US Environmental Protection Agency       1200 Pennsylvania Avenue, NW, 4201M    EPA-832-F-08-055
                    Office of Wastewater Management        Washington, DC 20460              August, 2008

                    NPDES Voluntary Permit Fee Incentive for Clean
      Err^    Water Act Section 106 Grants; Allotment Formula
 The NPDES Voluntary Permit Fee Incentive for Clean Water Act Section 106 Grants; Allotment
 Formula rule provides financial incentives to states to implement adequate fee programs when
 administering an authorized National Pollutant Discharge Elimination System (NPDES) permit
program.  The rule defines eligibility for the incentive, identifies the process for determining the
 amount each eligible state will receive, and establishes procedures and guidelines for eligible
 states to follow when applying for the incentive.  The rule encourages states to implement
 adequate NPDES fee programs that shift part of the financial burden to those who benefit from
 NPDES permits. The permit fee incentive will only be made available if state Section 106
funding is greater than the FY 2008 level.  Therefore, state grants will not decrease as a result of
 this rulemaking.  The rule will be in effect for the fiscal year 2009 grant process and beyond.
 For this year only, EPA has extended the deadline for states to certify for permit fee incentive
funds to November 14, 2008.

 Background

 Section 106 of the Clean Water Act (CWA) authorizes EPA to provide grants to state, interstate
 agencies, and tribes to administer programs for the prevention, reduction, and elimination of
 water pollution. EPA's current allotment formula for Section 106 grants establishes an allotment
 ratio for each state based on six components selected to reflect the extent of the water pollution
 problem in the respective states. These six components are: surface water area, ground water
 use, water quality impairment, potential point sources, nonpoint sources, and the population of
 urbanized areas (40 CFR 35.162  (b)(l)(i)). By including a component related to point sources,
 EPA recognizes the important role they play in determining the extent of pollution in a state.

 The CWA generally prohibits the discharge of pollutants from a point source into  waters of the
 United States except as in compliance with specified provisions of the Act. Among these
 provisions is CWA Section 402, which authorizes EPA and authorized states to issue permits for
 such discharges under the NPDES program. An NPDES permit includes technology-based
 effluent limits and any more stringent limits necessary to meet applicable water quality  standards.
 EPA oversees the NPDES program and  also approves applications from states to  administer and
 enforce the NPDES program in that state. Currently, 45 states are authorized by EPA to
 administer all or some parts of the NPDES program.

 State water quality programs are funded with a mixture of state and federal dollars. The grants
 awarded under CWA Section 106  are states' primary source of federal funding. The growing
 complexity of water quality issues and the growing resource needs associated with addressing
 these issues have prompted more states to implement NPDES permit fee  programs. An
 estimated 41 states currently have permit fee programs in place, with  such fees paying for all or a

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portion of the cost of the state's permit program.

A number of states still operate their permit programs with little or no reliance on permit fees.
EPA believes that these states can address permit program budget shortfalls through the
implementation of permit fee programs that collect funds to cover the cost of issuing and
administering permits. The amendment to the allotment formula is designed to provide an
incentive to states to move toward greater sustainability in the way they manage and budget for
environmental programs and to shift part of the financial burden to those who benefit from
NPDES permits.

About This Rulemaking

This rule amends the state allotment formula to incorporate financial incentives for states to
utilize an adequate  fee program when implementing an authorized NPDES permit program.
Funding permit programs with the support of permit fees allows states to target CWA Section
106 funds for other critical water quality program activities.  As a result of this change, EPA will
allot the state and interstate agencies CWA Section 106 grant funds in the following order:

     2.6 percent  will be set-aside for allotment to the interstates agencies in accordance with
      the existing Interstate allotment formula at 40 CFR 35.162(c),
     Funds may be allotted under the alternative allotment formula at 40 CFR 35.162 (d),
     EPA may allot funds (if funds exceed 2008 baseline level) to states in accordance with
      the permit fee incentive allotment formula at 40 CFR 35.162(e),
     The balance of the state Section 106 funds will be allotted in accordance with the existing
      allotment formula at 40 CFR 35.162(b).

The incentive will never exceed approximately $5.1 million  and will only be made available if
state Section 106 funding is greater than the FY 2008 level.  The rule is in effect for the fiscal
year 2009 grant cycle and beyond.

Only those  states that have been authorized by EPA to implement the NPDES program by the
first day of the fiscal year, October  1, will be eligible for the set-aside funds. To be eligible for
the set-aside funds, these States must also submit annually a certification to EPA (to the attention
of the Regional Administrator). For FY 2009, the certification must be postmarked by
November, 14, 2008. For every year thereafter, the required certification must be postmarked by
October 1.  The certification must meet the following two requirements.  First, the certification
must provide the total NPDES state program costs, the percentage of NPDES program costs
recovered by the state through permit fee collections during the most recently completed state
fiscal year,  and a statement that the  amount of permit fees collected is used by the state to defray
NPDES program costs. This rule defines NPDES program costs as all activities relating to
permitting,  enforcement, and compliance. Second, the certification must include a statement that
state recurrent expenditures for water quality programs have not decreased from the previous
state fiscal year, or indicate that a decrease in such expenditures is attributable to a non-selective
reduction of the programs of all executive branch agencies of the state government.

After EPA determines the number of eligible states, each state will be eligible to receive up to a

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full share of the set-aside amount. EPA will determine the amount of a full share by dividing the
set-aside amount by the number of eligible states.  The percent of a full share that each eligible
state will receive will be determined by the following formula, based on the certification
information described above.

(A) A state will receive 25 percent of a full share if that state has collected permit fees that equal
or exceed 75 percent of total state NPDES program costs;
(B) A state will receive 50 percent of a full share if that state has collected permit fees that equal
or exceed 90 percent of total NPDES program costs; or,
(C) A state will receive a full share if that state has collected permit fees that equal 100 percent of
total NPDES program costs.

How to Get Additional Information

For general information about the Section 106 Water Pollution Control Grant Program or
technical inquires, please contact Ben Hamm at (202) 564-0648 (hamm.ben@epa.gov) or Robyn
Delehanty at (202) 564-3880, (delehanty.robyn@epa.gov). Copies of the Notice of Final
Rulemaking can be downloaded from EPA's Office of Wastewater Management web site at:
www.epa.gov/owm/cwfinance/pollutioncontrol.htm.

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