UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                                                                             WSG 168
                                                          Date Signed: September 4, 2003

MEMORANDUM

SUBJECT:   Eligibility of Routine Compliance Monitoring Costs under the Drinking Water
             State Revolving Fund Capacity Development Set-aside

TO:          Water Division Directors
             Regions I-X

FROM:      Cynthia Dougherty, Director
             Office of Ground Water and Drinking Water
       The purpose of this memo is to clarify the appropriate use of Drinking Water State
Revolving Fund (DWSRF) capacity development set-aside funds for the conduct of routine
compliance monitoring for systems by states.

Background

       EPA Region 6 requested clarification on wether DWSRF capacity development set-aside
funds could be used by states to fund routine monitoring for systems to demonstrate compliance
with drinking water regulations.  The answer to this question turns on the language of the
appropriate Safe Drinking Water Act (SDWA) sections and funding mechanisms and the overall
goal of the capacity development program.

       The statutory restriction in section 1452(a)(2) of the SDWA on the use of DWSRF funds
for monitoring applies to section 1452(g)(2) and therefore compliance monitoring is not an
eligible use under the 2%, 4% and 10% set-aside categories. This prohibition on the use of the
1452(g)(2) set-asides for compliance monitoring was reflected in the DWSRF Program Final
Guidelines released in February 1997 and in the subsequent DWSRF final regulations at 40 CFR
35.3520(f) and 40 CFR 35.3535(a)(2).

       The complementary language in SDWA for the section 1452(k)(l)(B) capacity
development set-aside neither specifically authorizes nor prohibits use of funds for routine
compliance monitoring. However, it does explicitly state that the assistance must be "...in
accordance with section 1420(c)."  It is clear that the overriding Congressional purpose in

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                                                                                WSG168

mandating the capacity development program in the 1996 SDWA Amendments was to foster the
long-term independent sustainability of public water systems. This is evidenced by the language
in SDWA section 1420(c)(l)(C) indicating that states are to develop and implement "...a strategy
to assist public water systems in acquiring and maintaining technical, managerial, and financial
capacity" (emphasis added)."

       In initial development and implementation of the capacity development program, the
Agency sought input from a number of stakeholders. One effort involved seeking
recommendations from the statutorily mandated National Drinking Water Advisory Council
(NOWAC).  The Council's recommendations recognized and endorsed the core SDWA precept
that capacity development should lead to comprehensive system sustainability. NOW AC defined
capacity development as "a process through which a system plans for and implements action to
ensure the system can meet both its immediate and its long term challenges."

Discussion

       Statutory language and intent establishes constraints on the use of section 1452(k)(l)(B)
set-aside funds for routine operational functions such as compliance monitoring at water systems.
The controlling consideration is increasing the number of utilities that are self-sufficient to (1)
carry out the complete range of activities necessary to provide full public health protection to
their customers, and (2) ensure compliance with all applicable requirements. All statutorily
provide tools and authority should be utilized in a fashion to advance that core objective.

       To assist  systems in implementing the capacity development program, Congress
specifically authorized states to use DWSRF funding under section 1452(k)(l)(B). States may
utilize these funds for a range of activities that advance capacity development and promote
system sustainability such as guidance, training and technical assistance.  However, these funds
are not intended as routine subsidies for technical, financial and managerial activities that are
utility responsibilities.  Long-term subsidizing of routine operational activities such as
compliance monitoring does not improve the independent capacity of water systems that is the
ultimate goal of the capacity development by encouraging system dependency on outside funding.
It also diverts limited DWSRF funds from activities that directly support capacity development
and system sustainability.

Conclusion

       Conducting routine compliance monitoring for a system does not promote the ability of
the system to acquire and maintain independent capacity for the long-term.  Such a use of
DWSRF funds in inconsistent with the statutory and programmatic goals  of the capacity
development program.  Therefore, section 1452(k)(l)(B) set-aside funds should not be used for
long-term, routine compliance monitoring.

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       Since several states currently allow this practice, it is appropriate to institute a transition
period to minimize program disruption.  Any state currently using these funds for routine
compliance monitoring may continue this practice until no later than January 1, 2005. This
transition period will allow a state to continue working with the systems it had identified for
assistance and gives the state and systems time to move from using DWSRF funds to an
alternative funding source.

       If a state believes that it is appropriate for the state to conduct routine compliance
monitoring for systems as part of its drinking water program, that effort should be funded from
sources other than DWSRF grant funds. For most water systems, the best course is to work to
establish adequate rate structures that provide the revenue to pay for monitoring and other
essential  operational responsibilities.

       I hope this memo clarifies the appropriate use of DWSRF capacity development set-aside
funds for routine compliance monitoring. If you have any further questions, please feel free to
contact me or have your staff contact Charles Job, Infrastructure Branch Chief, at (202) 564-3941
or Kimberley Roy, from the DWSRF program, at (202) 564-4633.

cc:     Drinking Water Program Managers, Regions I-X
       DWSRF Program Managers,  Regions I-X
       DWSRF Program Coordinators, Regions I-X
       Capacity Development Coordinators, Regions I-X

bcc:   Bill Diamond, Director, Drinking Water Protection Division
       Nanci Gelb, Deputy Director, Office of Ground Water and Drinking Water
       Peter Shanaghan, Chief of Staff, Office of Ground Water and Drinking Water
       Chuck Job, Chief, Infrastructure Branch
       George Ames, Chief, State Revolving Fund Branch
       Evelyn Washington, Chief, Protection Branch
       Ken Redden, Office of General Counsel
       Carrie Wehling, Office of General Counsel
       Kimberley Roy, Acting DWSRF Team Leader
       Jenny Bielanski, Utilities Team

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