct like per capita income times household size).
• Dethrmine if the cost is potentially too high. Perform a statistical fit and decide that cost
ratios falling in the top .10 percent to 5 percent of the tail are high.
Secondary Screen .
For the communities that fall on the margin or-that-display--a i’ h buid ii,’ a more
extended analysis examines various measures of abilitylo finance the improvement. This
analysis is based, in most cases, on the need for-capital improvements and access to possible
financing. Some sources of revenue and borrowing may be accessible for one community but
not others, and intergovernmental flows can greatly alter apparent costs.
The second model proposed by the task force emphasiies rationales for financial relief. It
begins with a basic screening test, as in the first approach. A community would be eligible for
relief if the residents of the jurisdiction would be unfairly burdened (that is, the annual cost
relative to household income is above a selected threshold).
! the primary criterion for relief is not met, the municipality could petition for .relief
under either of two secondary criteria: 1) the municipality is literally unable to finance the
project at a reasonable cost; or 2) the compliance cost is excessively large relative to the level of
resources in the municipality. The burden of proof falls on the municipality/system.
Finally, the task force also provided a series of general recommendations for developing
successful affordability approaches:
• Clearly define the economic rationales for granting municipalities relief, and discuss
the links between the relevant rationales and the specific methodologies used.
• Fi nancial tests should be simple to use, even for non-finance personnel, and tailored
to the data available for smalf systems.
• Financial relief may be based on: 1) ability to finance a capital project; 2) household
abilityto pay; 3) the municipality’i relative ability to pay; or 4) the size of the
financial cost as compared to the resources available to the local government.
• Clearly and openly communicate the ratio.nale for setting the thresholds, since it is a
political decision involving value judgments.
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• Financial tests should account for differences among local governments and their
service responsibilities, access to revenue sources, and institutional relationships with
underlying and overlying jurisdictions.
• Use one of two models: 1) a two-part test consisting of a basic household burden
screen and an analysis of the municipality’s ability to finance the environmental
project; or 2) an approach that would grant relief to municipalities using household
costs as the primary criterion, and the ability to finance or the size of the financial
cost compared to the resources available as the secondary criteria. in the second
model, a municipality that did not meet the primary criterion could petition tbr relief
under the secondary criteria.
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4. An Affordability Framework
As noted,, a wide variety of indicators have been use4 in affordability assessment. These
indicat6rs and the broader issues they represent can be organized within an affordability
issessment framework. This framework recognizes the flow of resources that affect water
systems and the different resources available to different types of water systems. The framework
- can be used not only to understand affordability issues but also to explore options for addressing
affordability concerns.
Indicators organized according to the proposed framework can be used to:
• Evaluate the affordability of water service to households.
• Evaluate the water system’s general financial capacity.
• Evaluate the water system’s access to private capital.
• Evaluate the water system’s access to public capital.
• Evaluate the fiscal condition of relevant local governments.
• Evaluate the community’s socioeconomic conditions.
Resource-Flow Models
The generalized flow of resources to, from, and around water systems is depicted in
Figure 4. This framework can be used to understand the sources of revenues available to
different types of systems. The key elements of the model are:
• Water systems. Includes community and nontransient noncommunity systems of
different sizes and ownership.
• Water users. Includes residential and nonresidential water customers who support
water systems through rates and other charges but also, in the case of nontransient
private systems, through the cost of goods and services.
• Communities. Identifies the lowest level of local government within which the water
system provides service (for example, cities, counties, districts). Although some
communities own and operate systems, the distinction between communities and
systems is important.
• Private sector capitaL Includes bank loans, equity (stock), and other sources of
private capital or financial support that can be prbvided to the water system. Private-
sector sources of capital may not improve affordability if they add to debt costs.
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- Figure 4
Generalized Resource Flows to and From
- Water Systems
Assistance to
tndividuals
General (block)
grants
Voluntary
assistance
Socioeconomic Conditions
(income, employment. etc)
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• Public sector capital. Includes grants, loans, subsidies, and other sources of public
capital or financial support that can be provided to the water system. When it reduces
total costs, public-sector capital can improve affordability.
• Socioeconomic conditions.- Income, employment, and other socioeconomic indicators
measure the general ability of households in the water system’s service territory to
pay for water service.
Figüre s 5à and5b show the primary and secondary resources available to public and
privately owned’ community water systems, respectively. Publicly owned community water
systems have access to revenue sources that generally are not available to privately owned
systems. Publicly- owned systems may be supported by water users, as well as through
coinmüñityresources and public capital. Municipal governments can assist their own systems
with direct subsidies or financing. However, local communities generally do not provide
assistance to privately owned systems.
Publicly owned systems also generally have had greater access to public capital than
privately owned water systems; conversely, privately owned systems have had greater access to
private capital. These generalizations are being challenged. Privately owned systems should
have better access to state revolving funds and other sources of public capital; publicly owned
systems should have access to private capital through public-private partnerships. -
Figures 6a and 6b show the primary and secondary resources available to public (or
nonprofit) and private nontransient-noncommunity water systems, respectively. In general,
resource flows to nontransient noncomrnunity water systems are more limited than those to
community water systems. This is especially true of public or nonprofit nontransient systems.
For these systems, water costs cannot be supported through charges for goods and services.
However, they may have some access to private capital, public capital, and local community
resources.
Private nontransient-nencommunity water systems can be supported by water users, but
not usually through water charges. Water costs (like other utility costs) are passed along to users
through prices for goods. and services. Private nontransient systems may have general access to
private capital through their parent organizations, but probably have limited access to public
capital and no-accessto community resources.
A key difference -between commun ty-water systems and nontransient-noncommunity
water systems Wth t community water systems generally-charge customers for water service.
Thus, for community water systems, household affordability is a central focus. For nontransient
systems, attention is shifted tQ the financial capacity of the system and the organization
responsible for its operations.
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Public
Capital
__________ F I
.Primary
Seconda Y
pI I
Figure 5a
Potential resources for publicly owned
community wafer systems
Public
C-
W UsersI
L ‘Secondat
Private 1 , . ..
Cap ’ -‘
Figure 5b
Potential resources for privately owneti’ -
community waler systems -
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Public
Capital -
WaterUsersi
WatW
:!Sy t ii
£
k .
Pnvata
Capital
a - Pnmary
- Secondary
Figure 6a
Potential resources for public or nonprofit
nontransient noncommunity’water systems
Public
Capital
I Water ______
____ ConummitYl
• System
a -Pnmary
- Secondary
Figure 6b
Potential resources for private nontransient
- noncommunity water systems
- Water Usea a -
Pnvate
Capital -
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General Framework
Table 4 provides a general framework for an affordability analysis that builds on this
understanding of resource flows. Household affordability is perhaps the most basic and essential
element of the framework, assuming that it is desirable to-support the true cost of water through
user charges. The framework also suggests a variety of additional indicators for analyzing
affordability.
Household Affordability
Household affordability (or rate imnpact)indicators focus on the capacity of water users
(particularly residential users) to support the fill! cost of water service (iiicluding debt repayment)
through user charges. It can be used for assessing rate impacts and for screening systems for
further analysis. The level of analysis is hiitt hbld I rothbr Water users, sometimes measured in
terms àf connections to the water system. Selected indicators of water users’ ability-to-pay, are:
• Ratio of user charges to income
• Ratio of user charges to income relative to income levels
• Percentage rate increase (rate shock) -
The percentage rate increase is frequently used m affordability assessment. Although a
potential measure of rate shock, the percentage increase alone cannot be used as a valid measure
of affordability. A high percentage increase used to correct past underpricing is more affordable
in- an affluent community than in a poor community. -
Financial Capacity
Thefinancial capacity of the water system depends upon the financial structure of the
water ystem, including internal sources of capital, key financial ratios, and business planning
capability. The level of analysis shifts to the water system. Indicators of financial capacity are
used for both general capacity assessment and business planning. Business planning can help
identify and correct financial capacity needs. -
The literature on water system financial capacity is extensive. Numerous indicators and
‘composite indicators are available for an lysis and screening purposes. Selected indicators of
financial capacity are:
• Ratio of revenues to expenditures’
• Ratio of net income to revenues -
• Ratio of assets to liabilities
• Debt-service coverage
• Composite indicators of financial health
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In the case of private systems (including private nontransient-noncommunity systems)
owned by a parent company, the analysis of financial capacity may extend to the parent entity.
Access To Private Capital
Access to private capital refers to the ability of the water system (or its parent entity) to
arrange financing (such as a bank loan) through private markets and other local resources
(including communities). Whether or not a water system can raise financial capital through.
private markets provides a market test of the water system’s financial capacity. Private markets
are not likely to provide Tesources to systems that are financially unhealthy. The level of
analysis shifts to private debt and equity markets, where water systems must compete for.private
- capital. Selected indicators of access to private capitalare:;
• Credit and bond ratings
• Debt and debt capacity
• Market test
Some analysts have advocated a basic market test when evaluating a water system’s
access to private capital. The proof is in the process itself: those who can access capital, will
access capital. Systems that “pass” the. market test are those that successfully obtain private
financing of neede4 j provements.
Eligibility For Public Capital
Evaluating eligibility for public capital parallels evaluating access to private capital.
Eligibility refers to the ability of the water system (or its parent entity) to secure financing (grants
or loans) from local (community) or nonlocal (SRF and other programs) public sources.
Relevant indicators of eligibility for public capital are:
• Credit and bond ratings
• Priority rankings
• Eligibility test
Credit and.bond ratings are used to evaluate access to public capital as well as private
capital. In the case of municipal systemsratings of municipal governments may be used. Some
communities may be eligible for public assistance based on priority ranldngs of public agencies.
Rankings can be used-to rank systems in terms of their priority for public funding through grants
or loans. Funding priorities tend to focus on systems with pressing public health concerns or
systems located in distressed communities.
The eligibility test is similar to the market test: systems that “pass” the eligibility test are
those that successfully obtain public capital (grants or loans).
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Fiscal Conditions
Some indicators of affordability consider the fiscal condition of the relevant local
government. Fiscal stress on communities can be assessed in terms of competing demands for
capital and operating expenditures, particularly in the face of limited governmental resources.
This form of fiscal stress is particularly relevant when considering whether resources from the
community can be used to support water system costs. Some indicators of local fiscal conditions
are: -
• Debt as a percentage of market propefty value
• Tax revenues as a percentage of market property values
• Property tax collection or delinquency rate
• Local expenditures per resident
• Opportunity costs associated with water system expenditures
Opportunity costs may be relevant for some communities. Resources spent on water
system improvements cannot be devoted to other uses. Evaluating opportunity costs for a. gjyen
community generally requires a qualitative assessment of competing concerns.
Socioeconomic Conditions
As previously discussea, ability to pay is largely.a functip ipfjncome and employment.
A community’s socioeconomic conditions are closely related to household affordability
indicators, the priority rankings used in determining eligibility for public funding, and the fiscal
condition of local governments. Income, poverty, and unemployment indicators are often used to
measure socioeconomic conditions and to establish state definitions of distressed or
disadvantaged communities.
Two-step affordability tests often combine socioeconomic indicators with household
• affordability indicators. Some of the içading indicators of socioeconomic conditions are:
• Median household income
• Percent below the poverty level
• Percent unemployment
• Composite indicators of distressed communities
Accurately measuring income and-other socioeconomic indicators can be difficult
because data available from the Census and similar sources may not match water system service
territories. For this reason, home analysts have used income surveys in conjunction with
affordability analyses. These survey data may be needed to evaluate rate impacts (AUCIMHI) as
well.
Appendix A provides a summary of affordability analyses. Each makes use of one or
more of the affordability indicators and identifies the thresholds used to judge affordability.
35

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Affordability for Nontransient Noncommunity Systems
Most indicators developed for assessing affordability were designed and implemented
with community water systems in mind. While some indicators may not apply directly to the
case of nontransient noncomrmmity systems, some do. Specifically, household affordability
measures that focus on water user charges relative to income are irrelevant, while measures that
focus on the financial condition of the system and the socioeconomic condition of the
community may be useful:
For nontransient noncommurnty water systems, the nature of ownership has an important
bearing on affordability. In the case of systems run for profit, a market test may be particularly
appropriate. If the cost of compliance can be incorporated in the cost of business (like other
expenses) and the entity can price its product competitively and stay in business, then the
compliance technique might be considered affordable. For some systems, private capital for
improvements may be available from a parent corporate entity. If the effect on costs and prices
is so extreme as to threaten the existence of the business, and if losing the business would cause
the community great hardship, affordability is a concern.
Systems managed by and for public purposes cannot pass costs along through prices of
goods and services, but must rely instead on public sources of funding. Measures of the fiscal
stress for the relevant public entity and access to public capital are applicable topublicLy:owned
systems. The difficulty in applying affordability measures to these systems is.am intrinsic ..
relationship between the fiscal health of the water system and the fiscal health of the larger
entity.
For both privately and publicly owned nontransient-noncommunity water systems,
measures of general socioeconomic distress may also be useful for assessing affordability.
Although indirect, these indicators provide a general assessment of the financial condition of the
water service population and its ability to pay for water system compliance.
36

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Table 4: Framework for Affordability Analysis
Category
Focus .
-
Level of
Analysis
- Selected Indicators
Household
affordability


.

Rate impact or the
capacity of water users
(particularly residential
users) to support the full
cost of ‘c ater ‘serVice -
(including del*- -
repayment)-throug ii user.

Households
, ,.
S

-
‘ ‘
‘“‘“‘
• - Ratio of user charges to income
•.. .Ratio of user charges to income relative to
income levels
• Percentage rate inciease (rate shock)
,
S

Financial
capacity

The financial structure of
the water system,
including internal sources
of capital, key financial
ratios, and business
planning capability. \
-
Water
system
5
-
S Ratio of revenues to expenditures
• Ratio of net income to revenues
• Ratio of assets to liabilities
. Debt-service coverage
• Composite indicators of financial health-
• Market test for goods and services
(noncommünity systems)
Access to
private
capital

-
Ability of the water
system to arrange
financing (such as a bank
loan) through private
sector equity and debt
markets and other local
resources (including
communities).
System (or
parent
entity) and
private
5 capital
markets
• - Credit and bond ratings -
• Debt and debt capacity
• Market test
- 5 S -
S
-
S.
Eligibility ‘
for public
capital
Ability of the water
system to secure
financing (grants or
loans) from local
(community) or nonlocal
(SRF and other programs)
public sources;
System (or
parent
entity) and
public
capital
markets

• Credit and bond ratings -
• Priority rankings , S
• Eligibility test
S -
S
Fiscal
conditions,

Fiscal stress on the
community in terms of
the condition of local
government finances and
competing demands for -
capital and operating
expenditures.
,
Relevant
local
government
-
S
• Debt as a percentage of market property :
value
• Tax revenues as a percentage of market
property values -
• Property tax collection or delinquency rate
• Local expenditures per resident
• - Opportunity costs associated with water
system expenditures -
Socio-
economic
conditions
General socioeconomic
Service
temtory
• Median household income
• Percent below the poverty level
• Percent unemployment
• Composite indicators of distressed
communities
- S
conditions related to
household affordability,
priority for public
funding, and fiscal
distress.
37

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5 . Using Affordability Criteria
Pursuant to the 1996 SDWA, the states can develop and use affordability criteria when
determining whether or not to grant variances. Affordability criteria can also be used in
conjunction with state funding, planning, and other decisions.
Comparmg Household Affordability
Househc ldaffordabi1ity ind ators can be.used ’tOe’Qahiate the effects of alternative
treatment technologies that will bring water systems into compliance with the SDWA. As
illustrated ii Table 5, affordabilitycan be estimated for various compliance alternatives. The
cost associa ed’with each alternative canbe compared with the established affordability
threshold. l this ilu tration,annual user charges are judged against an affordability threshold.
Other indicators and metrics, such as percen4ge of income spent on water service, can be used in
- a comparable framework.
Table 5
Affordability Assessment and Paths to Compliance
Path to Compliance
Base Annual
User
Charges
Additional
Annual -
Charges
Annual User
Charge after
Compliance
Affordability
Threshold
Affordiblilty
Assessment
‘
Conventional treatment
$500
$500
$1,000
$900
Unaffordable
Affordable Treatment Technolog
es
Packaged or modular treatment
$500
$300
$800
$900
Affordable
Point-of-entry technologies
$500
$600
$1,100
$900
Unaffordable
Point-of-use technologies
- $500
$500
$1,000
$900
Unaffordable
dther
$500
$700
$1,200
$900
Unaffordable

Affordable Alternatives
- ‘
,
Source of supply
$500
$200
$700
$900
Affordable
Restructuring .
$500
$300
$800
$900
Affordable
Interconnection
$500
$500
$1,000
$900
Unaffordable
Other
$500
$600
. $ 1 ,10G
$90O
Unaffordable
Variance technology
$500
$300
$800
$900
Affordable
Note The figures used in this table are for illustrative purposes only.
38

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State Affordability Criteria
Many states already use affordability criteria in determining water system eligibility for
grant and loan assistance. A sample of state policies appears in Appendix B and is summarized
here.
New York State
New York State evaluates drinking water-according to an established priority ranking
system. Affordability criteria are used to determule ‘which public water systems are eligible for
financial assistance beyond the benefit available-thrcn gh h revolving loan fund. Funds for the
construction of eligible drinking water projects are targeted to econothic. lly disadvantaged water
systems. Systems may be eligible for assistance if assistance will bring systems closer to a
“target service charge” (TSC).
The state’s policy establishes the following TSCs according to median household income
levels: -
Median Household Income ( MHI) Target Service Charge ( TSC )
$0 to $24,725 i%MHI
$24, 725 to $39,557 $247 + (MHI - $24,725) x .0235
$39,558 and above 1.5% MIII
Pennsylvania (PENN VEST)
Pennsylvania’s revolving loan program, PENNVEST, makes affordability determinations using a
computer model (PACNEF). Projected user charges as a percentage of median household income
(adjusted for inflation) are compared with target user charges reflecting affordability. Target
charges range on a sliding scale from one to two percent depending on the socioeconomic
condition of the community. The model presumes that economically stronger communities can
afford to pay a larger percentage of mcome for drinking water.
Idaho
Idaho incorporates affordability in its assessment tools for SRF loans. Current and future rates
are compared in terms of average residential user charges as a percentage of median household
income. A threshold of 1.5% is used asa screen. In addition, the assessment considers whether
operating cash on hand is greater than or equal to 1.5 times the average monthly operations and
maintenanóe plus general and administrative expenses.
39

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Washington State
Washington calculates affordability in terms of average residential user charges as a percentage
of median household income. An affordability range of 1.25 to 1.75 percent is used. For
disadvantaged communities, the threshold is 2.0 percent of 80 percent of the statewide
nonmetropolitan average median household income.
40

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Appendix A
Affordability Measures and Thresholds:
Selected Studies
41

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Study
Concept
Indicator (s)
Threshold
Water Utility
Financing
Study (1980)
,
Household
affordability
Annual user char2eiAUC)
Median household income
(MHI)
Ouestionab le Unaffordable
1.5 to 2.5% >2.5%
-
Household
affordability
- Percentage rate increase .
100 to 200% >200%
Multiple Sector
Study (1988)
.
Household
affordability
Annual user charge (AUC
>1.12%
Median household income
( fffl)
Rural
Development
Administration
(Grant
Eligibility)
Financial
capacity
Household
affordability
Debt service portion of
annual user charge (AUC)
-and-
‘Statewide nonmetropolitan
median household income
(MET)
>0.5% and MIII is below the poverty line or
below 80% of the statewide nonmetropolitan
Ml i i
-
-or-
>1.0% and MH [ isbetween 80% and 100%
of the statewide nonmetropohtan MIII
Department of
Housing and
Urban
Development
Household
affordability
Water and sewer bills
Household income
1.3 to 1.4%
National
Consumer Law
Center “The
Poor and the
Elderly -
Drowmng m
the High Cost
of Water” (circa
1991)
Household
affordability
Water and sewer bills
>2.00%
Household income
-
National
Regulatory
Research
Institute (1992)

Financial
capacity:
profitability
Net income ÷ denreciation
Annual operating revenues

Indicators compared to normal distribution
for the investor-owned water industry -
.
‘

Financial
capacity:
liquidity
Current assets
Current liabilities
Financial
capacity: ‘
leverage
Current stock eauitv
Total assets
Financial
capacity:
profit trend
Retained earnings
Common stock equity
42

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Study
Concept
Indicator (s)
Threshold -
National
Regulatory
Research
Institute (1992)
(cont.)
‘
.



•

Financial
capacity: -
growth and
efficiency
.
Annual oneratm2 revenues
Total assets
-
.
-
-

.
•
-

- -
-
.
Financial
capacity:
efficiency
. and
profitability
Annual operating revenues
Annual operating expenses

.
Financial
capacity:
profitability
Net income -
Annual operating expenses
.
Financial
capacity:
composite
Composite score -
Composite scores compared to normal
distributiqn for the industry
-
U.S. EPA
Economic
Guidance fpr
Water Quality
Standards
(WQS)
Workbook
(draft)
,
•

- -
-
•
Household
affordability
(primary
test for
screening)
‘
Average annual cost for
household as a pórcentage of
M l ii

.
<0.8% not expected to create hardslup
=0.8 to 1.5% mid-range
>1.5% may be unreasonable burden

•
.
Access to
capital
(secondary
test)
-
Bond rating
‘

> BBB or Baa ‘ Strong
= BBB or Baa Mid-range
 5% ‘ Weak -
Socioecono
-miC
-conditions
.• . .
Unemployment rate
,
Median household ncome
(MIII) -
-,
 State average Weak
> State average Strong
= State average Mid-range
-------
Study -
Concept
Indicator (s)
Threshold
U S EPA
Economic
Guidance for
Water Quality
Standards
(WQS)
Workbook -
(draft) (coat.)
Fiscal .
conditions

•


.
- -
Property tax as percentage of
full market value of taxable,
property
. :
- :. - -
•, . .. .. .., ,...;
<2% Strong
=2 to 4% Mid-range
>4% Weak
.
.
Frope x ollec on rate
-
>98% Strong
=94 to 98% Mid-range
<94%’ Weak
Comp site score
> 2.5 Strong
= 1.5 to 2.5 Mid-range
<1.5 c) Weak
U.S. EPA
Municipality’s
Ability-to-Pay
(MABEL)
(1990)
Household
affordability
(ability to
issue
revenue
debt)
-
Long-nm household impact:
post-compliance average user
charges (AUC) per household
as a percentage of MIII
> 1 •Ø% must provide additional security
.
Short-run household impact:
Increase in average user
charge
> 25% ‘) system probably cannot issue debt
-
-
Composite
analysis
(short-nm
and long-
—
,
If community fails both short-nm and long-
run analyses, it will be difficult to raise
revenue debt
,
Financial
capacity,
access to
capital
.:.
Existing revenue debt plus -
new revenue debt
.
Revenues less expenditures
> revenue debt limit system probably -
cannot issue debt - -
.
negative system probably cannot issue
debt
—
— .. — . I , , . , ..
44
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Study
Concept
Indicator (s)
Threshold
U.S EPA
Municipality’s
Ability-to-Pay
(MABEL)
(1990) (cont.)
-
-
,
-
‘
- . .
‘‘S.,
• •
.

,
Financial
capacity,
access to
capital
(ability to
issue
general
obligation
bonds)
. & 1’_’_ i t t
. . .: --
.
- ..
Debt service of municioalitv
<0.18
,‘
- - ‘
..
Total revenues of -
municipality

.
- -

Debtsericesofm inicmalitv r
Market,value of taxable,.
op n
.< Q Q0 :
-
.Existing.plus newdebt- - , -
> debt linut, probably cannot issue GO
debt
Financial
capacity:
debt
capacity
Additional revenue from taxes
before reaching statutory limit

If less than O&M plus new debt service
‘probably cannot issue GO debt
.
.
Combined
Sewer
Overflow
Financial
Capability
Assessment
Guidebook
(1993)
‘
- -
.
-

Financial
capacity,
access to
capital
Bond ratings
.
.
,
‘
,,
Moody’s
B ‘ Weak
Baa ‘ Mid-range
Aaa ‘ ‘ Strong
-
Standard and Poor’s
BBB Weak
A Mid-range
AA Strong - - -
Fiscal
conditions:
debt
Overall net debt
Full market property value
‘
>5% Weak
2 to 5% Mid- ge
<2% Strong
Fiscal
conditions:
property tax
collection
Property tax revenues
>4% Weak
2% to 4% ‘ Mid-range
<2% Strong
Full market property value
45
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Study
Concept
Indicator (s)
Threshold
Combined
Sewer
Overflow
Fmancial
Capability
Assessment
Guidebook
(1993) (cont.)
.
.

Fiscal
conditions:
property tax
collection
(cont.)
Property taxes collected
Property taxes levied
-
•
<94% c Weak
94 to 98% Mid-range -
> 98% ‘ Strong
-
- -
Socio-
economic
conditions
.
,. ., ., ,
Unemployment rate

25% above state average i Weak -
State average Mid-raig ’ .
25% below stateaverage SLroiig
Median household income •
.,.. ‘ , :,, -
- .. ..
25% below state average Weak. -
State averag ‘d-range -
25% above state average Strong
U.S. EPA
Affordability of
the 1986
SDWA
Amendments
(1993)
‘

Household’
. affordability
.

-
Pre and post-SDWA costs as
percentage of median
household income
> 2.0% not affordable
.
Pre and post-SDWA costs as
percentage of median
household income for
impoverished households.
(worst case)
> 2.0% not affordable
.

Aggregate pre- and post-
SDWA costs as percentage of
aggregate household income
(best case)
> 2.0% not affordable
-
-
.
The Road to
Financing (U.S.
EPA, 1992)
.
Financial
capacity
Overall net debt per capital
Below $750 Strong
$750 to 1,200 Mid-range
$1,200 Weaker
Overall net debt as a
percentage of property value
Below 2% Strong
2% to 5% ) Mid-range
Above 5% Weaker
46
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Study
Concept
Indicator (s)
Threshold
\
The Road to
Financial
Operating ratio (revenues to
Above 120% Strong
Financing (U.S.
EPA, 1992)
(cont.)
capacity
(COnt.)
-
- .
expenditures

100 %to 120% Mid-range
Below 100% Weaker
Debt service coverage
Above 140% Strong
120 to 140% ‘ Mid-range
Below 120% Weaker
Utility operating surplus asja
percent of total expenses

Above 5% Strong
0 to 5% Mid- ge
Below 0% Weaker .
.
.
Fiscal
conditions
Socio-
economic
conditions
-.
- .
- .
Property tax collection rate
-
.
Annual population change
:
.. - - - - ‘— ------- - —--4 --- -- - - -
Above 98% Strong.,
4 to 8 ?/q Mid ç ige.
Be1ow 94%c) Weaker
— Z.i,Ci. I I1 ,i.!,IIIf
Ab,OVe 2°4 Strong - .
-1 to 2 % Mid-range
Ü, y 1 5 c’ Weaker
•(_ . I
.
•
Unemplo rrnent - .-
. •- - • - - -
-
Below state average Strong
State average ) Mid-range
Above state average Weaker
- - - . - . -
Median household income
(1989)
Above $40,000 Strong
$17,000 to 40,000 Mid-range
— - -
,
. .
Below $17,000 Weaker
,
47
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Study - Concept Indicator (s) Threshold
The Road to
Financing (U S.
EPA 1992)
(cont.)
Household
affàrdabihty
Utility operating cost as a
percent of median household
income
Below 1% Strong
i to 2% ‘ Mid-range
Above 2% Weaker
Percentage change in user fees
‘Below 5% Strong
5 to 10% Mid-range
Above 10% Weaker
48
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ND WA C Small Systems Working Group Discussion Draft—Do Not Cite or Distribute
Appendix B
Selected State Policies Using Affordability Criteria
49
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iVD WA C Small Systems Working GroupDiscussion Draft—Do Not Cite or Distribute
New York State
Affordability Criteria for the
Drinking Water State Revolving Eund (DWSRF).
I. Summarv
The purpose of the affordability criteria is to determine which public water systems are
eligible for fmancial assistance beyond the ordinary benefit available through the Drinking Water
State Revolving Loan Fund (DWSRF). The additional benefits will assist economically
disadvantaged water systems in the construction of eligible drinking water projects. As defined
by federal statute, a disadvantaged community is one in which the service area of a public water
system meets affordability criteria established after public review and comment by the state in
which the public water system is located.
In New York State, drinking water projects will be reviewed to determine eligibility and
scored based on an established priority ranking system. Communities whose water projects are
ranked high enough and whose annual projected service charges for drinking water are above the
DWSRF’s target service charge (TSC) may be eligible for additionaifinancial assistance to bring
the projected service charge closer to the TSC.
II. Affordability ( Hardship) Criteria
Hardship will be based on the following percentages of the community’s Median
Household Income (MHI)*:
Median Household Income (MI I I) Target Service Charge (TSC)
$0 to $24,725 1% M l i i
$24,725 to $39,557 $247 + (Mlii - $24,725) x .0235
$39,558 and above 1.5% MI II
50
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ND WA C Small Systems Working Group Discussion Draft—Do iVot Cite or Distribute
III. Projected Annual Drinking Water Service Charge
The projected annual service charge must be calculated on an Equivalent Dwelling Unit
(EDU) basis. Use of cost per EDU will standardize the way the projected service charge is
calculated and provides comparable results and consistency in the financial hardship review. The
EDU system relates all system usage proportionately to that equivalent to a typical single family
residence. EDU’s should be allocated to commercial, industrial, and institutional users based
upon the water usage from flow data, number of employees, fixture units, or other factors that
equate usage to that of an equivalent number of residential users.
*Most recent U.S. Census Data will be used. Acceptable income surveys for the service
area may also be considered.
IV. Information Required for Hardship Determination
A. Existing population of the project service area.
B. Number of EDU’s to be served, and the basis on which they were calculated.
C. Existing annual debt service for the system.
D. Existing annual operation and maintenance (O&M) costs ’
E. Estimated projectcosts.
F. Estimated O&M costs based upon completion of this project.
G. Any other sources of funding anticipated for this project, including the amount, type of
ftinding (loan or grant), and if a loan, its interest rate, term, and annual debt payment.
V. Criteria for Hardship Financial Assistance
A. Maximum project size will be $10,000,000. Projeéts may not be segmented in order to
qualif r for hardship assistance.
B. Hardship financial assistance is only available for new drinking water projects.
Refinancing of existing long-term debt is not eligible for hardship assistance; however,
debt issued after July 1, 1993 is eligible for refinancing through the regular subsidized
DWSRF loan program.
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ND WA C Small Systems Working Group Discussion Draft—Do Not Cite or Distribute
C. The applicant for DWSRF hardship loan must demonstrate that it can repay its debt
obligation.
D. Projects which are determined eligible for hardship assistance will receive a written
confirmation of eligibility.
E. Confirmation of fundingayailabilitywill.b.e .valid: foriwo. c nseçutiye..annua1 IntendecL_
Use Plan periods,. providedthat the projected service charge does not change
significantly.
F. Confirrnation:of funding availability maybe withdrawn IL the applicant fails to
‘demonsfrate satisfactory progress towardà roject i’mplethentatiàn, the information on
hich the determination was made changes prior to lOan closing, or the applicant fails to
demonstrate that it can i è ay the loan.
Example:
MEDIAN HOUSEHOLD
INCOME (MUl)’
TARGET SERVICE
CHARGE(S)
10,000
100
- 15,000
. 150
20,000
200
. 2S ,4 0O
2 i
30,000 .
. 371
‘35,000
488
40,000.
600
- . 45
75
50,000
750
55 OO0 -
60,000
. . ., 825
900
52
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ND JV-1 C Small Systems Working Group Discussion Draft—Do iVot Cite or Distribute
PENNVEST AffordabUity Determinations
PENNVEST’s primary affordability determination is done through a computer model
named PACNIF (which is FINCAP, or financial capability, backwards). Generally, PACNIF
operates by comparing the projected usçr rates for a project with a target rate it generates. The
target, or “affordable” rate, is based on a percentage of Adjusted Median Household Income
(AMIH1). Median Household Ii icome from the most recent census is adjusted for inflation
througl the useofCPI. The percentage that the AMI{Iis multiplied by is on a sliding scale of
1 percent to 2 percent, based on the socioeconomic condition of the community. The theory is
that a stronger community can afford to pay a larger percentage of its A.MHI for drinking water
rates than a weaker community.
Where a commun ty sits on the sliding scale is based primarily on its AMHI, but is also
influenced by its Early Warning System (EWS) score as calculated by the Department of
Community and Econorn c Development. The EWS consists of eighteen variables, including
demographic information, financial condition of the municipality, and burden on the rate payer.
The system was legislatiyely mandated by another program, and developed, by the state through a
stakeholders group. It represents a strong indication of the overall social and economic health of
a given municipality.
For systems whose service area does not match municipal boundaries, PENNVEST
weighs the AMHI and EWS for each municipality served based on the number of customers in
that municipality.
The PACNIF model starts by’cómparing the target rate to the projected rate assuming the
maximum interest and fees PENNVEST can charge. If the projected user rate is higher than the
target, the interest rate is lowered until either the target rate is reached, or the interest rate reaches
1 percent, which is the lowest PENNVEST can charge under its enabling legislation. If the
projected rate is still significantly above the target rate, PENNVEST considers a grant.
Conversely, if the projected rate is significantly under the target rate, PENNVEST will consider
requiring the applicant to fund the project from conventional sources, either in whole or inpart.
53
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ND WA C Small Systems Working Group Discussion Draft—Do Not Cite or Distribute
Idaho Assessment Tools for SRF Loans
1 . Water System Revenues From User Charges Meet or Exceed Expenses
Total User Charge Revenues - Total Water System Expenses 20
Yes (Go to Question #3)
No (Go to Question #2)
2. If Total Revenues from user charges less the total wa* i syit’ipeiises is less than
zero (0), are other funds contributed to water systèmoperations-to-offset-system—
expenses?
Yes, If yes, what is(are) the source(s) of these addit â- iffi è revenue funds?
What is the total amount of these additional revenues in 0 the current year water system
budget?
No (Go to Question #3)
NoTE: In some cases water systems may supplement user charges with other revenues. This
practice is usually discouraged because the full costs of operations should be met by
revenues. However, where user fees are supplemented, the DEQ should obtain
information regarding the specific situation and the dependability of the supplemental,
resources.
3. Water System Rate Affordability Index (current)
For residential customers only , please indicate the following using most current
information:
- Average Residential Water System User Charge (in dollars and cents)
- Frequency of Water System$illing (e.g., 12, 6, or 4 times per year)
- Average Median Household Income (AMIII)
(indicate county or local A.M}ll in dollars)
i.e., U/rn = 1.5% (AMHL/m)
where, U/m = Avg. Residential User Charge per Month
(AMHTJm) Avg. median Household Income per Month
54
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ND WA C Small Systems Working Group Discussion Draft—Do Not Cite or Distribute
NOTE: The State of Washington Drinking Water Program uses an affordability range of 1.25 to
1.75%. The disadvantaged community threshold is 2.0% of 80% of the statewide non-
metropolitan average median household income. In any case, a figure above 2.0% should
be investigated further, especially if the residents are paying additiQnal user charges for
wastewater, solid waste and other utility services.
4. Water System Rate Affordability Index (future)
For residential customers only , please indicate ‘the following after calculating the
exnected Average Residential Water system User Charge inclusive new debt
expenses related to capital improvements in the next five years:
- Average Residential Water System User Charge (in dollars and cents)
- Frequency of Water System Billing (e.g., 12, 6, or 4 times per year)
- Average Median Household Income (AMIIiI)
(indicate county or local AMHI in dollars)
i.e., U/rn = 1.5% (AMHJJm)
where, U/rn = Avg. Residential User Charge per Mouth
(AMHIJm) Avg. median Household Income pe .M ntl
NOTE: This measure considers the affordability of user charges when incorporating additional
capital improvements. Will additional debt be matched by increased rates? Will the rates
be affordable?
5. Does the water system include a cash budget within its annual budget for cash flow and
emergency purposes? -
Yes If yes, is the operating cash on hand greater than or equal to one and one-half (1.5)
times the average monthly operations and maintenance plus general and
administration expenses?
i.e., Operating Cash (annual)? 1/8(0 & M + G & A)
where, 0 = operations expenses
M = maintenance expenses
G = general expenses
A = administrative expenses
No (Go to Question #6)
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VDWAC Small Systems Working Group Discussion Draft—Do iVot Cite or Distribute
NOTE: A water system budget that incorporates ai ash budget equivalent to one and one-half the
monthly O&M and General & Administrative expenses is conscious of the need to be
prepared for emergencies, payment delinquencies, and other short-term cash flow
problems. -
6. Water System Rates RevIew -
Does the water system management review the user fee, user charge, or rate system at least
once every two years? -
Yes (Go to Question #7)
No If no, what was the date of the most recent water system rates (user fees, charges)
review?
What was the date of the previous water system rates (user fees, charges) review?
NoTE: It is good practice for a water system to review its rates on an annual basis. The longer
the interval between water system rate reviews, the less likely the system will be to adjust
to significant changes in expenses. The higher the interval, the i rlikely the s5 t iii will
be able to raise user charges to meet expenses related to new or amèiided drinking water
rules.
7. What resources and guidance does the water systemuse for setting water user rates,
fees or charges?
(Please List:) (then Go to NEXT SECTION)
Sources: “Financial Viability Manual for New and Expanding Small Water Systems.” Bill
Jarocki and Tim Wilkinson, Environmental Finance Center, Boise State University
ba &iöii a report by the Washington State Department of Health
“The Small System Guide to Viability.” Community Resource Group, Inc., Southern
R CAP
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ND W.4 C Small Systems Working Group Discussion Draft—Do Not Cite or Distribute
References
Saunders, Margot. 1992. “Water and Sewer Rates—The Emerging Crisis for the Poor.” In
Proceedings of the Biennial Regulatory Information Conference. Columbus, OH: The
‘National Regulatory Research Institute.
U.S. Environmental Protection Agency. ictober 1991. ABEL User ‘s Manual. Washington,
DC: Office of Enforcement, U.S. -Environmental Protection Agency.
U.S. Environmental Protection Agency. September 30, 1993. Affordability of the 1986 SDWA
Amendments to-Commumty Water Systems. Prepared by ICF, Inc. Washington, DC:
U.S. EPA; Drinking Water Standards Division.
U.S. Environmental Protection Agenày. September 1993. Combined Sewer Overflow Financial
Capability Aèsessment Guidebook Washington, DC: Office of Drinking Water, U.S.
Environmental Protection Agency.
U.S. Environmental Protection Agency. September 1993. Development and Analysis of
Community Financial Profiles. Washington, Dc: Drinking Water Standards Division,
Office of Ground Water and Drinking Water, U.S. Environmental Protection Agency.-
U.S. Environmental Protection Agency. November 1993. Economic Guidance for Water
Quality Standards: Workbook Washington, DC: Economics and Statistical Analysis
Branch, Office of Science and Technology, Office of Water, U.S. Environmental
Protection Agency.
U.S. Environmental Protection Agency. September 30, 1994. Evaluating Municipal
Environmental Burdens. Prepared by The Cadmus Group, Inc. Washington, DC:
U.S. EPA, Office of Policy, Planning, and Evaluation.
U.S. Environmental Protection Agency. March 1993. Guidance for Calculating Municipal and
Not-for-Profit Organizations ‘Ability to Pay CivilPenalties Using Current Fund
Balances. Washington, DC: Toxics Enforcement Policy Branch, Office of Compliance
Monitoring, U.S. Environmental Protection Agency.
U.S. Environmental Protection Agency. -June 1990. Municipality’s Ability to Pay (MABEL):
Volume 1 - User’s Manual. Washington, DC: Office Of Policy, Planning, and Evaluation,
U.S. ‘Environmental Protection Agency.
U.S. Environmental Protection Agency. October 1996. Proceedings of the Blue ribbon Panel
on Safe Drinking Water Act Costing. Washington, DC: Office of Drinking Water, U.S.
Environmental Protection Agency.
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U.S. Environmental Protection Agency. October 1991. The Road to Financing: Assessing and
Improving Your Community ‘s Credit. Washington, DC: Office of Water, U.S.
Environmental Protection Agency. EPA 832-B-92-004.
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