U.S. Environmental Protection Agency

Environmental Financial Advisory Board


          March 19-20,2007


           Meeting Summary

           Atlanta Hilton Hotel
            Atlanta, Georgia

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                                      CONTENTS

Opening Remarks and Introductions—Jim Barnes & Stan Meiburg	3

Workgroup Reports	3
  Environmental Management Systems—Rachel Deming	3
     Q&A	3
  Smartway Transport Program—Michael Curley	4
     Q&A	5

Update: Financial Assurance Compliance Reviews—Susan Bromm	6
  Q&A	8

Workgroup Reports	10
  Financial Assurance—Stan Meiburg for Mary Francoeur	10
     Q&A—Letter to the Administrator	10
     Q&A—Workgroup Continuation	11

Update: Environmental Finance Center Network—Sam Merrill	12
  Q&A	13

Remarks from Administrator Stephen Johnson	14
  Q&A	15

Workgroup Reports (Sustainable Water Infrastructure Projects)	16
  Leveraging the State Revolving Funds—George Butcher	16
     Q&A	16
  Private-Public Partnerships—JohnBoland	17
     Q&A	18
     Q&A	18
  Expanding the Definition of State Revolving Fund Financing—George Butcher	19
  Sustainable Watershed Financing—Lang Marsh	19
     Q&A	20
  Ben Grumble	20
  Financial Capability Guidance—Andrew Sawyers	20
     Q&A	21
  Sustainable Finance Policy—John Wise	22
     Q&A	23
Public Comment	24

Closing Remarks and Next Steps—Jim Barnes & Stan Meiberg	24

Participants	25
  March 19	25
  March 20	25

EFAB Membership	26
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Tuesday, March 20, 2007

Opening Remarks and Introductions—Jim Barnes & Stan Meiburg
EFAB Chair Jim Barnes opened the meeting, noting that the Advisory Finance Board was
named EPA's outstanding advisory backup group. Designated Federal Official Stan Meiburg
announced that this is Billy Turner's last meeting as a member of the board—he has made
outstanding contributions and will be missed—and he welcomed three new board members:
   •   Jim Gebhardt, Chief Financial  Officer for  the  New  York  State  Environmental
       Facilities Corporation;
   •   Scott Haskins, Executive Director of Seattle Public Utilities; and
   •   Lindene Patten, Senior Vice President and Counsel for Zurich North America.

Participants  introduced themselves. Jimmy Palmer, Administrator  for  EPA Region IV,
welcomed the group to Atlanta and EPA Region IV. As the largest, most populous, and fastest
growing, Region IV suffers incredible stresses on its infrastructure. Meanwhile, many small,
declining, and disadvantaged communities could  be destroyed  by EPA  requirements and
restrictions on discharges into the waterways, so the question of how to achieve sustainable
water infrastructure is very serious here. He noted that the Sustainable Infrastructure Meeting
and the Local Government  Advisory Committee  (LGAC) meeting, focusing on wetlands,
watersheds, and coastal issues, are also meeting at this time, and that all three meetings have
connecting threads.
Workgroup Reports

Environmental Management Systems—Rachel Denting
Members are planning a workshop in June (hopefully the 20th) in Washington, DC to discuss
valuation of environmental management systems, how financial  sectors can assess them, and
how environmental performance can  be measured.  The  workgroup has identified three
sectors—the equity market, the debt market, and the insurance market—and are convening
three panels, one for each market sector. Each panel will include three participants:  one from
stock  analysis (perhaps Inovest), one from an  index  that lists  companies on  a socially
responsible index with an environmental component, and one on the "buy side," i.e. a stock
analyst involved in analyzing environmental issues for stock picks. The insurance panel will
include someone from underwriting; the others  will be discussed in the next conference call.
The panels will be given  broad, but continually  evolving questions,  for example:  Do you
assess environmental performance?  How do you do it? What is  the role of environmental
management systems? Additional questions will be developed in a second conference call, as
well as the banking or debt side panel. The Environmental Banking Association will have its
meeting in Washington, DC in June, and the workgroup hopes to have someone from that
group.

Q&A
   •  Stan Meiberg asked for clarification  on reframing the  charge  from the narrow
      question, how can EPA develop market value for implementation for environmental
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       management systems? Ms. Deming explained the workgroup's rationale. Since many
       people do not know what an environmental management system is, they have been
       trying to "brand" systems and tease out those things that add value and that EPA could
       measure.  It  is an  interactive process centered around how  the market perceives
       environmental management and then what they do about it. They will assemble the
       panels and then get a sense of the direction they should take from panel members. The
       environmental component is becoming increasingly important across all sectors, and
       the workgroup is trying to be broader about voluntary add-ons that might enhance
       value. There is  an environmental component  to  prominent financial deals and in
       manufacturing. However, some reaction to that component seems to be cynical.

    •   John Wise endorsed this plan, saying that, notwithstanding the expertise on this board,
       convening a workshop  to reach out to  a broader group has always enriched  the
       dialogue.
Smartway Transport Partnership—Michael Curley
Upgrade kits for trucks, also called retrofits, are  devices that increase fuel efficiency and
capture emissions, but costs about $20,000. This workgroup discovered that there are millions
of small polluters who do not have superior credit. Furthermore, in construction, thereis no
financial benefit for the pollution devices 9only for long-haul trucking).  The report on the
Smartway Transport Program has grown to  be  more aptly called the  Financial Innovation
Programs for Air Pollution Abatement.

One productive idea is synthetic aggregation of small, independent truckers so they can get a
discount card to help pay for the Smartway.  Cascade Sierra Solutions  (Oregon) is  an NGO
that serves  as  a  go-between and  acts  as an agent to sell Smartway components.  By
aggregating  truckers,  Cascade  put together financing  programs and negotiated  volume
discounts.   In  response to  the financial  regime  of small trucking  companies,  which  is
negotiating three-year  loans at 14%, Cascade brokered 10-year loans at 4%. For example, the
Port of Seattle could  buy the trucks,  and truckers could pay for them over 10 years, the
average life of a truck. It makes a huge difference. Another enormous discount results from an
aggregator's purchase  of fuel futures by which truckers with  annual contracts to companies
have a fixed price for  fuel throughout the year. In addition, an opportunity may be offered  to
the regional entities to take advantage of private activity  bonds.  Cascade Sierra  may be
involved with this.

In sum, this workgroup recommends:

    1.  Because reduction  of air pollution is as much in  the public interest  as removing
       contaminants from water, the Agency  should bring the power of tax-exempt financing
       through public  agencies to bear on the  problem of air pollution.

    2.  The Agency should seek groups like Cascade Sierra to be intermediaries for forming
       synthetic aggregations.
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Q&A
          •   In terms of public interest,  there is no  difference between  air and water
              pollution,  but  tax  exemption was given for water because recipients  were
              primarily municipally owned. The  report should address why reducing  air
              pollutants  is  in the public interest because  it would  be  a move  of tax
              exemptions for public entities to private entities. There is  a $15  billion
              exemption from private activity bond exemptions in the Transportation Bill
              that could  easily be financed. The question is whether moving in this direction
              will lead to stationary sources. If  so, the report must provide the rationale for
              that change.
          •   Tax-exempt bonds are attractive, but taxable will be acceptable because  there
              is only about a 2%  difference. Allegedly, Congress is now on "pay-as-you-go,"
              that is, if you recommend something that results in a tax expenditure, you also
              recommend something to offset it. Nevertheless, the tax  code is  flexible, so the
              board should not be inhibited.
          •   This is exciting because it is very  different from what the Board has  done
              previously. But it seems that even without tax-exempt  financing, aggregation
              would provide significant benefits. The committee could look at the benefits of
              aggregation both with and without tax exemption. The New York-New Jersey
              Port Authority has  a new executive director who may well be interested in this
              idea.
          •   Ports are very interested in programs such as Smartway  that help them address
              the fact that they are air pollution  sources.  This is because they are concerned
              about regulations from the EPA.  Port financing for Smartway Upgrade Kits is
              a good option to pursue. Ports can get better deals on loans than individuals.
          •   John  Wise:   The notion of aggregation  has  power and also opens future
              inquiries that might be useful for  the board. The workgroup wants to explore
              more sources. For example, ports  are an enormous source of diesel emissions,
              which creates enormous opportunity to improve air quality. Truck stops, where
              thousands  of trucks idle all night, are another source. Stan Meiburg:  The
              Agency  has  been pursuing the issue of trucks idling  at truck stops;  one in
              Atlanta  has  been  successful as  a  private  sector  issue.  Mobile-source  air
              pollution is another issue:  fleets of cars and small trucks turn  over in  a  short
              period, but not heavy-duty trucks,  and anything that encourages retrofitting the
              existing  fleet  will  be beneficial. There  seems to  be continued  scientific
              pressure downward on the air  pollution control standard for fine  particles.
              Michael Curley: The workgroup's conversation with other people at EPA has
              been technical rather than policy-oriented.  The reaction from the truckers has
              been terrific.  If truckers are aggregated, they  could offer financing for new
              trucks, as well. The workgroup wants to meet with the head of air quality in the
              Maryland Water Quality Financing Administration (Mr.  Sawyers' department).
          •   Bill Jarocki:  For  communities that are having trouble meeting the  standard,
              this could also offer an economic  development opportunity.  A community
              could attract trucking firms  to its area knowing they could  offer a financial
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             advantage even without a port. Michael Curley:  But, we may be at the wrong
             part in environmental financing to suggest that.
             Kelly Downard:  The components of this program are  cheaper fuel, cheaper
             products, and discounts.  For the people involved in  this  industry,  these are
             foreign concepts, so the  most important part of aggregation is  a third-party
             administrator. If someone does this, it will sell. The pieces  are all there, but no
             one has known how to  put them  together.  The government has to teach
             someone how to do this or be part of it.
             Jennifer Hernandez:  Facility-expanded  permits have  been  successful in
             California.  Many people in the trucking fleet have bought the green principle
             and want ideas about what to do. Leveraging vendors is one, and this would
             just be added to the list of what would qualify as a green principle. Businesses,
             such  as Walmart and  REI, are taking a  public position on sustainability;
             therefore, the price will go down  and efficiency will go up.  We need to explore
             the private sector. For example,  school buses are among the worst offenders,
             and everyone can support the  health  of children, so  tax-exempt  financing
             would be a politically easy place to start.
             Lang Marsh:  The marvel of Cascade Sierra is the collaborative  approach
             between truckers and local government—all are on the board, so they have
             input into  how things  will work. It's a good model. And, there will  be an
             increase in this movement as a result of our expanding trade. EPA is looking
             for ways to  help communities  disproportionately affected by added  traffic.
             Pollution is  a particular challenge  to  communities near densely trafficked
             areas, such as ports and distribution centers.
             Using navigation facilities that are already in place with zillions of dollars of
             investment could reduce the number  of trucks on  the  road, which  might
             contribute  to the end result if a number of trucks could  be replaced with a
             single barge.
             Keith Hinds:  Using the profit motive, we can eliminate the need to have ports
             trained on  these things. What about  maintenance of the Smartway systems?
             Michael Curley:  The truckers'  association says they are not a burden and do
             not require additional maintenance; the user only has to clean the filter.
             Another model Cascade  uses is technical advisory committees  to deal with
             these issues.
Update:  Financial Assurance Compliance Reviews—Susan Bromm

Mr. Meiburg introduced Susan Bromm, who is responsible for enforcement for EPA clean-up
programs. She assured everyone that financial assurance is a hot topic in the world of waste.
Ms. Bromm noted that the data being provided is not statistically representative, but comes
only from the facilities they have targeted. Chris McCulloch and Greg Madden began.

Chris McCulloch: Financial responsibility is a national priority, and it relates not only to the
Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental
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Response, Compensation, and Liability Act (Superfund; CERCLA), but also to underground
storage tanks and the like. EPA wants to promote proper and safe management for handling
hazardous wastes, to prevent the taxpayer from having to pay the bill for closure or cleanup,
and to facilitate revitalization and reuse of contaminated properties.  Since 2005, OECA has
been gathering information related to the priority. OECA believes it is in everyone's best
interest to provide viable financial responsibility mechanisms to inspire confidence  among all
affected. The  reviews  EPA has conducted have  provided  a "snapshot in time."   For this
"snapshot" in  time, for closure/post-closure self-assurance mechanisms are used at 37% and
third party assurance are used at 64% of facilities.  However, this snapshot also shows that
56% of costs are covered by self assurance mechanisms, and 44% are covered by third party
mechanisms.   While this is less pronounced than an earlier snapshot, we continue to see a
trend toward  self-assurance.  For insurance, there is also  the  question of the number of
facilities vs the number of instruments. One insurance instrument may cover multiple
facilities in an "umbrella policy." The workgroup found that one instrument covered two to 24
facilities for amounts of money varying from a few thousand to several million dollars.

Greg Madden:  The cleanup work  has focused on facilities further along  in the RCRA
corrective action and CERCLA clean-up process in order to target higher dollar facilities. For
RCRA  corrective  actions,  generally  focused  on the 2008 Government Performance  and
Results Act (GPRA) baseline facilities to identify targeted  facilities for initial file reviews:
64% of those on the targeted list have had  an initial file  review.   For facilities with an
identified cost estimate 43% of facilities, but 58% of the costs are covered by the financial test
and corporate guarantee (total  costs of $535,000,000). For all instruments,  average is $5
million per facility. Over a third of the total estimated costs are covered by the financial test
($7.6 million per facility); corporate  guarantees are  also a high cost per facility mechanism
($5.8 million). The costs for facilities with an insurance mechanism falls between  those two
($6.4 million on average). For a small group of facilities, corrective action is estimated  to cost
nearly $1 billion. Third-party secured mechanisms are at the lower end of the scale in average
cost per facility.

They approached CERCLA with the same philosophy of focusing on high dollar sites and saw
the same results:  Have reviewed 82% of those targeted settlements  and orders, $2.4  billion
of clean-up work  is secured by  these  settlements  and orders.  In CERCLA even  higher
proportion was covered by self-assurance. 82% of  financial assurance was self insurance,
including annual reports. Some $971 million is spent on annual reports, and one facility has
about $700 million in costs covered by an annual report.

Susan Bromm:  Cost estimates—how good are they? States and regions conclude  that costs
are regularly underestimated. Lack of cost estimates and use of out-dated cost estimates are
both problems. Of facilities whose files they reviewed, 37% had no independent cost estimate;
and 19% had a cost estimate but it was outdated, and 12% had a cost estimate and a financial
instrument, but the costs did  not  match. These  results  do  not  necessarily equate to
noncompliance, but they do point to the need to ask more questions and delve further into the
world of cost estimation to determine whether cost assurance is meeting its goal.
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Chris McCulloch:  A number of companies and facilities use insurance to provide financial
assurance. Of companies (vs facilities) using insurance for closure/post-closure assurance, 28
are privately held. This information is based  only on 12 public companies. There were 13
commercial insurers, rated from A+ to A. Of the six "captive insurers," only one was rated; it
was good (B++). For RCRA closure/post-closure obligations, 28% were covered by captive
insurance, and there were two RCRA corrective actions. Using Altman z-scores for 18 to 24
months, three had less than 1.8, which would indicate that bankruptcy was likely.

Q&A
    •   Jim Barnes:  Captive insurance is a subset of this analysis. Using A&M Best Ratings,
       most captive insurers would fail the government test. Greg Madden: But, in fact, only
       10% of  the captives were rated. Lindene  Patten:   Everyone is focused on the
       permittee, not the insurer. The people who bought the insurance are the ones at fault.
    •   Susan Bromm:  If a company can pass the financial test, it will probably rely on that
       because there is no cost  associated  with  it,  and those  companies  would not be
       motivated to look for commercial insurance.
    •   Lindene Patten: How many permitted facilities  were looked  at, and  how many are
       there nationwide? Since the data presented  are not representative, we may be looking
       at the worst of the worst.  Chris McCulloch:  There  are more than 2600 treatment,
       storage, and disposal (TSD) sites, and a priority for 2006 and 2007  will be 25 to 35%
       of that universe. About a third has been studied so far. Greg Madden:  For corrective
       action, the workgroup did not target  the ones they thought would have violations, but
       targeted those that had big obligations, that is those with public exposure, the ones
       that, if they did  have problems, would have bigger consequences for the public. Susan
       Bromm:  It was intended to be  the highest risk sites. Greg Madden: The universe in
       corrective action is not nearly  so large as  closure/post-closure. Some facilities have
       completed all their corrective actions, and no longer need insurance.
    •   Lindene Patten: For those who do  not  operate in this area, companies will use the
       most efficient  mechanism.  The variance of  distribution of customers is  state
       regulations that will  permit various  financial mechanisms. Rachel Deming:   Many
       TSD facilities are driven  away from  corporate guarantees  and self-assurance.  The
       presumption is  that companies will  use  the most economically effective means, but
       many buy third-party insurance because the parent corporation does not keep the right
       kind of records and wants to remain separate from the subsidiary.
    •   Jennifer  Hernandez:  Data are not complimentary to  captives, but captives are not a
       big segment of the market.  Many captives are unrated.  The board may want to suggest
       that there be a rating system in place. Susan Bromm: It is very hard to know why they
       are not rated and we cannot  draw conclusions about that. Whether an objective  was
       facilitating reuse of these properties was not included in the analysis.  You wind up
       with situations  where people are desperate to turn a bankrupt facility into a viable
       situation  for the community,  rather than  having the site unaddressed. The money has
       been enough to  make the deal economically viable for the new  owner, but not enough
       to really  clean it up.  Peter Meyer:  An  increase in the number of properties getting
       reviews may lead to  third-party assurance to make it  possible for  sites to be reused.
       Cherie Rice: Captives may not be rated because they didn't need to be and it costs
       money to do so. Altman z-scores were developed for manufacturers, so for the waste

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       services industry (with little inventory), they may not be useful and we should identify
       another method.
       Susan Bromm:  Although anecdotal information  indicates that states are trying  to
       collect on financial assurance instruments and have had to litigate; state attorneys
       general do not want to pursue such cases because the cost of pursuit is not merited in
       light of the money that can be recouped. However, no valid  analytical analysis has
       been done on that.
       Keith Hinds: Should we require costs estimates be updated for inflation to compensate
       for  underestimation of costs?  Susan Bromm:   Some cost estimates  are  already
       updated for  inflation.   We can do a cost estimate early on in the corrective action
       process, but it will be less accurate. As we progress in the process, the estimate will be
       more accurate. The facilities we looked at were at the remedy select phase and quite
       far along in  the process. Dale Ruhter: The regulations for closure and post-closure
       require the cost estimates to be  updated for inflation. The idea behind the regulations
       is that cost is based on a third party to perform the work when the facility would be
       most expensive to close. They do not allow credits for waste that may have value as a
       product. We have limited information about the cost to close a facility vs the estimate
       of that cost.
       Rachel Deming:   Considering  only the  insurance  component,  could  we gain
       information  to move  forward  by evaluating  the  identified  failures for  insurance
       instruments,  or letters  of credit, or surety bonds? Is the problem the language of the
       endorsement or policy, or the financial  condition of the issuer? Chris McCulloch:
       Only the states can provide that sort of information.
       Jim  Wise: Federal facilities are not required to do these estimates, so, although some
       are bad actors, we have no data on them. EPA has no statutory authority, but as the
       nation's environmental overseer, EPA must  tell the Department of Defense and the
       Department  of Energy that they need to do these  estimates because sometimes the
       appropriations  they rely upon do not materialize. Chris McCulloch:  When they are
       permitted, they give the estimate, but they don't have to have the financial mechanism
       to pay for it because it  is assumed the government  will pay. Dale Ruhter:  The
       regulations exempt  state and federal  governments from  the subpart regarding cost
       estimates and requiring that they post a financial assurance instrument.
       John Wise:   Many things determine whether they make the financial test. Chris
       McCulloch:  Yes, but it's up to the government to verify. Dale Ruhter: At the Office
       of Solid Waste, the reporting requirements are that you file within 90 days of the close
       of the fiscal  year. The filing includes a letter from the Chief Financial Officer of the
       company listing how they pass  the financial  test and what environmental obligations
       are covered, and a statement from an independent auditor. This goes to the state, but
       an EPA regional office can review it. Chris McCulloch:  EPA has not given this area
       priority in the  past. States say the reports are difficult to review because they  do not
       have  the  necessary  expertise  in  house. John Wise:  Perhaps  the Board  should
       recommend that the federal government be required to do this and should study the
       self-examination. Rachel Deming:  Whether or not they get a shadow  bond rating
       (with the recommendation to further verify the financials), the Chief Financial Officer
       has  to verify the figures, under threat of perjury. Companies that want to self-assure
       have to have audited financial statements. They then go to state agencies and project

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       managers for review. Because of the Sarbanes-Oxley legislation, auditors evaluate this
       closely; whether that is sufficient, is another matter.
Workgroup Reports

Financial Assurance—Stan Meiburgfor Mary Francoeur
Ms. Francoeur's report covers the letter and report to the Administrator on captive insurance,
and continuation of the workgroup. This workgroup worked on this draft of the letter for
about 6 months; the draft is in the packet previously distributed to the board members. It
recommends independent credit analysis to demonstrate financial strength of captive insurers,
e.g., as is done in Vermont. If a financially responsible affiliate uses a captive, the affiliate
should pass the financial test and must be formally reviewed by the rating Agency annually.
Guidance may be faster,  but  regulations  provide more  certainty.  The letter recommends
strengthening the degree of independent evaluation, but there are three small changes: page 1,
page 5, paragraph 2, and page 5, the last sentence in that paragraph. The workgroup asks the
Board to approve the transmittal of this letter to the Administrator.
Q&A—Letter to the Administrator
    •   Michael  Curley: Except  for Lindene  Patten, people  on this Board have  little
       experience with commercial insurance; perhaps she could explain some of these things
       during the next conference call.
    •   Jennifer Hernandez:  The workgroup should think about breaking out of the RCRA
       financial  assurance  category and ask whether other  forms of financial assurance
       warrant  this  group's  attention,  particularly  Brownfield  sites.  The issue  with
       Brownfield and some postclosure RCRA sites is that  there is  no  good mechanism.
       Developing sites change ownership many times over; a viable real estate model would
       be an obligation (assessment or trust) that tracks with the land, such as is used for
       landslide repair. Any state with a master-plan community has the legal framework in
       place for this kind of regime. The RCRA model, designed to apply to the land, is a
       total breakdown from the real estate model, designed to apply to the owner or occupier
       of the land. Lindene Patten: An assessment or accrual on a go-forth basis must be
       discussed. Many mechanisms do not have the money now.
    •   John Wise:  We need to  inform ourselves about the  insurance industry  and  its
       changing nature. Many insurers  are changing their risk paradigms because of natural
       disasters and climate change. Can we continue to rely on insurance as the traditional
       model for providing  this kind of environmental liability assurance? We need to look at
       alternatives, such as instruments that run with the land or with the title. There's  a sea
       change in the insurance industry about their accumulated liability. Lindene Patten:
       This class of liability is serviced by a sub-sector of the industry, which may not be
       directly and significantly affected by  some of these issues. It may  be the ultimate
       repository of certain risk that cannot be accommodated under any other model. Often
       the more catastrophic risks are moved into such a sub-category.
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    •   A $30,000 to $50,000 cost is an obligation; insurance is for an unknown risk. In the
       post-closure world, where land is  being  managed over time, there is a need  for a
       known pot of money annually. Insurance does not quite fit this situation.
    •   Rachel Deming:  Taking it back to corrective action and the Superfund context: the
       RCRA financial assurance regime was built for operating facilities that have a lifetime
       over which  it would be closed, so  during the operation  of the  asset you would
       accumulate  sufficient resources during its lifespan. Alternative paradigms to the
       current RCRA regime include the  regime as  it applies to a sudden imposition of a
       large liability for historical operations. RCRA regulations do not fit that.
    •   Peter Meyer: This is a question of how much the Board wants to relate methods used
       for  RCRA  and Superfund on one side with brownfields on the  other.  (The term
       brownfield means real property, the expansion, redevelopment, or reuse of which may
       be complicated by the  presence or  potential presence of a hazardous  substance,
       pollutant, or contaminant.) The  issue of closure/post-closure in  the RCRA context
       reflects the increasing  concern to  risk-based,  corrective action and  long-term
       stewardship  (the brownfields context). From the point of view of managing these risks
       and coming up with the finances to  address issues in the future, there is a distinct
       parallel. The original question came  from us (brownfields) and  it seems logical to
       continue in this direction in the future.

Mr. Meiberg  called for a vote,  and  the Board voted by acclaim to transmit the letter to the
Administrator.

Workgroup Continuation
Workgroup members would like to continue  and to focus on commercial insurance and other
issues, such as cost estimation—a critical area,  reporting obligations, the nature of policy
being issued  for financial insurance,  availability  and reliability of insurance,  or federal
facilities. Workgroup  members  would like to reflect on Ms. Bromm's presentation and get
input on what the Agency would like the workgroup to pursue next.

Q&A—Workgroup Continuation
    •   Lindene Patten:  Best practices are  a good concept to work on—today it was best
       financial practices. There is an underlying need  to have a level of technical expertise
       and a  set of best practices to have the best outcome, nor can we ignore best practices
       for implementation. If we recommend an  alternative, there must be best practices for
       that. We must decide where the expertise  stops in this group and where we need
       outside input.
    •   Kelly Downard:  Insurance is undergoing a paradigm change. We asked how someone
       pays to fix  something. With the real  estate context, once someone fixes it and  some
       assurance puts in money, and there is a value left. The market is not looking at the
       person who wants to use it next. We do this with designated historic properties. When
       real estate changes, the  value  changes. The site ends up with the value of the real
       estate.  This  is true also with military base closings. The next developer is another
       person standing at the table with money. And we have not thought about that.
    •   Lindene Patten:   There are a  tremendous number of those transfers,  which are
       supported by structured financial instruments. Funds are set aside to  address  those

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       issues. Successful models are available. We have to analyze them and take the pieces
       we want.
    •   Terry Agriss: We need to know more about what has failed and what caused problems
       in the past.  Lindene Patten:  Another thing we  need to understand is where the
       insurance regulations and environmental regulations intersect in terms of what has
       worked and what hasn't. There is a lot of information and misinformation. However,
       there will be limitations to evaluating this because much data is not public for a variety
       of reasons, and we'll have to  be  extraordinarily skeptical about whatever data are
       available. Terry Agriss:  Insurance is an important  tool, but not  a tool to pay for
       planned  costs. We need to focus not on the developer, but on the land. Remediating a
       landslide area involves planned costs; money for that can be borrowed and bonded.
       There may be special assessment districts, community-based funds,  or  NGO-based
       funds. They come with disclosures, fee requirements, and  third-party enforcement
       rights by public agencies. They are a robust, but different, set of tools, and it would be
       valuable to understand them, both for planned costs and contingency funds. Lindene
       Patten:  In certain circumstances, insurance can be a funding tool for such expenses. It
       is part of the financial services industry and to suggest that insurance is limited to
       catastrophic risk  or fortuitous events may result in  inefficiencies. We need to look at
       flexible structures.
    •   Jim Tozzi:  The government gets all of these reports, which are audited. Therefore the
       information is available to the public. Dr. Tozzi would like someone  to take Mr. Dell's
       forms and see if the system is working. Are people in fact paying?
    •   Stan Meiburg:  Reporting is an issue for discussion. Our challenge is to not bite off
       more than we can chew. Which would the Agency most like us to focus on?
Update: Environmental Finance Center Network—Sam  Merrill
The nine universities represented (with nine different mission statements) discussed a diverse
set of activities and projects, a few of which are described:

Sam Merrill: The  New Hampshire  Department  of Environmental Services  wanted help
evaluating how to do infrastructure forecasting, building on Jeff Hughes' work in Region IV
in 2003.  This group helped them think through top-down vs bottom-up approaches  and cost
vs accuracy trade-offs and how to hybridize a plan for New Hampshire's particular needs.

The other project is a tool to help individual communities wrestle with how to take questions.
A huge portion of people has  neither the level of sophistication in tools and approaches, nor
the economic level to adopt these methods. Many small, rural communities do not have tools
available to evaluate their own conditions. A few hundred are nearly unorganized townships
with no Internet access. To assess a water system's health, the Environmental Finance Center
created a 25-question, self-driving survey, e.g.:  Does your system have a capital investment
plan and system to  invest in  capital projects? The questionnaire is scored and suggestions
made.

Heather  Himmelberger:  This workgroup used to be focused on how  to get more cost
effective environmental  management. Asset management was the common-sense way to do

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things  better, but there is a need to blend what Steve Albee was doing. At a recent New
Mexico meeting, everybody was at the table except for state regulators and financial agencies.
New Mexico finances and regulate many water systems and is trying to adapt principles for
small systems and is doing  a great deal of outreach to the New Mexico state  agencies.
Systems that do asset management will get 10 points, as part of the community development
block grant (CDBG) application process, which  will  help  them get  funded.  The Water
Investment Investigation Team (WIIT) looked at different aspects of management, which they
hope will lead to a requirement to  do asset management. They asked the Environmental
Finance  Center  Network to  look  at  three  small  communities'  water systems,  and the
workgroup put together a guide using Steve Albee's approach at a simpler level. They hope
this will tie them into  the future and help get Region VI states moving into sustainability,
using tools such as asset management.

Jeff Hughes:  The Environmental Finance Center Network partnered to try to get as many
rate structures and rate  sheets as possible for water and wastewater from across Georgia; they
got 415, which accounts for  95% of the people served by centralized water and sewage in
Georgia. These figures  are computerized  so that for any place in Georgia, the rate can be
calculated, grouped, and mapped for all consumers. Pricing has huge effects on finance and
the message sent to consumers. Institutionally and regionally, some of the biggest battles have
been over pricing. Also, they want to promote responsible use of comparative data, and this
database could help people compare like data. Many state  agencies use pricing for their
criteria for, e.g., preferential  interest rate-based policies. This project was also  an excellent
way for the Environmental Finance Center to partner with a number of other organizations. In
this way, other organizations will know who we are and what we can do for them.

In Georgia, unlike other states, the number of accounts and size of the utility had almost no
effect:  Small utilities charge the same as large utilities because small utilities use groundwater
and large ones use  surface water. In  other states, the larger the utility, the lower the rate. In
Georgia, there is a big variation in high consumption amounts, but not in the average amounts
(the average user  is assumed to use 6000 gallons  per month),  which has implications for
price-setting. We  tried  to determine  the message a  utility's rate  structure  sends  their
customers: increasing-block rates promote conservation (the more water used, the higher the
rate), but there are  also uniform rate structures  (the user pays the same regardless of actual
use) and decreasing-block rate structures (the more water used, the less it costs). However, for
the decreasing-block rate structure, the base is so high, that the decreased cost actually has
little effect. The group intends to continue these analyses state by state in Region IV.

Q&A
   •   Private utilities  are not included here, but, on the side,  we did a little analysis. The
       private sector has very small utilities serving maybe one community, and prices tend
       to be higher. In North Carolina, we included not-for-profit water corporations, which
       were in line with government,  but it is difficult to make accurate comparisons for
       investor-owned  corporations because they are so small.
   •   Whether there is a trend toward privatization, reflected in the  rate structure, will be
       discussed in a session in the Paying for Water Conference.
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    •   John  Wise:  North Georgia is  different from the rest of Georgia because of their
       efforts to impose the increasing-block rate structure, but is the rate structure higher or
       lower? Jeff Hughes:  Of local  utilities, with decreasing-block tariffs, 30% charged
       higher marginal  prices than those with increasing-block tariffs. John Wise:  The
       marginal price creates conservation, not the rate structure.
    •   This information is extremely useful. In Maryland, the question is how we know the
       number of gallons used per month. In Georgia, we did not ask what customers actually
       used;  past experience is that it would be 4500 to 7500 per month. Much depends  on
       the weather, which varies greatly every year.
    •   Greg  Madden: Arizona has surveyed all  1200 utilities in the state every  year since
       1999,  and they have found that privately owned utilities are more likely to charge full-
       cost rates, whereas publicly owned utilities  are living off depreciation and deferring
       maintenance and investments. These statistics are now used by USEPA to  score their
       utilities.

In conclusion, regarding data collection  problems for rate structure Mr. Merrill shared a quote
they received:  "The city is being  abolished and things are in disarray right now. The city
clerk  has left and we are completely confused by  this matter. We  cannot find  records to
compare  and  we are looking for them.
Remarks from  Administrator Stephen Johnson
Joe Dillon introduced and thanked Administrator Johnson, saying that he is a major supporter
of EFAB. The Administrator thanked the Board members for their service and dedication, and
especially he thanked Mr. Barnes for his willingness to chair the Board, and Mr. Meiburg for
continuing to serve as Designated Federal Official.

The decisions  EPA makes can  affect  the  entire nation and  the  world,  so EPA  needs
information  to  make the  best decisions. The President's charge to Mr.  Johnson was  to
accelerate the pace  of environmental protection while maintaining our country's economic
advantage—not one or the other, but both. The Board plays a critical role in helping to fulfill
this charge. There are many common grounds on global climate change and biodiversity, and
neither can be considered in isolation. And,  they have to be part of sustainable economic
development. So the question is how to do that?

One of Mr. Johnson's priorities is to leave EPA a stronger place than he found it 26 years ago.
He supports  senior executive service (SES) rotations as  a way to break up "stovepipes" across
the Agency and  the federal government, particularly the parts EPA interacts  with. Mr.
Meiberg  has begun  a two-year detail at the Centers for Disease Control (CDC), and in only
two months has learned of opportunities to collaborate. Another priority is our nation's water
infrastructure. A recurring theme in the 2008 budget hearings was the significant challenge of
how to take on an aging infrastructure. Financing issues are an important part, which could
include lowering debt-servicing fees, or leveraging state loan funds. The 2008 budget includes
the private activity bonds, something this Board worked through. The bonds will have a short-
term effect on taxes, but will bring great benefit. When the RCRA cap was removed, they saw
increased investment (from $1 billion to $3  billion per year). The  Board will be asked for

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advice and counsel on approaches to dealing with combined sewage overflows as part of our
guidance.

Mr. Johnson welcomed the three new members (James Gebhardt, Scott Haskins, and Lindene
Patten). He paid tribute to Mayor Girardy, a member of the board, and expressed condolences
to his wife. The Administrator honored Billy Turner with an award, acknowledging his seven
years'  service  on the Board,  during which  he contributed  more  than  four  decades of
experience.

Q&A
    •   John  Wise & Terry Agriss asked Mr. Johnson to expand  on  his four priorities. Mr.
       Johnson had begun with a list of 80 or 90, from which he winnowed four:  sustainable
       infrastructure,    homeland    security,    a    stronger   EPA,   and    clean   air.

       A $7  billion to $8 billion budget leaves a $300  billion shortfall for infrastructure,
       which must be addressed from a financial, technological, and public policy standpoint.

       Homeland security for water is EPA's responsibility,  as are  emergencies on land, such
       as oil spills. EPA has a critical role in detection  and response  to weapons of mass
       destruction.

       For a  stronger EPA, we must think  of human capital and of the fact that in the next
       five years, 50% of senior managers  are eligible for retirement. We must  be prepared
       by being sure we attract the brightest and the best. The intersection between energy
       and     the     environment     is     manifested     particularly    in     air.

       We need to clean up the  air and at the same time make sure we have affordable
       energy.  The United States has been criticized for not signing the Kyoto Protocol, but
       Mr. Johnson reminded critics that no other country has  done as  much as we have to
       address  global climate change. Since 2001, we have  spent $29 billion on  this and are
       continuing  to  do  so. The  Energy  Star Program  saved  $12  billion  in  2005  on
       greenhouse gas emissions. We have an aggressive, yet practical  program with China
       and India. The Alternative  Fuel Standard, which will raise  the standard for auto
       efficiency, was just sent to Congress. Efforts for clean  air will focus on working in
       collaboration with others to have clean and  affordable energy. EPA needs to see that
       we in the United States are  meeting  or exceeding our  standards.  Improving the
       permitting process would help  accelerate that process. EPA is  responsible for writing
       the renewable fuel standard, overseeing its implementation, and  making sure that we
       meet the first legislative mandate—7.5 billion gallons by 2012. Myriad opportunities
       will occur by working with agencies, such as the  Department of Commerce and the
       Treasury. We need to get off  the treadmill of dependence on foreign oil.  This is a
       national security, energy security, environmental, and economic issue.
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Workgroup Reports (Sustainable Water Infrastructure Projects)

Leveraging the State Revolving Funds—George Butcher
A more precise charge is the review and commentary on the relative effectiveness from a
financial perspective of the  leveraging approach. This will be  done in two phases:  data
collection and data analysis. A one-page summary comparing clean water and drinking water
had been distributed to board members; the data, which were not available until December,
are overwhelming. Mr. Butcher thanked Kit Farber of the EPA for providing information on
state programs.

States are groups  according to financing structure: direct loans, hybrid states, and leveraged
states. Hybrid states  issue bonds to leverage federal and state contributions, but issued only
25% of loans and capitalization grants.  Leveraged states (which originated 60% of all loans)
within the clean water revolving fund have received half of the total federal contributions in
state or federal loans. In clean water revolving funds, 16 states are above average. There is
20% growth in federal capitalization grants, and in  the drinking water revolving fund, 14%.
For a final report, the workgroup also looked at a finance agency's role. Direct loan states are
far less likely to be assisted by a finance agency or authority; the opposite is true for leveraged
states. The workgroup will compile comparative data for both clean water and drinking water.

Q&A
    •  Jim Smith:   The Office  of Management and Budget (OMB) has indicated that by
       2018, there will be no more federal money. Given the reality of diminishing capital
       into this  program, it might be  useful to review  what the Administrator  asked  the
       workgroup to do. The question put to us is,  what can you do  with  the financing you
       have and expect to receive to multiply that and get the most efficient use possible? It
       was not to support leveraging as the best way. Leveraging is borrowing, but it gives
       more money to make more loans. Mr. Butcher:  In the next conference call we will
       discuss various conclusions.  We expect to  have a completed report by the August
       meeting.
    •  Jim Tozzi:  Why are retained  earnings from leveraged states for  both mechanisms
       about the  same as retained earnings? Decision criteria would be helpful to see the
       objective  function  you're maximizing; the  criteria  are not  obvious  from these
       numbers. Mr. Butcher: More retained earnings result because the money is not being
       used to the  fullest extent—not making as  many loans  or not providing  as much
       subsidy as you could. You can't draw inferences between direct and leveraged loans.
       EPA's goal is to know how they can most effectively utilize the federal dollars; that is
       what we need to articulate. Leveraging is not robbing the fund of future capacity.
    •  John Wise:  How much money is evolving for the two funds annually? Mr. Butcher:
       Earnings  in 2006 are about 1.7%  annualized. Whether it's revolving old capital or
       whether it's  new capital, it's an earning capacity of the  fund.  The hope is  that the
       facility will become sustainable.
    •  Andrew Sawyers: Planners in Maryland thought they had enough coming in that they
       could supply the demand for  the foreseeable future, but that is no longer true.
       Leveraging is available, but it is not for everyone. Some  states receive the minimum
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       allocations, which probably should not be leveraged under any circumstances. Greg
       Swartz: Whether a state should leverage may not depend on its  having a minimum
       allocation; it has much more to do with the presence of a finance agency to guide them
       through the process.  There are ways the  state can fund itself to  support leveraging,
       such as charging  an annual fee on the loan.  Furthermore, states are distrustful of
       financial people, and in some states, a finance agency is told to stay out of it.
    •   John Wise:  In New York, the maximum leverage with no delinquencies in 20 some
       years is about  100  to  1. Total capitalization  grants  total $24 billion—what is the
       financial assistance benefit going to be? That is the driver to how you use your capital.
       For hardship cases, they offered 0% loans. Every state  uses bits and pieces of a
       number of instruments. For two-thirds of  the market rate,  you  can leverage your
       program three times. In New York, they are capitalized to the extent that they could go
       into the bond market and get a  AAA rating. Special reserve funds (SRF) are under-
       mortgaged from a financial point of view. Andrew Sawyers:  The real issue is political
       will and making political judgments. Michael Curley:  Interest rate and hardship
       assistance are two critical drivers. We  have a meeting with the governor to  discuss
       raising interest  rates.  The connection  between useful life analysis and this is also
       important. The ability to make 30-year loans makes the  SRF  competitive. Greg
       Madden: The relationship between the interest rates and what a community could do
       on its own should be considered. Some compliance costs are not  absorbed when you
       go on  your own.   It takes more principle  to borrow  from  an SRF,  but at a lower
       interest rate, it could equal the cost of  a loan with less principle  at a higher  interest
       rate. There seems to be no direct relation between interest rate and leveraging.
    •   Bill Jarocki: What is happening to all the federal funding  they  are used to? States
       where Mr. Jarocki works are very rural, and the biggest program  from these states is
       the  SRF. He expects increased demand because it's  the  cheapest money available.
       Another issue is the lack of enforcement in the drinking water area. It might be useful
       for EFAB to add  information about what is happening to other money and what is
       likely in the near term. People in the legislature don't know what is going  on. Dave
       Miller:  Federal allocations in New York have decreased from $44 million in 2001, to
       less than $10 million last year. Many rural states have been  focusing on the value of
       the utility, and that's the educational piece. It is sustainable to lend at the rate of 70%,
       and leave 30%  to grants. And, it will never be cheaper than today with construction
       costs doubling monthly. The demand for SRF will increase, and anything we can do
       to explain  that will be helpful. Terry Agriss:   If some  communities have  been
       borrowing through SRF, they could borrow on their own  and we  should let them do
       that. In the City of Baltimore, multiple projects need to be done, so we can help them
       get more projects  done. Subsidized  financing extends how far their available money
       will go.
Private Public Partnerships—John Boland
Eliminating the State Cap on Water Bonds
The workgroup drafted a letter to the Administrator on the proposal to eliminate the state cap
on water activity bonds. The workgroup was concerned that anyone would interpret this as
reducing the need for SRF, or that it would be  interpreted as  solving the infrastructure

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financing gap problem.  However, there is a potential source of capital in the private sector
that could be  brought to bear on water and wastewater.

Q&A
    •   Privately owned  facilities should be addressed for clean water, but there is as yet no
       paradigm or model to address this.
    •   John  Boland: You don't know how much capital will flow if the cap is lifted. Input
       the workgroup received was  that, if they had the same advantages as the public sector
       in the bond market, then they would invest more. So this might bring more capital into
       the market.  An enormous amount of private equity money is looking for investment
       opportunities.  It would be  interesting to investigate  what the barriers are to this
       investment. The workgroup is talking about that; Bill Riley may be a resource for this.
    •   Terry Agriss suggested deleting "unfortunately" in second paragraph.

The group voted by acclaim to send the letter to the Administrator.

Potential for Public Private Partnerships
Public private partnerships range from outsourcing minor activities to investor  ownership of
the entire utility. The workgroup wanted to find out whether barriers (real  or imagined)
impede otherwise  desirable partnerships. Every partnership is situation-specific.  EPA has
published documents and handbooks on the subject, and EFAB has published a few reports on
it.  Formerly  it  was  policies  concerning long-term  contracting. To get up-to-date, they
conducted informal surveys among  their peers asking what has been  done lately. Were they
successful? If not, why not? What  were the failure  modes and barriers? So far, they have
collected successes, but  no barriers.  Continuing this  learning process, Scott Raskins  gave an
overview of what the  City of Seattle has done with water treatment plants with two different
vendors. They are not ready to convene a workshop and are continuing to collect information.
Q&A
    •   Steve Grossman:  The Milwaukee example doesn't go to ownership. A possible
       obstacle may  be that there are buyers,  but a limited  number  of sellers. Andrew
       Sawyers:  An important discontinuity occurs when you transition from contractor
       ownership.  There is plenty of money to  be spent on the down-side, but not for
       consolidation. Smaller systems are being gobbled up and consolidated.
    •   Andrew Sawyers:  Perhaps  the workgroup  should also be thinking  about public
       corporations to consolidate small  systems.  Billy Turner:   There is opposition to
       consolidation on the private side, although many are consolidated in Australia and
       Europe. We have 160,000  drinking water facilities that are permitted  by EPA and
       16,000 wastewater facilities. It is too many, especially now that we have electronics
       that  allow us to monitor from 50 or so miles away. But, this is a political issue.
       Jennifer Hernandez: More package plants serve new communities, so there are many
       smaller and disaggregated  units, typically owned  or operated by a public utility
       district, but more often privately constructed in a new-town model.
    •   Jeff Hughes:  A few sessions during the week discuss these issues. In other sessions,
       there are discussions  about  alternative roles  for the private sector. There are  a painful

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       number of facility ID numbers to deal with:  in North Carolina one private utility owns
       700 systems. Although it has one rate system, one front office, and one staffer, all 700
       come  in as disaggregated system. They are often the small ones nobody wants. The
       barrier has always been obvious with  private  equity firms wanting to buy colonial
       waterworks. Existing equity totals billions and billions of dollars in this  state. Public
       policy in the United States comes into play. Local owners don't ask for a rate of return
       on that equity. The problem seems to be that equity companies do want a return on
       their investment. We could have an influx of capital, but if you handed it over to your
       customer base, they would want a rate of return. Heather  Himmelberger:  New
       Mexico tried to  consolidate its water utilities  two years ago. (There are 100  water
       systems within the boundaries of Albuquerque.) Now, when they try to consolidate,
       there's a bill to abolish them, and two bills to block eminent domain.
    •   Scott  Raskins:   There is  a backlog  of infrastructure  problems,  rising rates, and
       providing high service at low cost. Ownership,  governance, and service provision can
       be different strategies.  Regionalization,  which implies  consolidating  debt, is one
       option, but there are others, e.g., high-performing utilities could offer their services to
       other utilities. Lindene Patten:  We should focus on technology with point-of-service
       delivery, which is done in other places, but not the United States.
    •   Greg Madden:  At least for private utilities, invariably every state has a public utility
       commission. If a single owner owns multiple systems that are not contiguous, one
       cannot be used to subsidize the others—why would a private utility have rates higher
       than need be to  subsidize rates of another utility? Andrew Sawyers: Public utility
       commissioners are sensitive to  issues of fairness and equity and will see uniform rates
       as a positive.
    •   John Boland: The abominable failure  of "package plants" was one of the things that
       pushed passage  of the  1972  Clean Water Act.  Package plants were  popping up
       everywhere and were then abandoned.  The  state may not be able to capably monitor
       many  small facilities. Terry Agriss:  They are not likely to be owned or operated by a
       private entity, but are likely to be operated as  a piece of equipment managed by the
       district so it becomes more like a satellite.
    •   Jennifer Hernandez:   Telling people where their water  comes  from when it is
       reclaimed  water can be a problem. This moves into wastewater as  a  water  source
       where aggregation will not be a trend.
    •   George Butcher: The workgroup will  have survey results ready for discussion at the
       August meeting.
Expanding the Definition of State Revolving Fund Financing—George Butcher
This report represents a novel approach, but, as indicated in the report, it would require new
legislation to implement. Mr. Butcher expressed appreciation for the addition to the portfolio
of alternative ways to bolster financial resources and promote sustainability.
Sustainable Watershed Financing—Lang Marsh
An important issue is the Agency's financing for watershed restoration, a complex subject
that generates much interest. Most responses called for EPA to do internal adjustment. The

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Non-point source workgroup met this morning, and  Mr. Marsh will follow-up with Craig
Cooks to offer further assistance and cooperation. Then the workgroup will report to  the
Board in August. They intend to stage operation  for the March meeting and have another
discussion with the Agency some time before that. Region IV will meet with the workgroup
to discuss whether they can offer  some demonstration areas as a follow-up, and they  are
thinking  about the possible use of the model in the Great Lakes states.  Outreach continues,
e.g., River Network (an NGO) participants have invited Mr. Marsh to speak with them. The
workgroup will issue a report to the National Policy Research Center to the governor and state
agencies  and possibly others. After another year's work, they will review whether they can
continue  to be helpful.

Q&A
    •   Julie Belaga: We have identified a number of troublesome watershed areas. It's an
       attractive arena for organizations  and NGO's that deal with this area.  We need to
       analyze  at least for a year and  see what  EPA does and how  we can be helpful.
       Another participant concurred with the request for more time. The current finance
       capability of watershed coordinators is at best at kindergarten level,  while EPA talks
       about more sophisticated things. He has asked colleagues in his state to react.
    •   The National  Academy of Public Administration is completing a report  (the Agency
       has a draft of it) for the Office of Management and Budget  (OMB)  and EPA that
       focuses on the challenges of environmental protection in the future. This workgroup
       gets strong and favorable mention for dealing with financing challenges, so these ideas
       are being further disseminated.
    •   Andrew Sawyers: The Maryland Greenfund, in response to discharges into the Bay,
       levies $2/square foot for new impervious surfaces, e.g., parking lots, driveways.  In
       new development areas, it levies $0.25/square foot.
Ben Grumble
Mr. Grumble  dropped by to say "hello" and "thank you." He said  the Administrator is
committed to EFAB and its usefulness and looks forward to hearing more about sustainability
and financing.
Financial Capability Guidance—Andrew Sawyers
Mr. Sawyers discussed the Financial Capability Guidance with Jim Hanlon, who has a copy
of the document.  (A copy of the guidance had been distributed to board members.) Having
gotten input before the meeting, Mr. Sawyers hoped the board could endorse the guidance at
this meeting.

Financial Capability  Guidance addresses a  community's  economic condition and  the
investments needed to make water quality improvements. It demonstrates  how EPA will
evaluate  ability to pay, which will determine time frame for  the municipality in a 2-phase
process of determining a residential indicator, and then a series of financial indicators. Lastly
these 2 are combined.
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Jeff Hughes  summarized the main recommendations.   EPA wants  an easy-to-explain,
quantifiable, quantitative scale for utilities facing significant implementation costs. They want
to be able  to summarize their financial capability to implement assessments of combined
sewer overflows (CSO). The working group started with the premise of customer impact and
system impact, and the difference between  system-level affordability and household-level
affordability. The premise is that a local utility will implement CSO, and the burden placed on
them will be a function of the impact of their customers and the overall health of their utility.
This work was done in 1996 before the "4 pillars," which may influence the current work.

To summarize:  Residential impact is a single indicator, whereas systems impact is multiple
indicators.  We  should  consider having 2 to 4 separate  indicators to assess  the impact on
customers (right now they only collect residential  data). The  residential indicator is cost per
median income, done on pure cost, not household expenditure. But, we should consider the
rate structure, rather than household cost derived by dividing household cost by expenditures.
The 1997 factors omit some things we now consider important, e.g., depreciation. Therefore if
a utility  wants  to invest in asset management, cost per  household  would not give enough
information. The biggest issue is whether use cost or rate impact indicates incremental cost of
rate implementation or  cumulative impact of CSO. Since all analyses are done with a billion
dollar investment,  cumulative  impact may make  more sense. However,  if  it is done
cumulatively, where does it stop? If it is done incrementally,  does that take into account the
community burdened with other regulations? The workgroup concluded that it might be
possible to  do both, so the workgroup does not recommend doing one or the other.

On the financial systems  side,  comments mainly addressed updating the approach now that
we have a different framework  for finance. Few utilities now depend on property tax to
finance activities, as was prevalent in the 1990s. It is more like a bond-rating process. They
look at  bad debt rather than tax collection rate  and  then  convert  the figure to debt per
customer or per capacity. Greg Madden suggested ratings language.

Q&A
    • Andrew Sawyers:   The  National Water Quality Assessment Program (NAQUA) has
      other creative suggestions, but is in agreement with this.
    • Jim Barnes: Mr.  Barnes thanked the workgroup for complying with an aggressive
      schedule. It is time to look at the 1997 report, and these recommendations will serve
      well for considerations to go into the process. The board received 2 white papers on
      methodology from NAQUA and  the Senate Environment Committee. We  will be
      beginning a process, although the process in not yet clear. On January 25, the Federal
      Register gave notice of new  and invasive OMB guidance, and how the Agency will
      implement that is under discussion. Mr. Barnes  hopes the board will be available for
      telephone advice and counsel; the Agency does not have this expertise. Stan Meiberg:
      This has been a different model for the  Agency's  work, and he commended the
      workgroup for pulling it together in such a short time.
    • Jim Tozzi:  The report is substantive and  aggressive, but the letter is wimpish and
      should be  rewritten to  encourage  people  to read  the report.  Accumulative vs
      incremental cost pricing is a basic issue, however, Dr. Tozzi interprets the report to
      say  that cumulative is of secondary ranking, so incremental is primary; therefore, the

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       workgroup is not truly neutral. Of all the issues addressed, is not the issue of capturing
       cumulative vs incremental so large that it dwarfs all the others? Andrew Sawyers:  The
       letter is "wimpish" to communicate that  we thought the original document was good
       and that this  group just wanted  to highlight the  recommendations. The matter
       engendered  much  discussion.  They wanted to  look  at  both  incremental  and
       cumulative, and to a certain extent it is unresolved.
    •   Jeff Hughes:  It might be good to rephrase it with  a multi-indicator metric. Terry
       Agriss  would vote for "cumulative."  We need to  make a decision  in a report being
       provided to the Agency with recommendations. She is uneasy about saying members
       of EFAB are decided if they have not come to consensus. Ms. Agriss recommends
       giving  the Agency 2 options along with the benefits  and disadvantages of each. Dr.
       Tozzi:  Few people really understand this very complex issue. Therefore, this board is
       not likely to  come to a conclusion in a reasonable time. John Wise: "Incremental" and
       "cumulative" are entirely different. The incremental method asks, if we do this, what
       is  the  cost? The  cumulative method asks the  ability  to  pay and is  related  to
       affordability rather than to the project per  se. Incremental financial is primary; but
       cumulative is neither irrelevant nor unimportant. Mr. Wise agrees with the sentence  as
       Jeff wrote it. Mr. Sawyers summarized  the workgroup's position:  The way it  is
       written expresses  our meaning, but discussion might be expanded to incorporate Mr.
       Wise's comments. We are not in disagreement; there are 2 different approaches, but
       they get at 2 different things. NAQUA has not proposed using  incremental,  but we can
       show that there are benefits to both. Stan Meiberg: The workgroup will revamp the
       paragraph and, in the next couple of weeks, circulate it by e-mail for  comment; silence
       will mean agreement with the revision.
Sustainable Finance Policy—John Wise
Across the landscape of America—companies, local and state government, student activism,
new curricula and degrees, and the military—we see convergences of thinking and practices
about the issue of sustainability. In San Francisco last August this workgroup was established,
its purpose being:  to build on this convergence of activity and thinking on sustainability and
to urge EPA to embrace sustainability as  a strategic management agenda, fulfilling in part
some of Administrator Johnson's priorities; to focus on ecosystem assets as well as pollution
control; and to use the Agency's resources  wisely to move the agenda forward. With the first
draft of a report (in the packet distributed to board members), the  workgroup tried to identify
the notion of sustainability  in terms the Agency can grasp and to identify the ecological
imperative. It is not enough to control pollution to meet public health goals; we must attain an
environmental objective  to  compliance endpoints and  then  reach beyond that to  protect
ecosystems and the things they provide.

The Office of Research & Development will facilitate the  measurement  and assessment of
how we are doing.  To enhance EPA's agenda, we need more emphasis on processes to use as
tools,  such as life-cycle assessment,  full-cost pricing,   and  rate  structures.  There are
geographic ways to organize around  watersheds and  air-sheds that could be important
vehicles  for  organizing  and delivering financial services. We need more emphasis on
emerging market places for ecosystem assets, carbon markets, water rights, and conservation

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banking, keeping in mind EFAB's purpose to make recommendations to the Administrator.
We need to delineate the issue, as we did when we addressed how to pay for environmental
protection. In sum, if we think ecosystems are important, how will we pay for them?
Q&A
    •   Jim Tom:  The board has to look at the role of the board. Innovative financing I
       understand, but this paper goes to doctrine, ideology, and moral obligations, which
       seem too broad for this board. Keith Hinds:  The report is well written  as a thought
       piece, but it is much broader than a finance paper and should be narrowed to matters to
       which you can assign a dollar value. John  Wise:  On the other hand, the Administrator
       encouraged talking about sustainability.
    •   Rachel Deming:  It is completely outside government. Ms. Deming sees  the potential
       value as a vision of the Agency that gets away from the traditional compliance role to
       incentives for sustainable environmental performance. We should strengthen the idea
       that  it  is  continuing  in a  direction in  which  has  already  been  going—e.g.,
       environmental management systems are not mandated by any  statute—not that the
       direction is  so different  from what  the  Agency  has  been doing. This  should  be
       presented as an action by the Agency to seek enhanced environmental performance, to
       give  incentives to reach  the next level,  to go  beyond typical compliance and the
       regulatory role to suggest overarching ideas that go across the silos.
    •   X:  It  goes well beyond  the role of advisory  board. We should focus solely  on
       financing issues. The speaker looks forward to next draft and urges caution that we
       recognize our mandate.
    •   Bill Jarocki:   We have to look at the  paper to  understand the bigger context of
       sustainability.  In  a financial context, it is part  of the  environmental goods and
       management and how you bring that into the calculation. We need to look more at
       environmental economics.  Values, judgment,  and measurement  come into  play
       although they may not be measurable in a dollar amount.
    •   John Boland:  Both times the Administrator has spoken  to this group, he used the
       word "sustainability"  a number of times. We will not define sustainability for the
       Agency,  but we have  to understand it for ourselves. This paper will inform us and
       stimulate discussion. The paper  shows linkages.  John Wise: The previous paper Dr.
       Boland wrote was about stewardship,  which is a bold proposal. We should initially
       consider it as a policy piece for our own edification.
    •   Peter Meyer:  Many people think sustainability is a moral issue,  but  it is also  an
       economic one. A  particular remediation approach  can minimize financial cost in  an
       economic system, so we should take a broader look at the economics of incorporating
       the issue of sustainability and whether it leads to more efficient policies. This whole
       issue is central to the mission of the Environmental Advisory Boards.
    •   To submit practical suggestions and things the Administrator can and cannot do in his
       remaining time, we should separate it into 2 pieces:  one is big picture policy, and the
       other is suggestions that are practical and  do-able. That is, we continue to look at the
       paper as a policy piece for internal use by the board, but we extract specific ideas for
       the administrator. Finally, we aim for a paper that would be a board product on any
       issue. The board as a whole has no competence for the first paper—what sustainability

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      is and how it affects our work. From that paper we extract things we want the board to
      review.
Public Comment
No comments.


Closing Remarks and Next Steps—Jim Barnes & Stan Meiberg
The next meeting will be convened August 15 and 16, 2007 in San Francisco at the Nikko
Hotel (in response to an overwhelming vote).

Mr. Meiberg thanked everyone and adjourned the meeting.


Meeting Adjourned 5:15
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Participants

March 19
Sue Breggum, Waste Management
Susan Bromm, EPA OECA
George Faison, EPA OSW
Greg Mason, GEFAEFAB
David Miller, USD-Rural Development
Dale Ruhter, EPA
Dick Swanson, ASTSWMO
Larry Zargon, EPA
March 20
Stacey Berahzer, UNC, EFC
Jenny Bielanski, USEPA
Sue Breggan, Waste Management
Cynthia Dougherty, EPA OGWDW
John Duffy, Mat-Su Borough, AK
George Faison, EPA
Alan Farmer, EPA Region 4
Kevin Garon, DuPont
Robert Hall, USEPA
Shana Harbour, USEPA
Greg Madden, USEPA
Chris McColloch, USEPA
Kevin Mathews, AIG
Peter Meyer, NKYU
David Miller, USDA
Cara Norton, EFC
Matt Robbins, EPA Region 4
Dale Ruhter, EPA
Bob Stewart, N-RC
Dick Swanson, ASTSWMO
Barney Turney, BNIA
Maria Vichen, EPA
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EFAB Membership
Chair
James Barnes

Designated Federal Official
Stanley Meiburg, National EPA Liaison,
  CDC

Congressional
Pete Domenici, U.S. Senate

State & Local
Kelly Downard, Chairman, Louisville
  Metro City Council
Jamed Gebhardt, Chief Financial Officer
  for the New York State Environmental
  Facilities Corporation
Steve Grossman, Executive Director, Ohio
  Water Development Authority
Scott  Haskins, Deputy Director, Utility
  Systems Management, Seattle Public
  Utilities
Gregory Mason, Assistant Executive
  Director, Georgia Environmental
  Facilities Authority
Andrew Sawyers, PhD, Program
  Administrator, Maryland Water Quality
  Financing Administration
Billy Turner, President, Columbus Water
  Works
Business & Industry
Terry Agriss, Vice President, Energy
  Management, ConEdison
Donald Correll, President and CEO,
  American Water
Rachel Deming, Partner, Scarola Ellis LLP
Stephen Mahfood, President, Mahfood
  Associates, LLC
Lindene E. Patton, Senior Vice President
  and Counsel, Zurich North America
Cherie Collier Rice, Treasurer and Vice
  President of Finance, Waste
  Management, Inc.
Jim Tozzi, PhD, Multinational Business
  Services, Inc.

Banking, Finance, & Legal
George Butcher, Managing Director,
  Municipal Finance, Goldman, Sachs, &
  Co.
Michael Curley, Executive Director,
  International Center for Environmental
  Finance
Mary Francoeur, Director, Financial
  Guaranty Insurance Co.
Jennifer Hernandez, Partner/Co-Chair,
  National Environmental Team, Holland
  and Knight, LLP
Keith Hinds, Financial Advisor, Merrill
  Lynch
Helen Sahi, Director, Environmental
  Services Department, Bank of America
Greg Swartz, Vice President, Piper Jaffray
  &Co.
Sonia Toledo, Managing Director, Merrill
  Lynch
Justin Wilson, Waller Lansden
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Associates, Organizations, Academia,
  and Public Interest Groups
Julie Belaga, Co-Chair, Connecticut
  League of Conservation Voters
John Boland, Professor Emeritus, Johns
  Hopkins University
Langdon Marsh, Fellow, National Policy
  Consensus Center, Portland State
  University
Environmental Finance/Independent
  Consultants
James Smith, Bozeman, Montana
John Wise, Hidden Valley Lake, California
Sam Merrill, PhD, University of southern
  Maine
Mark Lichtenstein, Syracuse University
Dan Nees, University of Maryland
Jeff Hughes, University of North Carolina
Lauren Heberle, University of Louisville
Kevin O'Brien, Cleveland State University
Heather Himmelberger, New Mexico
  Institute of Mining and Technology
Sarah Diefendorf, California State
  University
William Jarocki, Boise State University
                                             Environmental Finance Staff
                                             Vanessa Bowie, Director
                                             Alecia Crichlow, Analyst
                                             Vera Hannigan Senior Analyst
                                             Susan Emerson, Analyst
                                             Pamela Scott, Analyst
                                             Timothy McProuty, Senior Analyst
                                             Sandra Keys, Admin Assistant
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