Recommendations of the
National Drinking Water Advisory Council
to U.S. EPA on Its National Small Systems Affordabilitv Criteria
July 2003
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NDWAC Affordability Recommendations, July 2003
Recommendations of the NDWAC to U.S. EPA on Its
National Small Systems Affordability Criteria
Table of Contents
Abstract v
Acknowledgements xviii
Section 1 Introduction 1
1.1 NDWAC Affordability Work Group Charge 1
1.2 NDWAC Affordability Work Group Membership 2
1.3 NDWAC Affordability Work Group Deliberative Process 2
1.4 Work Group Committees 2
1.5 Issues Considered in Making Water Affordable 4
1.6 The State Role in Implementing the National Affordability Criteria 4
1.6.1 Affecting the Cost of Water Production 5
1.6.2 Developing and Implementing Variance and Exemption
Provisions 6
1.6.3 Providing or Facilitating Grant and/or Low-Interest Loans 7
1.6.4 Public Education 7
1.6.5 Resource Issues 8
Section 2 Affordability Criteria 9
2.1 Affordability: The Concept, Definitions, and Concerns 9
2.1.1 Definitions and Concept 10
2.1.2 Affordability Issues 13
2.2 Approaches to Determining Affordability 14
2.2.1 Defensive Expenditures 15
2.2.2 Willingness to Pay 15
2.2.3 International Water Rate Comparisons 16
2.2.4 Comparison to Other Household Expenditures 16
2.3 The EPA Affordability Criteria 17
2.4 The Six Charge Questions: Reactions and Recommendations 17
2.4.1 EPA Affordability Criteria Concerns 18
2.4.2 Other Concerns, Suggestions and Recommendations 29
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NDWAC Affordability Recommendations, July 2003
Financial Support Strategies
Introducti on
Discussion
3.2.1 Rate Setting Techniques to Enhance Water Affordability
3.2.2 Low Income Water Assistance Program (LIWAP)
3.2.3 Modifications to Existing Sources of Funding to Address
Affordability
3.2.4 New Sources of Funding to Address Affordability
Recommendations
System-Level Strategies for Addressing Affordability Challenges
Introducti on
Discussion
4.2.1 Cooperation
4.2.2 National-Based Treatment Technologies
4.2.3 Alternatives to Central Treatment
4.2.4 System Capacity Optimization
Recommendations
Public Education
Introducti on
Approach to Public Education
Recommendations
Conclusion and Recommendations
Affordability Criteria
6.1.1 Recommendations Regarding National Affordability Criteria
6.1.2 Comparison of Work Group and EEAC of EPA's SAB
Recommendations
Financial Support Strategies For Addressing Affordability
Challenges
6.2.1 Rate-Making Strategies
6.2.2 Low Income Water Assistance Program
6.2.3 Modification of Existing Programs
6.2.4 Potential New Funding Sources
6.2.5 Recommendations Regarding Financial Support Strategies
System-Level Strategies For Addressing Affordability Challenges
6.3.1 Cooperation
6.3.2 Treatment Technologies
6.3.3 Alternatives to Central Treatment
6.3.4 Capacity Optimization
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NDWAC Affordability Recommendations, July 2003
6.4
6.5
Appendices
Appendix 1: Minority Views and Additional Comments 101
Appendix 2: Final NDWAC Affordability Work Group Roster 121
Appendix 3: National Drinking Water Advisory Council Ground Rules 125
Appendix 4: Operating Protocols of the NDWAC Affordability Work
Group 127
Appendix 5: Illustration of Two Possible Approaches for Small System
Drinking Water Determinations 133
Appendix 6: American Water Works Association Manual Ml: Principles of
Water Rates, Fees, and Charges (fifth ed.), Chapter 16: Low-Income
Affordability Rates 145
Appendix 7: Gilbert's Affordability Gap Graph 153
6.3.5 Recommendations Regarding System-Level Strategies for
Addressing Affordability Challenges 97
Public Education 98
6.4.1 Recommendations Regarding Public Education 98
NDWAC Perspective 99
Tables
Table 1:
Table 2:
Table 3:
Table 4:
Work Group Composition
VI
Ratemaking Table - Lifeline Rates Example, All Customers Eligible, In
Dollars 56
A. Using Service Charge and Consumption Charge Tariff Design:
Comparison of Uniform Consumption Rate and Inclining Block Rate
B. Using Minimum Bill and Consumption Charge Tariff Design:
Comparison of Uniform Consumption Rate and Inclining Rate Using
5,000 Gallons per Month Minimum Consumption
57
Ratemaking Table - Affordability Rates Example, Lifeline For Low-
Income Customers Only, In Dollars
A. Using Service Charge and Consumption Charge Tariff Design:
Comparison of Uniform Consumption Rate and Inclining Block Rate
B. Using Minimum Bill and Consumption Charge Tariff Design:
Comparison of Uniform Consumption Rate and Inclining Rate Using
5,000 Gallons per Month Minimum Consumption
Ratemaking Table - Lifeline Rates Example, All Customers Eligible, In
Percent Of MHI 58
A. Using Service Charge and Consumption Charge Tariff Design:
Comparison of Uniform Consumption Rate and Inclining Block Rate
in
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NDWAC Affordability Recommendations, July 2003
B. Using Minimum Bill and Consumption Charge Tariff Design:
Comparison of Uniform Consumption Rate and Inclining Rate Using
5,000 Gallons per Month Minimum Consumption
Table 5: Ratemaking Table - Affordability Rates Example, Lifeline For Low-
Income Customers Only, In Percent Of MHI 59
A. Using Service Charge and Consumption Charge Tariff Design:
Comparison of Uniform Consumption Rate and Inclining Block Rate
B. Using Minimum Bill and Consumption Charge Tariff Design:
Comparison of Uniform Consumption Rate and Inclining Rate Using
5,000 Gallons per Month Minimum Consumption
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NDWAC Affordability Recommendations, July 2003
Recommendations of the
National Drinking Water Advisory Council
To U.S. EPA on Its National Small Systems Affordability Criteria
Abstract
This document represents the report and recommendations of the National Drinking
Water Advisory Council's (NDWAC's) Work Group on the National Small Systems
Affordability Criteria. The Affordability Work Group consisted of 18 members, collectively
chosen to reflect a balanced range of expertise, experience, and perspectives. Work Group
members met five times between September 2002 and January 2003. The Work Group included
representatives of small and large water utilities, small system advocacy and technical assistance
organizations, academic and consulting experts on small systems and on economics, States and
local governments, tribes, and environmental and consumer groups. (See Table 1 on the
following page for introductory information about each of the 18 Work Group members.)
The Work Group was asked to provide advice to the NDWAC, which in turn is
providing recommendations for the U.S. Environmental Protection Agency (EPA) on the
national small systems affordability criteria associated with the variance technology provisions
of the Safe Drinking Water Act (SDWA). The Work Group was specifically asked - based on
six charge questions posed by EPA - to provide advice on EPA's national-level affordability
criteria, the methodology used to derive the criteria, and EPA's approach to applying these
criteria to National Primary Drinking Water Regulations. The Work Group also explored
strategies - including funding mechanisms and possible legislative actions - that may better
enable small systems to achieve compliance in a more cost-effective and/or less financially
burdensome manner.
Because the Affordability Work Group was formed under the auspices of the NDWAC, it
operated under the NDWAC's ground rules for working groups (Appendix 3), as well as Work
Group-specific operating protocols (Appendix 4). The Affordability Work Group used
consensus decision-making procedures to guide its deliberations. However, it was recognized at
the outset of the deliberations that, due to the complex and controversial nature of the subject
matter to be discussed by the Work Group, consensus would probably not be reached on all
issues. Where consensus could not be reached, the Work Group was asked to present the range
of views expressed, along with a discussion of the potential pros and cons associated with the
various alternative approaches. Minority views on issues for which the Work Group did not
reach consensus, as well as additional comments submitted by Work Group members, can be
found in Appendix 1. These minority views and additional comments are an important part of
this report.
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NDWAC Affordability Recommendations, July 2003
Table 1
WORK GROUP COMPOSITION
WORK
GROUP
MEMBER
ORGANIZATIONAL
AFFILIATION
CONNECTION TO SMALL SYSTEMS
Kevin Brown
Utah Department of
Environmental Quality
and Association of
State Drinking Water
Administrators
Kevin Brown is the Director of the Utah
Department of Environmental Quality Division of
Drinking Water. He is also a member of the
Association of State Drinking Water
Administrators (ASDWA). ASDWA represents
the drinking water programs in each of the 50
States and 6 territories in their efforts to ensure the
provision of safe, potable drinking water.
Together, ASDWA's members regulate
approximately 166,000 public water systems
serving 263 million people. ASDWA's primary
mission is the protection of public health through
the effective management of State drinking water
programs that implement the SDWA.
Stephen Cooke
University of Idaho
Stephen Cooke represented the discipline of
agricultural economics on the Work Group. He is
associate professor of agricultural economics in
the Department of Agricultural Economics and
Rural Sociology at the University of Idaho. Dr.
Cooke's areas of responsibility are rural economic
development and local public finance.
Makia Epie
National League of
Cities
Councilman Makia Epie of Cedar Hill, Texas,
represented the National League of Cities (NLC)
on the Work Group. NLC's mission is to
strengthen and promote cities as centers of
opportunity, leadership, and governance. It
represents 49 State municipal leagues, more than
1,700 cities and town of all sizes directly and,
through the membership of the leagues, more than
18,000 municipalities in total. It is the oldest and
largest organization representing cities and the
only one that includes both mayors and city
council members as active participants.
Bruce Florquist
National Drinking
Water Advisory
Council
Bruce Florquist is a member of the NDWAC, as
well as a member of the Water Resources
Management Committee for the American Public
Works Association and the Public Works Director
in Rawlins, Wyoming.
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NDWAC Affordability Recommendations, July 2003
WORK
GROUP
MEMBER
ORGANIZATIONAL
AFFILIATION
CONNECTION TO SMALL SYSTEMS
John Gaston
California-Nevada
Section of the
American Water Works
Association (AWWA)
and Association of
California Water
Agencies
John Gaston is a civil engineer with more than 35
years' experience in the drinking water industry as
both a regulator with the State of California and a
consultant with CH2M HILL. On this Work
Group, he represented both the California-Nevada
Section of the American Water Works Association
and their 7,500 + members and the Association of
California Water Agencies, which represents 80
percent of the 36 million drinking water
consumers in California.
Jerry Gilbert
J. Gilbert, Inc.
Jerome B. Gilbert, consulting engineer, has been a
manager of large and small utilities and a State
regulator. He is also past president of the
American Water Works Association (AWWA)
and the AWWA Research Foundation
(AWWARF). He was a member of the NDWAC
Arsenic Cost Work Group, which gave rise to the
Affordability Work Group, and is a consultant to
utilities.
Merl Hackbart
University of Kentucky
Merl Hackbart is professor of finance and
administration at the University of Kentucky,
Gatton College of Business and Economics.
Saeid Kasraei
Maryland Department
of the Environment and
ASDWA
Saeid Kasraei is the manager of the Maryland
Department of the Environment Water Supply
Program. He is also a member of ASDWA, which
is described above under the entry for Kevin
Brown.
Laurie Marin
Nez Perce Tribe
Laurie Marin is the Utilities Planner for the Nez
Perce Tribe. The Nez Perce Tribe operates
community water systems that serve 3
economically depressed tribal communities of
under 50 connections each, located over 60 miles
apart.
David Monie
Small Companies
Committee of the
National Association of
Water Companies
David Monie, a small system owner, also
represents the Small Companies Committee of the
National Association of Water Companies
(NAWC). The nation's only trade organization
for the investor-owned water industry, the
NAWC's 200 member systems provide drinking
water service to more than 20 million Americans
in 42 States every day. The NAWC serves as the
ambassador for this $2 billion industry that
employs 15,000 people.
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NDWAC Affordability Recommendations, July 2003
WORK
GROUP
MEMBER
ORGANIZATIONAL
AFFILIATION
CONNECTION TO SMALL SYSTEMS
Diana Neidle
Consumer Federation
of America
The Consumer Federation of America is a non-
profit association of more than 280 pro-consumer
groups, with a combined membership of 50
million, that was founded in 1968 to advance the
interests of consumers through advocacy and
education.
Erik Olson
Natural Resources
Defense Council
The Natural Resources Defense Council is a
national non-profit public interest organization
dedicated to protecting public health and the
environment, with over 500,000 members. NRDC
strongly believes that all Americans deserve water
that is safe to drink and affordable. NRDC
recognizes the special challenges faced by small
water systems and believes that the best approach
to dealing with small system affordability issues is
to encourage cooperative strategies, innovative
small system package treatment and source
protection, and targeted public funding, rather than
giving small system water users "second tier"
lower quality tap water.
Bob Raucher
Stratus Consulting
Bob Raucher, executive vice president of Stratus
Consulting and an active member of AWWA, is
an economist with more than 25 years' experience
on compliance cost and affordability issues
associated with the SDWA. He has worked
extensively on the equity and efficiency
implications of drinking water regulations,
financial strategies, and public health policies.
Velma Smith
Campaign for Safe and
Affordable Water
The Campaign for Safe and Affordable Drinking
Water is a nationwide alliance of over 300
environmental, consumer, public health and other
organizations working to improve drinking water
and protect our nation's drinking water sources.
The Campaign recognizes the unique problems of
small drinking water systems and supports
solutions to these problems that will ensure a good
quality of affordable water for all Americans.
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NDWAC Affordability Recommendations, July 2003
WORK
GROUP
MEMBER
ORGANIZATIONAL
AFFILIATION
CONNECTION TO SMALL SYSTEMS
Blanca Surgeon
Rural Community
Assistance Program
Blanca Surgeon is a technical assistance provider
and trainer with Rural Community Assistance
Corporation the Western RCAP. Since its'
founding in 1969, RCAP has worked to help
people living in small rural communities improve
their quality of life through ensuring the
availability of safe and clean water. The RCAP
network includes field staff in all states and Puerto
Rico, six regional offices with multi-state service
areas, and a national office located in Washington,
D.C. Blanca Surgeon is also a member of the
NDWAC.
John Trax
National Rural Water
Association
The National Rural Water Association (NRWA) is
the country's largest community-based
environmental organization representing over
22,000 small and rural communities. NRWA is a
non-profit, grassroots organization dedicated to
improving and protecting the quality of water for
rural and small communities and protecting
natural resources.
Olivia Wein
National Consumer
Law Center
The National Consumer Law Center (NCLC) is a
non-profit organization specializing in low-income
consumer issues and works with legal services,
government and private attorneys, as well as
community groups and organizations around the
country, in addition to publishing 16 legal treatises
on consumer law. NCLC was founded more than
30 years ago to advocate for economic justice for
low-income households and is committed to
advocating for safe and affordable drinking water
for low-income consumers.
John S. Young,
Jr.
American Water and
National Drinking
Water Advisory
Council
John Young is a member of the NDWAC and an
employee of American Water, which provides
water service to approximately 100 small systems
and, in total, 20 million customers in 27 States, 4
Canadian provinces, Puerto Rico, and South
America.
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NDWAC Affordability Recommendations, July 2003
Background
EPA's affordability criteria establish national guidelines for determining when new
drinking water standards are deemed "affordable" for small water systems throughout the United
States. If it is determined (based upon the affordability criteria) that achieving the new standard
is "unaffordable" for small systems, then EPA must attempt to identify and designate a variance
technology - a technology less expensive than EPA-designated Best Available Technologies
(BATs), but which also provides less contaminant removal than BATs and, as such, may not
achieve the national Maximum Contaminant Level (MCL). To date, no rulemakings have been
found by EPA to be "unaffordable" for small systems.
If EPA determines that a rule is unaffordable for small systems and designates a variance
technology, then small water systems are eligible to request a technology variance from the
system's State primacy agent. Such a variance, if granted, would enable the community to
acquire and operate the variance technology in lieu of the more expensive (and more effective)
BATs.
NDWAC Perspective
The NDWAC agrees with and adopts the report of the Affordability Work Group, with
additional recommendations and minor modifications to some of the Work Group's
recommendations. The NDWAC fully recognizes the importance of affordable and safe drinking
water, especially for small systems. The 1996 Amendments to the SDWA established the
principle that variances in water treatment technology could be used to address the issue of
affordability. The efforts of the Affordability Work Group were predicated on the fact that the
SDWA includes variances as regulatory construct. However, significant practical, logistical, and
ethical issues mitigate against the use of variances.
For example, the cost of establishing the appropriateness of a variance for a specific
small system is significant. The heightened monitoring and regulatory burden that would fall to
State and local authorities is unacceptable for many of them. Furthermore, the potential
acceptance of lower water quality for disadvantaged communities is ethically troublesome.
The NDWAC believes that alternatives to the variance process identified by the Work
Group in this report (such as cooperative strategies, targeted use of funding to disadvantaged
water systems, a LIWAP, etc.) are more appropriate means to address the affordability problem.
Therefore, if a variance process is deemed necessary to achieve affordability, it should only be
pursued after all other alternatives presented in this report are given due consideration.
However, because the NDWAC has pragmatic and ethical concerns with variances and the
associated connotation of a 2-tier approach to protecting public health, the Council makes the
following recommendation.
• The NDWAC advises the Administrator to convey to Congress the NDWAC's
logistical and ethical concerns with variances and the NDWAC's position that
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NDWAC Affordability Recommendations, July 2003
variances in the extent of water treatment, as a means to achieve affordable
compliance, be reconsidered.
Recommendations in Response to EPA's National Affordability Criteria for Small Systems
EPA's current approach to small system affordability is based on an "expenditure
margin" concept. EPA's expenditure margin is calculated as the difference between an assumed
"maximum affordable water bill" (which EPA currently sets at 2.5 percent of median household
income [MHI] for that size class of small systems) and the "expenditure baseline" intended to
reflect the current cost of water for the median small system of that size class (current baseline
water bill). If the new rule can be implemented for a marginal cost that is less than the
expenditure margin, the new standard is considered to be "affordable" for small systems at the
national level. The current EPA approach is intended to reflect the cumulative effect over time
of multiple regulations and other events that affect small systems' costs, but data challenges
inherent in the expenditure baseline national approach limit its ability to do so.
The Work Group recommends a change in the overall approach EPA uses to assess small
system affordability, switching to an incremental approach to determine affordability.
Specifically, we recommend a national incremental affordability threshold be set at a specific
percent of MHI that EPA would apply to individual rules for purposes of determining national
small system affordability. The Work Group also recommends that States make system-level
variance decisions based on cumulative regulatory impacts and other important system-specific
circumstances, as detailed in the full report.
The six questions considered by the Work Group at EPA's request, along with summary
responses, are as follows:
Question 1: Should MHI or another income percentile measure (such as per capita income) be
used for the income level?
While Work Group members note the possibility that a better metric for determining
water system affordability may be available in the future, they agreed that MHI is the most
appropriate income metric to use for this purpose at this time. The metric is unambiguous and
available for all regions of the nation. Consequently, it is felt that MHI provides a simple,
consistent income metric to use in determining "ability to pay."
Question 2: Should 2.5 percent or another percentage be used as the income percentage for
determining the maximum affordable water bill, and what is the basis for an alternative
selection?
The Work Group recommends that EPA seriously consider replacing its current approach
with an incremental approach. Given that the affordability criteria recommended by the Work
Group is based on an incremental approach, the question of whether 2.5 percent of MHI is an
appropriate standard for total water affordability becomes somewhat irrelevant (although it is
discussed at greater length in the full Work Group report).
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NDWAC Affordability Recommendations, July 2003
For the recommended incremental approach, the Work Group recommends setting the
national affordability increment at 1.0 percent of MHI.
The Work Group also reached consensus on key recommendations regarding factors
States should consider when they administer the variance technology provisions: (1) the
"quantum leap" when small systems that have little or no treatment invest for the first time in
significant water treatment, triggering potentially significant one-time costs; (2) cumulative
impacts of multiple regulations that may affect a particular system, an extended time horizon in
making variance decisions, and ways to encourage systems to invest for their long-term viability;
(3) meaningful local public education and local public participation efforts to ensure current and
future consumers are fully informed in plain language that variance technology does not result in
water quality that meets EPA standards, informed of their options, and informed of the
implications of the two-tier phenomenon; and (4) full compliance with legal requirements for
issuing variances (including a meaningful review of restructuring opportunities, local public
hearings, compliance tracking, etc.). The Work Group also reached consensus that EPA re-
evaluate variance technologies and BAT at least every 5 years, to take account of technological
developments as treatment technologies become lower in cost for small systems.
Question 3: How should the expenditure baseline be adjusted to account for new rules?
The Work Group recommends an incremental approach that eliminates the need for
establishing or updating an expenditure baseline. However, if EPA continues use of the current
affordability approach, efforts should be undertaken to deal with the concerns described in
section 3 of the report. In this case, the Work Group recommends factoring into the expenditure
baseline those costs that systems generally incur nationwide and for which there are reliable data.
Question 4: Should separate affordability criteria be developed for surface and groundwater?
The same criteria should be applied to surface and groundwater systems.
Question 5: Should financial assistance be incorporated in the calculations of the expenditure
baseline?
As mentioned above, the Work Group recommends an incremental approach that
eliminates the need for establishing or updating an expenditure baseline. However, if EPA
retains the present approach to making the national affordability determination, financial
assistance should be incorporated in the calculations if the financial support is generally
available to all systems (nationwide). The availability of financial assistance should, however,
be included in the calculations and analysis conducted by the State that ultimately determines
whether a variance should be granted, and what the variance compliance schedule will be,
regardless of whether EPA uses the present approach to making the national affordability
determination or adopts the Work Group-recommended incremental approach.
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Question 6: Should regional affordability criteria be developed, given current data limitations?
If EPA retains its current approach to making the national affordability determination,
regional affordability criteria should be developed and implemented if data are available from
national sources to make eligibility determinations. Due to recognized small system operational
cost and other regional differences, it is recommended that EPA establish differential regional
affordability criteria when sufficient supporting data are available. To more accurately reflect
actual ability and/or willingness to pay, the MHI for small systems should be further
differentiated into "rural" (non-metropolitan) and "urban" categories. The Work Group
recognizes that both of these recommendations require more detailed data than may be currently
available. Therefore, these recommendations may be more appropriate for future than for
current affordability policy.
The Work Group also considered whether to recommend applying the incremental
approach on a regional basis. However, most members opposed this idea, deeming it
impractical, given the data limitations.
The NDWAC recognizes that the incremental approach recommended by the
Affordability Work Group is designed to avoid "rate shock" and mitigate the excessive costs of
any single rule. However, the NDWAC believes that the cumulative cost of drinking water
regulations is also an important consideration in affordability determinations. The NDWAC is
concerned that the incremental approach alone does not sufficiently address the cumulative costs
of several rules and other operating cost burdens (e.g. infrastructure replacement) that
collectively may be "unaffordable" for some systems. The Work Group gave careful
consideration to this important issue (see Pages 20-23, 86-89, and Appendix 5), and
recommended that, where EPA identifies a need for variance technologies at the national level
based on an incremental approach, States consider cumulative impacts at the system-level in
determining whether to approve individual variance requests.
Cumulative impacts should be considered, for example, in determining eligibility for
grants, loans, and funding under the DWSRF. In addition, if variances are to be made available,
cumulative impacts should be considered in determining system eligibility for a small system
variance. In order to assist states in making affordability determinations for individual systems:
• The NDWAC recommends that EPA augment the incremental approach with
reasonable cumulative affordability guidelines that could be used by the states to
determine the eligibility for small system variances and/or financial support.
Recommendations on Financial Support Strategies to Address Affordability Challenges
The Work Group also generated recommendations to improve small systems' access to
financial help in complying with the Safe Drinking Water Act (SDWA). The Work Group
developed several suggestions, including:
• Providing rate-making information;
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NDWAC Affordability Recommendations, July 2003
• Providing support to individual households in the form of a Low Income Water
Assistance Program;
• Changing the way that existing funding sources are used to better support small
systems with affordability problems; and
• Providing new funding sources to help solve this problem.
More specifically, the Work Group made several recommendations regarding financial
support strategies. The NDWAC modified some recommendations to propose additional studies
or less prescriptive solutions to identified problems.
1. Adopt a Low Income Water Assistance Program (LIWAP) to assist low-income
households facing high drinking water costs, funded by a Congressional appropriation
similar in structure to (though requiring far less money than) the funding for
LIHEAP.
2. Provide additional funding beyond the current Drinking Water State Revolving Fund
(DWSRF) funding for small systems to adopt cooperative strategies, as broadly
defined in Section 4.2.1.
3. Increase DWSRF funding, with special consideration given to assisting small
systems.
4. The Work Group proposed that EPA modify the DWSRF allotment formula. The
NDWAC believes such an action is premature and instead recommends that EPA
determine if, as a result of the current DWSRF allocation formula, small public water
systems are being disproportionately denied funding from State DWSRF programs
due to inadequate funding being available.
5. Explore and consider the use of other State and federal agencies, such as the U.S.
Army Corps of Engineers and the Bureau of Reclamation, to assist small drinking
water-related projects.
6. The Work Group proposed that any disadvantaged system should receive priority for
DWSRF funding. With the understanding that not all States currently have
disadvantaged programs, the NDWAC changed the recommendation to propose that
EPA encourage States, that have not already done so, to establish a disadvantaged
community program to address small system affordability issues. Such funding
should be consistent with the principles in the DWSRF to encourage restructuring
where viable. Provide information and examples pertaining to the use of affordability
rates for systems to help make water affordable to low-income households.
7. EPA should work with other agencies to help overcome barriers to the effective use
of existing funding sources to promote small system affordability for safe drinking
water.
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Recommendations for System-Level Strategies to Address Affordability Challenges
The Work Group also developed recommendations on initiatives that could be
undertaken by the small drinking water systems themselves to minimize the cost of SDWA
compliance. Recommendations regarding system-level strategies for addressing affordability
challenges are:
1. New and expanded State leadership is essential to promote cooperation among small
systems. Cooperative efforts designed for an area or region are essential if the cost of
compliance is to be reduced. These efforts should be funded through new
appropriations or through re-allocation of a portion of DWSRF funds that are
currently being applied to individual system projects. State-managed cooperative
efforts should include numerous components, as detailed in section 5 of the full
report.
2. Consider regulatory changes to allow the use of system-delivered bottled water in
appropriate cases, either as a variance technology or to achieve compliance (with
primacy agency approval) for non-microbial, non-inhalation, and non-dermal
compliance situations. The use of bottled water should only be considered when it
meets applicable standards, is accompanied by a public education program, and the
system guarantees quality assurance.
3. Recent scientific and technical developments have increased the potential for
"umbrella" compliance technologies, such as membranes. EPA should establish a
Work Group to review the technical and policy feasibility of allowing a "Super" BAT
approach to provide affordable, long-term compliance, including the consideration of
appropriate incentives regarding future compliance.
4. When examining the cost of regulatory compliance at the national or State level,
system flow capacity optimization (achieved through control of water leakage,
metering, rate structure, and facility design) should be considered prior to calculating
the cost of treatment technologies and/or cooperative solutions.
Recommendations on Public Education
Public education is an essential component of any SDWA variance process. For
consumers to make an informed decision on the desired quality of their drinking water, they must
first understand the public health risk and other water quality benefits, cost of compliance, and
compliance options. Effective public education, which is structured to allow stakeholders to
participate in developing and understanding solutions for regulatory compliance, must be
initiated at the earliest possible date.
The Work Group recommends that EPA take several steps (as detailed in section 6 of the
full report) with respect to educating the public about issues related to the affordability of
drinking water and small system variances. The Work Group recommends that EPA undertake
these steps with outreach to, and input from, stakeholders.
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Minority Views and Additional Comments - Summary
A minority report was submitted by the National Rural Water Association (NRWA), and
additional comments were submitted by the National League of Cities (NLC). Both submissions
are briefly summarized here, and the full reports are provided in Appendix 1.
NRWA: Through its representative on the Work Group, the NRWA filed a minority
report indicating disagreement and / or concerns that the recommended affordability level
is not affordable for millions of low-income families and many communities. The
NRWA also expressed concerns about the lack of availability of a small systems variance
technology program "as mandated by the SDWA that allows small and low-income
communities to comply with rules without experiencing harmful tradeoffs." Concerns
and or disagreements are also expressed regarding consolidation, USDA Program
Initiatives, erosion of State and local authorities, control and protection, low-income
water assistance programs (LIWAP) and other federal initiatives. (NRWA's complete
minority report views are in Appendix 1.)
NLC: The NLC representative submitted additional comments (Appendix 1) indicating
concerns about the Work Group's recommendation to enact a Low Income Water
Assistance Program (LIWAP) and the Work Group's recommended changes to the
Drinking Water State Revolving Fund (DWSRF). While indicating probable support for
a LIWAP-like program, the NLC representative expressed concern about the revenue
source for funding such a program, particularly if it were done through a "water tax,"
rather than a Congressional appropriation as recommended by the Work Group.
Concerns regarding recommended changes in the DWSRF focused on the fact that
allocation formulas are political decisions in which NLC does not get involved, and the
view that such changes may ultimately adversely affect some municipalities.
Majority Response to NRWA Minority Report
The majority appreciated the contributions of the members contributing minority reports
and is disappointed that a complete consensus could not be reached. While each member of the
Work Group brought unique expertise and personal experiences, we believe that the majority
report considered and gave significant weight to insights provided by Work Group members
from small drinking water systems and those with small drinking water utility experience.
Again, the majority respects the opinions of the members submitting minority reports and the
input of those members had substantial influence on the substance of the final report.
While the majority recognizes the complexity of the issues at hand, we respectfully
disagree with most of the arguments made in the minority report. We believe that the
recommendations made by the Work Group establish a balanced approach that will allow the use
of small system variance technology programs as mandated by the SDWA. The majority
believes that the package of recommendations developed, which seeks to remedy the root causes
of the small system affordability problem, will be more successful than an approach relying
primarily upon the issuance of variances.
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The report makes it clear that cooperative strategies including regionalization and
consolidation will help substantially but are not expected to resolve all small system problems.
We also make several specific recommendations to encourage stronger State and local authority
and control, including, for example, more funding targeted to small system problems and
enhanced local participation in variance decisions.
In addition, a low-income water assistance program (LIWAP) would help low-income
water users pay for their water, thereby avoiding the difficult financial tradeoffs noted in the
minority report.
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Acknowledgements
The NDWAC Affordability Work Group greatly appreciates the assistance of the following
consultants to EPA and/or the Work Group. Without the data and analysis provided by these
individuals, the Work Group would have been considerably less well-informed and would not
have been able to produce these recommendations.
• The Cadmus Group, Inc. - Peter Jardine, Ralph Jones, Ken Mayo, Michelle Young
• Industrial Economics, Inc. - Stephen Cantin, Mark Ewen, Jason Sardell, Jonathan
Shefftz
• Institute of Public Utilities at Michigan State University - Janice Beecher
• James McFarland, Independent Consultant
• Scott Rubin, Independent Consultant
• Modern Technologies Corp. - Todd Steiner
The Work Group also wishes to thank Vanessa Leiby and Bridget O'Grady of the Association of
State Drinking Water Administrators (ASDWA) for their assistance in polling the ASDWA
membership on issues of interest to the Work Group.
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Recommendations of the
National Drinking Water Advisory Council
To U.S. EPA on Its National Small Systems Affordability Criteria
1.0 Introduction
1.1 NDWAC Affordability Work Group Charge
This document represents the report and recommendations of the National Drinking
Water Advisory Council's (NDWAC's) Work Group on the National Small Systems
Affordability Criteria.1 The Work Group was asked to provide advice to the NDWAC to assist it
in developing recommendations for the U.S. Environmental Protection Agency (EPA) on the
national small systems affordability criteria required under the Safe Drinking Water Act
(SDWA) and on related matters.
The Work Group was specifically asked to provide advice to the NDWAC on:
• EPA's national-level affordability criteria, the methodology used to derive the criteria
and the approach to applying these criteria to national primary drinking water
regulations;
• Alternative approaches to those used to-date by the Agency; and
• The role of alternate strategies - including funding mechanisms and possible
legislative actions - that would enable small systems to achieve compliance.
In developing these recommendations, Work Group members were asked to bear in mind
the structure of the SDWA and the limitations of readily available data and information sources.
EPA asked its Science Advisory Board to provide recommendations on a similar list of
policy questions. A comparison of the two groups' recommendations can be found at the end of
section 6.1.
1 The NDWAC was established by law to provide practical and independent advice, consultation, and
recommendations to EPA on SDWA-related activities, functions, and policies. Recognizing the many new activities
mandated as a result of the 1996 SDWA Amendments, the NDWAC formed several Work Groups to provide expert
advice on specific program areas. Each Work Group operates under NDWAC's official charter under the Federal
Advisory Committee Act and reports directly to the full NDWAC, providing information that can be used to
formulate recommendations and advice to the EPA Administrator. (Additional information on the NDWAC and its
Work Groups is available on the EPA homepage at http://www.epa.gov/safewater/ndwac/council.html.)
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The first meeting of the Affordability Work Group took place September 11 and 12, 2002
in downtown Washington, D.C., and the Work Group met on a monthly basis through January,
2003. RESOLVE, Inc., was retained by EPA to provide neutral facilitation services and to assist
in coordinating meaningful and productive Work Group dialogue.
1.2 NDWAC Affordability Work Group Membership
The Affordability Work Group consisted of 18 members (see Appendix 2). Members
were chosen to reflect a balanced range of perspectives, expertise, and experience. Collectively,
these individuals brought into the discussions the perspectives of State, local, and tribal
government, environmental and consumer groups, drinking water utilities, small system
advocates, technical assistance providers, and academia.
1.3 NDWAC Affordability Work Group Deliberative Process
Because the Affordability Work Group was formed under the auspices of the NDWAC, it
operated under the NDWAC's ground rules for working groups (Appendix 3), as well as Work
Group-specific operating protocols (Appendix 4). The Affordability Work Group used
consensus decision-making procedures to guide its deliberations. However, it was recognized at
the outset of the deliberations that, due to the complex and controversial nature of the subject
matter to be discussed by the Work Group, consensus would probably not be reached on all
issues. Where consensus could not be reached, the Work Group was asked to present the range
of views expressed, along with a discussion of the potential pros and cons associated with the
various alternative approaches. Minority views on issues where the Work Group did not reach
consensus, as well as additional comments submitted by Work Group members, can be found in
Appendix 1.
Members were encouraged to keep their respective constituencies well informed about
the Work Group's discussions and to bring their constituents' views into the Work Group
discussions in order to ensure that Work Group members:
• Fully understood the challenges they have been asked to address; and
• Could therefore develop advice that was as responsive as possible to stakeholders'
needs.
The Work Group's recommendations represent an effort to improve affordability within
the broader context of water management in each individual community.
1.4 Work Group Committees
At the outset, the Work Group divided itself into three committees to provide greater
focus and take advantage of specific member expertise. The committees focused on:
affordability criteria, financial support strategies, and system-level strategies for reducing small
water systems' SDWA compliance costs. These committees had discussions at meetings of the
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Work Group, and in regular conference calls which were staffed and documented. The results of
each committee's activities were reviewed by the full group, and some members participated in
more than one committee.
The Affordability Criteria Committee (ACC) focused on six specific questions posed by
the EPA:
• Is median household income (MHI) the right metric for determining small water
system affordability?
• Should 2.5 percent or other alternatives be used as the income percentage (of MHI),
and what is the basis for selection?
• How should the expenditure baseline be adjusted to account for new rules?
• Should separate criteria be developed based on primary source?
• Should financial assistance be incorporated?
• Should regional criteria be developed, given data limitations?
The NDWAC Affordability Work Group's charge also included defining alternate
strategies that would enable small systems to affordably achieve regulatory compliance. The
role of the Work Group's Committee on System Level Strategies (CSLS) was to investigate non-
financial approaches that reduce the cost of small system compliance. Through expanding
compliance options beyond individual contaminant removal by conventional treatment, more
cost-effective solutions can be identified and implemented, and the need for affordability
variances reduced. The CSLS focused on cooperation, treatment technology, alternatives to
central treatment, and system flow capacity optimization as methods of promoting affordable
compliance.
Recognizing that assistance to small systems to meet compliance requirements at rates
that are affordable to these systems should lessen the need for variance technologies, the Work
Group tasked the Committee on Financial Support Strategies (CFSS) with exploring means to
make financial assistance more readily available to small water systems facing infrastructure
improvements to meet regulatory requirements. The CFSS also considered methods to target
assistance to individual households in need that are served by small systems charging high water
rates in order to meet regulatory requirements. Better utilization of such funds, augmented by
additional funding if necessary, has the potential to make quality drinking water affordable to all
households and reduce the need for the use of variance technology. The work of the CFSS also
links to the national affordability criteria in that, under certain circumstances, financial assistance
may be reflected in the way EPA calculates affordability at the national level.
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1.5 Issues Considered in Making Water Affordable
The Work Group's primary assignment was to develop recommendations to make EPA's
affordability criteria do a better job of achieving Congressional intent. However, the Work
Group's charge was framed broadly; it included considering a variety of factors that affect
affordability and the ability of small systems to achieve compliance with the SDWA.
Small water systems must comply with current Maximum Contaminant Levels (MCLs)
while considering other potential requirements under SDWA such as radon and secondary
standards. Compliance is but one requirement for the delivery of water service. Although many
small communities rely on individual waste disposal systems, central sewage treatment costs are
frequently a part of the total water bill. Both sewer and water systems are in need of capital
investment and reinvestment to ensure long-term sustainability. The Work Group considered the
affordability issue in this broader context.
The Work Group's deliberations highlighted a number of important interrelated issues.
They include the value of cooperation in achieving system needs by consolidation or through
common services to reduce costs and facilitate compliance, the difference between system
affordability and individual user affordability, the need to ensure water system sustainability, the
importance of water conservation and efficient use in cost minimization, and issues related to
willingness to pay in addition to ability to pay. Each of these issues is discussed further in the
body of this report and related recommendations offered. One other consideration to which the
Work Group gave careful thought is the State role in implementing the national affordability
criteria. This issue is discussed further in section 1.6.
1.6 The State Role in Implementing the National Affordability Criteria
States play important roles in affordability issues associated with compliance and
implementation of the federal SDWA. Currently, 49 of the 50 States implement the SDWA as
agents of EPA as part of the "primacy" process. Because of the extensive State role in SDWA
implementation and potential impacts of other recommendations in this document on State
responsibilities, a discussion of the State's role in implementing the national affordability criteria
is important in understanding the remainder of this report.
Other entities at the State, local, and private levels also play important roles in the cost of
water service and implementation of the SDWA. Those entities include, but are not limited to,
planning and zoning boards, building code inspectors, fire marshals, water rights agencies, rural
water agencies, and watershed planning councils.
State-related implementation issues that may affect the basic cost of delivering safe water
include monitoring (source and distribution system), surface water treatment requirements,
consumer confidence reports, addressing MCL issues, operator certification, source water
protection, and other SDWA requirements. Also, separate State requirements (such as
construction, source requirement standards, fire flow requirements, etc.) may affect costs to
water systems. Below is a discussion of State issues in five critical aspects of affordability: (1)
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affecting the cost of water production, (2) developing and implementing variance and exemption
provisions, (3) providing or facilitating grants and/or low-interest loans, (4) public education,
and (5) resource issues.
States that are particularly pro-active in creating solutions to overcoming the affordability
issues described below are referenced in section 4.2.1 of this document.
1.6.1 Affecting the Cost of Water Production
State primacy agents and public service commissions may directly affect the system-level
and indirectly the household-level cost of water provision. Factors that may help reduce costs
and thereby facilitate affordability and compliance include:
• Effectively promoting water system efficiency and sustainability, such as through
encouraging restructuring (physical, managerial or shared resources) of non-viable
systems, implementing regional and/or statewide water service delivery programs,
providing effective technical assistance, and providing exemptions and variances for
systems facing high costs and low ability to pay for needed improvements.
• Conducting regional and/or Statewide planning to help encourage restructuring and to
share the positive aspects of restructuring. State water programs, where possible,
should take a leadership role in this area.
• Providing or facilitating State revolving loans and subsidies, made to community
water systems (CWS) through well-targeted use of Drinking Water State Revolving
Funds (DWSRF) monies or other infrastructure funding mechanisms (see item 3
below).
• Working with non-viable water systems in applying the capacity development
provisions of the SDWA (refer to sections 1420(a) (b) and (c)). Some States
implement the capacity development provisions of the SDWA at a higher level than
others. Refer to section 4.2.1 of this document to see a list of States with particularly
pro-active programs to encourage restructuring/cooperation.
Likewise, States may increase costs and reduce affordability in several ways, including:
• Establishing standards or other requirements in addition to, or more stringent than,
federal MCLs and applying them to small systems;
• Limiting use of DWSRF or other monies for small systems;
• Limiting alternative cost-reducing compliance strategies; and
• Inadequately evaluating technical, managerial, and financial capacity prior to new
water system approval.
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States can also influence costs according to how they conduct various aspects of their
responsibilities with respect to:
• Operation, maintenance, and administrative costs. Water systems are required to
monitor source water quality and distribution system quality, provide public notice
and consumer confidence reports, maintain operator certification, have repair
equipment, prevent cross-connections, have an emergency response plan, maintain
records, and report information to States.
• Requiring minimum source quantities (minimum flow rates and number of sources); a
minimum number of sources, minimum storage, treatment, disinfection; and
distribution systems and other engineering requirements.
1.6.2 Developing and Implementing Variance and Exemption Provisions
A State may also affect affordability by how it chooses to implement variances and
exemptions, the variance technology provision of the SDWA, and/or in how it structures consent
agreements for compliance.
• General variances (as distinct from small system variances) and exemptions have
existed within the structure of the SDWA for many years (refer to sections 1415 and
1416 of the SDWA). These variances and exemptions are for use by all sizes of
public water systems. However, because of the resource-intensive nature of these
system-by-system determinations and the perception of a "dual" public health
standard, States have seldom used the variance and exemption allowances. Also,
implementing variances using Best Available Technology (BAT) may make the cost
of water to the customer unaffordable.
• If EPA identifies a small system variance technology (refer to section 1420(f) of the
SDWA) for a rule in accordance with the provisions of the SDWA, then it becomes
the primacy agency's decision as to whether and how to consider and grant variances
to small systems in the State. Small system variances are only allowed for public
water systems serving less than or equal to 3,300 people, although systems serving
less than or equal to 10,000 people could be eligible with the EPA Administrator's
approval. Similar to the general variance and exemption provisions, use of the small
system variance technology allowance in the SDWA by States is not (as currently
constructed) anticipated to be used extensively by States for similar reasons. To date,
EPA has not identified any small system variance technology - so no State has been
able to offer one. Also, under the current methodology used by EPA to determine
small system affordability (2.5 percent of MHI), all regulations may end up with at
least one compliance technology that is considered to be affordable by public water
systems nationwide. Some members of the Work Group believe that many individual
small, poorer systems will be unable to afford some of these improvements.
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• The Affordability Work Group's recommendation that States become more involved
at the State and local levels in determining affordability at the water system level for
variance technologies may cause more drinking water systems to seek variances. As
a result, States may have many more opportunities (and resource prioritization
problems) associated with implementing the variance technology provisions.
1.6.3 Providing or Facilitating Grants and/or Low-Interest Loans
States have and will continue to assist small systems by either targeting DWSRF monies
to them or by helping small systems identify and successfully apply for grants or loans from
other parties.
• In designing formulas and applying discretion in how DWSRF monies are targeted
and applied across systems, States can help address affordability concerns in small
systems. Allowing lower interest rates for water system consolidation and ranking
water system restructuring higher on the State priority list are among the
opportunities for real cost savings.
• States help small systems obtain grants and/or favorable term loans by actively
identifying funding opportunities and assisting communities with their applications.
Using external service providers such as circuit riders, educating consulting engineer
firms, setting up planning "seed" grant funds, and maximizing the allowable uses of
the federal DWSRF set-asides are possible opportunities to assist small water systems
in the planning process. In addition, one-on-one training for local water boards is
needed to consider the positive aspects of not only physical restructuring, but also
managerial and/or resource sharing possibilities.
• Working through health and human services agencies, States may help ease cost
burdens on low-income households in systems of any size by instituting income
supplements, enabling lifeline rates, facilitating conservation in low-income homes
(which typically include older, less water-efficient fixtures), or adopting similar
household-targeted mechanisms.
1.6.4 Public Education
• State leadership is a key component in the overall implementation of public education
surrounding variances and exemptions, small system variance technology, water
system restructuring, and wise use of the State revolving loan funds.
• Public education is critical, particularly for the local government officials who often
make key decisions regarding creation of new public water systems and/or evaluate
the restructuring of existing public water systems. The education must be ongoing as
local government officials turn over (through election and/or attrition) on a regular
basis.
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• Public education is also critical so that the general public has a full understanding of
the cost and public health impacts small system variance technologies may have on
their daily lives.
• Nationwide, public education by State drinking water programs has a lower priority
than other public health requirements imposed by the SDWA due to State resource
constraints. Generally speaking, minimal resources are allocated at the State level to
implement a long-term sustainable public education/outreach program. Nationwide,
State programs are facing over a $115 million shortfall in funds needed to fully
implement current SDWA requirements (This does not include funding for a pro-
active public education program, which is not one of the requirements).
1.6.5 Resource Issues
Resource availability and resource prioritization play key roles in implementing
affordability issues at the State level. As mentioned above, States, on average, have only 60
percent of the funds needed to fully implement the SDWA. State program and resource
managers must carefully balance the workload to ensure public health is being protected. The
current SDWA places priority on monitoring water quality, inspections, adequate infrastructure,
and technical assistance to public water systems. Full implementation of variances and
exemptions, small system variance technology, restructuring, public education, and/or State-level
affordability determinations will require additional resources and/or a national reprioritization of
SDWA implementation needs.
The report that follows provides background discussion and more detailed versions of the
Work Group recommendations that were summarized in the Abstract. Section 2 focuses on
consideration of EPA's national affordability criteria for determining when new drinking water
standards are deemed "affordable" for small water systems throughout the United States.
Related financial support strategies are discussed in section 3. Section 4 deals with system-level
strategies for addressing affordability challenges. Issues related to public education are covered
in section 5. The Work Group's conclusions and recommendations are summarized in section 6.
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2.0 Affordability Criteria
This section provides an analysis of the proposed affordability criteria and the six
affordability criteria issues posed by EPA to the NDWAC Work Group. The section begins with
an analysis of the concept of affordability, including term definitions and conceptual issues
associated with the use of such a term in setting national regulation implementation guidelines.
Included is an analysis of the theoretical and operational concerns associated with the use of a
term such as "affordability." This assessment is followed by a discussion of the conceptual
difficulties associated with setting national affordability standards based on those definitions and
reviewing suggested approaches to determining affordability.
Next, the EPA affordability criteria and EPA's six issues and concerns regarding their
current national affordability criteria are considered. The responses include an evaluation of the
issues posed along with suggestions for alternative ways and means to assess whether the EPA-
proposed national standard for affordability determination is reasonable and should be
maintained.
2.1 Affordability: The Concept, Definitions, and Concerns
Determination of the affordability of water quality standards (for individuals or
households) is both a simple and a complex concept. In simple terms, higher quality water is
affordable if a consumer has the "ability to pay" or the financial resources to purchase a product
or service. The individual makes consumption choices from among a set of purchases subject to
the person's budget constraint or income. Once a person's income is exhausted by apportioning
it to various expenditures, assumedly based on rational choices given prices and preferences (or
willingness to pay), other purchases become "unaffordable" because that person no longer has
the ability to pay for additional goods and services at the margin without reducing expenditures
by an equivalent amount in another category.
Likewise for a water system, a new technology is "affordable" if the system has the
financial resources or can acquire the resources (for example, cash reserves, loans, or bond sales)
to obtain the equipment or technology needed to meet water quality standards. Once the
system's resources are employed based upon the system's judgment regarding relative
efficiency, effectiveness (and regulatory mandates), other acquisitions are unaffordable unless
additional resources are acquired. The major difference between household and system
affordability is the possibility that additional system resources may be acquired through rate or
price changes if the system's customers are willing to pay the price or have the ability to pay the
higher price demanded by the system. Households are constrained by their budgets and water
systems by the nature of their costs and production functions. The second affordability question
for the system, then, is whether its customer base can afford the rate increase required to support
the investment so that the system's cash flow will be sufficient to pay for the new water quality
technology.
Thus, in a theoretical sense, "absolute" affordability depends on one's income or
financial resources (ability to pay) and preferences regarding the various items available for
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purchase. Obviously, specific goods and services are not affordable if their prices exceed an
individual's income or a firm's financial resources. Otherwise, the consumer determines
affordability based on his or her "willingness" to pay for a product or service as compared to
alternative purchases. These consumption trade-offs are made within a household, theoretically,
until the ratio of marginal utilities of each good or service equals the inverse of the price ratios.
Therefore, under one approach, a product or service may be considered affordable (in a real or
ability to pay sense) but "relatively" unaffordable given the consumer's preferences and
willingness to pay. A less restrictive definition of a "real" unaffordable good or service would
be one that displaces basic necessities in a household's consumption pattern.
From a public policy perspective, however, the concept of "affordability" takes on added
complexity. The complexity arises from the fact that currently, national affordability standards
have to be established without knowledge of individual preferences. Proxy data and information
must be used to estimate household or consumer willingness to trade, at the margin, the
consumption of goods and services for an item whose price has increased due to the
establishment of new water standards. Likewise, for a water system, new national drinking
water quality standards are set without prior knowledge whether the cost of the equipment and
technology required to meet the new standard can be passed forward by the system to its
customers. If a system's efforts to raise prices are resisted, the system may not be able to
"afford" the new technology, and its continued operation may be in question. This is the point at
which the marginal costs are greater than the marginal revenues to the water system.
2.1.1 Definitions and Concepts
Due to the practical and conceptual challenges associated with a value-laden term such as
affordability, the Work Group attempted to define a set of terms relevant to the affordability
issue. The Work Group also considered a series of concepts relevant to assessing the proposed
affordability standards. The definitions are:
• Household Absolute Affordability: A product, service, or standard is affordable in
an absolute sense if households have income levels in excess of the cost of the
product, service, or standard after implementation. (Note: for the current analysis,
absolute affordability has little relevance as the cost of higher water standards is not
expected to exceed household incomes.)
• System or Firm Absolute Affordability: Like households, absolute affordability for
firms or systems refers to whether the system can raise sufficient capital to install the
technology to meet new standards. (Note: like the household case, absolute
affordability has little, if any, relevance to the setting of national standards.)
• Household Relative Affordability: In contrast to absolute affordability, relative
affordability refers to the trade-offs that have to be made by households in order to
acquire water that meets national standards. With relative affordability, the focus
shifts to the nature of the trade-offs (goods and services given up) required to pay for
higher quality water. If the trade-offs are "discretionary expenditures," then the new
standards are more affordable for households than if essential expenditures have to be
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reduced to "afford" the higher quality water. (It appears that relative affordability is
what policy makers had in mind when EPA's proposed affordability criteria were
established.)
• System Relative Affordability: For systems, relative affordability implies that the
system's investment in new water system technology and infrastructure is feasible and
the new water rates will not be so high that they induce consumers to opt out of the
system. This would reduce revenues at the margin, even as marginal costs increase.
If the rates are so high that households cannot afford them (in a real or relative sense),
then the system's cash flow will be reduced to the degree that it is unable to cover the
system upgrade costs. The Work Group was not provided evidence regarding
whether or not this is a widespread or likely problem.
• System Variance: If it is determined that compliance technologies which meet EPA
MCLs are not affordable (absolutely or relatively) for a small water system, the
system may not be required to install a variance technology (presumably at a lower
cost). Water bills will still have to increase to cover the new variance technology and
operating and maintenance costs. In essence, a small system variance is a "pay less
for less" approach.
The concepts relevant to assessing the proposed affordability standards are:
• Affordability in Context of National Rulemaking: Affordability for small systems
is not a prime consideration when a national standard (e.g., an MCL) is established
under the SDWA. MCLs are established based on considerations of public health
(the risk-free MCL Goal) and technical feasibility, considering costs (for analytic
measurement and treatment). The statute calls for setting the MCL "as close to the
MCLG as feasible" generally based upon considerations of feasibility for large
systems, while also considering whether a less stringent MCL may be justified based
on how the anticipated public health benefits compare to the costs.
Thus, affordability does enter into the statute's MCL-setting process, but only with
regard to what is affordable for the very largest systems. In general, it is unlikely that
a rule would not be affordable by a very large system. Therefore the issue of
affordability, in effect, becomes moot in the MCL-setting process except to the extent
that an unaffordable MCL may have costs exceeding benefits, so it may fail the
cost/benefit test. Due to the economies of scale typical in most water supply
treatment technologies, standards established under the Act generally impose much
higher costs per household in very small systems than in large ones. Technology
long-run average cost curves tend to flatten out when the population served reaches
approximately 5,000 people, so only the smallest systems tend to have "much higher
costs" per household. This fact may make some rules unaffordable for some small
systems, and/or unaffordable for some households in systems of any size.
• Affordability in Context of a Specific Community Water System: At the system
level, the concept of affordability is inevitably linked to the long-term sustainability
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of the system, and this in turn ultimately depends on the ability of households to pay
the water charges needed to meet the cost of long-term service provision. Therefore,
system-level affordability depends on what revenue collections are needed to operate
an efficient and fully compliant utility over the long term, and whether it is
reasonably likely that the households and other customers can and will cover those
revenue requirements. These marginal revenue requirements are the money needed to
meet not only marginal costs but also long-run average costs.
To define or measure affordability at a system level, it is essential that revenue
requirements accurately and fully reflect system sustainability costs and revenues
(including grants and other subsidies received, regardless of source, to subsidize the
costs of infrastructure, security, and other expenses required for system
sustainability). It also is important to consider household-level impacts within the
system. This can be evaluated according to what percent of households face a cost
impact above a given threshold (e.g., the water bill as a percent of annual household
income) or, alternatively, what percent of income is spent on water by households of
different income characteristics (e.g., the median household income).
To ensure or promote system-level affordability, the policy mechanisms available
focus predominantly on the difficulty of households to meet the revenue requirements
for a water system as a whole. Some policy options accomplish this by reducing or
delaying costs borne by the utility (e.g., variances). Other options do not affect costs
per se, but instead cover a portion of the revenue requirements (e.g., grants and
favorable-term loans), so that the revenues required from customers can be reduced
and meeting the MCL becomes more affordable.
Affordability in Context of Households: Households are both the primary
beneficiary of improved drinking water quality and the entities that ultimately bear
the costs of meeting new MCLs. Paying for higher water quality inevitably requires
that each household make trade-offs, because additional funds spent on water must
come at the expense of other spending or saving options at the margin. Affordability
at the household level therefore is directly related to the types of "trade-offs
households must make" in order to pay for increased water costs.
For middle and upper income households, water bills tend to require a relatively small
portion of the household's disposable income and a lower marginal utility of money
so that increases in water bills typically will affect mostly spending on discretionary,
non-essential items. In lower income households, however, the trade-offs may be
more difficult. While data presented to the Work Group suggest that a "typical" low-
income household may spend more on alcohol, tobacco, and entertainment than they
do on water, some Work Group members are concerned that additional spending on
MCL compliance may entail a household trade-off of another essential good, such as
foregoing medical care, food and nutrition, heating, phone service, and the like.
These members believe the trade-offs necessary to pay for MCL-driven water bills
might end up creating a net increase in the health risk for the impacted households.
This belief is based on data presented to the Work Group indicating that many low-
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income households' expenditures on necessities alone exceed their income.
However, other members believe that it is just as likely that bottled water, soda,
alcohol, tobacco, or unhealthful junk food expenditures would most likely be the first
items to be traded off to pay for higher quality tap water. If the latter trade-offs
occur, higher standards and associated increased water costs could produce indirect
health benefits for the community. These expenditure trade-offs suggest a higher
utility of money in low-income households.
Affordability at the household level can be an issue in both small and large systems.
Because per household costs of installing new treatment or other technologies are
typically much higher in small systems than large ones, the percent of households
forced to make difficult trade-offs due to the installation of new treatment is likely to
be higher in small systems than in large ones. Still, the urban poor and other low-
income households in large systems are also likely to face difficult choices when
water bills increase.
Policy mechanisms to improve household-level affordability include tools to
supplement household-derived revenues with additional water utility funds (e.g.,
grants, low interest loans, variances and the like) as well as changes in operation and
management or restructuring that reduce the overall costs that must be covered.
These system-targeted mechanisms can be quite effective in helping households in
small systems.
In addition, household-targeted mechanisms such as income supplements and lifeline
rates may directly affect affordability. It should be noted that the latter are likely to
be more effective in large systems than they are in small ones, since there is a larger
customer base to cover the intra-system subsidy. By reducing the price of safe
drinking water to low-income households, society increases the marginal utility of
safe drinking water to low-income households relative to the marginal utility of other
goods and services.
For further discussion of these issues, see the sections of this report dealing with ways
to enhance related financial assistance programs and system-level strategies
(Sections 3 and 4, respectively).
2.1.2 Affordability Issues
The review of definitions and concepts indicates that there are several conceptual issues
involved in setting national affordability standards. Some of the major issues are identified here
along with tentative recommendations and interpretations based on the Work Group's
understanding of its charge and related discussions:
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• Does affordability mean absolute or relative affordability?
For both households and systems, the emphasis is on relative affordability or the
trade-offs that must be made to "afford" the higher water quality associated with the
new MCLs.
• If the concern is relative affordability, how can/should relative affordability be
estimated or determined?
Relative affordability could be estimated by using "willingness to pay."
"Willingness-to-pay" is an approach focused on trade-offs, at the margin, and covered
in the next section. This could be a reasonable approach when accompanied by an
evaluation of "defensive expenditures," relative expenditures on other household
items, and cost of water in similar nations. Willingness to pay is a conceptual
approach to determining consumer and system attitudes regarding trade-offs that may
be necessary to "afford" new products or services (or water standards or the
infrastructure required to meet new standards). It is consistent with the concept of
relative affordability.
• Should affordability standards be focused on system affordability, household
affordability, or both?
While the Work Group held extensive discussions regarding household affordability
issues and realizes that system affordability may be linked to household affordability,
the EPA charge to the Work Group focuses on system affordability. Other sections of
this report (sections 3 and 4, reflecting the work of two other committees (the
Committee on Financial Support Strategies and the Committee on System-Level
Strategies) offer suggestions that will enhance both household-level and system
affordability.
2.2 Approaches to Determining Affordability
Given the complexities of setting affordability standards suggested by the previous
sections, what conceptual approaches are available to meet the EPA challenge of setting
"national MCL affordability standards"? Four methods for estimating system affordability have
been proposed: (1) analyzing relevant defensive expenditures by households and other users, (2)
assessing willingness to pay, (3) considering international water rates for "benchmark"
comparisons, and (4) comparing drinking water rates to other household expenditures (e.g.,
utilities, entertainment, alcohol, and tobacco.) The second method (willingness to pay) can be
further divided into "revealed preference" and "stated revealed preference." Each of the
conceptual approaches to estimating affordability is explored here to provide a basis for
assessing the appropriateness of the proposed EPA approach to setting national affordability
standards.
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2.2.1 Defensive Expenditures
The "defensive expenditure" approach to estimating affordability is based on the
assumption that a new regulation is affordable if the cost of the technology required to meet the
new standard is approximately equal to the cost of "defensive" measures taken voluntarily to
offset the problem or "disamenity" the regulation is intended to eliminate. While initially
appealing, this approach requires the acceptance of some basic assumptions, including (1) that
the disamenity is understood and defensive expenditures are already being made, and (2) that the
purchasers of the defensive measures are the individuals who are the focus of the affordability
analysis. If the latter assumptions are reasonable, the use of bottled water and of point-of-use
(POU) and point of entry (POE) devices may be reasonable "defensive measure" affordability
proxies. However, in the case of rare drinking water contaminants, the disamenity may not be
understood and, therefore, defensive expenditures may not exist to a great extent at least across
all systems and households. In other words, the current purchasers of the defensive measures for
meeting drinking water standards may not represent the broader population's values for
improved drinking water standards.
While this method of national affordability analysis has limitations, it also has
advantages. Chief among its advantages are the existence of actual data (the cost of bottled
water, for example) and general availability of such data nationally. Also, defensive
expenditures such as bottled water provide a "cost base" upon which a new national standard
focused on demonstrated consumer values could be constructed. As noted, however, such a
defensive expenditure may only reflect the values of certain consumer groups and other
unrelated values or preferences may be affecting such defensive expenditures.
2.2.2 Willingness to Pay
The second approach to estimating affordability may be theoretically and operationally
more appealing than the "defensive expenditure" approach. In its simplest form, analysts would
attempt to determine the willingness of consumers to pay for water meeting the new MCLs.
Such willingness to pay would then serve as an indicator of affordability given household
incomes and/or budget constraints and the household's elasticity of demand for drinking water.
It is assumed that the willingness to pay assessments would reflect consumer relative
affordability based on the trade-offs that the new higher quality water would mean for their
budget.
As noted, there are two approaches for empirically implementing the willingness to pay
affordability approach: revealed preference and stated preference. The revealed preference
approach to affordability determination involves observing consumer actions that might serve as
proxies for the regulation being analyzed. (Such observations could include national expenditure
data by income cohort.) In the case of water quality standards, a potential "proxy" observation
would be data on the purchase of bottled water. Like defensive expenditures, this affordability
determination approach has shortcomings. Among the shortcomings is the limited ability of
revealed preference to reflect consumer values and motivations. It is difficult to determine
whether price or another factor, such as aesthetics, convenience, or prestige, has influenced
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consumer decisions to purchase bottled water. However, if only the cost of bulk bottled water is
considered in estimating defensive expenditures, it is unlikely that prestige or convenience would
be significant factors.
Contingent valuation or "stated preference" is another approach for estimating
willingness to pay or affordability. In this approach, individuals would simply be asked to
indicate the price they would be willing to pay for better quality water. While initially appealing,
this approach requires significant research and surveying to determine preferences. Again, this
approach has limitations including the specific design of the survey, consumer understanding of
exactly what improved quality means, including information on the specific contaminants and
their potential impacts as well as attitudes and characteristics of the respondent.
2.2.3 International Water Rate Comparisons
The third general method of estimating affordability is to use a comparison group that has
made similar choices for "benchmark" comparisons. A potential "benchmark" comparison
group for affordability of enhanced drinking water standards could be water rates in nations
similar to the United States. While there may be significant data problems associated with such
comparisons (exchange rates, comparison periods and the like), the international water rate
comparison provides a useful perspective regarding the acceptance of water rates in other
economies as another indicator of willingness to pay: Such analyses can determine whether
water is more highly valued in the United States or in other countries. If water appears to be
relatively inexpensive in the United States compared to other countries, it might suggest that
water rates could be raised to accommodate the cost of technology needed to enhance water
quality and meet the EPA MCL. Such an approach has limitations, however, as different values
and other factors may be involved, and some Work Group members felt these limitations would
limit the relevance of such international affordability comparisons.
2.2.4 Comparison to Other Household Expenditures
Another method that can be used to ground truth the other three methods of determining
affordability is the comparison of water rates to other common household expenditures. For
example, the Work Group was provided Bureau of Labor Statistics data indicating that the
average household (whether it is in the lowest quintile of income or at the median of income)
spends about 4-5 percent of its total household expenditures on energy, 4-5 percent on
entertainment, 3 percent on telephone services, about 1 percent on alcohol, and about 1 percent
on tobacco. These necessary and discretionary expenditures could be used as additional proxies
for willingness to pay for a necessity such as high-quality water.
The Work Group considered all four of the methods discussed above in developing its
recommendations for the percent of MHI that constitutes an affordable expense for drinking
water, or for complying with a drinking water standard.
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2.3 The EPA Affordability Criteria
The EPA national affordability threshold sets the maximum affordable water bill at 2.5
percent of the MHI for the median system in a given size category. EPA has set standards for
three size classes of small systems, and the affordability standards are the same for ground and
surface water systems.
The key EPA calculation used for determining whether new system standards are
affordable involves comparing the "available expenditure margin" with the anticipated
"incremental" water bill impact of water system expenditures (capital and 0& M) required to
meet the new EPA water quality standards. The "available expenditure margin" is estimated by
subtracting the current "median baseline water bill" from the affordability standard or maximum
affordable water bill (2.5 percent of the MHI for the median system ranked by MHI). It follows
that the incremental water bill impacts of a new rule are not affordable if such incremental costs
exceed the "available expenditure margin." A concern of the Work Group regarding this overall
approach involves the possibility that the "expenditure margin" could get fully used over time
through cumulative regulatory procedures. This could result in a situation whereby small water
system compliance and variance analysis is governed by time sequences of rules rather than
considering where there are the greatest, most cost-effective opportunities to reduce risks and
protect public health. There was also a concern on the part of some members that the
expenditure margin would not adequately reflect cumulative regulatory burdens on individual
systems (as discussed below).
In setting the 2.5 percent standard, EPA appears to be using a combination of modified
revealed preference and defensive expenditures to estimate the water system affordability
threshold. The 2.5 percent standard was established by using other household goods and services
as proxies for "willingness to pay" for quality water. EPA also analyzed defensive expenditures
for guidance in determining "revealed preferences" for quality water. The agency also
considered international water rates.
2.4 The Six Charge Questions: Reactions and Recommendations
EPA faces a major challenge in setting national affordability criteria across small water
systems. Regardless of the criteria chosen, the criteria must be (1) simple so that all relevant
parties can understand and work with them, (2) based on national data sources that are readily
available, and (3) structured so that it is clear whether a water system meets the criteria or should
be a candidate for the State to consider for a system variance. This section provides the Work
Group's reactions and recommendations regarding the six issues that EPA specifically referred to
it for consideration. In addition, the Work Group's concerns and recommendations are
compared and contrasted to those of the EPA Science Advisory Board, which was asked to
consider a similar set of questions.2
2
U.S. Environmental Protection Agency, Affordability Criteria for Small Drinking Water Systems: An EPA Science
Advisory Board Report, EPA-SAB-EEAC-03-004, December 2002.
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2.4.1 EPA Affordability Criteria Concerns
1. Is MHI the right metric for determining small water system affordability?
Observation
MHI meets several basic, reasonable criteria for national system affordability standards.
MHI data are available for all regions of the nation. The calculation of MHI is simple (it is based
on readily available per capita income and household density data), and the metric is
unambiguous and can be understood by various parties. Consequently, it provides a consistent
income base for determining a reasonable measure of affordability or "ability to pay" for new
water system quality standards. The Work Group observed that the SAB supported the use of
MHI as the metric for determining small water system affordability.
Recommendation Regarding the Metric to Use
The Work Group agrees with the SAB and recommends that the MHI be used as the most
appropriate income metric for determining water system affordability available at this time.
Work Group members note that a better metric may be found in the future.
2. Should 2.5 percent or other alternatives be used as the income percentage (of
MHI), and what is the basis for selection?
Observation
If a percentage of MHI is the standard adopted, the selection of the appropriate
percentage becomes an important consideration. If the percentage is lowered (from 2.5 to 1.5,
for example), the "door" that allows for small system variance considerations may be opened
more often or for more classes of systems (i.e., size groupings). For example, the "available
expenditure margin" for the "median" system with a 2.5 percent threshold was estimated to be
$769 for systems serving 25-500 customers; $747 for systems with customer bases of 501-3,300;
and $771 for systems with between 3,301 and 10,000 customers. If the threshold (percentage)
was reduced to 1.5 percent, the expenditure margins would drop to $317, $303, and $282,
respectively. If a higher threshold is selected, EPA may find that the expenditure margin is not
"exceeded" for any of the three size categories and, therefore, no national small system variance
technology would be identified. If that is the case, then the states would have to use compliance
time extensions, enforcement discretion, general variances or exemptions to deal with hardship
cases of small systems unable to afford full compliance. Small system variances might not be
available at all.
In fact, the Work Group was informed that no rules have resulted in identification of a
small system variance technology for any size class of system using the current standard (2.5
percent). The SAB suggested that because the national affordability threshold has not been
exceeded consideration should be given to lowering the percentage (below 2.5 percent). It
further indicated, without citing any data, that "some small water systems appear to have
genuinely struggled with costs." Therefore, the Work Group asked consultants to use their
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database and information sources to try to determine if the SAB concern was justified. The
consultant's database was created from the 2000 U.S. Census and the 1995 Community Water
Systems Survey. Included in the database are income and population data for 465 systems
serving 25-500 people, 380 systems serving 501-3,300 people, and 211 systems serving 3,301-
10,000 people. From these observations, water bill information is available for 163, 208, and
112 systems, respectively (by size class). Analyses of these systems can be extrapolated to the
total population of small systems, which according to U.S. EPA includes 31,327 systems serving
25-500 people, 14,149 systems serving 501-3,300 people, and 4,458 systems serving 3,301-
10,000 people.
The consultants did not find a single system in the database whose water bill now
exceeds 2.0 percent of MHI. Only seven systems in the database exceed 1.5 percent of MHI:
two in the smallest size class, four systems in the next size class, and one system in the largest
size class. These systems represent about 1 percent of all systems in each size class.3 Even if
very few systems now exceed 1.5 percent of MHI, and even if none now exceed 2.0 percent,
future rules could increase their costs significantly, especially if the rules are not so costly as to
trigger the availability of a variance technology. Federal financial assistance, however, may be
available to help systems that do struggle with costs. The consultants estimated that about $37
million in annual assistance subsidies (e.g., grants, loan forgiveness) would be necessary to bring
all small systems below 1.5 percent of MHI, before any new rules are considered. For the
arsenic rule, the consultant estimates that about $100 million in one-time assistance for treatment
equipment would be necessary to keep all small systems below 1.5 percent of MHI (assuming
that most small systems affected by arsenic have relatively low treatment costs, but that some
other systems have relatively high costs). By contrast, $850 million was allocated from the FY
2002 budget to the Drinking Water State Revolving Fund for all eligible infrastructure projects
and set-aside activities. Of this, up to $216.8 million (30 percent) is eligible to be used for
subsidies (including principal forgiveness for disadvantaged communities).
While the consultant's calculations suggest that the SAB concern regarding "struggling
systems" may be isolated, future regulations may involve compliance costs that could pose
financial viability challenges for some small systems. Therefore, some Work Group members
felt that there may be some justification for considering a lowering of the current EPA
affordability standard (2.5 percent). Other Work Group members believe that there may be some
justification for an affordability standard greater than 2.5 percent of MHI because the true value
of "safe" water to the public may be greater than EPA's established threshold.
Admittedly, the determination of the percentage of MHI that "nationally" establishes a
reasonable, equitable affordability standard does not lend itself to scientific analysis. If a
3
As a check upon the accuracy of this database, an EPA consultant reviewed a compilation of State water surveys it
had performed in 1993, representing 1,203 small systems. Based upon a 90,000 gallon annual consumption, 36
systems were above 1.5 percent of MHI, representing about 3 percent of the sample. Since this 1993 compilation
was intentionally biased to target States with high water bills, this higher result (i.e., 3 percent of systems above 1.5
percent of MHI, as opposed to 1 percent) suggests that the CWSS/Census-based database is reasonably accurate for
the purposes of producing national estimates.
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percentage of MHI is the affordability standard ultimately chosen, the percentage selected is
based on a somewhat subjective analysis of various indices of "willingness to pay," "ability to
pay," and "informed" value judgments.
After reviewing data and analysis of the proposed EPA standards and household impact
comparisons, some members of the Work Group felt that a 2.5 percent of MHI affordability
standard may be reasonable; some thought it may be too high, while others thought it may be too
low.4 However, the Work Group felt that it was appropriate to consider other measures of
affordability to assist in evaluating the "reasonableness" of the EPA affordability threshold.
Consequently, the Work Group evaluated various "incremental" measures of small water
system water quality standard affordability because some members felt that an incremental
approach was a more theoretically sound approach to determining the affordability of individual
standards. Among the incremental approaches suggested by some members of the Work Group
were (1) the use of value of statistical life (VSL) as an indicator of the willingness to pay and,
hence, affordability, and (2) the use of a percent of MHI as the maximum dollar expenditure per
water quality standard. The suggestion that a VSL approach be used was controversial to Work
Group members, and no consensus was reached on its appropriateness. The latter standard (a
percent of MHI) would be derived from the analysis of a series of comparisons of enhanced
water quality standards (their potential benefits, the willingness to pay by households and other
measures) relative to small system income levels.
Among other considerations, the incremental affordability approaches were offered as a
means of managing the "adding up" problem associated with EPA's expenditure baseline. The
proposed EPA affordability threshold, as currently structured, applies to an aggregate water bill
(and willingness to pay to reduce accumulated risks across various contaminants), while an
incremental approach may be more conceptually appropriate. Some economists argue that each
risk and the affordability of the associated regulation should be evaluated on an incremental
basis.
The incremental affordability measures are described in the sections that follow.
• The use of a percent of MHI as an "incremental" approach to determining a national
affordability standard:
The use of a "percent of MHI" as an incremental affordability criterion could be
established based on an analysis of willingness to pay measures (comparable
expenditures as a percent of MHI), defensive expenditures (bottled water, for
example) or other observations regarding household affordability or willingness to
pay such as the "doubling of current water bills." For example, if the current EPA
standard of 2.5 percent of MHI (and associated calculations), the VSL analytical
approach, and the "doubling of current water bill" approach yield similar
"incremental" percentages of MHI, that percentage could be used as the national,
4
By near consensus (17 of 18 members), an incremental affordability threshold of 1.0 percent of MHI was deemed
acceptable to the Work Group. (One member believed 1.0 percent was too high.)
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incremental affordability threshold for a single contaminant regulation. Such a
standard would be simple and would be used as a first screen. Other detailed, system-
level data would be used by the states to determine whether a variance should/would
be granted.
For the decade of the 1990s, the average water bills for small water systems in Utah
were calculated and provided to the Work Group. During that period, the average
water bill was calculated to be approximately 1 percent of statewide median adjusted
gross income (MAGI). Because Utah is a western State, it seems reasonable that such
costs are at the "high end" of comparative water systems. On the other hand, other
data indicated that the average water bill for households amounted to about 0.5 to 0.6
percent of MHI. This measure of affordability suggests that a doubling of the median
household's current water bill might result in a new water bill that cost in the range of
1 to 1.2 percent of MHI. As such, it could be a reasonable approximation of
incremental affordability. This standard would be an incremental national standard
and would apply to each new regulation being implemented by EPA.
Such an incremental national standard could be used in combination with the current
EPA analytical approach (which includes an assessment of the current expenditure
baseline and the expenditure margin). For example, under the incremental approach,
1 percent of MHI could become the national affordability standard or threshold for
each rule. If the 1 percent of MHI standard indicated that a system was eligible for a
variance, the EPA affordability model could be used by State officials along with
other system-specific considerations as a factor in determining whether a small
system technology variance should be granted if an EPA-approved technology was
available.
• Value of statistical life as a determinant of affordability:
An alternative incremental approach for estimating considered by the committee was
the VSL approach. This approach was controversial among committee members, and
no consensus was reached on its appropriateness. VSL data have principally been
developed as a means of estimating the monetary impact of reducing risk of
premature fatality; they typically are applied to rulemakings associated with
potentially fatal cancer risks. Because some contaminants have been identified as
contributing to the incidence of cancer, some Work Group members suggest that
consideration should be given to the use of VSL data as an alternative means of
estimating what households would be willing to pay to reduce the incidence of cancer
risk. The VSL data have been critically reviewed and have been used by EPA in part
(along with non-quantifiable benefits) as a basis for estimating health risk reduction
benefits for premature mortality from some contaminants. At the same time, some
economists and Work Group members believe that VSL data have serious limitations
and biases, that many contaminants to which EPA regulations apply cause non-fatal
adverse effects for which VSL is not relevant, and that control of most contaminants
will yield many non-quantifiable benefits that cannot be captured under the VSL
approach. These Work Group members also are concerned about what they believe is
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the malleability of the VSL approach, including the use of discounting of the
presumed value of lives based on age, latency of effects, and other factors.
While the limitations of VSL are recognized, some members of the Work Group feel
that consideration ought to be given to estimating willingness to pay and affordability
with VSL data as a supplement to determine the reasonableness of the current EPA
standard (2.5 percent of MHI) or as an alternative incremental approach to
establishing the national affordability standard. Other Work Group members, based
upon the concerns noted above and other issues, believe VSL is not an appropriate
method to determine affordability.
Recommendations Regarding Analytical Approach and Value of the Metric to Be Used
• The Work Group recommends the use of an incremental approach to setting the
national small water system affordability standard. The incremental approach would
replace the current EPA standard and calculation methodology. While Work Group
members are concerned about the implications of the "adding up" problem of the
EPA expenditure baseline calculation (a critical element of the current methodology),
the Work Group's analysis suggests that an incremental approach is theoretically
sounder, is simpler to administer, and has greater transparency, making it more
understandable than the current EPA method.
The Work Group also observes that an affordability methodology that permits the
assessment of each new rule independent of the cumulative costs of preceding
regulations (the adding up problem with the current methodology) is an appropriate
and equitable national affordability criteria (while cumulative regulatory impacts,
which are still vitally important, are best addressed at the State level).
The Work Group believes that the States would be in a better position to consider the
impact of previous regulatory compliance efforts, the mitigating impacts of financial
support or local subsidies, and other regional and local factors on the cost structure of
small systems. The latter factors should be considered in determining the relevant
"expenditure base" for a small system, and such information would be relevant in the
determination of whether a variance should be granted (assuming that the incremental
standard qualifies a small system for a variance and an alternative technology has
been identified by EPA).
The Work Group also recommends that the incremental affordability criteria be set at
a fixed percent of MHI. As indicated in Appendix 5, such a criterion, while sharing
the problem of a degree of subjectivity with the current EPA methodology, also
appears reasonable when it is compared with the EPA approach or a set of alternative
incremental methods considered by the Work Group. For example, given the current
MHI of about $40,000, a 1 percent of MHI rule would set the affordable per
regulation standard at $400. This is approximately two times the current water bill
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for the median household (felt by some members of the Work Group to be a high
water mark for perceived household affordability for a rule), and about 1.5 times the
cost of POU-treated water.5
In summary, the Work Group recommends that EPA use an incremental approach to
determining national affordability and that the value of the increment be a fixed
percent of MHI per rule. See below for recommended value of the increment.
• The Work Group recommends setting the increment at 1 percent of MHI. (One of the
18 Work Group members opposed this recommendation, advocating for a lower
percent.)6
• When a State makes a decision about whether to allow a variance, it should consider
the "quantum leap" and "rate shock" phenomena. This issue occurs when small
systems that have no or little treatment must invest for the first time in significant
water treatment. This will trigger potentially significant one-time investments (e.g.,
manifolding wells, establishing a centralized treatment building and equipment unit)
that probably will not have to be repeated if future rules are issued.
• In addition, when making variance decisions, States should consider the cumulative
impacts of multiple regulations that may affect a particular system. The Work Group
encouraged States to consider an extended time horizon in making variance decisions,
encouraging systems to invest for their long-term viability. The Work Group notes
that this recommendation might also have broader implications regarding financial
assistance to systems (e.g., a State might decide to set eligibility for financial
assistance relative to a certain cumulative impact).
• The Work Group also agreed that, when a State is considering whether to allow a
variance, a strong effort should be made through a meaningful local public education
and local public participation effort, to ensure consumers are informed and
understand (1) that the variance technology does not result in water quality that meets
EPA standards, (2) the implications of the two-tier phenomenon, and (3) all the
options they may have for achieving compliance. These efforts should be ongoing to
ensure that new consumers are educated, too. These efforts should be done using
simple, straightforward language. Related legal requirements (found in SDWA
section 1415(e) and EPA's regulations at 40 C.F.R. section 142.301 et seq.) should be
followed, including:
5 Interestingly, 1 percent of MHI is only slightly higher than a VSL-based indication of potential willingness to pay
(approximately $250 as calculated by a Work Group member), using a method not agreed to by all Work Group
members. Some Work Group members believe this reinforced the appropriateness of the 1 percent of MHI number.
As noted earlier, however, other Work Group members do not agree that VSL-based data are suitable for regulatory
analysis of this nature. They believe that the method used to develop the $250 estimate may substantially understate
the public's willingness to pay for health protection. (See Appendix 5.) Some members, during deliberations
regarding the VSL approach, suggested that if a VSL standard was used, an "adjustment factor" might be added to
the VSL value to overcome the potential understatement of benefits inherent in the VSL calculations.
6 See Appendix 1 for minority views.
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¦ Conducting a local hearing or hearings;
¦ Conducting a meaningful review for the system applying for a variance as to
whether the system cannot afford to comply through:
Treatment;
Alternative source of water supply;
- Restructuring or consolidation; and/or
- Financial assistance under the Drinking Water State Revolving Fund
(DWSRF, administered by EPA and the States), the U.S. Department of
Agriculture's Rural Utilities Service (RUS), the Community Development
Block Grant (CDBG) Program administered by the U.S. Department of
Housing and Urban Development (HUD), or other State or federal programs.
¦ Ensuring that the system has the financial and technological capability to install,
operate, and maintain the equipment;
¦ Assuring that the variance will ensure adequate protection of human health and
meets all legal requirements for a variance;
¦ Tracking compliance with the variance; and
¦ Reviewing the adequacy of the variance at least every 5 years.
The Work Group recommends that EPA re-evaluate variance technologies and BAT at
least every 5 years, to take account of technological developments as the cost of
treatment technologies declines. EPA should share resulting information with State
primacy agencies to assist in their 5-year reviews of variances and their assessments of
whether to approve variance technologies for specific systems.
Given the affordability criteria recommendation of the Work Group (a substitution of an
incremental approach for the EPA methodology), the question of whether 2.5 percent of MHI is
an appropriate standard becomes somewhat irrelevant. However, the question of whether 2.5
percent of MHI is a reasonable value for the affordability metric was aggressively discussed and
debated, with the Work Group not reaching a consensus on the issue, assuming EPA maintains
the current methodology.
Those supporting a lowering of the standard to 2 percent of MHI or less raised concerns,
as did the EPA SAB, about the apparent fact that no systems had qualified for variance
consideration with the current standard. Work Group members suggesting that 2.5 percent or a
higher value be used were concerned that a "widening of the door" or increasing the likelihood
of variance considerations for small water systems might lead to a two-tier system of water
quality standards. In summary, the Work Group prefers an incremental approach to affordability
criteria setting. If EPA decides to continue use of its current methodology, no recommendation
is offered regarding the question of whether a 2.5 percent standard is appropriate.
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3. How should the expenditure baseline be adjusted to account for new rules?
Observation
The EPA affordability threshold approach is based upon adding the estimated compliance
costs for a "new" rule to the baseline water bill that households are already facing. This baseline
is known as the "expenditure baseline." There are several challenges and problems with how the
expenditure baseline is estimated and how it must be periodically updated to reflect additional
regulations and other factors that will affect household water costs. Among the issues are the
following.
• The current baseline is estimated on revenues collected by CWSs, as identified in the
Community Water Systems Survey (CWSS) data set. For many small systems,
revenues collected do not fully reflect the full costs of current operations, as indicated
by CWS expenditure data from the CWSS data set. (Expenditures tend to exceed
revenues in 60 percent of the systems responding to the 1995 survey.) However, it is
not clear that small systems reporting into the CWSS were amortizing/capitalizing
their reported expenditures, so it may be that expenditures are overstated for some
systems.
• Even if there were reliable, annualized historic expenditure data for small systems,
the costs for many systems may need to be adjusted upward to reflect additional
utility expenditures associated with achieving sustainable service. This adjustment
should be made to the extent that there are reliable national data for making such
adjustments to reflect revenue needs for long-term sustainability.
• When the costs of new regulations are added to the baseline, the proposed approach
spreads those compliance costs across ALL the systems in a size category. As a
result, there would be a considerable diluting of the costs faced in a given system
(e.g., if 10 percent of systems face a compliance cost for a given new rule, then the
expenditure baseline would reflect an increase of only 10 percent of what the costs
would be in an affected system).7 At the same time, it is not known how many
individual small systems will have to spend considerable sums to comply with
multiple new standards (e.g., arsenic, radon, the groundwater rule, and/or future
microbial/disinfection byproduct rulemakings, and uranium). It is not clear exactly
how to resolve this issue if EPA continues to rely upon its current approach, but under
the recommended incremental approach, this issue becomes moot at the national
level, and states can examine any cumulative regulatory burdens faced by individual
small systems.
• Infrastructure rehabilitation and replacement costs — above and beyond capital needs
related to regulatory compliance — should be added to the baseline calculations, to
For example, the EPA methodology could increase the expenditure baseline by only $12 per household per year to
account for the arsenic standard, whereas households in small systems needing to comply with the MCL are
expected to see average costs of $240 per year or more.
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the extent that there are reliable national data to document such an adjustment.
Recent studies (e.g., EPA, the Congressional Budget Office, and the Water
Infrastructure Network) indicate that the "gap" between the needs for capital
spending on infrastructure and the available subsidies is significant. Conservative
estimates suggest the gap will require a 3 percent increase in baseline water rates per
year, compounded every year, for at least the next 20 years to meet recognized needs.
• The added costs of security and anti-terrorism efforts should be added to the baseline
as well, to reflect the expected costs for vulnerability assessments, training,
emergency response training, and any potential physical changes needed to protect
water system facilities. This adjustment should be made to the extent that there are
reliable national data to document such costs for small systems.
• Subsidies should be added to the baseline calculations as well, to the extent that they
(1) are readily available to assist the small systems in need, (2) are not already
counted in the "gap" analysis noted previously, and (3) are available for regulatory
compliance rather than other capacity development needs.
• EPA's proposed "expenditure baseline" calculations do not take into account the fact
that many small systems do not, presently, have the capacity to run effectively in a
sustainable manner. The technical, managerial, and financial (TMF) aspects of small
water system capacity building take time and resources to achieve. To the degree that
TMF issues are currently dealt with, they may be benefiting from cross-subsidies and
voluntary efforts. Work Group members expressed concern that the current baseline
calculations do not include such costs and these costs would have to be accounted for
as systems take steps to meet new standards and ensure long-term sustainability. As a
result, increases in the expenditure baseline may exceed the incremental cost of new
regulation compliance.
• On the other hand, potential differences in water usage and rate structures for low-
income users are not captured in the baseline calculation. Many low-income users
may pay less than the median cost of water for their system size because, for
example, they are eligible for lower rates (e.g., lifeline rates or the low end of
inclining block or seasonal rates) or because they have lower water usage than the
median (e.g., due to frugality in light of income limitations or due to low outdoor
water use for lawn watering, etc.).
• It was noted that the SAB had concerns that the use of the currently structured
expenditure baseline could lead to a situation that early regulation might be deemed
affordable while later regulations may be determined to be unaffordable because the
affordability threshold has been crossed.
Recommendation Regarding Expenditure Baseline
As noted, the Work Group recommends that an incremental approach to affordability
determination be used with a fixed percent of MHI per rule, rather than the current EPA
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affordability methodology. As the recommended incremental methodology does not include the
calculation of an expenditure baseline, an expenditure baseline recommendation would be moot
if this recommendation is accepted.
However, if EPA decides to maintain its current methodological approach, it is
recommended that efforts be undertaken to make expenditure baseline adjustments to alleviate
concerns raised about the expenditure baseline as discussed above. In this case, the Work Group
recommends factoring into the expenditure baseline those costs that reliable data indicate
systems nationwide generally incur.
4. Should separate criteria be developed based on primary source?
Observation
The Work Group observed minimal cost differences between surface and groundwater
systems. At the same time, it was observed that treatment costs vary widely for both types of
systems.
The Work Group agrees with the observation of the SAB that the critical issue for small
water systems is standard affordability not the source of water.
Recommendation Regarding Source-Specific Criteria
The Work Group recommends that the criteria chosen for national affordability screening
be the same regardless of water source. Moreover, EPA guidelines for State officials to use in
making the final determination of whether a variance should be granted should also be the same
for both ground and surface water systems.
5. Should financial assistance be incorporated?
Observation
Water system financial assistance varies from State to State and region to region. While
there are national sources of water system financial aid (e.g., DWSRF and RUS), State and local
governments have sponsored financial assistance programs in an effort to assist local water
systems. So while financial assistance can affect the expenditure baseline of operating systems,
differential financial assistance opportunities across the country make it difficult to use such
assistance in equitably establishing national threshold standards.
Recommendation Regarding Consideration of Financial Assistance
Like the SAB, the Work Group recommends that if EPA retains the present approach to
making the national affordability determination, financial assistance should be included in
baseline (or other calculations associated with determining variance eligibility) analysis when
such financial assistance is routinely available for systems throughout the nation.
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Because the States will be involved in the final determination of whether a variance is
warranted, the Work Group suggests that EPA's variance guidelines include a suggestion that
States consider local and regional financial assistance in determining whether variances will be
granted.
6. Should regional criteria be developed, given data limitations?
Observation
Under current standards and conditions, the costs of operating small water systems vary
due to water source, pretreated water quality, and cost of compliance with current standards.
Compliance costs will likely vary for new EPA standards as well. Therefore, a universal
affordability standard or threshold could lead to variances for high-cost regions even though the
"willingness to pay" for the region indicates that higher water prices may be affordable by the
affected population.
It seems reasonable to set differential standards if regional "cost of compliance" data
indicate major regional cost differences and regional data suggest that "willingness to pay"
varies by region. For example, cost data for systems located in the western States (due to arid
climate and population dispersion) tend to be higher than comparable cost data for small systems
in the eastern States. Likewise, MHI varies according to whether the system is located in a rural
or urban community.
Recommendation Regarding Regional Criteria
To more accurately reflect compliance costs, efforts should be undertaken to establish
differential regional threshold standards that reflect regional compliance costs. More
specifically, in this case, the Work Group recommends that EPA establish differential "regional"
affordability criteria, to the extent that reliable data are available.
To more accurately reflect the actual ability and/or willingness to pay, the MHI for small
systems should be further differentiated into rural and urban categories.
The Work Group recognizes that both of these recommendations require more detailed
data than may be currently available. Therefore, these recommendations may be more
appropriate for future than for current affordability policy.
The Work Group also considered whether to recommend applying the incremental
approach on a regional basis. However, most members opposed this idea, deeming it impractical
given the data limitations.
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2.4.2 Other Concerns, Suggestions and Recommendations
1. Adjusting National Standards Over Time
Observation
As indicated above, "willingness to pay" is a consumer judgment based on preferences,
knowledge, and other factors. As citizens learn more about the health risks from sub-optimally
treated water, their willingness to pay is likely to change. As a result, a higher affordability
threshold may be appropriate in the future.
Recommendation
The NDWAC Work Group recommends that the affordability threshold chosen be
periodically reviewed to ensure it reflects changing attitudes and values.
2. Managing the Household Affordability Issue
Observation
While the primary charge to the Work Group centered on system affordability, members
of the Work Group recognized the important, though indirect, relationship between household
affordability and system affordability If the price of water is increased to such a level that a
significant number of low-income households cannot afford to pay their water bills, the cash
flow anticipated by a water system may not be realized and the investments and water system
expenditures based on those assumptions become unaffordable for the entire system.
What is more, problems of household affordability can emerge in any type of water
system, regardless of overall financial capacity. Individual households may face hardships in
paying for water, regardless of the overall "reasonableness" of system costs. Due to these
complexities and the limited charge to the Work Group, the recommendations have treated
household affordability as an important consideration, albeit not the focal issue for this
document. The Work Group recognizes that many of the options for dealing with household
affordability may be unique to certain States, regions, or systems and, for the most part, this
"within" system affordability issue may be addressed most effectively at the State or system
level.
3. Verifying the calculations used to determine willingness to pay
Observation
Data used for willingness to pay calculations are based on a set of assumptions that
should be verified. For example, EPA estimated an "affordability threshold" of about $550 per
household per hear ($550/HH/yr.) based on bottled water consumption of 2 liters per day per
person, and 3 persons/HH. Other data suggest median consumption rates of 1L per day and a
typical household with 2.6 persons. These data would suggest an expenditure per household of
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about 43 percent of the $550 estimate developed by EPA, or just under $240/HH/yr compared to
the EPA estimate of $550. Some members pointed out that current expenditures for bulk bottled
water are by no means a ceiling on consumers' willingness to pay for safer water and, indeed,
may represent a floor for some households. On the other hand, other Work Group members
point out that most households choose not to purchase bottled water for routine in-home use, and
these members believe that willingness to pay could be less than the prevailing bottled water
market price. It is worth noting that the limited studies available have found that when the public
is informed of a health risk in its water, the willingness to pay for risk reduction actions such as
bottled water typically increases.
Recommendation
Given the significance of the data selected on the affordability criteria, the Work Group
recommends that calculations used to estimate willingness to pay based on household water use
be re-analyzed and verified as reasonable estimates prior to use as proxies for willingness to pay.
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3.0 Financial Support Strategies
3.1 Introduction
One method of addressing drinking water affordability problems is to provide additional
financial support to water systems or individual households. Financial support can be funded at
the individual system level, the State level, or by the federal government. If financial assistance
is made more readily available for small water systems facing infrastructure improvements to
meet regulatory requirements, the need for variance technologies may be reduced. In addition,
under certain circumstances, financial assistance may be reflected in the way in which EPA
calculates affordability at the national level. Recommended financial support strategies include
providing information on affordability rate-making practices, supporting individual households
with a Low-Income Water Assistance Program (LIWAP), making changes in the way that
existing funding sources are used to better support small systems with affordability problems,
and providing new funding sources.
3.2 Discussion
3.2.1 Rate Setting Techniques to Enhance Water Affordability
EPA should provide information and examples pertaining to the use of affordability rates
for systems to help make water affordable to low-income households^)
Introduction
The design of water rate tariffs varies significantly, both over time and between water
systems.8 In the early years of the water industry, flat rates (charges based on a per customer
charge or based on the number of water fixtures) were widely used. Most systems have now
gone to a metered rate basis with at least part of the water bill based on the amount of water
used. Traditionally, it has been thought that the best water rate design is based on matching the
revenues produced from the various customer classes to the cost of providing service to the same
classes ("cost of service rates"). The term "cost of service rates" is also used to describe a rate
design system that produces sufficient total revenues to match the full costs of operating a
system. All of the tariff design examples in this section assume this full matching of revenues
and expenses is happening.
Since water, like most commodities, is generally cheaper to produce and deliver in
quantity to one customer, declining block rates (rates that decline as more water is purchased by
one customer) historically have been the most widely used rate design which best approximates
cost of service rates. In recent years, however, many communities have abandoned strict cost of
service rates to address both water conservation and affordability concerns. The most widely
used method of addressing conservation concerns is to eliminate the declining block rate concept
g
Systems and utilities, as well as tariffs and rates, are used interchangeably in this section.
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and substitute either uniform rates (same consumption charge for all water quantities) or
inclining block rates (the more water one customer uses, the higher the price). To discourage
water use for lawn irrigation, seasonal rates (with higher prices for water used in the summer
months) have also been used for conservation purposes.
This section will discuss the various tariff design mechanisms available to address
affordability concerns. Finally, this section will look at the "rate shock" issue, which occurs
when water rates increase significantly over a short time period, such as when new treatment is
added to meet new regulatory requirements.
Affordability Rates
To promote conservation and provide a cost break to the small water user, many water
systems have abandoned the declining block rate methodology. One common method of rate
design is to use both a service charge (sometimes called a customer charge) and a consumption
charge. To promote conservation and affordability for very small water users, the service charge
can be kept artificially low with correspondingly higher consumption charges. An "artificially
low" service charge fails to fully recover all of the utility's fixed costs and allows a low-volume
user to pay something less than the full cost of service. The amount lost on these small users is
then made up by larger users, who contribute toward variable and fixed costs with a higher
consumption charge. This small user subsidy can be increased by using an inclining block rate
or seasonal rate methodology. Another method of subsidizing small water users is to use a
minimum bill (a fixed price for the first block of water consumed) concept with an artificially
low minimum water charge. In this concept, rates and the "minimum consumption block" are set
based on the presumed amount of water necessary for a small family to live on which is then
used to determine the minimum consumption block. These methods are sometimes referred to as
"lifeline rates." Table 2 shows an example of how using such rate designs can produce lower
rates for small users. The columns headed "Modified Cost of Service Rates" are an example of
what the tariff design might look like using uniform rates that most closely match cost of service
rates. Since the best way to match cost of service rates is to use a declining rate block design,
these rates are called "modified cost of service rates." In section A of Table 2, the service charge
concept is used with both a uniform consumption charge and an inclining block consumption
charge. To allow for small users to have the maximum benefit, the service charge is greatly
reduced. By putting higher fees on consumption, conservation is promoted. By having no
minimum allowance, conservation is promoted for all user sizes. As would be expected, the
small user gets a greater subsidy when inclining block rates are used. A disadvantage of
subsidizing all small users is that all small users are not in low-income households. In addition,
some low-income households are larger, necessitating greater use of water.
The most widely used reference for setting water rates has been Principles of Water
Rates, Fees, and Charges published by the American Water Works Association (AWWA Ml
Manual). This manual, while describing the best method for developing cost of service rates, has
been modified to include other tariff design principles. The current 5th edition, published in
2000, includes a discussion of "Low-Income Affordability Rates" (Chapter 16 - see Appendix
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69), including various methods to promote affordability. The manual recommends that
affordability rates, such as lifeline rates, be limited to low-income households. By limiting the
use of lifeline rates to low-income customers, the benefit can be increased and the effect on the
remaining customers can be lessened. Table 3 shows the possible effect of limiting the examples
in Table 2 to customers who meet low-income eligibility requirements. It is assumed that 15
percent of the customers will meet low-income requirements, and the table shows an assumed
distribution of low-income household water use. The examples in Table 3 do not repeat the
modified cost of service rates as shown on Table 2, but show the lifeline rate examples. As
expected, low-income users at all consumption levels obtain a greater subsidy, while other users,
at higher consumption levels, get penalized less.
These examples show that it is possible to have affordable rates for low-income
households by adopting lifeline rates. The examples shown in Tables 2 and 3 are based on an
average residential bill of approximately $492 per year, with average consumption of 104,000
gallons per year and median consumption of 84,000 gallons per year. These rates are higher than
national average rates and were chosen to show that a 5,000 gallon per month user can be
subsidized to ensure that water rates are affordable for most low-income households. Data
submitted to the NDWAC suggest the assumed $492 annual water bill is two and one-half times
the estimated average annual household bill of $197 for a system serving roughly 1,000
customers using EPA's national database. Further, the annual water bill assumed in these tables
constitutes roughly 1.3 percent of median household income for systems of this size. It should
be recognized, however, that there are some small systems that serve a very high percentage of
low-income homes. Lifeline rates alone are not likely to alleviate the affordability problem in
those systems.
As a further illustration of how lifeline rates can be used to offset the costs incurred by
low-income households, the example rate structures detailed in Tables 2 and 3 have been
expressed as a percentage of household income based on a summary of national data reported to
the NDWAC. Tables 4 and 5 express the reported monthly charges from Tables 2 and 3 as a
percentage of estimated MHI. Monthly water bills for all customers were expressed as a
percentage of median income using median values and are compared to similar results for low-
income customers using the 10th percentile value for MHI in systems of this size. These tables
further indicate that when expressed as a percentage of MHI basis, affordability rates provide an
opportunity for low to moderate usage, low-income households to have annual water costs below
EPA's affordability threshold.
It is interesting that the size of the system is not as important as the diversity of the
customers in determining the efficacy of affordability rates. The examples shown use a system
serving 1,000 customers. The results would be the same in any size system with the same
distribution of customers. Larger systems, however, tend to have a larger proportion of
commercial and industrial customers, which benefit the efficacy of affordability rates.
9
Reprinted with permission of the American Water Works Association. Copyright 2000.
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The advantages of using affordability rates to alleviate the small system affordability
problem are:
• In most cases, lifeline rates can be implemented by an individual system and do not
rely on outside sources of funding. While regulatory approval may be required,
especially for investor-owned water systems, no new legislation must be enacted.
Many systems already, to some extent, use this method.
• Affordability rates promote water conservation as well as address affordability.
• Affordability rates can be very effective in systems that have a relatively low
proportion of low-income households.
The disadvantages of using affordability rates to address small system affordability issues
are:
• Regulatory approval is needed for some (e.g., investor-owned) systems.
• Affordability rates do not follow cost-of-service principals under which revenues are
based on the cost of providing service to each customer class. This is especially true
in systems that have larger commercial and industrial customers. Some systems have
separate rate schedules for such customers.
• Affordability rates require some users, especially larger users, to subsidize other
customers. This may be difficult to implement if there are significant objections by
the subsidizers.
• Affordability rates are not effective in systems that have a high proportion of low-
income households.
• Affordability rates may be beyond the capacity of some small systems to implement.
It may be particularly difficult for small system operators to determine qualifying
low-income households unless they are able to link enrollment in other programs,
such as Low Income Home Energy Assistance Program (LIHEAP) and Supplemental
Security Income (SSI), to eligibility for lifeline rates.
Rate Shock
An indirect effect of affordable water rates is "rate shock," a significant and sudden
increase in the cost of water. While the new, higher cost of water may be deemed affordable
overall, the sudden increase may be difficult for low-income households to incorporate in their
budgets in the time frame required.
Rate shock can occur when a new and expensive treatment technology must be
implemented, especially in systems with little or no existing treatment and very low water rates.
In such cases, it is possible for water rates to increase by three or four times their current levels.
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If the existing water rates were to be, for instance, $100 annually, and the annual cost of a new
treatment technology were to be $300, then there would be a quadrupling of the rates from $100
to $400. However, the $400 annual average water bill would not exceed affordability thresholds.
Such rate shock is a barrier to the implementation of treatment technologies.
Rate shock can be diminished by phasing in the required rate increase over time. The
problem with such a phase-in is that the water system must have the financial capacity to carry
the difference between the lowered revenues it receives in the early period of the phase-in and
the total cost of service. Slightly higher rates may be required once the full rate increase is
implemented to ensure the capacity of the water system to make up for the lost revenues during
the early stages of the rate phase-in. Another method of implementing a rate phase-in that would
support financial capacity without the need for higher final rates would be to start the phase-in
prior to the full expenditure of money. While systems regulated by State utility commissions
usually are required to wait until the treatment plant is operational prior to increasing rates, there
is precedent for allowing the phase-in of the rate increase as the money is spent toward the
project. For systems that have local control of rate-setting, it would be easier to implement this
type of phase-in. Financial assistance for capital expenditures can be structured so that the first
payment due would occur after the completion of the project, a typical practice in many areas for
administering the DWSRF. If the rates increased incrementally prior to the start of repayments,
phasing would be easier and rate shock attenuated.
Conclusion
For many water systems, rate-setting techniques can be an effective method of ensuring
safe and affordable drinking water for all of that system's users. The optimum use of
affordability rate-setting is to limit those eligible to receive subsidized rates to low-income
households. In systems that need to significantly increase rates to pay for needed infrastructure
improvements, for example, rate shock may occur. The best way to alleviate rate shock is to
phase in the rate increase over a period of time. It is important, however, that the phase-in be
developed in a way that keeps the utility financially viable.
While affordability ratemaking can be an effective tool for an individual system to
provide financial support to its low-income households, limiting needed subsidies from outside
sources and the need for variance technologies, rate-setting is a local or State prerogative. EPA
has limited, if any, authority in such matters. Nevertheless, EPA should provide information and
examples to the States and to water systems that demonstrate how affordability ratemaking can
be an effective tool.
3.2.2 Low Income Water Assistance Program
The Work Group recommends that EPA adopt a LIWAP as a means to assist low-
income households facing high drinking water costs, funded with a Congressional appropriation
similar to the funding for LIHEAP.10
10 See Appendix 1 for minority views.
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The real impact of water costs should be measured at the individual household or
customer level, and most systems with an affordability gap have some users who are able to pay
their water bills. However, other customers will not. While the ability of low-income
households to afford their water service, especially when combined with sewer costs, merits
national attention, this recommendation focuses on addressing low-income household water
affordability when small system costs rise due to compliance with the SDWA. While there are
federal assistance programs for other utility services, such as the LIHEAP for heating and
cooling costs and the Universal Service Low Income Program for local phone service, there is no
similar program for water. A national LIWAP is being recommended by the Affordability Work
Group as another tool to help States assist low-income households facing increased rates due to
costs associated with compliance with the SDWA. Adoption of a LIWAP could help offset the
need for the use of variance technologies.
The LIWAP would be modeled on LIHEAP, using an annual block grant to the States
funded through an annual appropriation. While systems should be strongly encouraged to use
rate design to the extent practicable to address affordability issues for low-income consumers (as
discussed in section 3.2.1), there are systems where rate design alone cannot ensure affordable
rates for the low-income households served. This is where an outside source of funding is
needed to help fill the "affordability gap" (see Appendix 7). LIWAP assistance would both
benefit qualifying low-income households by promoting affordable water bills and help preserve
a small system's revenue stream from the negative impact of too many low-income customers.
Structuring a LIWAP
The goal of a LIWAP is to assist low-income residential customers of small systems with
high rates due to costs associated with compliance with the SDWA. The small system LIWAP
described in this section directs assistance to the low-income consumers of systems undergoing
compliance measures, as opposed to all low-income customers. This is a narrow universe of
households, but one that addresses the specific low-income affordability issues explored by this
Work Group. A LIWAP could promote compliance with the MCLs by protecting the most
vulnerable segment of a small system's customers (those without the income elasticity to cover
the costs of a system's compliance measures), while providing the system operators with
adequate revenues to finance these requirements. Low-income customers facing the largest rate
increases should be treated as a priority and receive more assistance. LIWAP could be part of a
financial assistance package to eligible systems, but the beneficiaries would be low-income
households.
The LIWAP would be modeled on the federal LIHEAP.11 LIHEAP is an annual block
grant to the States, funded through an annual appropriation by Congress, to help low-income
households pay their heating and cooling bills. There is a separate LIHEAP emergency
contingency grant that can be released at the Administration's discretion in response to a variety
of crises. The authorizing statute directs the States to target assistance to vulnerable populations
(the elderly, households with members with disabilities, households with young children, and
low-income households with high energy burdens). The program sets an eligibility floor, 110
11 42 U.S.C §8621 etseq.
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percent of poverty and a ceiling of 150 percent of poverty or 60 percent of the State median
income. The statute also establishes categorical eligibility for individuals receiving Social
Security, SSI, food stamps, or certain payments under the Veterans' and Survivors' Pension
Improvement Act. Up to 15 percent (or 25 percent with a waiver) of the block grant may be used
for weatherization or other energy-related home repair, and up to 5 percent can be used for
services that encourage or enable households to reduce home energy needs including needs
assessments, counseling, and assistance with energy vendors. States can use up to 10 percent of
the block grant for administration of the program.
Many aspects of LIWAP could be patterned after the LIHEAP program. Eligibility for
LIHEAP and other assistance programs such as the federal or State telephone lifeline rate
program could qualify a household to receive LIWAP assistance. Using categorical eligibility
could make administration of a LIWAP more efficient. If LIWAP is funded through a block
grant like the LIHEAP program, States could set eligibility levels and benefit amounts, with
priority given to low-income households facing the greatest rate increases.12 As with the
LIHEAP block grant, a LIWAP block grant would give the States the flexibility to tailor the
LIWAP to address their own particular needs. States could be authorized to set aside a portion of
LIWAP funds for more permanent measures to reduce low-income customer usage (such as leak
repair or conservation measures for toilets and faucets).
LIWAP could be distributed to eligible households in a number of ways. States could
determine how the assistance is applied for and distributed. They could consider administering
LIWAP through the same agencies that administer other low-income benefits programs, such as
LIHEAP.
The LIHEAP approach has worked well as a block grant that States can tailor to fit their
needs. LIWAP could have conservation and rehabilitation components similar to those in
LIHEAP, but its primary goal would be to address the ability of low-income households to
access safe and affordable drinking water, especially where a small system's costs are increasing
due to MCL compliance.
While some water systems may already have voluntary programs to provide assistance to
low-income households, it is unlikely that these programs alone will adequately address the
needs in small systems facing substantial compliance cost increases.
There is also the issue of water affordability for low-income households that do not pay
water bills directly. Water is different from energy and telephones in terms of the percent of
households that pay a water bill. These costs are frequently "invisible," included as part of a
household's rent or mobile home space lease.13 The Affordability Work Group made very clear
12 Other factors that could be used to prioritize LIWAP assistance could include vulnerable populations, such as
seniors, households with young children, and households with members whose medical conditions render them more
susceptible to illnesses associated with drinking water contaminants.
13 States have faced similar challenges in administering the federal low-income Weatherization Assistance Program.
One way to address landlord-tenant billing issues is to have the landlord sign a contract with the State in which, as a
condition of receiving LIHEAP, the landlord agrees to pass along the savings from a weatherized building to the
tenants.
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that in any case in which LIWAP assistance is provided to landlords, protections must be
incorporated to ensure the benefits accrue to the disadvantaged tenants. An analysis of 1990
census data by Scott Rubin shows that nationwide, about 66 percent of households pay a water
bill and that number is lower among low-income households (e.g., in 1989 around 50-60 percent
of households with incomes below $25,000 paid a water bill).14 The percentages vary greatly by
region as well.
Coordination of LIWAP with Other Funds for Water
LIWAP is intended to be a tool to help address low-income water affordability. For a
LIWAP to be most effective, State water administrators should have a role in determining how
the assistance is targeted within the State. LIWAP assistance could also reach more low-income
households when coupled with the types of rate setting techniques described in section 3.2.1.
Should a program similar to LIHEAP be established, there should be an incentive (or penalty) to
make sure that States actually use funds for low-income individuals. One way to ensure that
LIWAP is appropriately directed is to have LIWAP appear as a credit on the low-income
household's water bill. By providing subsidies directly to the utility to offset increased costs to
disadvantaged customers of the system, States could also reduce their administrative burdens.
States should be required to return to EPA any unused portion of the LIWAP after a set period of
time.
Determining the Size of a Small System LIWAP
This subsection will discuss the determination of the funding requirement for a small
system LIWAP subsidy. It should be noted that it is not possible to determine, especially on a
national average basis, a subsidy amount that works well in all cases. The level of water rates
varies greatly from system to system and the level of income in low-income households varies
greatly, as does the poverty rate from State-to-State. A level of subsidy that is appropriate in one
situation may not, therefore, be appropriate in another system or household. If LIWAP is
structured as a block grant to States, States can use different methodologies to determine the
amount of assistance per household.
It is not possible, or desirable, to fully subsidize the water bill of all low-income
households without first considering the possibility of a water system using its own subsidy in
the form of affordability rates, as discussed in section 3.2.1. In addition, the level of a funding
base and the number of participating households will be critical factors in the determination of
the actual amount of funding. The purpose of this analysis is, in part, to determine the
appropriate total level of funding, on a national basis, to move toward a solution to the small
system affordability problem by providing assistance to individual households.
While many different funding mechanisms could be used, the majority of the Work
Group recommends a LIWAP structured similarly to LIHEAP. The individual household
14 Scott Rubin, A Nationwide Look at the Affordability of Water Service, Proceedings of the 1998 Annual
Conference of the American Water Works Association, Water Research, Vol. C, No. 3, pp. 113-129 (American
Water Works Association, 1998).
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subsidy will be controlled by the amount of money in a LIWAP fund and the number of
participating eligible households. For a LIWAP limited to low-income households (those
eligible for LIHEAP), served by a small water utility (less than 3,300 population) with high
annual water rates(>$500) due to compliance with regulatory requirements, the total annual
required funding is estimated to be approximately $750,000.15
Variations of LIWAP Discussed, But Not Recommended
Another model, ultimately not recommended by the Work Group, is to distribute LIWAP
in a manner similar to the federal telephone lifeline program. Under the Federal Universal
Service Low-Income Programs (Lifeline and Link-Up), carriers apply to be "eligible
telecommunications carriers." To receive Lifeline subsidies, the carriers must offer Lifeline and
Link-Up to qualifying customers. The carriers are reimbursed for the discounted rates from the
central entity that administers the program. Lifeline customers receive a credit on their monthly
phone bills. The LIHEAP model and the telephone universal services model both require entities
at the federal and State levels to administer the funds, however, the block grant model may be
easier to administer since there are other assistance programs on which to piggy-back LIWAP.
Another variation of the LIWAP, but not recommended by the Work Group, is to address
low-income water affordability through existing funding streams to the systems. At one time,
Congress considered modifying the DWSRF to allow States to direct a certain percentage of their
grants to "disadvantaged users." While this approach still provides assistance directly to the
water utility, it results more directly in lower bills for low-income households. The
Congressional Budget Office (CBO) has a favorable analysis on the direction of funds to address
low-income household affordability in a November 2002 study, "Future Investment in Drinking
Water and Wastewater Infrastructure." The CBO noted that federal assistance to households
"could address distributional objectives with more precision and less loss of efficiency than can
be achieved from aid for investment in water systems" and could be "more cost effective in
achieving a given distributional objective."16
The Affordability Work Group does not recommend this approach because the usefulness
of this mechanism is seriously undermined if there is no new funding for DWSRF to specifically
cover this program. As an analogy, the DWSRF provision for "disadvantaged communities" is
currently underutilized by the States, in part because of a concern about spending down the
corpus of the State's DWSRF.17 The Work Group felt that a modification to the DWSRF that
allows States to target low-income households more directly would likewise be underutilized for
the same reasons if there were no separate, new funding for the program.
There are numerous challenges to a LIWAP in terms of the political viability of such a
program as well as efficient program administration. The majority of the Work Group
15 Estimated by EPA consultants.
16 CBO, "Future Investment in Drinking Water and Wastewater Infrastructure," November 2002, pp. 42-43.
17 U. S. General Accounting Office, Drinking Water: Key Aspects of EPA -s Revolving Fund Program Need to Be
Strengthened, GAO-02-135, January 2002.
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recommends the adoption of a small system LIWAP funded through a Congressional
appropriation.
Possible Ways To Fund A LIWAP
Congressional Appropriations: An annual Congressional appropriation following an
authorization is a potential source of funding. In establishing a LIWAP, Congress would make a
finding that this program accrues to the general good. However, the appropriations process is
highly political and unpredictable from year to year, and in the current economic and political
climate, it would be difficult to fund LIWAP through a general appropriation.
Using the DWSRF as a Mechanism: LIWAP could be funded through increases in
funding for the DWSRF, an option that has the advantage of funneling additional funds through
an existing program. However, the DWSRF currently authorizes assistance to systems, not
individuals, and would require a legislative revision to the authorization.
New Revenue Enhancements: A Drinking Water Assistance Fund could be created by
establishing an affordability charge on all water bills as a cost per 1,000 gallons. However, since
the LIWAP would serve only a subset of low-income households, the cost of establishing and
administering a national water charge would be disproportionate to the modest level of assistance
actually needed. LIWAP could also be funded through a bottled water tax. Such a fund would
be substantial, fairly stable, and financed completely from discretionary spending. However, the
industry being taxed would not benefit from the tax.
Conclusion
A LIWAP could create a sustainable and predictable fund for low-income household
water affordability assistance. Payments through this fund could help preserve and enhance
revenue streams for utilities, as they would have fewer "write offs," (unpaid and uncollectible
bills), and/or disconnection and reconnection costs.
LIWAP could play a critical role in closing the affordability-gap for low-income
households. As a tool to assure the affordability of treatment technology necessary for small
systems to meet new regulations, the LIWAP should:
• Reduce administrative costs by piggybacking eligibility onto the existing LIHEAP.
• Express the intent to the States that the funds should be distributed to provide the
highest amount of funding to the lowest-income households with the highest cost of
water due to system compliance with regulatory requirements.
• Provide for cooperation between the State primacy agencies and LIHEAP
administrators so the States target the distribution of LIWAP funds appropriately.
• Include sufficient LIWAP funding to cover the States' additional administrative costs.
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3.2.3 Modifications to Existing Sources of Funding to Address Affordability
With regard to modifications to existing sources of funding to address affordability, the
Work Group recommends:
• DWSRF funding should be increased, with special consideration given to assisting
small systems.
• EPA should determine if, as a result of the current DWSRF allocation formula, small
public water systems are being disproportionately denied funding from State DWSRF
programs due to inadequate funding being available. 18
• EPA should encourage States, that have not already done so, to establish a
disadvantaged community program to address small system affordability issues.
Such funding should be consistent with the principles in the DWSRF to encourage
restructuring where viable.
• EPA should work with other agencies to help overcome barriers to effective use of
existing funding sources to promote small system affordability for safe drinking
water. Examples of such assistance include:
¦ Increased outreach efforts to small systems of all classes to provide information
on available funding programs.
¦ Increased technical assistance to small water systems to address needs in the areas
of funding applications, accounting and long-range planning, engineering and
technical corrections, and record-keeping practices consistent with the needs for
funding and SDWA requirements.
¦ Improved opportunities of small systems to acquire funding from all sources,
governmental and private. Increased use of grant funds, zero-interest loans, and
other means of assistance to low-income water systems in need.
¦ Analyze methods of removing institutional barriers at both the State and federal
levels that prevent small systems from obtaining funding and complying with
SDWA requirements in an affordable manner.
¦ Establish new, and expand existing, sources of funding to provide assistance to
small systems in all areas of achieving and maintaining system capacity.
Introduction
Existing State and federal funding programs provide financial assistance to water utilities
that help make the cost of water affordable as significant infrastructure improvements and new
18 See Appendix 1 for additional comments.
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regulatory demands are required. The purpose of this section is to provide some background on
these existing sources of funding and to propose approaches for optimizing the use of these funds
so that small water systems can provide safe drinking water at affordable prices. The section
first outlines information on the financial support that federal agencies and States have
historically provided for water infrastructure improvements. It then looks at barriers to the
optimum use of this existing funding for small system affordability and ways to overcome those
barriers. The section next discusses some existing programs for providing assistance to
individual households in order to promote affordability. Finally, the section presents
recommendations for improving the existing funding sources' ability to help small systems
provide safe drinking water at affordable rates.
Existing Sources of Funding
Providing safe drinking water to the 254 million people served by the approximately
55,000 CWSs in the United States is an important goal of federal, State, and local officials.
While our drinking water is among the safest in the world, the owners and operators of the
nation's public water systems know that they must make significant infrastructure improvements
to continue supplying safe drinking water to their customers. A 1999 EPA survey of drinking
water infrastructure needs identified a 20-year need of more than $150.9 billion. Approximately
one-quarter of this total national need ($31.2 billion) is for small systems serving up to 3,300
people. While user rates serve as the major source of system financing, federal and State
government agencies offer financial support as well.
According to a General Accounting Office (GAO) report, from fiscal year 1991 through
fiscal year 2000 nine federal agencies made available about $44 billion in funds for drinking
water and wastewater capital improvements. Four agencies including EPA, the Department of
Agriculture (USDA), HUD, and the Department of Commerce, accounted for about 98 percent of
this total. Also, according to GAO, over the past 10 years State governments made a total of
about $25 billion in State funds available for water infrastructure programs. The break down is
as follows:
• $10.1 billion to match EPA's capitalization grant
• $9.1 billion in grants and loans committed under State-sponsored programs
• $4.4 billion in loans made possible by selling general obligation and revenue bonds
(in States).
Through water and sewer bills, local citizens and private businesses pay about $60 billion
annually, or 90 percent of the total cost, to build, operate, and maintain drinking water and
1 9
wastewater systems.
19 Water Infrastructure Now, "Recommendations for Clean and Safe Water in the 21st Century," Water Infrastructure
Network Report, February 2001, p. 2.
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DWSRF Funds
Many public water systems, particularly small water systems, have difficulty obtaining
affordable financing for infrastructure improvements. Recognizing this fact, Congress
established the DWSRF program as a part of the 1996 SDWA Amendments. For fiscal years
1994 through 2003, Congress authorized $9.6 billion in new federal funding to help ensure that
the nation's drinking water remains safe and affordable. The DWSRF program was modeled, in
part, after the Clean Water State Revolving Fund (CWSRF) program initiated in the late 1980s
under the Clean Water Act.
EPA distributes DWSRF funds to each of the 50 States and Puerto Rico in the form of
capitalization grants. As of June 30, 2002, EPA had awarded more than $4.3 billion in DWSRF
grants to States for drinking water projects. States use the grants to capitalize revolving loan
funds from which low-cost loans and other types of assistance are provided to eligible systems to
finance the costs of infrastructure projects. States must provide matching funds equal to at least
20 percent of each grant. As of June 30, 2002, State matching funds have added more than $1
billion to the program. Loan repayments made by assistance recipients return to the revolving
loan fund and provide a continuing source of financing for infrastructure projects.
The 1999 EPA survey of the drinking water needs indicated that $31.2 billion was needed
to address total regulatory compliance for the next 20 years. Of this total, $21.7 billion reflected
compliance needs associated with existing SDWA regulations, $0.2 billion for American Indian
and Alaska Native systems, and $9.3 billion reflected compliance needs associated with
proposed or recently promulgated SDWA regulations.
The 1999 EPA survey indicated that the total need for the approximately 55,000 CWSs
(those that are State-regulated and those that serve American Indian and Alaska Native
populations) and 21,400 not-for-profit non-community water systems was $150.9 billion. The
survey indicated that out of the total $150.9 billion needed, $61.8 billion was attributed to 886 of
the largest water systems (serving 50,000 persons or more), and $79.8 billion was attributed to
the needs of small and medium-size community water and not-for-profit non-community water
systems. In other words, 886 large systems represent 41 percent of the total need and, in
contrast, approximately 55,000 small and medium community water systems and 21,400 not-for-
profit non-community water systems represent 53 percent of the total need. The remaining need
(6 percent) is associated with costs for proposed and recently promulgated SDWA regulations.20
The allotment of DWSRF to the States ensures that each State receives 1 percent of the
total funding, based on a formula that calculates a ratio involving the extent to which States
exceed or fall short of the 1 percent threshold, and then multiplies a State's allotment by this
ratio. This represents the distribution of funds from about $8 million (1 percent States) to about
20 The 1999 EPA survey estimates of $61.8 billion for large systems and $77.6 billion for small and medium size
community water systems and not-for-profit non-community water systems exclude needs associated with proposed
or recently promulgated SDWA regulations. The impact on different-sized systems cannot be determined for EPA's
estimate of $9.3 billion to comply with proposed or recently promulgated SDWA regulations. See U.S. EPA,
"Drinking Water Infrastructure Needs Survey," EPA 816-R-01-004, February 2001.
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$80 million (the largest amount received by only one State) based on the FY 2002 national
appropriation of $850 million.
Barriers to Compliance and Affordability for Small Systems Using Existing
Funding Sources
Approximately 93 percent of community water systems are small systems, many of
which serve fewer than 3,300 people. Small systems have certain characteristics that make
compliance with minimum standards difficult without outside assistance. These characteristics
include very small staff, extremely limited financial resources, and a small and, in some cases,
widely distributed customer base. These systems often need financial assistance to provide safe
water to their communities, but find it difficult to obtain funding for either their compliance or
infrastructure improvement needs. This is one of the reasons that the majority of violations
occur in small systems. The financial barriers highlight the importance of the DWSRF Program
as an important source of affordable funding for small systems and accounts for why 75 percent
of total loans awarded by the States have gone to small systems.
Funding Program Rules Limit Their Effectiveness for Small Systems
All federal and State programs place limits on the use of their funds. State program
limitations often are different from federal program limitations, thereby creating a situation in
which state funds can often be creatively packaged with federal funds.
Nonetheless, there are a number of limitations that have proven to be especially
challenging barriers. Many programs have ceilings on the amount they will loan to any one
entity. RUS grants, for example, are limited to the amount needed to establish reasonable user
rates and cannot exceed 75 percent of eligible project costs. Thus, grant recipients must provide
matching funds, even though their MHI is below the statewide non-metropolitan average. These
funding restrictions are particularly frustrating for systems wishing to consolidate, as they
generally require a larger funding package.
While some federal funding programs, such as the RUS, provide assistance for preparing
loan or grant applications and for project planning and design, others do not. A number of states,
including South Carolina, Virginia, Missouri, and Oregon, use DWSRF funds to assist small
systems in hiring engineering firms to prepare project plans and specifications or offer the
assistance of their own program staff. However, some states require systems to choose between
a funding source that pays for project planning and review and a source that provides no up-front
assistance but provides a lower interest rate.
Finally, small privately owned systems face their own unique obstacles to receiving
DWSRF funding. Most small water systems are privately or investor-owned. Several states
have legislative, regulatory, or policy-based restrictions on providing assistance to private or
investor-owned systems. This is, in part, out of concerns for endangering the tax-exempt status
of bonds issued for the state match. In addition, some states without legal restrictions still have
yet to provide any DWSRF assistance to private systems. States have indicated that the
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disproportionately low figure of DWSRF funding for private systems is the result of either a lack
of demand or a reluctance to provide assistance due to the creditworthiness of these applicants.
Overall, 57 percent of the nation's CWSs are privately or investor-owned, though they account
for only 9 percent of DWSRF assistance agreements.
Lack of Coordination by Funding Agencies
Because federal and state programs have their own statutory and regulatory constraints,
states cannot coordinate funding without substantial effort. While the goals of various funding
programs are similar, their eligibility criteria - such as the size and type of system eligible to
apply - alone may impede systems' efforts to fund infrastructure projects. In addition, programs
have varying timetables for processing applications and/or awarding grants or loans. Systems
applying for multiple loans or grants to fund a project must carefully coordinate their
applications to avoid project delays. This is evident in the experiences of Franklin County,
Georgia, which had to prepare six different application packages to fund a water and sewer
project. The project was completed 5 years after it was proposed because of funding delays;
many of the funding sources required that other sources of funding be secured before their own
were granted.
Coordinated funding, however, may simplify the funding search, application, and review
processes at the federal, state, and local levels, saving systems and funding agencies both time
and expense. Many states have been working to coordinate their funding processes and criteria.
For example:
• In Montana, a coordination team developed a uniform application for all
infrastructure funding programs. The State has streamlined several procedures
including money tracking, environmental assessments, and supplemental contracts.
• Pennsylvania's Uniform Environmental Review (UER) process, finalized in July
2001, standardizes the process for documenting the environmental effects of proposed
drinking water and wastewater infrastructure projects requiring financial assistance
from a number of federal funding sources. The process should coordinate the
environmental review of projects, helping to avoid the duplication of work by
multiple agencies. Participating programs and agencies include the DWSRF, RUS,
CDBG, and EPA.
• The California Financing Coordinating Committee (CFCC), a formal committee
created in 1998, is composed of representatives from numerous State and federal
agencies. CFCC sponsors funding fairs for funding agencies to explain their
programs and discuss specific plans; hosts an annual public financing conference;
signed and updated a joint Memorandum of Understanding; and maintains a Web site
with information on funding programs and information on coordinated funding efforts
in place.
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Disincentives for Regionalization
Disincentives for regionalization are inherent in the limitations on use of funds, as
described above in Section A. If the size of loans or grants is strictly limited, a regional
consortium cannot obtain sufficient funds to consider a large-scale consolidation. If the loan or
grant provisions fail to provide for planning and design funds, systems may be unable to pay for
the up-front services that may be required for successful regionalization.
An additional disincentive for regionalization is the lack of a comprehensive
understanding among funding programs that least-cost solutions to small system problems
should be actively sought. There is no authority at EPA or in the states who can require all
funding agencies to adhere to a planning process requiring consideration of regional alternatives.
Lacking that authority, funding agencies continue to support sub-optimal solutions for water
systems. These sub-optimal solutions, while consistent with the agencies' overall mission, are
inconsistent with a strategy to promote lasting, least-cost solutions. Thus, some current funding
decisions create barriers to regionalization. One of the barriers is earmarked Congressional
appropriations. States report that it is not uncommon for a system to end-run a state program
designed to promote regionalization through a Congressional earmark.
However, EPA continues to talk about regionalization as one of the best means to achieve
adequate capacity for small systems. A number of states are also actively promoting
regionalization or consolidation. For example, the State of Alabama, working with the RUS,
provided funding for extension of transmission lines, creating a near state-wide distribution
"grid." California's DWSRF program requires that all systems applying for DWSRF funding
consider consolidation as an alternative to their proposed projects. In addition, a number of
states give higher priority rankings or additional points to systems considering consolidation in a
DWSRF loan application.
Impact of Section 1926(b) on Consolidation. Section 1926(b) of the Consolidated
Farm and Rural Development Act prohibits "curtailment or limitation of service" provided by
water systems that have outstanding loans from the RUS.
"The service provided or made available through any such association shall not be
curtailed or limited by inclusion of the area served by such association within the
boundaries of any municipal corporation or other public body, or by the granting of any
private franchise for similar service within such area during the term of such loan; nor
shall the happening of any such event be the basis of requiring such association to secure
any franchise, license, or permit as a condition to continuing to serve the area served by
the association at the time of the occurrence of such event."21
The prohibition means that the service area of a system with an outstanding loan is
protected against annexation or "cherry picking" of customers. The theory behind the statute is
that any such curtailment or limitation of service would increase the risk of a system defaulting
on its RUS loan. The prohibition therefore protects the integrity of the federal government's
outstanding loans.
21 7 U.S.C. § 1926(b)
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There are three different perspectives from which one can view the impact of section
1926(b). First, from the standpoint of the lending agency (the RUS), this provision was passed
in 1961 as a means of protecting the ability of systems to repay their loans. As a prudent lender,
the RUS wants to protect their systems from default.
The second perspective is that of the National Rural Water Association (NRWA) as an
advocate for small water systems. Their argument is that well-managed small systems should
not be subject to "cherry picking" by adjacent larger systems. Even if this did not damage the
ability of the small system to repay debt, it is not sound public policy (in the NRWA view) to
allow a large system to force financial hardship on a small system by taking away its customers.
In an industry that is asset-intensive, an involuntary reduction in customers leaves a stranded
asset base that increases the cost of service for remaining customers. In other words, the
prohibited "cherry picking" also could cause problems of affordability.
The third perspective is that of larger systems which are being urged by EPA to assist in
consolidation of systems. Under the SDWA Amendments of 1996, consolidation of water
systems is seen as a desirable goal. As such, the National League of Cities has asked Congress if
it were willing to "remove federal impediments to consolidation - for example, section 1926(b)
of the Agriculture Act of 1961, which disallows absorbtion of any drinking [water] system
indebted to the Farmers Home Administration. Numerous cities have attempted to expand their
service areas to unincorporated areas served by these small systems, or to areas surrounding the
small system service areas. Federal law precludes them doing so. Many of these small systems
are inefficient and marginally protective of public health. State and local efforts at consolidation
in such areas have been barred - by federal law."22
In the context of barriers to affordability in small systems, section 1926(b) represents two
types of conflicts. First, there is a statutory principle that may lead to conflict between the RUS
and other federal or State agencies. The RUS is a lender with legitimate policy concerns about
the repayment of loans. The role of the RUS as lender may (from time to time) be inconsistent
with other federal or State policies such as regional solutions (including annexation) or other
types of consolidation. The RUS mission of assistance to low-income rural communities may
not always be consistent with an emerging interest in regional, least-cost alternatives.
Second, there are honest differences of opinion about how best to achieve affordable
drinking water in rural communities. Small, rural systems would argue that if they are well
managed, the worst outcome would be to allow larger systems to "cherry pick" their customers,
thereby making water less affordable for their remaining customers. Large systems would argue
that all (or most) small systems are inefficient. Therefore, the least-cost solution for the largest
number of people is achieved by consolidation, including annexation.
22 Testimony of Alderman Joseph A. Moore, Chicago, Illinois, on behalf of National League of Cities before the
Environment and Public Works Committee, United States Senate, March 2002, reprinted by the National League of
Cities at http://www.nlc.org.
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This is an important policy issue for both the NRWA and the National League of Cities.
It raises the question of whether a Department of Agriculture statute is creating barriers to
consolidation.
Underutilization of DWSRF Funds for Disadvantaged Communities
Funding provisions for disadvantaged and small communities may take a number of
different forms. States must make at least 15 percent of DWSRF funds available to small
systems (a provision that has been exceeded with approximately 40 percent of loan funds overall
going to small systems as of June 30, 2002). In addition, states may provide up to 30 percent of
their capitalization grants to disadvantaged communities. This effort is voluntary, and some
states have no programs for disadvantaged communities. Finally, states may set aside an overall
sum of 31 percent of their annual DWSRF appropriation for program administration, technical
assistance to small systems, program management, local assistance, and other state programs.
This 31 percent could potentially provide states with additional resources to assist disadvantaged
communities.
Applicants that serve disadvantaged communities may be eligible for DWSRF principal
forgiveness (as done by 16 states) and extended repayment terms of up to 30 years (done in 20
states). States may also offer other subsidies to disadvantaged communities, including lower
interest rates, no-interest loans, and negative interest loans. Twenty-nine states with
disadvantaged assistance programs have made 625 assistance agreements totaling $837.5 million
as of June 30, 2002.
To date, however, states have underutilized the resources available to assist
disadvantaged communities. No state has used the full 30 percent of its capitalization grants for
disadvantaged assistance. This may simply be a start-up phenomenon, or it may reflect
reluctance on the part of states to use all forgiveness provisions in the funding available in the
absence of a long-term Congressional commitment to DWSRF funding. In response to the latter,
states must address an important operating question: What portion of the fund can be allocated
to systems in the form of loans with principal forgiveness? These forgiven loans undermine the
ability of the DWSRF to be self-financing in the future on the one hand, but on the other hand
offer a means of assisting the neediest small systems.
Increasing use of loans to small disadvantaged communities has two effects on the
DWSRF: increased administrative costs (as a percentage of loan value) and increased likelihood
of default by systems that lack financial capability. These concerns are manifested in the
organization of existing state disadvantaged assistance programs. These programs are tied to
capitalization grants. If capitalization grants were to cease, States would not be able to use funds
for principal forgiveness.
Another factor that may explain the underutilization of the DWSRF special funding
provisions for small and disadvantaged communities is the fact that the Public Water System
Supervision (PWSS) primacy agency often does not make the DWSRF financial decisions. In
many States, administration of the DWSRF is combined with that of the CWSRF in a different
state agency. The financing agency may have different incentives from those of the primacy
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NDWAC Affordability Recommendations, July 2003
agency. Its actions may be aimed primarily at the maintenance of a self-funding revolving fund.
Risky loans, or loans with principal forgiveness, are inconsistent with prudent lending practices
that are important to a self-sustaining loan fund.
Overcoming Difficulties Faced By Small Systems in Applying for Funds
The Work Group recommendations emphasize that the methods of first choice in dealing
with the very small system barriers are the appropriate cooperative strategies discussed in this
section. However, if none of these are available to aid in achieving compliance, programs could
be adopted that will help overcome some of the small system limitations and barriers.
System knowledge. There are approximately 32,000 CWSs that serve fewer than 500
people. Almost 13,000 of these systems (40 percent of the total) are "ancillary systems," i.e., the
provision of water to the public is ancillary to their primary business such as operating a mobile
home park. About 5,000 of these systems are homeowners' associations. Homeowners'
associations and other ancillary systems have many competing responsibilities, which limit their
ability to deal with the increasingly complex issues of water system funding and compliance.
State outreach efforts have been primarily aimed at governmental entities such as cities,
towns, and water districts. The privately owned water systems (most ancillary systems are
privately owned) need to be included in the scope of small system assistance and funding
available through numerous state programs. Many states do not provide funding to private
systems, and there has been little effort to find effective methods to provide information on
compliance and funding programs for these systems.
EPA and the States need to increase efforts to provide assistance, including funding to
small independent water systems. Programs could be carried out either by states or through the
many existing local and rural training programs. Training can be provided directly or through
contracts and funded from DWSRF set-asides, small system training funds, and operator
certification training programs.
Managerial capacity. Systems serving fewer than 500 people (32,000 of the 55,000
CWSs) usually have part-time personnel or are operated by the owner of the business that the
system services. Quite often, operators with limited education and many responsibilities must
confront the application and regulatory process, which can be daunting, and additional
engineering, accounting, recordkeeping, and legal expertise is needed.
Simplifying the application process at the state and federal levels would help. What is
urgently needed is more funding for the kinds of assistance currently provided by Rural Water
Associations, AWWA Sections, Rural Community Assistance Programs, and other technical
assistance programs. The needs include application completion, accounting practices, and
engineering requirements for system cooperative effort and upgrades. Assistance to small
systems is often provided by large systems, but usually as time permits, and is generally
inadequate to address the many small systems in need. (See recommendations for financial
assistance.)
49
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NDWAC Affordability Recommendations, July 2003
Financial capacity. Before lending agencies will fund small water systems, they require
adequate proof that the systems will be able to repay a loan. A system with deteriorated assets,
low income, and extensive need is not a very good risk. Collateral is virtually non-existent.
There are many reasons why small systems cannot demonstrate their credit-worthiness. Lack of
an accounting system and poor recordkeeping are common. Rate structures cannot support
repayment. The very nature of a small system lends itself to disregarding common business and
accounting practices for water systems until the deficiencies become overwhelming.
States are very active in ensuring, under SDWA requirements, that new systems have the
necessary financial capacity to operate into the foreseeable future. However, assistance and
education are needed for the many existing systems that are in serious need when a cooperative
solution is not feasible. Such systems may need assistance to secure adequate operating funds,
meet new requirements, and improve systems to ensure adequate long-term financial capacity.
Institutional Barriers. Both state and federal actions will be necessary to deal with
these problems. Federal regulations, the SDWA, or state implementation programs frequently do
not take into account the small, poor systems that are facing major affordability problems
without the ability to obtain assistance. Some states do not allow the use of federally established
set-aside programs that were designed to assist small systems by funding technical assistance and
training programs. Some solutions can come only from the States, such as providing interest-
free loans, grants, easier application processes, and the assistance necessary to develop capacity
in all public water supplies, regardless of size or ownership.
3.2.4 New Sources of Funding to Address Affordability
The Work Group's recommendations with respect to establishing new sources of funding
are as follows:
• Provide additional funding beyond the current DWSRF funding for small systems to
adopt cooperative strategies, as broadly defined in section 4.2.1.
• Explore and consider the use of other state and federal agencies, such as the U.S.
Army Corps of Engineers and the Bureau of Reclamation, to assist small drinking
water-related projects.
Introduction
Additional financial assistance is necessary because new infrastructure and technologies
to meet compliance can be very expensive, particularly for small systems that have had little or
no treatment in the past. Small systems have so few rate payers to absorb these costs that it is
important to encourage as many of these small systems as possible to restructure or pursue
cooperative strategies that reduce their costs and allow the costs to be shared by more rate
payers.
50
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NDWAC Affordability Recommendations, July 2003
Possible Sources of Funding
Additional sources of funding may be made available through expanding the scope of
existing programs or the development of new programs.
Small System Grant Program for Cooperative Strategies
To encourage cooperative strategies among small water systems, a Small System Grants
Program for Cooperative Strategies could be federally funded with monies over and above those
appropriated for the DWSRF. Grants (with a small match from the system) would be awarded to
systems that cannot afford to bring their water into compliance with drinking water health
standards because of the small number and low-income of their customers. Projects eligible for
grants would be those that assess and implement cooperative or restructuring strategies which
will enhance the future financial sustainability of one or more small systems. Grants would also
fund small system treatment or other drinking water infrastructure projects, but would require
that those projects integrate the assessment and implementation of cooperative and restructuring
strategies into the infrastructure project. States should be encouraged to add more monies to
increase the funds available for encouraging cooperative strategies among small water systems
through these small system grants.
Advantages of this program There are many advantages to a grant program that is
dedicated to funding cooperative or restructuring projects and funded with federal monies.
Federal funding, with a small match such as 20 percent by the system or state, is essential
because states alone do not have the financial resources to provide this support. The federal cost
of supporting these cooperative and restructuring projects - that sometimes entail large initial
expenditures - is spread more equitably through the progressive national income tax.
Because these small system assistance grants would be separate from the DWSRF
monies, the program would be less likely to be regarded as reducing the ability of the DWSRF to
fund larger system needs for infrastructure replacement as well as new treatment systems. In
turn, this program could provide a strong incentive for state drinking water agencies and the
water systems to thoroughly investigate possible restructuring options in each case and save the
DWSRF monies for those small remote communities with water systems that are impractical to
restructure. If small system assistance grants are not tied to cooperative restructuring activities,
they could encourage long-term dependence on federal dollars by too many financially
unsustainable small systems. It has also been noted that reserving the availability of the fund's
dollars solely for projects that include cooperative or restructuring activities may provide
incentives to county and state governments to remove state financing, taxation, regulatory, and
other barriers to restructuring.
Disadvantages of this program This new program may decrease available federal funds
needed for larger system treatment and distribution system infrastructure. Alternatively, the
standalone funding for the small system assistance grants could make the whole program easier
to cut during the Congressional appropriation process. As a separate program, it could require
additional state-level staff to administer. This program, as envisioned here, does not solve the
problem of many systems that are non-sustainable because of high operations and maintenance
51
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NDWAC Affordability Recommendations, July 2003
costs. In addition, in the current economic and political climate, any increase in appropriations
for drinking water utilities may be difficult to obtain.
Overall, in addition to a LIWAP that directs support to the household level of the small
system, new funding would aid in solving the affordability issue at the system level. Increased
appropriations will be used to enhance programs to help make technology and infrastructure
improvements affordable for small systems. Most Work Group members believe that any new
funding sources should be used for infrastructure only. Funds to support operations and
maintenance at the system level should not be included, because that would only prolong the
non-sustainability of the system.
Recommendation
• EPA should encourage States, that have not already done so, to establish a
disadvantaged community program to address small system affordability issues. Such
funding should be consistent with the principles in the DWSRF to encourage
restructuring where viable.23
It was recognized that even when all small systems experience fewer barriers to receiving
loans for compliance infrastructure and make use of restructuring or cooperative strategies,
where possible, to lower and spread the costs to their customers, some systems would still find
achieving compliance with some water quality rules unaffordable for their customers. Data
studied by the Work Group, however, indicated that the number of small water systems whose
water bills after compliance with a new rule would be greater than what the MHI of their
customers could afford, would be manageable. Statistics given to the Work Group and generally
accepted indicated that the required funding to assist this subset of systems would be relatively
modest (less than 1 percent of the current total U.S. financial assistance to public water systems.
It was recognized that such funding must be supplied in a manner consistent with the
principles of the DWSRF. Small systems must first make every effort to restructure and use
other strategies to achieve maximum fiscal sustainability before receiving this priority funding.
Increase use of existing agencies in providing infrastructure support for drinking
water systems
Funding from other federal agencies such as the U.S. Army Corps of Engineers or the
Bureau of Reclamation should be explored. These agencies should be tasked with increasing
their authority to assist small systems. They could be particularly helpful in providing
cooperative assistance through interconnecting small systems where feasible and where such
interconnections would promote affordability. This approach may be an access to additional
funds. Some funding may also be available from the new Homeland Security Program.
Eligible taxpayers should be encouraged to apply for the underutilized earned-income tax
credit (EITC). Although this would not require establishment of a new funding source, it is one
23
See Appendix 1 for minority views.
52
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NDWAC Affordability Recommendations, July 2003
way to get more money to poor families. Within this system, one might also consider use of rate
structures to address affordability problems. (Maybe some DWSRF for disadvantaged
communities can be channeled here.)
Systems should be helped to establish "Lifeline" rates/low-income discount
rates/discounted rates to "vulnerable" populations such as the elderly, young children, people
with disabilities, etc. Some mechanism would be necessary to allow systems to make up the gap
in the revenue stream created by adjusting rates for the disadvantaged population. For example:
• Percentage of income plans (e.g., if at least X percent of a household's income is paid
on its water bill, its service will not be cut off);
• Payment restructuring programs (arrearage forgiveness, budget billing); and
• Customer charge waivers.
3.3 Recommendations
In summary, the Work Group offers the following recommendations regarding financial
assistance strategies to help small drinking water systems comply with the SDWA:
• EPA should provide information and examples pertaining to the use of affordability
rates for systems to help make water affordable to low-income households.24
While EPA is not a rate-making agency, the use of affordability rates can be an
effective tool for many systems, both large and small, to allow for infrastructure
improvements needed to meet regulatory requirements without the need for variance
technologies. By EPA providing information and examples of such rate-making ideas
to water systems, more systems may take advantage of this tool.
• Adopt a Low Income Water Assistance Program (LIWAP) as a means to assist low-
income households facing high drinking water costs, funded with Congressional
appropriations similar to the funding for LIHEAP.25
By targeting funding assistance to low-income households served by small systems
(<3,300 population) that face significant rate increases to ensure compliance with
regulatory requirements, better utilization of limited funding for making water
affordable to all households with less use of variance technologies can be
accomplished. Piggybacking eligibility requirements for such households onto
existing programs, such as LIHEAP, can save administrative costs. A limited
LIWAP program, as described above, may require as little as $750,000 in additional
funding.
24
See Appendix 1 for minority views.
25
See Appendix 1 for minority views.
53
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NDWAC Affordability Recommendations, July 2003
• DWSRF funding should be increased, with special consideration given to assisting
small systems.
In order to lessen the need for variance technologies, additional funding for the
DWSRF, targeted to small systems, would be effective.
• EPA should determine if, as a result of the current DWSRF allocation formula, small
public water systems are being disproportionately denied funding from State DWSRF
programs due to inadequate funding being available.26
• EPA should encourage States, that have not already done so, to establish a
disadvantaged community program to address small system affordability issues.
Such funding should be consistent with the principles in the DWSRF to encourage
restructuring where viable.27
To ensure the most effective use of grant funding to help achieve affordable safe
drinking water, targeting compliance assistance funding to the systems most in need
should be a priority. It is important, however, that grants not be given to
disadvantaged systems that, after the grant, will not have managerial, technical, and
financial capacity to operate over the long term. Since restructuring can be the most
effective tool in ensuring such long-term capacity, priority should be given to using
the funds for such restructuring purposes.
• EPA should work with other agencies to help overcome barriers to the effective use
of existing funding sources to promote small system affordability for safe drinking
water. Examples of such assistance include:
¦ Increase outreach efforts to small systems of all classes to provide information
on available funding programs.
¦ Increase the technical assistance to small water systems to address needs in
the areas of funding applications, accounting and long-range planning,
engineering and technical corrections, and record-keeping practices consistent
with the needs for funding and SDWA requirements.
¦ Improve the opportunities of small systems to acquire funding from all
sources, governmental and private. Increase the use of grant funds, zero
interest loans, and other means of assistance to low-income water systems in
need.
26 See Appendix 1 for additional comments.
27
See Appendix 1 for minority views.
54
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NDWAC Affordability Recommendations, July 2003
¦ Analyze methods of removing institutional barriers at both the State and
federal levels that prevent small systems from obtaining funding and
complying with SDWA requirements in an affordable manner.
¦ Establish new, and expand existing, sources of funding to provide assistance
to small systems in all areas of achieving and keeping system capacity.
• Provide additional funding beyond the current DWSRF funding for small systems to
adopt cooperative strategies as broadly defined in section 4.2.1.
Cooperation between small systems can take many forms. It is one of the best
methods for allowing small systems to achieve financial, managerial, and technical
capacity for long-term sustainability as well as to meet compliance requirements
without the need to use variance technologies.
• Explore and consider the use of other state and federal agencies, such as the U.S.
Army Corps of Engineers and the Bureau of Reclamation, to assist small drinking
water-related projects.
By expanding the use of such existing programs in the ways discussed above, compliance
requirements may be achieved without undue cost and without the need to use variance
technologies.
55
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NDWAC Affordability Recommendations, July 2003
TABLE 2: RATEMAKING TABLE - LIFELINE RATES EXAMPLE, ALL CUSTOMERS ELIGIBLE, IN DOLLARS
A. EXAMPLE OF LIFELINE RATES USING SERVICE CHARGE AND CONSUMPTION CHARGE TARIFF DESIGN
COMPARISON OF UNIFORM CONSUMPTION RATE AND INCLINING BLOCK RATE
Customer Base
Modified Cost of Service Rates
Uniform Lifeline Rates
Inclining Block Lifeline Rates
Monthly
Total
Monthly
Consumpt.
Monthly
Total
Monthly
Consumpt.
Monthly
Total
Monthly
Consumpt.
Monthly
Total
Consumption
Number
Consumption
Service
Charge
Charge
Annual
Service
Charge
Charge
Annual
Service
Charge
Charge
Annual
(1.000 Gal.1
of Bills
(1.000 Gal.1
Charae
(1.000 Gal.1
Der Bill
Revenues
Charae
'1.000 Gal.
Der Bill
Revenues
Charae
'1.000 Gal.
Der Bill
Revenues
1
25
25
$ 15.00
$ 3.00
$ 18.00
$ 5,400
$ 6.33
$ 4.00
$ 10.33
E 3,099
$ 5.48
$ 2.00
$ 7.48
$ 2,244
3
100
300
$ 15.00
$ 3.00
$ 24.00
$ 28,800
$ 6.33
$ 4.00
$ 18.33
E 21,996
$ 5.48
$ 2.00
$ 11.48
$ 13,776
5
200
1,000
$ 15.00
$ 3.00
$ 30.00
$ 72,000
$ 6.33
$ 4.00
$ 26.33
E 63,192
$ 5.48
$ 2.00
$ 15.48
$ 37,152
7
300
2,100
$ 15.00
$ 3.00
$ 36.00
$ 129,600
$ 6.33
$ 4.00
$ 34.33
E 123,588
$ 5.48
$ 4.00
$ 33.48
$ 120,528
10
200
2,000
$ 15.00
$ 3.00
$ 45.00
$ 108,000
$ 6.33
$ 4.00
$ 46.33
E 111,192
$ 5.48
$ 4.00
$ 45.48
$ 109,152
15
100
1,500
$ 15.00
$ 3.00
$ 60.00
$ 72,000
$ 6.33
$ 4.00
$ 66.33
E 79,596
$ 5.48
$ 4.00
$ 65.48
$ 78,576
20
50
1,000
$ 15.00
$ 3.00
$ 75.00
$ 45,000
$ 6.33
$ 4.00
$ 86.33
E 51,798
$ 5.48
$ 6.00
$ 125.48
$ 75,288
30
25
750
$ 15.00
$ 3.00
$ 105.00
$ 31.500
$ 6.33
$ 4.00
$ 126.33
E 37.899
$ 5.48
$ 6.00
$ 185.48
$ 55.644
Total
1,000
8,675
$ 492,300
$ 492,360
$ 492,360
B. EXAMPLE OF LIFELINE RATES USING MINIMUM BILL AND CONSUMPTION CHARGE TARIFF DESIGN
COMPARISON OF UNIFORM CONSUMPTION RATE AND INCLINING RATE USING 5,000 GALLONS PER MONTH MINIMUM CONSUMPTION
Cu
stomer Ba:
>e
Modified Cost of Service Rates
Uniform Lifeline Rates
Inclinina Block Lifeline Rates
Monthly
Total
Monthly
Consumpt.
Monthly
Total
Monthly
Consumpt.
Monthly
Total
Monthly
Consumpt.
Monthly
Total
Consumption
Number
Consumption
Service
Charge
Charge
Annual
Service
Charge
Charge
Annual
Service
Charge
Charge
Annual
(1,000 Gal.1
of Bills
(1,000 Gal.1
Charae
(1,000 Gal.1
per Bill
Revenues
Charae
'1,000 Gal.
per Bill
Revenues
Charae
'1,000 Gal.
per Bill
Revenues
1
25
25
$ 29.10
NA
$ 29.10
$ 8,730
$ 21.00
NA
$ 21.00
E 6,300
$ 17.72
NA
$ 17.72
$ 5,316
3
100
300
$ 29.10
NA
$ 29.10
$ 34,920
$ 21.00
NA
$ 21.00
E 25,200
$ 17.72
NA
$ 17.72
$ 21,264
5
200
1,000
$ 29.10
NA
$ 29.10
$ 69,840
$ 21.00
NA
$ 21.00
E 50,400
$ 17.72
NA
$ 17.72
$ 42,528
7
300
2,100
$ 29.10
$ 3.00
$ 35.10
$ 126,360
$ 21.00
$ 5.04
$ 31.08
E 111,888
$ 17.72
$ 5.00
$ 27.72
$ 99,792
10
200
2,000
$ 29.10
$ 3.00
$ 44.10
$ 105,840
$ 21.00
$ 5.04
$ 46.20
E 110,880
$ 17.72
$ 5.00
$ 42.72
$ 102,528
15
100
1,500
$ 29.10
$ 3.00
$ 59.10
$ 70,920
$ 21.00
$ 5.04
$ 71.40
E 85,680
$ 17.72
$ 5.00
$ 67.72
$ 81,264
20
50
1,000
$ 29.10
$ 3.00
$ 74.10
$ 44,460
$ 21.00
$ 5.04
$ 96.60
E 57,960
$ 17.72
$ 7.50
$ 130.22
$ 78,132
30
25
750
$ 29.10
$ 3.00
$ 104.10
$ 31,230
$ 21.00
$ 5.04
$ 147.00
E 44,100
$ 17.72
$ 7.50
$205.22
$ 61,566
Total
1,000
8,675
$ 492,300
$ 492,408
$ 492,390
56
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NDWAC Affordability Recommendations, July 2003
TABLE 3: RATEMAKING TABLE - AFFORDABILITY RATES EXAMPLE, LIFELINE FOR LOW-INCOME CUSTOMERS ONLY, IN DOLLARS
III
A. EXAMPLE OF LIFELINE RATES USING SERVICE CHARGE AND CONSUMPTION CHARGE TARIFF DESIGN
COMPARISON OF UNIFORM CONSUMPTION RATE AND INCLINING BLOCK RATE
Custo
ner Base
Uniform Lifeline Rates for Elidible Customers
Inolininn Block I ifeline Rates for Fliaible Customers
Monthly
No. of
Total
Monthly
Consumpt.
Lifeline
Lifeline
Normal
Total
Monthly
Consumpt.
Lifeline
Lifeline Normal
Total
Consumption
Number
Low Income
Consumption
Service
Charoe
Service
Monthly
Monthly
Annual
Service
Charae
Service
Monthly Monthly
Annual
(1.000 Gal.)
of Bills
Eliaible Bills
(1.000 Gal.)
Charoe
(1.000 Gal.)
Charae
Charae
Charae
Revenues
Charae
(1.000 Gal.1
Charae
Charae Charae
Revenues
1
25
5
25
$ 15.00
$ 3.16
$ 5.75
$ 8.91
$ 18.16
$ 4.893
$ 10.75
$ 2.01
$ 5.00
$ 7.01 $ 12.76
$ 3.483
3
100
18
300
$ 15.00
$ 3.16
$ 5.75
$ 15.23
$ 24.48
$ 27.378
$ 10.75
$ 2.01
$ 5.00
$ 11.03 $ 16.78
$ 18.894
5
200
35
1.000
$ 15.00
$ 3.16
$ 5.75
$ 21.55
$ 30.80
$ 70.035
$ 10.75
$ 2.01
$ 5.00
$ 15.05 $ 20.80
$ 47.505
7
300
45
2.100
$ 15.00
$ 3.16
$ 5.75
$ 27.87
$ 37.12
$ 128.637
$ 10.75
$ 3.52
$ 5.00
$ 29.64 $ 35.39
$ 124.299
10
200
32
2.000
$ 15.00
$ 3.16
$ 5.75
$ 37.35
$ 46.60
$ 108.288
$ 10.75
$ 3.52
$ 5.00
$ 40.20 $ 45.95
$ 108.072
15
100
10
1.500
$ 15.00
$ 3.16
$ 5.75
$ 53.15
$ 62.40
$ 73.770
$ 10.75
$ 3.52
$ 5.00
$ 57.80 $ 63.55
$ 75.570
20
50
4
1.000
$ 15.00
$ 3.16
$ 5.75
$ 68.95
$ 78.20
$ 46.476
$ 10.75
$ 5.03
$ 5.00
$105.60 $111.35
$ 66.534
30
25
1
750
$ 15.00
$ 3.16
$ 5 75
$100 55
$ 1 09 80
$ 32 829
$ 10 75
$ 5 03
$ 5 00
$155 90 $161 65
$ 48 426
Total
1.000
150
8.675
$ 492.306
$ 492.783
B. EXAMPLE OF LIFELINE RATES USING MINIMUM BILL AND CONSUMPTION CHARGE TARIFF DESIGN
COMPARISON OF UNIFORM CONSUMPTION RATE AND INCLINI
NG RATE USING 5.000 GALLONS PER MONTH MINIMUM CONSUMPTION
Custo
ner Base
Uniform Lifeline Rates for Elidible Customers
Inclinina Block I ifeline Rates for Fliaible Customers
Monthly
No. of
Total
Monthly
Consumpt.
Lifeline
Lifeline
Normal
Total
Monthly
Consumpt.
Lifeline
Lifeline Normal
Total
Consumption
Number
Low Income
Consumption
Service
Charae
Minimum
Monthly
Monthly
Annual
Service
Charae
Minimum
Monthly Monthly
Annual
(1.000 Gal.)
of Bills
Elidible Bills
(1.000 Gal.)
Charoe
(1.000 Gal.1
Bill
Charae
Charae
Revenues
Charae
(1.000 Gal.l
Bill
Charae
Charae
Revenues
1
25
5
25
$ 29.10
$ 10.02
$ 10.02
$ 29.10
$ 7.585
$ 28.00
$ 9.77
$ 9.77
$ 28.00
$ 7.306
3
100
18
300
$ 29.10
$ 10.02
$ 10.02
$ 29.10
$ 30.799
$ 28.00
$ 9.77
$ 9.77 $ 28.00
$ 29.662
5
200
35
1.000
$ 29.10
$ 10.02
$ 10.02
$ 29.10
$ 61.826
$ 28.00
$ 9.77
$ 9.77 $ 28.00
$ 59.543
7
300
45
2.100
$ 29.10
$ 3.72
$ 10.02
$ 17.46
$ 36.54
$ 121.241
$ 28.00
$ 3.38
$ 9.77
$ 16.53 $ 34.76
$ 115.292
10
200
32
2.000
$ 29.10
$ 3.72
$ 10.02
$ 28.62
$ 47.70
$ 107.153
$ 28.00
$ 3.38
$ 9.77
$ 26.67 $ 44.90
$ 100.760
15
100
10
1.500
$ 29.10
$ 3.72
$ 10.02
$ 47.22
$ 66.30
$ 77.270
$ 28.00
$ 3.38
$ 9.77
$ 43.57 $ 61.80
$ 71.972
20
50
4
1.000
$ 29.10
$ 3.72
$ 10.02
$ 65.82
$ 84.90
$ 50.024
$ 28.00
$ 5.07
$ 9.77
$ 85.82 $104.05
$ 61.555
30
25
1
750
$ 29.10
$ 3 7?
$ 10 0?
$1 03 0?
$12? 10
$ 36 401
$ 28 00
$ 5 07
$ 9 77
$136 52 $154 75
$ 46 206
Total
1.000
150
8.675
$ 492.300
$ 492.297
57
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NDWAC Affordability Recommendations, July 2003
TABLE 4: RATEMAKING TABLES - LIFELINE RATES EXAMPLE, ALL CUSTOMERS ELIGIBLE, IN PERCENT OF MHI
A. EXAMPLE OF LIFELINE RATES USING SERVICE CHARGE AND CONSUMPTION CHARGE TARIFF DESIGN
COMPARISON OF UNIFORM CONSUMPTION RATE AND INCLINING BLOCK RATE
Customer E
ase
Modified Cost of Service Rates
Uniform Lifeline Rates
Inclinina Block Lifeline Rates
Median
HH Water
Monthly
Consumpt.
Monthly
Total Bill
Monthly
Consumpt.
Monthly
Total Bill
Monthly
Consumpt.
Monthly
Total Bill
Number
HH Income
Cost
% of
Service
Charge
Charge
as % of
Service
Charge
Charge
as % of
Service
Charge
Charge
as % of
of Bills
(Median Svsteml
($/Yr.1
MHI
Charae
(1.000 Gal.1
Der Bill
MHI
Charae
(1.000 Gal.1
Der Bill
MHI
Charae
(1.000 Gal.1
Der Bill
MHI
25
$ 38,713
$ 197
0.5%
$ 15.00
$ 3.00
$ 18.00
0.6%
$ 6.33
$ 4.00
$ 10.33
0.3%
$ 5.48
$ 2.00
$ 7.48
0.2%
100
$ 38,713
$ 197
0.5%
$ 15.00
$ 3.00
$ 24.00
0.7%
$ 6.33
$ 4.00
$ 18.33
0.6%
$ 5.48
$ 2.00
$ 11.48
0.4%
200
$ 38,713
$ 197
0.5%
$ 15.00
$ 3.00
$ 30.00
0.9%
$ 6.33
$ 4.00
$ 26.33
0.8%
$ 5.48
$ 2.00
$ 15.48
0.5%
300
$ 38,713
$ 197
0.5%
$ 15.00
$ 3.00
$ 36.00
1.1%
$ 6.33
$ 4.00
$ 34.33
1.1%
$ 5.48
$ 4.00
$ 33.48
1.0%
200
$ 38,713
$ 197
0.5%
$ 15.00
$ 3.00
$ 45.00
1.4%
$ 6.33
$ 4.00
$ 46.33
1.4%
$ 5.48
$ 4.00
$ 45.48
1.4%
100
$ 38,713
$ 197
0.5%
$ 15.00
$ 3.00
$ 60.00
1.9%
$ 6.33
$ 4.00
$ 66.33
2.1%
$ 5.48
$ 4.00
$ 65.48
2.0%
50
$ 38,713
$ 197
0.5%
$ 15.00
$ 3.00
$ 75.00
2.3%
$ 6.33
$ 4.00
$ 86.33
2.7%
$ 5.48
$ 6.00
$125.48
3.9%
25
$ 38,713
$ 197
0.5%
$ 15.00
$ 3.00
$ 105.00
3.3%
$ 6.33
$ 4.00
$ 126.33
3.9%
$ 5.48
$ 6.00
$185.48
5.7%
1.000
Monthly Bill =
$ 16
B. EXAMPLE OF LIFELINE RATES USING MINIMUM BILL AND CONSUMPTION CHARGE TARIFF DESIGN
COMPARISON OF UNIFORM CONSUMPTION RATE AND INCLINING RATE USING 5,000 GALLONS PER MONTH MINIMUM CONSUMPTION
Customer E
ase
Modified Cost of Service Rates
Uniform Lifeline Rates
Inclinina Block Lifeline Rates
Median
HH Water
Monthly
Consumpt.
Monthly
Total Bill
Monthly
Consumpt.
Monthly
Total Bill
Monthly
Consumpt.
Monthly
Total Bill
Number
HH Income
Cost
% of
Service
Charge
Charge
as % of
Service
Charge
Charge
as % of
Service
Charge
Charge
as % of
of Bills
(Median Svsteml
($/Yr.1
MHI
Charae
(1.000 Gal.1
Der Bill
MHI
Charae
(1.000 Gal.1
Der Bill
MHI
Charae
(1.000 Gal.1
Der Bill
MHI
25
$ 38,713
$ 197
0.5%
$ 29.10
NA
$ 29.10
0.9%
$ 21.00
NA
$ 21.00
0.7%
$ 17.72
NA
$ 17.72
0.5%
100
$ 38,713
$ 197
0.5%
$ 29.10
NA
$ 29.10
0.9%
$ 21.00
NA
$ 21.00
0.7%
$ 17.72
NA
$ 17.72
0.5%
200
$ 38,713
$ 197
0.5%
$ 29.10
NA
$ 29.10
0.9%
$ 21.00
NA
$ 21.00
0.7%
$ 17.72
NA
$ 17.72
0.5%
300
$ 38,713
$ 197
0.5%
$ 29.10
$ 3.00
$ 35.10
1.1%
$ 21.00
$ 5.04
$ 31.08
1.0%
$ 17.72
$ 5.00
$ 27.72
0.9%
200
$ 38,713
$ 197
0.5%
$ 29.10
$ 3.00
$ 44.10
1.4%
$ 21.00
$ 5.04
$ 46.20
1.4%
$ 17.72
$ 5.00
$ 42.72
1.3%
100
$ 38,713
$ 197
0.5%
$ 29.10
$ 3.00
$ 59.10
1.8%
$ 21.00
$ 5.04
$ 71.40
2.2%
$ 17.72
$ 5.00
$ 67.72
2.1%
50
$ 38,713
$ 197
0.5%
$ 29.10
$ 3.00
$ 74.10
2.3%
$ 21.00
$ 5.04
$ 96.60
3.0%
$ 17.72
$ 7.50
$130.22
4.0%
25
$ 38.713
$ 197
0.5%
$ 29.10
$ 3.00
$ 104.10
3.2%
$ 21.00
$ 5.04
$ 147.00
4.6%
$ 17.72
$ 7.50
$205.22
6.4%
1.000
Monthly Bill =
CD
to
58
-------
NDWAC Affordability Recommendations, July 2003
TABLE 5: RATEMAKING TABLES - AFFORDABILITY RATES EXAMPLE, LIFELINE FOR LOW-INCOME CUSTOMERS ONLY, IN PERCENT OF MHI
A. EXAMPLE OF LIFELINE RATES USING SERVICE CHARGE AND CONSUMPTION CHARGE TARIFF DESIGN
COMPARISON OF UNIFORM CONSUMPTION RATE AND INCLINING BLOCK RATE
Customer Base
Uniform 1 ifeline Rates for Flioihle Customers
Inclinino Block I ifeline Rates for Flioihle Customers
Median
No. of
Median
HH Water
% of MHI
% of MHI
Monthly
Consumpt.
Lifeline
Lifeline
Normal
Bill as %
Bill as %
Monthly
Consumpt.
Lifeline
Lifeline
Normal
Bill as %
Bill as %
Total
HH Income
Low Income
HH Income
Cost
(Median
(10th %ile
Service
Charge
Service
Monthly
Monthly
of MHI
of MHI
Service
Charge
Service
Monthly
Monthly
of MHI
of MHI
Bills
(Median Svsteml
Flioihle Rills
(10th %ile Svsteml
(SfYr.)
Svsterrrt
Svsteml
Charoe
f1 000 Gal'
Charoe
Charoe
Charoe
Lifeline
Normal
Charoe
f1 000 Gal'
Charoe
Charoe
Charoe
Lifeline
Normal
25
$ 38,713
5
$ 27,876
$ 197
0.5%
0.7°/
$ 15.00
$ 3.16
$ 5.75
$ 8.91
$ 18.16
0.4%
0.6°/
$ 10.75
$ 2.01
$ 5.00
$ 7.01
$ 12.76
0.3%
0.4%
100
$ 38,713
18
$ 27,876
$ 197
0.5%
0.7°/
$ 15.00
$ 3.16
$ 5.75
$ 15.23
$ 24.48
0.7%
0.8°/
$ 10.75
$ 2.01
$ 5.00
$ 11.03
$ 16.78
0.5%
0.5%
200
$ 38,713
35
$ 27,876
$ 197
0.5%
0.7°/
$ 15.00
$ 3.16
$ 5.75
$ 21.55
$ 30.80
0.9%
1.0°/
$ 10.75
$ 2.01
$ 5.00
$ 15.05
$ 20.80
0.6%
0.6%
300
$ 38,713
45
$ 27,876
$ 197
0.5%
0.7°/
$ 15.00
$ 3.16
$ 5.75
$ 27.87
$ 37.12
1.2%
1.2°/
$ 10.75
$ 3.52
$ 5.00
$ 29.64
$ 35.39
1.3%
1.1%
200
$ 38,713
32
$ 27,876
$ 197
0.5%
0.7°/
$ 15.00
$ 3.16
$ 5.75
$ 37.35
$ 46.60
1.6%
1.4°/
$ 10.75
$ 3.52
$ 5.00
$ 40.20
$ 45.95
1.7%
1.4%
100
$ 38,713
10
$ 27,876
$ 197
0.5%
0.7°/
$ 15.00
$ 3.16
$ 5.75
$ 53.15
$ 62.40
2.3%
1.9°/
$ 10.75
$ 3.52
$ 5.00
$ 57.80
$ 63.55
2.5%
2.0%
50
$ 38,713
4
$ 27,876
$ 197
0.5%
0.7°/
$ 15.00
$ 3.16
$ 5.75
$ 68.95
$ 78.20
3.0%
2.4°/
$ 10.75
$ 5.03
$ 5.00
$105.60
$111.35
4.5%
3.5%
25
$ 38.713
1
$ 27.876
$ 197
0.5%
0.7°/
$ 15.00
$ 3.16
$ 5.75
$ 100.55
$ 109.80
4.3%
3.4°/
$ 10.75
$ 5.03
$ 5.00
$155.90
$161.65
6.7%
5.0%
1.000
150
Monthly Bill =
$ 16 I
B. EXAMPLE OF LIFELINE RATES USING MINIMUM BILL AND CONSUMPTION CHARGE TARIFF DESIGN
COMPARISON OF UNIFORM CONSUMPTION RATE AND INCLINING RATE USING 5,000 GALLONS PER MONTH MINIMUM CONSUMPTION
Customer Base
Uniform I ifeline Rates for Flioihle Customers
Inclinino Block I ifeline Rates for Flioihle Customers
Median
No. of
Median
HH Water
% of MHI
% of MHI
Monthly
Consumpt.
Lifeline
Lifeline
Normal
Bill as %
Bill as %
Monthly
Consumpt.
Lifeline
Lifeline
Normal
Bill as %
Bill as %
Total
HH Income
Low Income
HH Income
Cost
(Median
(10th %ile
Service
Charge
Service
Monthly
Monthly
of MHI
of MHI
Service
Charge
Service
Monthly
Monthly
of MHI
of MHI
Rilk
(1 rmnrcar
(1 nnn rcai'
25
$ 38,713
5
$ 27,876
$ 197
0.5%
0.7°/
$ 29.10
$ -
$ 10.02
$ 10.02
$ 29.10
0.4%
0.9°/
$ 28.00
$ -
$ 9.77
$ 9.77
$ 28.00
0.4%
0.9%
100
$ 38,713
18
$ 27,876
$ 197
0.5%
0.7°/
$ 29.10
$ -
$ 10.02
$ 10.02
$ 29.10
0.4%
0.9°/
$ 28.00
$ -
$ 9.77
$ 9.77
$ 28.00
0.4%
0.9%
200
$ 38,713
35
$ 27,876
$ 197
0.5%
0.7°/
$ 29.10
$ -
$ 10.02
$ 10.02
$ 29.10
0.4%
0.9°/
$ 28.00
$ -
$ 9.77
$ 9.77
$ 28.00
0.4%
0.9%
300
$ 38,713
45
$ 27,876
$ 197
0.5%
0.7°/
$ 29.10
$ 3.72
$ 10.02
$ 17.46
$ 36.54
0.8%
1.1°/
$ 28.00
$ 3.38
$ 9.77
$ 16.53
$ 34.76
0.7%
1.1%
200
$ 38,713
32
$ 27,876
$ 197
0.5%
0.7°/
$ 29.10
$ 3.72
$ 10.02
$ 28.62
$ 47.70
1.2%
1.5°/
$ 28.00
$ 3.38
$ 9.77
$ 26.67
$ 44.90
1.1%
1.4%
100
$ 38,713
10
$ 27,876
$ 197
0.5%
0.7°/
$ 29.10
$ 3.72
$ 10.02
$ 47.22
$ 66.30
2.0%
2.1°/
$ 28.00
$ 3.38
$ 9.77
$ 43.57
$ 61.80
1.9%
1.9%
50
$ 38,713
4
$ 27,876
$ 197
0.5%
0.7°/
$ 29.10
$ 3.72
$ 10.02
$ 65.82
$ 84.90
2.8%
2.6°/
$ 28.00
$ 5.07
$ 9.77
$ 85.82
$104.05
3.7%
3.2%
25
$ 38.713
1
$ 27.876
$ 197
0.5%
0.7°/
$ 29.10
$ 3.72
$ 10.02
$ 103.02
$ 122.10
4.4%
3.8°/
$ 28.00
$ 5.07
$ 9.77
$136.52
$154.75
5.9%
4.8%
1.000
150
Monthly Bill =
$ 16 I
59
-------
-------
NDWAC Affordability Recommendations, July 2003
4.0 System-Level Strategies for Addressing Affordability
Challenges
4.1 Introduction
The affordability of SDWA compliance is primarily driven by the cost of the technical
solution(s) required to provide quality drinking water. Minimizing the capital and operating
costs of this solution is a critical factor in establishing whether public health protection can be
affordability achieved. To minimize costs and promote system sustainability, all options that
achieve full regulatory compliance need to be considered prior to and during the small system
variance process. These approaches include cooperation/consolidation/regionalization,
decentralized treatment, and capacity optimization. In most cases, system-specific solutions are
required to minimize small system regulatory compliance costs. System size, location,
geography, type and level of contaminant, and current system operations must all be considered
when determining the most cost-effective approach to regulatory compliance.
Clearly, strategies that reduce a system's total regulatory compliance cost will promote
increased compliance and the associated public health benefits. The cost of compliance solutions
can be reduced through either creative funding incentives or by innovative management,
technical, and/or operating solutions. This section explores non-financial approaches that reduce
the cost of small system compliance. By expanding compliance options beyond individual
contaminant removal by conventional treatment, more cost-effective solutions can be identified
and implemented and the need for variances reduced. This section focuses on cooperation,
treatment technology, alternatives to central treatment, and system flow capacity optimization as
methods of promoting affordable compliance.
4.2 Discussion
4.2.1 Cooperation
Cooperative efforts among water systems can result in technical and economic value and
potentially reduce the cost of regulatory compliance. Over the years, these efforts have been
referred to as "regionalization," initially meaning a physical consolidation of independent water
systems and more recently including cooperative purchasing, financing, operation, or other
management strategies that may or may not include the actual physical connection of one system
to another. State and federal regulators use the term "restructuring" to cover the full range
cooperative activities.
The Work Group believes that high priority should be given to an increase in cooperative
activities of all kinds and that the terminology used should facilitate an objective evaluation of
the costs and benefits of cooperative activities. To one degree or another, State and federal
policy, regulations, and financial assistance programs have increasingly emphasized the benefits
and need for these broadly defined "consolidation" strategies, including economies of scale for
61
-------
NDWAC Affordability Recommendations, July 2003
both capital and operating costs; enhanced access to financial assistance; improved use of
technology; heightened capacity for dealing with drought, pollution or other unforeseen
problems; and better access to qualified planners and operators.
While the most recent round of SDWA amendments recognizes the value of such efforts
in addressing drinking water affordability, federal law does not impose specific requirements for
consolidation and cooperation, and the Work Group had considerable difficulty in finding broad-
scale measures of progress on this point. EPA's database for Community Water Supply Systems
shows that many States have decreasing numbers in their inventories of systems, but those data
alone do not offer a complete and accurate measure of the remaining potential or need for
cooperation within each State. For example, in Pennsylvania, which has an impressive program
of financial assistance promoting cooperation, the total number of small systems increased by 14
percent between 1994 and 2001, while the number of consolidated systems increased by 72
percent so that the resulting number of standalone small systems increased by just 7 percent.
Overall, the Work Group relied heavily on anecdotal information from knowledgeable sources,
case studies, and examples rather than specific, objective measures of capacity development and
consolidation.
EPA has provided resources and suggestions to the States for their triennial capacity-
building reports to governors, stipulated in the SDWA. These include strategies for assessing the
long-term viability of systems; models for improving the technical, managerial, and financial
capacity of systems; use of funds to improve capacity; and informing the public of the benefits of
consolidation and cooperation. States continue to do a better job in this area as evidenced by a
number of State initiatives and programs, including water delivery planning in the States of
Washington, Maryland, and Connecticut; the Virginia Department of Health technical assistance
program, which includes independent contractor assistance for on-site operations, source water
protection planning, and compliance and business plan development; the Pennsylvania program,
which includes targeted funding for improving the condition of small systems; and other
programs in Kentucky, South Dakota, Texas, and elsewhere.
Overall, the information reviewed indicates that many States have increased their
emphasis on local capacity development and cooperative efforts, but that large numbers of small
systems still act to preserve their independence, sometimes even in the face of strong economic
pressures to the contrary. For example, the Virginia Department of Health's 1999 survey of
3,781 small water systems indicated that half would not be willing to consolidate, and only 22
percent said they would be interested.
The Work Group believes that new technologies, improved communications, and the
increasing availability of private-sector services have created new opportunities for small
systems to gain the benefits of cooperative action and still preserve management control over
rates and basic policy decisions. Thus, it may be possible for EPA to further support the States
in creating a variety of incentives for cooperative action. While the problems facing many small
systems are common, there are significant differences that should be recognized in the creation
of any new programs. Almost every small system would benefit from increased cooperation; the
questions are what the possibilities of cooperation are and how government can act to stimulate
cooperative action.
62
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NDWAC Affordability Recommendations, July 2003
Drivers for Cooperation
Listed below are some of the issues that should encourage systems to cooperate.
• A variety of State and federal initiatives (both regulatory and financial) have steadily
increased pressure to cooperate, including enforcement of quality standards; State
water service planning programs; State requirements for reporting on technical,
managerial, and financial capacity by small systems; and federal and State funding
assistance for consolidation and cooperation programs.
• The high cost of construction and operation of treatment works, distribution system
improvements, and interconnections that are needed to achieve compliance.
• The increasing technical requirements for operation, maintenance, and oversight
including monitoring and laboratory work for treatment systems.
• Increasing common interests of systems within a region or watershed with regard to
planning and regulatory oversight.
• Potential opportunities for performance of difficult new operating and customer
service functions by larger nearby utilities and/or the private sector.
• Regional problems with drought, pollution, or other restrictions on water supply.
• Increasing public dissatisfaction with the quality of drinking water as indicated by the
purchase of individual solutions such as POU devices and bottled water.
Barriers to Cooperation
While there are numerous economic and operating advantages of cooperation, there are
also many barriers that discourage the implementation of cooperative activities. These barriers
include:
• Determination to maintain independent control of all utility functions, even when
costs are significantly higher.
• Lack of technical experience or knowledge about planning, technology, operations,
and maintenance.
• Geographic barriers, including long distances between systems or separation by
mountains, rivers, or transportation routes.
• Public or institutional concern about land use factors, including issues related to
expanding population and economic development.
63
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NDWAC Affordability Recommendations, July 2003
• Lack of funding for planning and capital investment, or retention of needed expertise
that is necessary to implement any solution, particularly the least costly.
• Absence of an institutional vehicle for local cooperation.
• Lack of business incentives, particularly in small non-profits, to protect and improve
water system assets.
• Divergent philosophies of integrating systems, such as different levels of service,
finished water qualities, system condition, debt service, rate levels and structure, and
general financial viability.
• Lack of leadership for championing cooperation at the State or local level.
Overcoming Barriers
Past cooperative efforts, including physical consolidation of small, non-viable
neighboring systems, have been mandated under some State statutes, supported with incentives
for some PUC-regulated utilities, and offered enforcement delay incentives. Many have thought
that with sufficient grants, an atmosphere of crisis, and incentives, consolidation would occur
broadly all around the country. In most areas, however, this appears not to have been the case.
Cooperation has occurred, but needs to be continued and expanded to achieve a high potential for
improvement and compliance.
Members of the Work Group heard strong evidence from practitioners in the field that the
historic institutional determination to preserve local independence has been the single most
serious barrier to cooperation. The solutions identified below are designed to overcome this and
other barriers. In general, the skillful use of assistance when combined with new State or
regional level initiatives can achieve a significantly higher level of cooperative effort in a variety
of areas. We recognize that there is no single program or effort that will overcome the small
system economic challenge. In some areas, fully competent systems exist alongside systems that
are financially and technically challenged, and the Work Group sees these situations as being the
most fruitful candidates for cooperative solutions.
The Work Group strongly supports the reorientation of the DWSRF and related grant
programs to assist those systems with inadequate collective rate repayment capacity with
implementation of cooperative solutions that improve the systems' long-term viability. EPA can
also foster greater cooperation and consolidation by working to create better measures of
progress in this area and modifying the triennial reporting requirements to include these
measures. This may be accomplished by continuing improvements to the EPA Community
Water Supply inventory and by working with the States to find additional reliable indicators of
improvement through consolidation and cooperation.
64
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NDWAC Affordability Recommendations, July 2003
Recommendations to Enhance Cooperation
On balance, there has been a steady increase in cooperative efforts ranging from
consolidation to focused shared services. The following recommendations (followed by detailed
discussions) are offered in hopes of accelerating existing programs and creating the necessary
impetus in areas where cooperation and consolidation have been viewed with suspicion.
• New and expanded State leadership is essential to promote cooperation among small
systems. Cooperative efforts designed for an area or region are essential if the cost of
compliance is to be reduced. These efforts should be funded through new
appropriations or through re-allocation of a portion of DWSRF funds that are
currently being applied to individual system projects. State-managed cooperative
efforts should include:
¦ Providing managerial, technical, and planning assistance for small systems,
including expanded use of the private sector and large central utilities that can
provide these services.
¦ Public outreach to small systems to provide support and information on the
value of cooperative and consolidation efforts.
¦ Conducting focused outreach programs to regional groups directly or in
conjunction with others, and allowing cooperation expenditures by these
groups to be considered in federal and State financial assistance programs.
¦ Continuing and improving methods of recordkeeping and reporting progress
in capacity-building programs (consistent with SDWA capacity development
provisions) and reporting progress in achieving small system cooperation and
consolidation to EPA and the NDWAC. EPA and the States should use this
information to develop and maintain an effective small system cooperation
database that can be used to promote cooperation.
¦ Offering meaningful incentives for cooperative efforts and limiting financial
and technical support for individual system compliance solutions to only those
small systems that have assessed cooperative options and found them to be
infeasible or not cost-effective.
¦ Offering assistance to community groups, system operators, and owners in the
development of governance, advisory, or other participatory vehicles to ensure
a continued role for these stakeholders when cooperative solutions are
implemented.
28
See Appendix 1 for minority views.
65
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NDWAC Affordability Recommendations, July 2003
These recommendations are supported by the following conclusions:
Strengthened State Leadership
Given the wide diversity of small systems and their geographic, economic and social
circumstances, it is clear that there is no one-size-fits-all solution to small system affordability.
Where consolidation and cooperation have been successfully used, however, it is clear that one
element is generally present. Leadership from individuals or institutions has been a key factor in
cooperation successes, and the Work Group believes that the States are in the best position to
generate the leadership that will promote safe and affordable water over the long term. States
should give higher priority for assistance to cooperative efforts of all kinds and implement the
following programs.
• Increase the proportion of resources currently allocated to States from federal sources
to assist small utilities in cooperative efforts. State funding agencies should also link
future assistance to success in taking advantage of cost-savings opportunities from
operating water and wastewater systems in conjunction with one another.
• Enhance public education, with a strong emphasis on the value of cooperative efforts.
• Permit the creation of new small systems only if there is a clear demonstration that
future financial, managerial, and technical capacity will be available at an affordable
rate.
• Ensure that construction of any small systems anticipates future opportunities for
consolidation and coordination.
• Create direct and appropriate public linkages between enforcement and cooperative
action, addressing compliance problems of small systems with enforcement options
that maximize cooperation and consolidation in order to address long-term as well as
short-term problems.
• Initiate planning programs that provide an opportunity to take full advantage of
economies of scale that can be achieved with water service cooperation and
consolidation in critical regions or statewide.
New State Activities
New efforts are needed in the initiation of cooperative activities including preliminary
planning and, financial and institutional strategies. States should also consider two new
programs involving State or delegated activities, under which the services of independent private
contractors, non-profit entities, and existing water utilities are made available to local systems
for project development and other tasks identified below. In general, such services should be
under the guidance of stakeholder groups at statewide, regional, and local levels.
66
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NDWAC Affordability Recommendations, July 2003
Area-wide Contractors
Qualified non-profit entities or private companies, including existing investor-owned
water utilities, with expertise in such fields as engineering, analysis, and operations should be
mobilized to provide service to groups of small utilities. Incentives are needed to reduce start-up
risks for such contractors, and service-providers should be selected in a competitive process that
is administered by the State or other appropriate unit of government. When private contractors
are used to achieve efficiencies and obtain expertise, these services must be appropriately
controlled or regulated (through contracts and other legal methods) to protect consumer interests.
Cooperating Entities
A variety of techniques should be used to provide services to small utilities. They
include not only direct service outreach by government agencies but also assistance to existing
larger utilities (public and private), which in turn service smaller systems. In order to overcome
barriers to implementing such programs, service contracts can provide for shared liabilities in the
conduct of the particular function. If necessary, new legislation should be sought to limit
liability of a capable service-providing entity so that the liability is not transferred except in the
case of negligence.
Local Roles
Many small communities place a high value on sustaining a measure of local
independence and on entrusting their own citizens with important decision-making authority.
Thus, the prospects of dissolving a local water board or authority can be met with solid
resistance, even in instances where more affordable rates would be achievable with
consolidation. Creating meaningful future roles for existing owners and individuals with a stake
in each water system, then, is perhaps the essential element in overcoming the negative
perceptions of system takeover. These roles may be required for a short period of time or
function indefinitely to ensure that future water rates and local service conditions continue to
reflect the needs of the community. These activities can be conducted through an informal
association, a more formal association similar to a homeowners' association, a joint exercise of
powers for governmental units, or through a cooperating agreement among participants.
Types of Services
• Planning: development of plans and a cost-sharing basis for any joint activities
ranging from physical consolidation to sharing of common services.
• Monitoring and Analysis: sample collection, laboratory analysis, and regulatory
representation in communication.
• Facilities: design and construction of needed improvements that could range from
treatment additions to regional consolidations.
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• Operations: provide master State (or regional) competitively selected contractor who
would offer identified services including treatment operations (circuit rider),
installation and operation of water treatment facilities, Supervisory Control and Data
Acquisition systems , and emergency response.
• Administration: create a central private or public service for meter reading, billing,
and consumer advice including water conservation.
Allocation of Assistance
Assistance would be allocated to utilities with affordability issues, giving priority to
cooperative solutions, with analysis based on a study of overall operations as well as each utility
function. If initial planning shows continuing independent treatment and/or operations to be the
most cost-effective, funding should be provided.
Cooperation, which achieves optimal long-term investment value, may result in increased
operation and maintenance costs. In some situations the locally borne operating costs
(particularly for energy) may deter agreement on an integrated cooperative solution. In these
situations, short-term financial relief may be required through individual customer subsidies or
by spreading cost across the consolidated systems.
If a way can be found to direct the value of DWSRF subsidies to the benefit of individual
low-income customers, particularly in cases that justify cooperative action, the combined
financial strength of utilities could be enhanced. The allocation would be directed through the
utility to individual users within the system who cannot pay a fully allocated share. The amount
of the support would be determined by the "affordability gap" and would not result in a cost
reduction for individual users that could afford their full allocated share. (See section 3 on
financial assistance strategies.)
4.2.2 National-Based Technology Solutions
The technology to treat and deliver water that meets the drinking water standards is
known and available. Continuing research may lower the cost of centralized treatment and
simplify the technology, but current technology is in place to deal with all known common
contaminants. With newer technology there continues to be a need for training and additional
operations personnel. Costs for the technology are generally known and are site specific,
although costs will probably come down with widespread adoption and development. Residuals
disposal may be a problem for some of the technologies, and these costs must be considered as
part of an overall cost assessment.
Technology is available for every common drinking water contaminant regulated to date.
Groups of contaminants and the associated treatment technology are listed below.
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• Microbiological Contaminants'. Appropriate technologies exist to reduce and
inactivate every regulated microbiological contaminant encountered to date. Using
chlorine as a disinfectant continues to be very effective, but may increase disinfection
byproducts. Many utilities are switching to other disinfectants to deal with this issue.
• Inorganic Contaminants: Technology exists to reduce the commonly encountered
inorganic contaminants, but treatment of some of these may produce problem
residuals that require special disposal technology. This would apply to radioactive-
chemicals such as radium.
• Organic Contaminants: Technology exists that can reduce organic contamination,
but there may be secondary issues depending upon the technology selected. For
example, granular activated carbon (GAC) must be replaced and/or regenerated at
some frequency. Regeneration is by heat and this may pose some air quality issues.
Barriers
Some barriers to implementing compliance technology are listed below.
• Capital Costs: Capital costs for all of the technologies are known and will vary from
site to site because of individual site conditions, land costs, residuals disposal, local
zoning, etc. For example, pack tower aeration (PTA) is appropriate technology for
many volatile organic compounds, but installing PTA in a residential neighborhood
may require noise abatement and carbon scrubbers for the off-gas. These costs
cannot be predicted on a general basis and must be done site by site.
• Operation and Maintenance Costs: Operation and maintenance (O&M) costs are
known for all of the technologies and will vary from site to site because of the
differences in the equipment. Additional costs will be incurred as the technology
becomes more complicated and more operator training needs are identified.
Residuals disposal may be considered to be an O&M cost, and if the residual is
deemed "hazardous," as with some of the arsenic treatment options, the disposal cost
can escalate rapidly.
• New Technology Development: The development of new technologies may be
delayed because of the cost for development and the length of time it takes to obtain
appropriate regulatory approval and acceptance. There may be more need for an
expanded National Certification Program to accelerate the approval process for new
technologies.
• Regulatory: The regulatory procedures for currently available technology are in
place, but as more and more complicated treatment is employed more training and
information will have to be provided to the States. For example, more membrane
technology is being installed for filtration, but most State regulatory agencies have
not had a great deal of experience inspecting these units and training is needed.
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• Business Strategies: As more complicated technology is employed, there will be
more opportunities for "third party" operations and technical support. New
technology for new contaminants will lower costs and provide simpler solutions in
some cases. This will almost surely occur with development of new treatment
technology for arsenic.
Overcoming Barriers
The two major barriers are money and training to operate the newer technologies. There
are also residual disposal questions that need to be answered, but these translate into additional
costs. New technology testing and approval procedures can be streamlined. Additional work
will have to be done to identify the training needs of operators and regulators. Third party
operations may be appropriate to improve the economies of scale for more complex
technologies.
Super BAT
One concept that has been suggested for small systems is the development of a "Super
Best Available Technology" (Super BAT). This proposal suggests a monitoring program and
treatment train, which can be designed and installed to treat for every MCL currently in the
regulations and for those that are likely to be promulgated in the future. This treatment would
only be for small systems, population 10,000 or less, and would differ for groundwater and
surface water. At a use rate of 100 gallons per capita per day, this will equate to a capacity of 1
million gallons per day. It is assumed that a new unit would be built, rather than retrofit an
existing unit.
The objective is to create an alternative compliance track for small systems, which are
confronted with a current compliance gap, and anticipate the possibility of future additional
treatment requirements. Recent technology improvements in the area of membrane separation
and disinfection show potential for small size units that could be made available through various
contractual arrangements. The treatment steps would vary depending upon the identified
contaminants and projected future regulations.
Groundwater Treatment
A typical treatment train might include all or some of the following units depending upon
the types of contaminants present:
• Pre-oxidation with chlorine;
• PTA to reduce radon and other volatile organic chemicals;
• Coagulant addition (Ferric or another chemical);
• Membrane filtration to reduce metals (arsenic) and remove microbial contaminants;
• Ozone or ultraviolet light for additional disinfection;
• Filtration with GAC to further reduce organic contaminants including disinfection by-
products;
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• Final disinfection with chloramines; and
• If nitrate is a problem ion exchange may also be included in the process.
Surface Water Treatment
A typical treatment train for rivers, lakes, springs, etc. might include all or some of the
following units depending upon the contaminants present or suspected and the quality of the
source:
• Continuous source monitoring for organic indicators;
• Pre-oxidation with chlorine;
• Coagulant addition (Ferric or other chemical);
• Sedimentation for reduction of solids;
• Membrane filtration for reduction of metals, turbidity, and microbial contaminants;
• Ozone or ultraviolet light;
• Filtration with GAC to further reduce organic contaminants including disinfection
byproducts; and
• Final disinfection with chloramines.
Other site-specific considerations are land availability, treatment residuals disposal
(sludge from membrane filtration, etc.), local zoning requirements, pumping costs, storage needs,
permitting requirements, etc. In each case, it is assumed that the best available source will be
used.
Recommendation Regarding National-Based Technology Solutions
• Recent scientific and technical developments have increased the potential for
"umbrella" compliance technologies, such as membranes. EPA should establish a
Work Group to review the technical and policy feasibility of allowing a "Super BAT"
approach to provide affordable, long-term compliance, including the consideration of
appropriate incentives regarding future compliance.
It may be possible to design and implement a treatment unit, as noted above, that will
anticipate future contaminants and standards and will allow the utility to make only one
installation. If cost was not a constraint, this can be done in every situation. However,
the affordability issue requires that additional work be done to identify costs and the
appropriate technologies without compromising public health protection.
4.2.3 Alternatives to Central Treatment
Various alternatives to centralized treatment are available, but barriers to these
alternatives exist. All alternatives are capable of being implemented and are in place in various
water systems. The alternatives vary from providing individual treatment units in each home to
providing an entirely new source or sources of water. Costs for implementation are site specific
and may require significant expenditure of new resources and operations personnel.
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Types of Alternatives to Central Treatment
POU Treatment
This technology is applied at the "Point-of-Use" in a location such as the kitchen sink. It
is designed to treat only a portion of the flow in the entire household, so only a portion of the
water delivered to the household meets the drinking water standards. As such, POU units are
only appropriate for management of certain contaminants and cannot be relied upon where
microbial infection from bathing, inhalation, or dermal exposure is a major concern. In addition,
POU units must be small enough to fit under the sink or in some equally confined space. Issues
with POU units include education of the members of the house to drink water only from the
treated tap (or taps) and to use this water for cooking and making other beverages.
Responsibility for maintaining the unit in proper working order lies with the water utility, and
use of the units must include a management and inspection program to ensure proper operation.
Typical POU units are ion or resin exchange for arsenic reduction, GAC for reduction of minor
organic chemical contamination, and reverse osmosis for reduction of dissolved solids or some
specific ions such as arsenic.
POE Treatment
This technology is designed to treat all of the water being delivered to the residence or
residences such as multiple houses, condominiums, town houses, apartments, etc. The unit is
sized to treat all of the water and has the advantage that all of the taps in the residence are
considered potable. Treatment units are typically located in a garage or other buildings outside
the actual residence. Units are similar to POU units only larger. As with the use of POU units,
the use of POE technologies must provide for proper maintenance and operation by the water
utility.
Bottled Water
Bottled water delivered by the water system is appropriate, but is only currently allowed
for short-term acute drinking water problems such as nitrate or bacteria. The Work Group
agreed that the alternative of bottled water was not the first choice to be considered by a utility,
and its use for long-term problems should be allowed in very small systems with limited
resources and without reasonable options for cooperation or consolidation. If allowed, the need
for public education is essential to ensure that the occupants drink only bottled water and use it
for cooking and preparing beverages, and that bottled water cannot be relied upon where
microbial infection is a risk, or where a health risk from bathing, inhalation, or dermal exposure
is a major concern. The bottled water must comply with all appropriate drinking water standards
and be administered (and delivered) by the utility. The use of bottled water is not an option if
inhalation or dermal exposure to the applicable contaminant poses a health risk.
Dual Water System
Provide a dual water system wherein only a small proportion of the total amount of water
is treated and provided to each home for domestic purposes. This may be appropriate in areas
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where there is a high amount of irrigation water use. However, costs could be prohibitive to
provide a dual system.
Source Replacement
This approach may be possible to avoid providing treatment and is one of the options
generally considered in all contamination issues. In general terms, source replacement might
mean abandoning a contaminated well and drilling a new well in a more protected area. This
would also require installation of a new transmission line and might require additional pumping
depending on the distance to the new source.
Barriers to Implementation
Legislative
At the federal level, POU and POE units are allowed (except for microbial contaminants).
Based on EPA's informal assessment of the SDWA, the Act is "silent" on whether bottled water
is allowed as a variance technology or for other, normal compliance efforts.
Regulatory
If allowed, POU and POE units must be regulated by the States and some form of
approved maintenance procedure must be developed. Generally, POU units must be replaced at
some frequency by "qualified" personnel; POE units must be "serviced" at some similar
frequency by "qualified" personnel. If regulatory actions allow bottled water as a variance
technology or other compliance option, then the bottled water should be delivered to the house or
available at some convenient central pickup location. In addition, quality control procedures
must be employed by the primacy agency and the utility to ensure that these technologies are
used correctly.
Cost
These technologies may be cost-effective vs. central treatment based upon an individual
system analysis taking into consideration some of the following factors:
• Amount of water to be treated. If the system has a large irrigation or other non-
potable demand, it may be cheaper to treat only the drinking water.
• Number of contaminants. A single problem contaminant may be more cost-effective
vs. multiple contaminants. For example, it may be cost-effective for only arsenic but
not a problem that involves arsenic, nitrate, and an organic chemical problem.
• Size of the system. For example, if a POU or POE unit must be serviced once a
month and that servicing plus travel time takes 1 hour, in 1 day a service person can
visit 8 units or 40 per week or 160 per month. Given other needs such as other
maintenance, stock procurement, vacation time, sick leave, etc., the labor needs will
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probably double. For a community with 160 or fewer residences, two people would
be required.
• Number of systems. Dual water systems are expensive since a second complete water
distribution system is required and extensive cross connection control is needed.
• Need for a new source. Source replacement will require a new well or other source
and appropriate pumping and transmission facilities. New storage may also be
desirable to allow for more efficient pumping schedules. If more than one source is
contaminated, planning will have to include the possibility that more than one source
will have to be replaced.
Practicality
• POU: This option cannot be used for contaminants that are acutely hazardous (e.g.,
acute toxins or infectious microorganisms) or that may affect the user through dermal
exposure or inhalation. These units do not treat the water that may be ingested by the
traveling public unless they are installed in every public facility and thus are not
appropriate for acute contaminants associated with acute effects.
• POE: This option can be used for contaminants that are acutely hazardous or that
may affect the user by dermal or inhalation exposure. There may be an issue with
residuals disposal depending on the type of treatment employed. The traveling public
issue is the same as with POE units.
• Bottled Water: This may be practical in smaller communities, but is not currently
allowed. If the regulations are changed to allow the use of bottled water, guidance
will have to be provided to ensure the quality of the water and to provide for use by
all consumers. It is envisioned that bottled water will be appropriate only in limited
situations and under strict controls.
• With these technologies there may be an aversion by the consumers to having
"someone" come into their homes to service the units. This issue has been seen in
some communities that are attempting to use POU technologies. Methods to deal
with these problems must be developed prior to deployment of the technology.
Overcoming Barriers
• POU and POE: Determine and develop State and local programs to provide
approval and maintenance procedures.
• Bottled Water: Provide legislation and/or regulation at the federal and State levels
to allow the use of bottled water.
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Recommendation Regarding Alternatives to Central Treatment
• Consider regulatory changes to allow the use of system-delivered bottled water in
appropriate cases, either as a variance technology or to achieve compliance (with
primacy agency approval) for non-microbial, non-inhalation, and non-dermal
compliance situations. The use of bottled water should be considered only when it
meets applicable standards, is accompanied by a public education program, and the
system guarantees quality assurance.
The Work Group recognized that many States would be reluctant to use this option
but concluded that careful scrutiny and case-by-case evaluations of this option were
appropriate. The Work Group's recommendation is meant to allow for the use of
bottled water for "exceptions" (i.e., for hardship cases) and not to promote the use of
bottled water as a preferred means of long-term compliance for significant numbers
of systems.
4.2.4 System Capacity Optimization
To achieve small system compliance with the SDWA, compliance affordability must be
addressed at many different levels. Whether a cooperative and/or a treatment solution is the
preferred option selected for compliance, the cost of this option may be reduced through
implementation of individual system-based technological enhancements. These system-based
improvements are primarily focused on reducing a small system's required production or
distribution capacity through water loss reduction, system optimization, or demand management.
Capacity Enhancements
For a small system confronted with contaminant removal to comply with the SDWA, the
cost of regulatory compliance can be directly related to the capacity (in gallons per minute or
gpm) of the required treatment facilities. Therefore, potential cost-effective and publicly
acceptable methods to reduce capacity must be examined. In general, these capacity issues are
divided between supply and demand-side management.
Supply-Side Management
Water Loss
Many small systems have deteriorating buried infrastructure due to improperly designed
or constructed systems and/or inadequate funding to maintain the system. Unfortunately, actual
levels of small system water loss are difficult to quantify due to poor records and/or lack of
metering. While many publications recognize the small system water loss issue, the data from
recent surveys [USEPA (1997), USEPA (2002), SIU (2000)] show the average values of small
system unaccounted-for water to be at an acceptable level of less than 15 percent. These
findings are suspect given the limited source water and customer metering present in many small
systems. Therefore, better data collection and understanding of small systems are necessary to
confirm the presence and quantify the magnitude of the small system water loss "problem."
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Allowing high levels of water loss and/or not quantifying leakage has historically made
economic sense for small systems. Since small systems typically have inexpensive ground water
sources with minimal treatment, the incremental cost to produce water is typically less than the
cost of repairing leaks. However, with future regulatory compliance driving the cost of drinking
water substantially higher through significant capital investment and operating expenses, these
economic conclusions need to be re-evaluated. It is especially important that the financial
impact of all future regulations that drive treatment and/or cooperative solutions be considered in
the evaluation.
System Optimization
Because of the evolution and size of many small water systems, their distribution systems
and water use patterns are not always designed to minimize required production capacity.
Historically, this is due to the relatively low incremental costs of minimally treated groundwater
compared to the construction of flow equalization facilities (distribution storage). This design
approach, combined with high peaking factors (maximum hour/maximum day) associated with
many small systems, can result in a high treatment capacity requirement per customer. To avoid
the high SDWA compliance costs associated with this small system characteristic, optimization
of production and distribution facilities is required. This analysis, which includes evaluating
features such as water storage, system interconnections, and standby power facilities, is unique
for each system and involves determining the least cost combination of plant capacity and
distribution system improvements.
Demand-Side Management
Metering
If a small system is constructed without residential water meters, residential water rates
are typically identical for all consumers and are independent of water use. This tariff structure
provides no incentive for the individual consumer to control water use. The resulting water use
characteristics can be high average and peak day water use compared to metered systems.
Higher peak day use directly relates to increased plant capacity requirements. Higher average
day use directly relates to higher O&M costs. Therefore, if a treatment facility is required for
regulatory compliance, the associated per customer capital and operating costs would be higher
for an unmetered system. Since system metering can reduce water use by up to 30 percent
(conservation rates may also be required to achieve this level of reduction), the cost of meter
installation would typically be fully supported by operating cost savings. Therefore, the avoided
incremental plant capacity capital costs, achieved through metering, may require no further
economic justification.
The cost and effectiveness of meter installation need to be confirmed before
implementation. Older homes may require significant plumbing modifications to facilitate meter
installation. Additionally, where the individual consumer does not have direct control over the
metered water use (i.e., multi-family dwellings, some mobile home parks, etc.) or is not directly
billed for the water used (renters), the effectiveness of metering can be limited.
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Conservation Rates
Conservation rates discourage "excessive" water use by charging the public increasing
unit rates as more water is consumed. These rates have been found to affect normal water usage
in the home through the installation of conservation devices, as well as discretionary water use
associated with lawn watering, car washing, and similar activities. However, implementing a
conservation rate structure, which can effectively decrease the cost of required capital
improvements associated with plant capacity, is a complicated process. It requires both public
acceptance of the new pricing policy and proper economic design to shave peak demands. Meter
reads must be timed to capture water used during peak demand periods. Generally, monthly
billing is needed. Price elasticity must be studied to ensure that a rate structure will depress peak
demand patterns. If conservation rates are successful only in controlling average water use,
operating costs will be marginally reduced but cost savings associated with plant capacity
reduction will not be achieved.
Recommendation Regarding System Capacity Optimization
• When examining the cost of regulatory compliance at the national or State level,
system flow capacity optimization (achieved through control of water leakage,
metering, rate structure, and facility design) should be considered prior to developing
the cost of system treatment technologies and/or cooperative solutions
Since the majority of small systems use inexpensive groundwater sources with minimal
treatment, there has been limited incentive to optimize their flow capacity requirements.
However, with the significant increase in the incremental cost (capital and O&M) of treatment
associated for regulatory compliance, flow capacity optimization should be implemented. Small
system treatment capacity requirements can be significantly reduced by the installation of
customer meters, controlling system leakage and enhancing distribution systems to minimize the
impact of peak demands on production capacity. Each of the flow capacity optimization options
should be introduced to the development of national compliance cost estimates. Additionally,
States should consider the impact of capacity optimization on compliance affordability prior to
initiating a variance process or funding compliance solutions.
4.3 Recommendations
In summary, the Work Group recommendations related to system-level strategies for
addressing affordability challenges are:
• New and expanded State leadership is essential to promote cooperation among small
systems. Cooperative efforts designed for an area or region are essential if the cost of
compliance is to be reduced. These efforts should be funded through new
appropriations or through re-allocation of a portion of DWSRF funds that are
currently being applied to individual system projects. State-managed cooperative
efforts should include:
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¦ Providing managerial, technical, and planning assistance for small systems,
including expanded use of the private sector and large central utilities that can
provide these services;
¦ Public outreach to small systems to provide support and information on the
value of cooperative and consolidation efforts;
¦ Conducting focused outreach programs to regional groups directly or in
conjunction with others, and allowing cooperation expenditures by these
groups to be considered in federal and State financial assistance programs;
¦ Continuing and improving methods of recordkeeping and reporting progress
on capacity-building programs (consistent with SDWA capacity development
provisions) and reporting progress in achieving small system cooperation and
consolidation to EPA and the NDWAC. EPA and States should use this
information to develop and maintain an effective small system cooperation
database, which can be used to promote cooperation;
¦ Offering meaningful incentives for cooperative efforts and limiting financial
and technical support for individual system compliance solutions to only those
small systems that have assessed cooperative options and found them to be
infeasible or not cost-effective; and
¦ Assistance to community groups, system operators, and owners in the
development of governance, advisory, or other participatory vehicles to ensure
a continued role for these stakeholders when cooperative solutions are
implemented.29
• Consider regulatory changes to allow the use of system-provided bottled water in
appropriate cases, either as a variance technology or to achieve compliance (with
primacy agency approval) for non-microbial, non-inhalation, and non-dermal
compliance situations. The use of bottled water should be considered only when it
meets applicable standards, is accompanied by a public education program, and the
system guarantees quality assurance.
• Recent scientific and technical developments have increased the potential for
"umbrella" compliance technologies, such as membranes. EPA should establish a
Work Group to review the technical and policy feasibility of allowing a "Super" BAT
approach to provide affordable, long-term compliance, including the consideration of
appropriate incentives regarding future compliance.
• When examining the cost of regulatory compliance at the national or State level,
system flow capacity optimization (achieved through control of water leakage,
29
See Appendix 1 for minority views.
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metering, rate structure, and facility design) should be considered prior to developing
the cost of treatment technologies and/or cooperative solutions.
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5.0 Public Education
5.1 Introduction
Public education plays an important role in almost all of the recommendations of the
NDWAC. Only after the public is informed on the cost and value of SDWA compliance can the
proper public policy decisions be made. Educating consumers and public agencies on issues
such as public health risks, affordability criteria, financial assistance, technical approaches and
compliance options is necessary before a water system commits to a compliance variance.
However, implementation of an effective public education program will be difficult given the
challenges of accessing the public (especially small systems), communicating complex technical
issues, addressing unique local concerns, and literacy/language issues.
5.2 Approach to Public Education
Justifying increased water rates for regulatory compliance, even when affordability limits
are not reached, requires that the value of compliance and the associated water quality benefits
be clearly and accurately communicated to the consumer. While public education has limited
value when the consumer is unable to pay for utility service, it can influence the consumer's
willingness to pay for regulatory compliance if funds are marginally available. Competing
demands for disposable income can result in the public challenging the benefit/cost of improved
drinking water quality, unless public health and aesthetic values are balanced against other
expenditures. This education becomes more important when the regulatory actions do not
improve the aesthetic quality of the drinking water. Therefore, to encourage regulatory
compliance and public acceptance of the associated increased water rates (which may be
significant), public education programs must be developed which:
• Emphasize the short- and long-term health risks and benefits (risk avoidance) of
improved drinking water quality;
• Explain the options evaluated and the recommended solution to produce a water
quality that achieves regulatory compliance; and
• Identify and address local concerns, cultures, and issues that affect affordability.
A requirement of the small system variance technology process is public notice and
hearings. In addition, to successfully achieve regulatory compliance, it is essential that the
public be educated and understand the value derived from improved water quality. However,
compliance solutions, economic challenges, and social priorities will vary significantly from
system to system. Therefore, public education initiatives must recognize the socio-economic
issues and values that drive public opinion for individual small systems. Where the per customer
cost of regulatory compliance is significant, public education and communication are essential to
overcome resistance to compliance.
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Unfortunately, the education derived from public hearings occurs near the end of the
compliance evaluation process - often too late for effective public education and input. In
addition, since in many cases the State and utility bypass the formal variance process in lieu of
other compliance approaches, all formal education may be eliminated. In these cases, the only
proactive public education would be the annual Consumer Confidence Report (CCR).
Unfortunately, the CCR offers limited and very structured information on the very complex
subject of public health protection and regulatory compliance.
Effective public education, which is structured to allow stakeholders to participate in
developing and understanding solutions to improve water quality and achieve regulatory
compliance, must be initiated at the earliest reasonable date. The development and
implementation of these education programs needs both State and local input. For regulatory
issues, the utility and State primacy agency need to evaluate when it is appropriate to initiate the
public education process. The level of contaminant(s), aesthetic issues, health implications,
regulatory status, and the development of compliance options all need to be considered when
establishing the timing for public input. The communication plan needs to address the topics
being addressed by each of the three NDWAC Affordability Work Group committees:
affordability, financing options, and system-level strategies.
A national strategic public education plan should be developed to identify the resource
needs and the process which most effectively addresses local small system concerns with
compliance and affordability issues. While the States (and EPA) can provide the technical,
health, and risk base for a particular SDWA requirement, local leadership is required to promote
the solution selected to achieve compliance and the value derived from compliance. Principles
of the education program could be derived from other public health and safety education
programs that have been successfully implemented (vaccinations, seatbelts, etc.).
The difficulty in communicating the messages associated with water contaminants must
be recognized. Public health and compliance issues can be complicated and emotional. For
small systems, where the technical and communication resources are not internally available,
State and/or other technical assistance personnel will be needed to initiate and maintain public
dialogue. Extensive use of the media needs to be considered. The goal of the
communication/education process is to engage as many interested consumers and other
stakeholders as possible to create a forum with a variety of perspectives.
5.3 Recommendations
The members of the NDWAC Affordability Work Group recognized the importance of a
comprehensive public education program to communicate the complex technical issues
associated with the SDWA variance process. The general recommendations of the Work Group
are:
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• EPA should determine the scope, feasibility, and cost of implementing a national
public education campaign that addresses the health risks and benefits (risk
avoidance) of improved drinking water quality, and implement such a campaign, if
feasible.
The most effective process for communicating health-related and aesthetic drinking
water quality issues to the public, and the cost of the process, should be identified.
The program must consider the challenges in communicating technical issues, the
accessibilities of the consumer (especially in small systems), and cultural (language,
economic, literacy) issues. The federal government, States, public entities, and/or
private contractors could be used to develop and implement this public education
program. However, any national-level campaign should be adaptable to allow
inclusion of regional or local issues. The proposed public education program should
strive to reach a diverse target audience and encourage stakeholder feedback,
especially where issues with regulatory compliance exist.
• EPA should review the CCR process to determine if it can be used as a more effective
public education tool.
The CCR concept should be reviewed and revised to be a more effective public
education tool. While the current CCRs contain a significant amount of data
addressing water quality and regulated contaminants, the reports do not emphasize the
value and cost of regulatory compliance. When an individual system is confronted
with a potential MCL violation, the CCR should be expanded to discuss the risk
avoidance associated with regulatory compliance, the options available to meet water
quality standards, and the cost/rate impact of the solution. In addition, the CCR could
be used as an effective tool for educating the public on aesthetic water quality issues
and other consumer satisfaction concerns. In these cases, the CCR could be
structured to address the cultural, education, language, and values of a specific
community.
• EPA should review the SDWA variance/exemption processes to ensure that
stakeholder education and input is achieved at the earliest reasonable date)
Consumers in a community confronted with a health-related drinking water quality
issue need to be informed of the health risks and compliance costs as early as
possible. While a requirement of the affordability variance process is public
education and hearings, the education derived from these hearings occurs near the end
of the process - often too late for effective public education and input. By State and
local officials taking a leadership role in early communication of the risk avoidance
of approved drinking water quality and the compliance costs/options for a specific
community, valuable stakeholder input can be derived. These education programs
need to include an explanation of the "two-tiered" regulatory standard, potentially
implemented by the affordability variance process, and the fact that capital
expenditures will probably be required even if a higher MCL is allowed. In some
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communities, this information alone may avoid the official initiation of the small
system variance technology process.
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6.0 Conclusions and Recommendations
This document represents the report and recommendations of NDWAC's Work Group on
the National Small Systems Affordability Criteria. The Work Group was asked to provide
advice to the NDWAC to assist it in developing recommendations for the EPA on the national
small systems affordability criteria required under the SDWA and on related matters.
The conclusions and recommendations resulting from the deliberations of the Work
Group are summarized in the remainder of this section. The Work Group operated under the
ground rules of its parent organization, the NDWAC, as well as Work Group-specific operating
protocols. The Affordability Work Group used consensus decision-making procedures to guide
its deliberations, while recognizing that consensus would probably not be reached on all issues.
Where consensus could not be reached, the Work Group was asked to present the range of views
expressed, along with a discussion of the potential pros and cons associated with the various
alternative approaches. Minority views and additional comments can be found in Appendix 1.
6.1 Affordability Criteria
The charge to the NDWAC Work Group included a request to review, analyze, and
provide recommendations regarding six small system affordability criteria issues. EPA's
affordability criteria establish national guidelines for determining when new drinking water
standards are deemed "affordable" for small water systems throughout the United States. If it is
determined (based upon the affordability criteria) that achieving the new standard is
unaffordable, small water systems are eligible to request a variance from the system's State
agency responsible for implementing and monitoring EPA standards (the "primacy" agency).
The granting of such a small system variance from the national standard is contingent, however,
upon the system agreeing to acquire an alternative, more affordable technology that brings the
system closer to compliance with EPA standards, but does not meet the MCL.
Therefore, the affordability criteria set forth by EPA are important SDWA
implementation guidelines. As indicated, if a small system technology variance is granted, the
system's customers will receive water that is more "affordable," but of lesser quality than
national EPA standards would otherwise require. The awarding of variances suggests that there
could be two water quality standards for American citizens depending on the system from which
they acquire their drinking water. Citizens obtaining water from systems for which the new
standards are affordable may have access to higher quality water than those who obtain their
water from small systems that cannot afford to implement the technology required to meet the
new MCL.
While the dual standard possibility raises equity and other questions, the elimination of
the technology variance option for some small systems raises other concerns. For example, if
variances are not an option, new stringent water quality standards are "truly" not affordable —
and no funding assistance, alternative higher quality water sources, or restructuring options are
available — some small water systems may continue to operate "as they were," meeting neither
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the desired national standard nor an acceptable lesser standard which could be achieved with a
variance and the adoption of an alternative EPA-approved technology.
In setting the national small system affordability criteria, EPA attempted to provide
criteria that could be equitably and uniformly applied across the nation, that could be clearly
understood, and that would be responsive to technological and economic changes over time. The
affordability standard was based on the concept of an "expenditure margin." EPA's expenditure
margin is calculated by determining the difference between an assumed "maximum affordable
water bill" (which EPA assumed to be 2.5 percent of MHI) and the current cost of water for the
median system (current baseline water bill) of a given size category. If the new rule can be
implemented for a marginal cost that is less than the expenditure margin, the new standard is
affordable for the median household of the median small system. If the cost of the technology to
meet the new standard for a selected subset of small systems exceeds the "expenditure margin,"
then the standard is deemed unaffordable for that subset of systems. Also, a small system
variance technology that is potentially applicable to systems within the relevant size and raw
water quality criteria is "approved" or "listed" by EPA. Once such a small system variance
technology has been identified by EPA, the States may, on a case-by-case basis, allow systems
that meet the same size and raw water criteria to use the small system variance technology. Each
State will set its own process for considering small system variances. While the States must
demonstrate that their programs are protective of human health, they are not bound to use the
same economic criteria that EPA uses to determine which small systems in the relevant subset
can afford to meet the MCL without the use of a small system variance technology.
The implications of the process for setting the affordability criteria are clear. If the
affordability standard is set too high, few, if any, systems will be eligible for variances. If
variances and alternative technology options are not permitted for small systems that cannot truly
afford full compliance — and no funding support, restructuring options, or alternative water
supplies are available — such systems may operate dramatically out of compliance (with no
technology change), and their customers may continue to be exposed to high levels of the
contaminant for which the standard was established. On the other hand, if the affordability
standard is set too low, more small systems will be eligible to make variance requests and more
systems — some of which could actually afford to achieve full compliance — may be granted
variances by the States to use alternative, less effective technologies. As a result, more water
systems will be permitted to operate with water that does not meet the EPA MCL national
standard and the dual standard, issue will be exacerbated and, in a sense, officially condoned.
6.1.1 Recommendations Regarding National A ffordabitity Criteria
Given the importance and potential impacts of the affordability criteria chosen, EPA
asked the Work Group to consider six issues associated with the Agency's proposed affordability
criteria. The six issues considered by the Work Group at EPA's request, along with summary
responses, are as follows:
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1. Should MHI or another income percentile measure (such as per capita income,
for example) be used for the income level?
• While Work Group members note that it is possible that a better metric for
determining water system affordability may be available in the future, they agreed
that MHI is the most appropriate income metric to use for this purpose at this
time. The metric is unambiguous and available for all regions of the nation.
Consequently, it is felt that MHI provides a simple, consistent income metric to
use in determining "ability to pay."
2. Should 2.5 percent or another percentage be used as the income percentage for
determining the maximum affordable water bill, and what is the basis for an
alternative selection?
• The Work Group recommends that EPA seriously consider replacing its basic
affordability methodology with an incremental approach to affordability
determination. Specifically, the group recommends that the national incremental
affordability threshold for each rule be set at a specific percent of MHI that EPA
would then apply to individual rules for purposes of determining whether to issue
small system variance technologies. See below for the recommended increment.
• The Work Group recommends setting the increment at 1 percent of MHI. (One of
the 18 Work Group members opposed this recommendation, advocating for a
lower percent.)
• When a State decides whether to allow a variance, it should consider the
"quantum leap" and "rate shock" phenomena. This issue occurs when small
systems that have no treatment, or little treatment (e.g., chlorination only), for the
first time must invest in significant water treatment. This will trigger potentially
significant one-time investments (such as manifolding wells, establishing a
centralized treatment building and equipment unit, etc.) that probably will not
have to be repeated if future rules are issued.
In addition, when making variance decisions, States should consider the cumulative
impacts of multiple regulations and other cost-raising factors (e.g., infrastructure and
security) that may affect a particular system. The Work Group encouraged States to
consider an extended time horizon in making variance decisions, encouraging
systems to invest for their long-term viability. The Work Group notes that this
recommendation may have broader implications regarding financial assistance to
systems (e.g., a State might decide to set eligibility for financial assistance relative to
a certain cumulative impact).
• The Work Group also agreed that, when a State is considering whether to allow a
variance, a strong effort should be made through a meaningful local public
education and local public participation effort, to ensure consumers are informed
and understand variance technology does not result in water quality that meets
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EPA standards, the implications of the two-tier phenomenon, and options they
may have. These efforts should be ongoing to ensure that new consumers are
educated using simple, straightforward language. Related legal requirements
(found in SDWA section 1415(e) and EPA regulations at 40 C.F.R. section
142.301 et seq.) should be followed, including:
¦ Conducting a local hearing;
¦ Conducting a meaningful review for the system applying for a variance as to
whether the system cannot afford to comply through:
Treatment;
Alternative source of water supply;
- Restructuring or consolidation; and /or
- Financial assistance under the DWSRF administered by EPA and the
States, the USDA's RUS, CDBG Program administered by HUD, or other
State or federal programs.
¦ Assuring that the system has the financial and technological capability to
install, operate, and maintain the equipment;
¦ Assuring that the variance will ensure adequate protection of human health
and meets all legal requirements for a variance;
¦ Tracking compliance with the variance; and
¦ Reviewing the adequacy of the variance at least every 5 years.
Finally, the Work Group recommends that EPA (1) re-evaluate variance
technologies and BAT at least every 5 years to take account of technological
developments as treatment technologies may become lower in cost for small
systems, and (2) share resulting information with State primacy agencies to assist
in their 5-year reviews of variances and their assessments of whether to approve
variance technologies for specific systems.
Given the affordability criteria recommendation of the Work Group (a
substitution of an incremental approach for the EPA expenditure margin
methodology), the question of whether 2.5 percent of MHI is an appropriate
standard becomes somewhat irrelevant. However, the question of whether 2.5
percent of MHI is a reasonable value for the affordability metric was aggressively
discussed and debated, with the Work Group not reaching a consensus on the
issue, assuming EPA maintains the current methodology.
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Work Group members supporting a lowering of the standard to 2 percent of MHI
or less raised concerns, as did the SAB, about the apparent fact that no systems
had qualified for variance consideration with the current standard. Work Group
members suggesting that 2.5 percent or a higher value be used were concerned
that a "widening of the door" or increasing the likelihood of variance
considerations for small water systems might promote a two-tier system of water
quality standards and delay otherwise achievable improvements in water quality.
In summary, the Work Group prefers an incremental approach to affordability
criteria setting. If EPA decides to continue use of its current methodology, no
recommendation is offered regarding the question of whether 2.5 percent is an
appropriate MHI standard.
3. How should the expenditure baseline be adjusted to account for new rules?
• The Work Group expressed several concerns regarding the use of the expenditure
baseline. Among the concerns raised were:
¦ Concerns with the source of baseline calculation data (the CWS survey);
¦ Concerns regarding whether the CWS data included all costs of small
systems;
¦ Concerns about the impact of rehabilitation and replacement costs on the
baseline analysis;
¦ Concerns about the added costs of security and anti-terrorism and how such
costs might distort the calculation of the expenditure baseline;
¦ Concerns about whether baseline cost calculations can appropriately consider
the impact of technical, managerial and financial (TMF) costs;
¦ Concerns about whether the baseline adequately reflects the availability of
subsidies or financial assistance (see question 5 below);
¦ Concerns about whether small systems reporting into the CWS were
amortizing/capitalizing their reported expenditures; and
¦ Concerns about whether low-income households' potentially lower-than-
median water usage and rates are captured in the baseline calculation.
The Work Group emphasizes, again, that it recommends an incremental approach.
However, if EPA continues use of the current model, efforts should be undertaken
to deal with the above concerns. In this case, the Work Group recommends
factoring into the expenditure baseline those costs - regulatory and otherwise -
that systems nationwide generally incur.
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4. Should separate affordability criteria be developed for surface and
groundwater?
• The same criteria should be applied to surface and groundwater systems.
5. Should financial assistance be incorporated in the calculations of the
expenditure baseline?
• If EPA retains the present approach to making the national affordability
determination, financial assistance should be incorporated in the calculations if
the financial support is generally available to all systems nationwide. If only
"unique" sources are available, the determination of financial assistance should
not be included in the calculations relative to the national criteria. However,
regardless of whether EPA uses the present approach to making the national
affordability determination or adopts the Work Group-recommended incremental
approach, the availability of financial assistance should be included in the
calculations and analysis conducted by the State, when it is ultimately determined
whether a variance should be granted, and what the variance compliance schedule
will be. (See SDWA § 1415(e)(4).)
6. Should regional affordability criteria be developed, given current data
limitations?
• If EPA retains its current approach to making the national affordability
determination, regional affordability criteria should be developed and
implemented if data are available from suitable sources to make eligibility
determinations. However, due to recognized small system operational cost
differences, it is recommended that EPA establish differential regional
affordability criteria as soon as the compliance cost data are available. To more
accurately reflect the actual ability and/or willingness to pay, the MHI for small
systems should be further differentiated into "rural" (non-metropolitan) and
"urban" categories.
The Work Group also considered whether to recommend applying the incremental
approach on a regional basis. However, most opposed this idea, deeming it
impractical given the data limitations.
6.1.2 Comparison of Work Group and EE AC of EPA's SAB Recommendations
The Environmental Economics Advisory Committee (EEAC) of EPA's SAB was asked
to comment and provide recommendations on a series of policy issues similar to those posed to
the Work Group. This section provides a comparison of the EEAC's and the Work Group's
recommendations regarding the six questions posed to both groups.
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Median Household Income
The Work Group and the EEAC agreed that MHI was a reasonable metric upon which to
base household affordability assessments. The EEAC indicated that MHI avoided potential
"pitfalls" of alternative measures such as "mean income," which may be distorted or "skewed"
by a small number of wealthy individuals in a system. Among other reasons, the Work Group
supported the MHI metric due to its simplicity, unambiguous nature, and national availability.
Appropriateness of 2.5 percent of MHI as the Affordability Threshold
The EEAC and the Work Group raised concerns that no variances had been granted by
EPA using the 2.5 percent of MHI as the threshold criterion. The EEAC suggested that EPA
consider other affordability thresholds such as affordability decision rules used in health sciences
and transportation or lowering the percentage. The EEAC did not suggest an alternative
percentage of MHI as the appropriate threshold. In contrast, the Work Group, after reviewing
empirical examples of the use of the 2.5 percent threshold concluded that 2.5 percent of MHI
might be acceptable. However, the Work Group felt that other affordability standards should be
considered and, ultimately, decided to recommend that an incremental approach be substituted
for the 2.5 percent affordability threshold. Specifically, the Work Group recommended that EPA
adopt an affordability criterion of 1 percent of MHI as the "incremental" affordability threshold
for each new regulation proposed by EPA.
The Calculation of EPA's Expenditure Baseline
The EEAC felt that the expenditure baseline calculation neglects variations in costs or
other economic circumstances that might affect affordability. Therefore, if the expenditure
baseline is used to determine affordability, the expenditure baseline should be used only for an
initial "screening function." The EEAC suggested that greater focus should be given to
individual cases to determine affordability. The Work Group's recommended incremental
approach to affordability determination does not use an expenditure baseline, so it is irrelevant to
their recommended affordability criteria. However, the Work Group identified several concerns
regarding the expenditure baseline that should be dealt with if EPA ultimately decides to
maintain its current approach to affordability assessment. In addition, the Work Group
recommends, under its suggested incremental approach, that States take system-specific
circumstances into full consideration.
Same Criteria, Regardless of Water Source
Both the EEAC and the Work Group recommended that the same affordability criteria be
used regardless of water source.
Consideration of Financial Aid in Affordability Calculations
The Work Group and the EEAC concluded that financial support should be incorporated
in affordability determinations if such support is readily or uniformly available to small systems.
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Different Regional and Urban/Rural Affordability Criteria
Both study groups supported the development of affordability criteria that reflect
differential regional and urban/rural EPA regulation compliance costs if data are available to
support such affordability assessments.
6.2 Financial Support Strategies for Addressing Affordability Challenges
One method of helping overcome problems with the affordability of drinking water is to
provide additional financial support to water systems or individual households that have
affordability problems. Financial support can be funded at the individual system level, the State
level, or by the federal government. If financial assistance is made more readily available for
small water systems facing infrastructure improvements and/or operating costs to meet
regulatory requirements, the need for variance technologies may be reduced. In addition, under
certain circumstances, financial assistance may be reflected in the way in which EPA calculates
affordability at the national level.
The Affordability Work Group has examined the matter of financial assistance, and is
presenting several suggestions on this issue:
• Providing rate-making information;
• Providing support to individual households (as distinct from systems) in the form of a
LIWAP;
• Making changes in the way that existing funding sources are used that will better
support small systems with affordability problems; and
• Providing new funding sources to help solve this problem.
6.2.1 Rate-Making Strategies
For many water systems, it is possible for rate-making techniques to allow water to be
affordable to most, if not all, of their users without placing an undue burden on any user. Many
water systems already employ some type of "lifeline rates" to address the affordability issue and
to promote water conservation. Affordability ratemaking techniques work best when the
eligibility for the application of a rate structure that is less than the cost of providing water
service is limited to low-income households.
While systems of any size that are predominately made up of low-income households
will not be able to significantly address the affordability issue internally, systems of all sizes that
have a minority of low-income households can assist their poorest customers with rate-making
strategies. In order to promote the affordability of water without heavy reliance on small system
variance technologies, EPA should publish information about and examples of affordability
rates.
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6.2.2 Low Income Water Assistance Program
LIWAP is being presented as another tool to help States assist low-income households
facing increased rates due to costs associated with compliance with the SDWA. Assistance to
low-income households is provided for other utility services. Providing assistance directly to
those who are in need is the fairest and most effective way to provide support to achieve
compliance. Two of these programs are the LIHEAP and the Universal Service Low Income
Program (for local phone service).
While the total cost of a LIWAP program would depend on its eligibility requirements,
the cost should be significantly less than the LIHEAP program because fewer households are
served by a water utility than are eligible for energy assistance. If eligibility was limited to those
low-income households receiving water service from a small water utility with high rates (e.g.,
>$500), then the cost of this program would be relatively moderate, perhaps as low as $750,000
per year.
By providing financial assistance at the individual household level, rather than, or in
addition to, assistance at the system level, more of the taxpayer funding would go to households
in need. When a water system is subsidized, all ratepayers benefit from
taxpayer support, even those who are not low income. Since there are similar existing programs
that can be used to help determine eligibility, administrative costs of a LIWAP should be lower.
Several methods of providing funding for a LIWAP were considered and it is
recommended that the best method to fund such a program would be through a Congressional
appropriation, similar to the way the LIHEAP is funded.
6.2.3 Modification of Existing Programs
Although affordability is best addressed at the individual household level, there are State and
federal programs that provide financial assistance to water utilities to help make the cost of water
affordable as significant infrastructure improvements are being required to meet ever-changing
regulatory demands. One major financial assistance program is the DWSRF. To help make this
important funding program more effective in addressing small system affordability issues, the
barriers to small system utilization should be examined and, where appropriate, changed. Since
cooperative efforts are very effective in helping small system affordability problems (see section
4), a larger share of the DWSRF disadvantaged assistance funds should go toward supporting
these cooperative efforts.
6.2.4 Potential New Funding Sources
Since the cost of safe drinking water is increasing, especially in small systems facing
mandatory infrastructure improvements to meet SDWA requirements, new funding sources may
be required in order to lessen affordability issues for drinking water. While the DWSRF was
established for this purpose, other funding sources, as well as additional funding for the DWSRF,
should be considered.
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Targeted grant programs that could make small systems self-sustaining (e.g., grants for
cooperative efforts such as consolidation or restructuring as defined and discussed in section 4 of
this report) should be considered. Existing agencies and programs could be expanded to provide
assistance for a greater number of drinking water systems in order to promote affordability.
Specifically, the U.S. Army Corps of Engineers and the Bureau of Reclamation could be better
involved in water system efforts, such as providing interconnections between systems.
6.2.5 Recommendations Regarding Financial Support Strategies
• EPA should provide information and examples pertaining to the use of affordability
rates for systems to help make water affordable to low-income households.
• A Low Income Water Assistance Program (LIWAP) should be adopted as a means to
assist low-income households facing high drinking water costs, funded with a
Congressional appropriation similar in structure to (though clearly requiring far less
money than) the funding for the LIHEAP.
• DWSRF funding should be increased, with special consideration given to assisting
small systems.
• . The Work Group proposed that EPA modify the DWSRF allotment formula. The
NDWAC believes such an action is premature and instead recommends that EPA
determine if, as a result of the current DWSRF allocation formula, small public water
systems are being disproportionately denied funding from State DWSRF programs
due to inadequate funding being available.30
• . The Work Group proposed that any disadvantaged system should receive priority for
DWSRF funding. With the understanding that not all States currently have
disadvantaged programs, the NDWAC changed the recommendation to propose that
EPA encourage States, that have not already done so, to establish a disadvantaged
community program to address small system affordability issues. Such funding
should be consistent with the principles in the DWSRF to encourage restructuring
where viable.
• EPA should work with other agencies to help overcome barriers to effective use of
existing funding sources to promote small system affordability for safe drinking
water. Examples of such assistance include:
¦ Increasing outreach efforts to small systems of all classes to provide information
on available funding programs.
¦ Increasing the technical assistance to small water systems to address needs in the
areas of funding applications, accounting and long-range planning, engineering
30
See Appendix 1 for additional comments.
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and technical corrections, and record-keeping practices consistent with the needs
for funding and SDWA requirements.
¦ Improving the opportunities of small systems to acquire funding from all sources,
governmental and private. Increase the use of grant funds, zero interest loans, and
other means of assistance to low-income water systems in need.
¦ Analyzing methods of removing institutional barriers at both the State and federal
levels that prevent small systems from obtaining funding and complying with
SDWA requirements in an affordable manner.
¦ Establishing new, and expanding existing, sources of funding to provide
assistance to small systems in all areas of achieving and maintaining system
capacity.
• Provide additional funding beyond the current DWSRF funding for small systems to
adopt cooperative strategies, as broadly defined in section 4.2.1
• Explore and consider the use of other State and federal agencies, such as the U.S.
Army Corps of Engineers and the Bureau of Reclamation, to assist small drinking
water-related projects.
6.3 System-Level Strategies for Addressing Affordability Challenges
Minimizing the capital and operating costs associated with regulatory compliance is
another important component of SDWA compliance affordability. Traditionally, a system's
regulatory compliance costs are derived by pricing a treatment facility (at the system's current
flow capacity) based on the particular contaminant of concern. However, to minimize costs and
promote system sustainability, all options that achieve full regulatory compliance need to be
considered prior to and during the small system variance process. The cost of compliance
solutions can be reduced through creative funding incentives or by innovative management,
technical, and/or operating solutions.
The Affordability Work Group's CSLS investigated non-financial approaches for
reducing the cost of small system compliance. By expanding compliance options beyond
individual contaminant removal by conventional treatment, more cost-effective solutions can be
identified and implemented, and the need for variances reduced. To determine the most cost-
effective solution for small systems, innovative approaches need to be considered. These
approaches include cooperation/consolidation/regionalization, decentralized treatment, and
capacity optimization.
6.3.1 Cooperation
Probably the most effective long-term compliance option for small systems is a
cooperative approach. This approach is being increasingly implemented to achieve cost
reduction and greater water management expertise. Cooperation is achieved through physical
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interconnection of independent water systems or by sharing resources within a region. The
numerous potential benefits of cooperation include economies of scale for both capital and
operating costs, financial assistance, and better access to planning and technical expertise.
While federal and State policies have increasingly emphasized the benefit of
consolidation, significant political, geographical, and business barriers have prevented
widespread consolidation. Section 4.2.1 describes these barriers and provides a list of suggested
actions, programs, and approaches to encourage and enhance cooperation. Enhanced State
leadership, private sector resources and expertise, involvement of larger utilities, and local
participation are recommended elements in the initiation and success of cooperative efforts.
6.3.2 Treatment Technologies
The technologies to treat and deliver water that meets all SDWA standards are known
and available (see section 4.2.2). Recent process enhancements have exhibited a trend of
reduced costs and improved performance. Research and new product development needs should
continue to be encouraged to lower the capital and operating costs of centralized treatment.
Additional qualified personnel and training is also needed to effectively maintain and operate
new technology that is used to remove newly regulated organic, inorganic, and microbiological
contaminants.
6.3.3 Alternatives to Central Treatment
There are alternatives to centralized treatment for individual small systems that in some
cases can provide cost-effective and sustainable solutions for regulatory compliance. As
presented in section 4.2.3, the cost-effectiveness and practicality of POU and/or POE treatment
needs to be evaluated on a system-by-system basis since the cost of implementation is site-
specific. System size, type and volume of water used within a system, and the number and type
of contaminants present must be considered in the evaluation. Improved education addressing
how and when to use POU/POE devices is also needed. In addition, a process for POU/POE
performance monitoring (for current and future consumers within a residence) should be
addressed. While POU and POE are allowed by federal legislation, State and local support for
this treatment approach would be enhanced by the development of POU/POE distribution,
maintenance, and "certification" procedures.
Alternatively, since less than 1 percent of a consumer's water is ingested, bottled water
may be an appropriate solution for certain contaminants for a limited number of small systems.
However, federal and State legislative changes are needed and significant public education
would be required before bottled water can be considered a permanent solution to regulatory
compliance. Additional measures to ensure the quality of bottled water may also be required.
6.3.4 Capacity Optimization
One of the areas most frequently overlooked in determining the cost and affordability of
regulatory compliance is a system's flow capacity requirements. As presented in section 4.2.4,
there are several methods to reduce a system's production and distribution capacity
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requirements, thereby reducing compliance costs. Whether centralized treatment or a
cooperative solution is determined to be appropriate for compliance, the cost of that solution can
be further reduced through supply-side or demand-side management.
Control of water loss, a problem in many small systems with deteriorating infrastructure,
can help control the significant increases in operating costs associated with the new treatment
technologies required for compliance. Optimizing a small system's distribution system design
can potentially result in a significant reduction in needed treatment plant capacity. Demand
management, through individual customer metering and rate design, can also cost-effectively
reduce the volume of water needed from an alternate source or treatment facility for compliance.
States should encourage investigation of each of these small system capacity issues prior to
finalizing the financial burden of compliance and when considering variances.
6.3.5 Recommendations Regarding System-Level Strategies for Addressing Affordability
Challenges
• New and expanded State leadership is essential to promote cooperation among small
systems. Cooperative efforts designed for an area or regions are essential if the cost
of compliance is to be reduced. These efforts should be funded through new
appropriations or through re-allocation of a portion of DWSRF funds that are
currently being applied to individual system projects. State-managed cooperative
efforts should include:
¦ Providing managerial, technical, and planning assistance for small systems,
including expanded use of the private sector and large central utilities that can
provide these services;
¦ Public outreach to small systems to provide support and information on the value
of cooperative and consolidation efforts;
¦ Conducting focused outreach programs to regional groups directly or in
conjunction with others, and allowing cooperation expenditures by these groups
to be considered in federal and State financial assistance programs;
¦ Continuing and improving methods of recordkeeping and reporting progress on
capacity-building programs (consistent with SDWA capacity development
provisions) and reporting progress in achieving small system cooperation and
consolidation to EPA and the NDWAC. EPA and States should use this
information to develop and maintain an effective small system cooperation
database that can be used to promote cooperation;
¦ Offering meaningful incentives for assessing whether cooperative efforts are
feasible and limiting financial and technical support for individual system
compliance solutions to small systems that have assessed cooperative options and
found them to be infeasible or not cost-effective; and,
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¦ Assistance to community groups, system operators, and owners in the
development of governance, advisory, or other participatory vehicles to ensure a
continued role for these stakeholders when cooperative solutions are
implemented.
• Consider regulatory changes to allow the use of system-provided bottled water in
appropriate cases, either as a variance technology or to achieve compliance (with
primacy agency approval) for non-microbial, non-inhalation, and non-dermal
compliance situations. The use of bottled water should be considered only when it
meets applicable standards, is accompanied by a public education program, and the
system guarantees quality assurance.
• Recent scientific and technical developments have increased the potential for
"umbrella" compliance technologies, such as membranes. EPA should establish a
Work Group to review the technical and policy feasibility of allowing a "Super" BAT
approach to provide affordable, long-term compliance, including the consideration of
appropriate incentives regarding future compliance.
• When examining the cost of regulatory compliance at the national or State level,
system flow capacity optimization (achieved through control of water leakage,
metering, rate structure, and facility design) should be considered prior to developing
the cost of treatment technologies and/or cooperative solutions.
6.4 Public Education
Public education is an essential component of any SDWA variance process. For the
consumer to make an informed decision on the desired quality of their drinking water, they must
first understand the public health risk and other water quality benefits, cost of compliance, and
compliance options. Effective public education, which is structured to allow stakeholders to
participate in developing and understanding solutions for regulatory compliance, must be
initiated at the earliest possible date.
However, the difficulty of communicating the messages associated with water
contaminants must be recognized. The goal of the communication/education process should be
to engage as many consumers and other stakeholders as possible to create a forum with a wide
variety of perspectives. An effective public education program must also address local concerns,
cultures, and issues. Therefore, a strategic public education plan should be developed to identify
the process that most effectively addresses compliance and affordability issues, along with
related resource needs.
6.4.1 Recommendations Regarding Public Education
The Work Group recommends that EPA take the steps listed below with respect to
educating the public about issues related to the affordability of drinking water and small system
variances. The Work Group recommends that EPA undertake these steps with outreach to, and
input from, stakeholders.
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• EPA should determine the scope, feasibility, and cost of implementing a national
public education campaign that addresses the health risk and benefits (risk avoidance)
of improved drinking water quality and implement such a campaign if feasible.
• EPA should review the CCR content to determine if the CCR can be used as a more
effective public education tool.
• EPA should review SDWA variance/exemption processes to ensure that stakeholder
education and input are achieved at the earliest possible date.
6.5 NDWAC Perspective
The NDWAC agrees with and adopts the Affordability Work Group's recommendations
with the following clarifications.
The NDWAC fully recognizes the importance of affordable and safe drinking water,
especially for small systems. The 1996 Amendments to the SDWA established the principle that
variances in water treatment technology could be used to address the issue of affordability.
However, significant practical, logistical, and ethical issues mitigate against the use of variances.
For example, the cost of establishing the appropriateness of a variance for a specific
small system is significant. The heightened monitoring and regulatory burden that would fall to
State and local authorities is unacceptable for many of them. Furthermore, the potential
acceptance of lower water quality for disadvantaged communities is ethically troublesome.
The NDWAC believes that alternatives to the variance process identified by the Work
Group (such as cooperative strategies, targeted use of funding to disadvantaged water systems, a
Low Income Water Assistance Program, etc.) are more appropriate means to address the
affordability problem. Therefore, if a variance process is deemed necessary to achieve
affordability, it should only be pursued after all other alternatives presented in this report are
given due consideration. However, because of the NDWAC has pragmatic and ethical concerns
with variances and the associated connotation of a 2-tier approach to protecting public health, the
Council makes the following recommendation:
• The NDWAC advises the Administrator to convey to Congress the NDWAC's
logistical and ethical concerns with variances and the NDWAC's position that
variances in the extent of water treatment, as a means to achieve affordable
compliance, be reconsidered.
The NDWAC recognizes that the incremental approach recommended by the
Affordability Work Group is designed to avoid "rate shock" and mitigate the excessive costs of
any single rule. However, the NDWAC believes that the cumulative cost of drinking water
regulations is also an important consideration in affordability determinations. The NDWAC is
concerned that the incremental approach alone does not sufficiently address the cumulative costs
of several rules and other operating cost burdens (e.g. infrastructure replacement) that
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collectively may be "unaffordable" for some systems. The Work Group gave careful
consideration to this important issue (see Pages 20-23, 86-89, and Appendix 5), and
recommended that, where EPA identifies a need for variance technologies at the national level
based on an incremental approach, States consider cumulative impacts at the system-level in
determining whether to approve individual variance requests.
Cumulative impacts should be considered, for example, in determining eligibility for
grants, loans, and funding under the DWSRF. In addition, if variances are to be made available,
cumulative impacts should be considered in determining system eligibility for a small system
variance. In order to assist states in making affordability determinations for individual systems:
• The NDWAC recommends that EPA augment the incremental approach with
reasonable cumulative affordability guidelines that could be used by the states to
determine the eligibility for small system variances and/or financial support.
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Appendix 1
Minority Views and Additional Comments
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NDWAC Affordability Recommendations, July 2003
National Rural Water Association
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January 27,2003
Ms. Marei DuPraw
Senior Mediator
Resolve, Inc.
1255 23rd St, NW, Suite 275
Washington, DC 2003?
Dear Ml DuPraw:
The National Rural Water Association (NRWA) is respectfully submitting a small
community affordability report lo the National Drinting Water Advisory Council
(NDWAC) Affordability Workgroup. The attached report describes the
consensus position of over 22,400 small and rural community members of
NRWA. We request that our Executive Summary be included in the Executive
Summary of the panel's report and that our full report bs included immediately
following the panel's Executive Summary. If this request is not acceptable please
contact us.
The NDWAC Panel has recommended numerous activities that are either not
authorized by the Safe Drinking Water Act (SDWA) or would be impossible to
implement. Our organization urges EPA to concentrate on fixing the variance
provision and the means to implement the provision. We recommend using a
framework based on the following criteria;
1. Establish variance technology for every EPA rule thai can be applied at
the stale and local level The proposal by the panel to use an incremental
approach -1% of MHI per rule (S400) - ts contrary to the very reason for
an affordability policy. First, it uses a national median household income
(we are talking about lower-income rural households thai have a problem).
Second, the panel generally agrees dial this approach will no" help any of
these small systems meet the arsenic requirements Why do we need a
panel to confirm the status quo?
2. EPA should list variance technologies for all applicable roles. Authority
for implementing the variance technology should be retained at the stale
and local level. States will decide on a ease-by-case basis (based on local
conditions) the appropriateness of variance technology. For example,
some states use Lhnr own affordability test of 1% of the specific
communities MHI to determine "disadvantaged community" eligibility for
SRF funding - which may also be appropriate for variance technology
decisions.
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There are a number ot concerns our organization has with the NDWAC afifordabi lily
panel and tbctr conclusions Below are tfce major issues thai we believe are inherent to
the pane] and the process used in developing the panel's report
• EPA has a vested interest in defending an affordabilitv policy that the SAB indicated
was broken. The agency expressed do real interest in significant changes to the
existing policy,
• The panel did not adequately represent small systems. Colleges, private water
systems, environmental organizations, state primacy agencies, and large water systems
do not represent the types of systems that have to pay the unaffordabk rates—so tl is
easy 10 come up with a solution that does little good for the low-income rural water
customer.
• The panel's report is over 200 pages long—with an executive summary of 20 pages.
It includes recommendations that go beyond the authorizations of the SDWA. In that
law. EPA has limited authority lb die issue of consolidation or the recommendation of
funding alternatives. Any recommendations in those areas depend on institutions
outside of EPA and are either unworkable or politically impassible to accomplish
¦ EPA has the authority and the SDWA expectation that it will provide:
> A workable small system variance,
> A definition of the URTH for each contaminant; and
> An affordability policy that actually helps low-income rural small systems
afford compliance,
EPA should implement the small system variance provisions in the SDWA as intended
by Congress arid avoid bringing outside institutions into the process that arc not impacted
by this provision. Nor should HP A go beyond the clear boundaries of authority set forth
in the SDWA
Thank-you for the opportunity to submit this consensus report, on behalf of over 50% of
the small communities across the naUon.
Anachment: Small and Rural Community AfFordability Consensus Report
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NDWAC Affordability Recommendations, July 2003
Small and Rural Community
Affordability Consensus Report
National Rural Water Association
January 27, 2003
Executive Summary
The National Rural Water Association (NRWA), representing over 22,400 rural and small
community members, submitted a separate report because small communities believe the
NDWAC affordability Work Group's report: (1) recommends a new affordability level that is
clearly unaffordable for millions of low-income families and many communities by any
reasonable definition of affordable, (2) does not provide a reasonable and workable small
systems variance technology program as mandated in the SDWA that allows small and low-
income communities to comply with rules without experiencing harmful tradeoffs, and (3)
recommends new (or changes to) federal, state, and local programs for public education,
viability, full compliance, revised CCR requirements, capacity, rate structures, federal funding
programs, SRF review requirements, consolidation, water tax, state policy on SRFs, variances
and exemptions, and the USDA programs/authorities. These recommendations are all steps in
the wrong direction for assisting small and low-income communities comply with rules because
each recommendation shares a common theme of eroding local government authority, control,
and protection. Small communities support exploiting all legal options to provide low-income
and small/rural communities with compliance options that are affordable and protective of public
health. However, the majority's report falls short of this simple goal.
NRWA urges EPA to adopt the safe and affordable variance approach (SAVA) detailed in this
small and rural community consensus report. To date, EPA has determined all regulations are
affordable for small communities and therefore has not allowed any use of variance technologies.
If the Congressionally prescribed solution to the affordability problem is unworkable because
EPA cannot determine variance technology policy (i.e., reasonable affordability standards,
contaminant concentrations that are "protective of public health," and alternative variance
treatment methods) then this should be clearly stated and reported to Congress. Until such time
that Congress determines they need to rewrite the Act, we should assume they meant what they
passed in 1996.
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Small and Rural Community
Affordability Consensus Report
National Rural Water Association
January 27, 2003
1.0 Introduction
Included in the National Drinking Water Advisory Council (NDWAC) affordability Work
Group's (referred to as "the panel") mission was a review of the Environmental Protection
Agency's (EPA) "affordability" policy for small communities. Currently EPA uses a metric of
2.5 percent of median household income (or approximately $1000 per year) as the indication of
an affordable drinking water bill. Review of this EPA administrative policy was the single most
important issue for small communities and was our primary reason for participating on the panel.
EPA's affordability policy has been found inadequate by their Science Advisory Board, the
National Rural Water Association, and, to some limited extent, this NDWAC panel. However,
there has been no consensus on exactly how to "fix" or modify EPA's policy.
Many members on the panel supported a policy of increasing water bills by 1 percent of median
household income (or $400) as an alternative to EPA's affordability determination. We are
encouraged by the finding that EPA's policy needs to be changed, and appreciate being part of
the deliberations. However, small communities have a different perspective and we respectfully
dissent from the panel's report. Our report represents the consensus recommendations of small
communities. Therefore, we have prepared this separate small community consensus report
because the panel's report: (1) recommends a new affordability level that is clearly unaffordable
for millions of low-income families and many communities by any reasonable definition of
affordable, (2) does not provide a reasonable and workable small systems variance technology
program as mandated in the SDWA that allows small and low-income communities to comply
with rules without experiencing harmful tradeoffs, and (3) recommends new (or changes to)
federal, state, and local programs for public education, viability, full compliance, revised CCR
requirements, capacity, rate structures, federal funding programs, SRF review requirements,
consolidation, water tax, state policy on SRFs, variances and exemptions, and the USD A
programs/authorities. These recommendations are all steps in the wrong direction for assisting
small and low-income communities to comply with rules because each recommendation shares a
common theme of eroding local government authority, control, and protection. Small
communities support exploiting all legal options to provide low-income and small/rural
communities with compliance options that are affordable and protective of public health.
However, the majority's report falls short of this simple goal.
2.0 Support and Explanation of Small Community Affordability Position
• Scott J. Rubin: Evidence that EPA's and Majority Recommendation Are
Unaffordable
Scott Rubin's presentation to the NDWAC panel showed that the lowest 20 percent
of households (25 million households in the U.S.) are already paying more in their
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public health expenditures than their income permits (Scott J. Rubin, Criteria to
Assess Affordability, NRWA 2002). Therefore, any increase in water rates for
these economically "sensitive subpopulations" is unaffordable. What is
confounding to small communities is that Rubin's studies and evidence are not
in dispute by the panel. Yet, the majority still recommended that these families
could afford up to an additional $400 per year per rule.
• The Affordability Metric
Rubin's analysis of data from the 1990 census shows only a weak correlation
between MHI and the level of poverty in a community. Rubin found that at the
median income of approximately $30,000 in 1989, the level of poverty ranged
from zero to more than 20 percent in U.S. countries. That is, communities with the
same median income can have poverty rates, and the presence of low-income
households, that vary drastically from one another.
The use of MHI computed as a national aggregate as the sole metric for
determining affordability has many problems. NRWA believes that MHI masks
the financial hardship that low-income communities and low-income households
have in meeting many of the existing regulations. The purpose of the national -
level affordability determination is to identify the likelihood that small water
systems will be able to afford to comply with a regulation without creating a
serious risk of adverse health consequences. The fact that a certain level of
expenditure is affordable to the median income household in a community tells us
very little about the ability of the low-income households in the community to
afford the same level of expenditure.
A more equitable metric can be found for determining affordability for small water
systems. Our organization has outlined a policy that maximizes public health
protection under the section titled, "Safe and Affordable Variance Approach."
However, if EPA uses MHI as a metric of affordability until a more equitable
metric can be found, an adjustment must be made for the differences in rural vs.
urban communities. There are fundamental differences between rural and urban
communities. Some of these differences are obvious: rural communities are less
densely populated and tend to have smaller water systems. Some of the
differences are not so readily apparent: there are a large number of small water
systems in urban areas, and income levels are substantially higher in urban areas
then they are in rural areas. As a result, rural households tend to spend a higher
percentage of their income on utilities and other necessities than do urban
households. In fact, the typical rural household tends to spend essentially all of its
after-tax income, while the typical urban household tends to have a surplus of
nearly $4,000 per year. (Scott R. Rubin, Economic Characteristics of Small
Systems, NRWA, 2001). We also suggest that EPA develop a matrix of
affordability criteria so that any system that has valid affordability concerns will
not be precluded from obtaining relief because it did not qualify under a single
criterion such as a national MHI target.
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Safe and Affordable Variance Approach (SAVA) - A policy option that provides
maximum public health protection
Recognizing that any increase in water rates for economically "sensitive
subpopulations" is unaffordable and that the variance technology is always
"protective of public health, " EPA should list variance technologies for all
applicable rules. Authority for implementing the variance technology should
be retained at the state and local level. States will decide on a case-by-case
basis (based on local conditions) the appropriateness of variance technology.
For example, some states use their own affordability test of 1 percent of the
specific communities MHI to determine "disadvantaged community"
eligibility for SRF funding - which may also be appropriate for variance
technology decisions.
Education, source water protection, bottled water and "other means" should be
used as a variance technology as authorized in the Safe Drinking Water Act. In
some situations, communities are within the range of being protective of public
health and meet the affordability criteria but cannot afford installation of expensive
treatment technology. This will require EPA to determine what is "protective of
public health" and the contaminant level that presents an "unreasonable risk to
health" (URTH).
Tradeoffs
Some have mentioned that low-income families are already paying over 2.5
percent MHI for water. While a fraction of a percent may be paying more than 2.5
percent of MHI, this perspective misses the main point of affordability, which are
tradeoffs. Yes, a small fraction of families are paying more than 2.5 percent;
however, they are trading off more important expenditures (food, health, doctors,
etc.), which they have more discretion over. The fact that low-income families are
currently paying over 2.5 percent MHI is proof that the current procedure is
flawed. Low-income families will indeed pay more for water; Rubin has shown
that families will always pay for rent and water. However, families will be forced
to choose between paying for medical care, food, heat, or other necessities that
directly impact public health.
Rubin's studies document in detail the tradeoffs that low-income families are
forced to make in order to pay for higher water rates. For example, a recent study
conducted for the State of Iowa Department of Human Rights reached dramatic
conclusions about the tradeoffs that low-income households must make in order to
pay their utility bills (Mercier, Joyce M., Cletus R. Mercier, and Susan Collins,
Iowa's Cold Winters: LIHEAP Recipient Perspective (Iowa Dept. of Human
Rights, 2000)). That study concluded that, in order to pay their home-heating bill,
low-income households made the following tradeoffs: over 12 percent went
without food at some point during the month, more than 20 percent went without
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NDWAC Affordability Recommendations, July 2003
necessary medical care (failed to see a doctor when sick, failed to fill prescriptions
for medicine, failing to take the full dosage of a prescription so it would last
longer), nearly 10 percent were unable to pay their mortgage or rent, risking
foreclosure or eviction, and almost 30 percent did not pay other bills or incurred
debt to pay the heating bill. A researcher who has studied the problem for the U.S.
Census Bureau concluded that one-third of households with incomes below
$10,000 per year were unable to meet at least one basic need (rent, utilities, food,
medical care). In a later study, the same researcher concluded, "about 1 person in
5 lived in a household that had difficulty meeting at least basic needs. These
included households that didn't pay utility bills, didn't pay mortgage or rent,
needed to see the doctor or dentist but didn't go, had telephone or utility service
shut off, were evicted, didn't get enough to eat, or otherwise didn't meet essential
expenses."
During the proceedings of this panel, PBS, the New York Times, National Public
Radio, and 60 Minutes all did exposes on the plight of low-income populations in
the U.S. These features covered the reality of the difficulty of these economically
sensitive subpopulations to afford housing, food, medical care, and obtaining
employment. They also brought to light real people and families in dire economic
situations. The documentaries highlighted increasing rates of unemployment in
minority populations, housing expenses increasing at uncontrollable rates, and
families avoiding medical care to pay for other expenses necessary for survival.
• The Politics of Variance Technology
Small low-income communities do not understand why the panel does not
recognize the fact that millions of families can't afford one or more $400/year
increases in their water rates? NRWA is concerned that the panel did not
acknowledge a realistic affordability level because it would require EPA to
determine a variance technology policy, which incidentally is the Congressionally
prescribed solution to unaffordable EPA rules. Some panelists argued that
variance technology allows for higher concentrations of contaminants in drinking
water, and therefore results in lower safety of drinking water, and that states can't
implement variance technology. We believe these arguments are "red herrings."
We believe that the granting of variances should be embraced and used as widely
as possible, to provide the greatest potential for public protection in low-income
and rural households. As Scott Rubin 's research revealed, cost is a function of,
and arguably the most critical component of, public health protection for low-
income households. Since every variance is de facto: (1) protective of public
health; and (2) a cost savings to low-income families, the more variances granted,
the greater the over-all public health. Before any variance technology is identified,
EPA must conclude that the variance technology is "protective of public health."
Who could credibly argue that 10.1 ppb of arsenic is unsafe, while 10.0 ppb is
safe? Even under the most legally liberal federal policy of granting variances,
local and state oversight still exists. States may use the EPA authorization of
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variance technology at their discretion; there is no right to install the EPA-
identified variance technology. Also, a state must determine that each variance
ensures "adequate protection of human health." If anything, this bureaucratic
hurdle is already too burdensome. More importantly, every community has the
choice of whether or not to install the variance technology. Limiting the use of
variance technology, through administrative actions, increases the potential for
overriding a local population's own decision on how best to utilize their limited
resources. Maximizing public health protection means allocating limited public
health resources in the most effective manner.
State agency representatives and others have expressed opposition to utilization of
the variance provisions because of the complexity and, in their opinion, the
potential for the creation of a two-tiered standard setting program. On the other
hand, small communities do not believe EPA nor states can decide which
provisions of the SDWA to implement and which to not. Under the SDWA, EPA
is required to exploit the small systems' variance provisions when triggered by
mandated EPA determination (i.e., affordability). Congress has already spoken on
this issue, and has overwhelmingly agreed that EPA must implement a small
system treatment variance program consistent with the Act.
Can EPA identify a drinking water standard above the MCL that is protective of
public health (PPH) or an unreasonable risk to health (URTH)? That is what the
law requires; however, it has not been adequately implemented. For example, in
March, EPA did not find that arsenic concentrations above their standard
necessarily present an "unreasonable risk to health (URTH)." Instead of
identifying the levels of arsenic that are "protective of public health" as
contemplated by the variance technology provision in the Act, EPA creatively
chose to identify what these levels are not. "EPA is... determining what does not
pose an unreasonable risk to health with respect to arsenic, rather than addressing
the much more complex issue of what does constitute an unreasonable risk to
health." Does this make sense? EPA cannot say what "is" a health risk, only what
is "not" a health risk. If EPA cannot determine PPH or URTH, we should know
that.
EPA should identify what constitutes PPH and URTH as contemplated by the
SDWA for all contaminants or provide a clear definition of principle for
determining such levels.
We understand the concern of those who do not wish to go down the road of a
variance technology, which requires a wholly new and separate cost benefit
analysis using a mixture of URTH, PPH, and affordability. It would be complex
and politically risky. Also, it could result in a conundrum. For example, if EPA
declared that 10.1 ppb of arsenic presented no unreasonable risk to health and
allowed small communities with affordability problems to utilize "other means"
that supplied water greater than the MCL it may be politically difficult to argue the
10.0 standard is necessary for larger, more affluent, systems. However, the answer
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is not to shut the door on variance technology; because, it denies a solution for
low-income populations, forces them into harmful tradeoffs, and small system
variances are required by law.
• Environmental Justice
Some have argued that variance technology presents an environmental justice issue
(poorer communities receiving less public health assistance than richer
communities). However, this argument neglects the reality that cost per family is a
function of public health. The main environmental justice issue is EPA's overly
high 2.5 percent MHI affordability level. Again, if we can conclude anything from
Scott Rubin's research, it is that cost is a function of, and, arguably, the most
critical component of, public health protection. EPA has stated that the purpose of
its affordability determination is to "look across all the households in a given size
category of systems and determine what is affordable to the typical, or middle of
the road household." [FR 6975-7066] EPA's MHI standard does not adequately
consider the quantity, concentration, and financial abilities of low-income families
or disadvantaged communities; EPA did not take into consideration the ability of
low-income and rural populations to afford the rule as required by the Agency's
Environmental Justice policy. [Executive Order 12898],
• Alternative Approaches
The scope or mission of the panel includes the objective to find "alternative
approaches to those used to-date by the Agency." The panel lists numerous
recommendations under this category including new polices on rate structures,
consolidation, funding programs, changes to federal programs, state programs,
roles for private systems, etc. It is presumptuous to consider additional federal
authorities (that Congress chose not to authorize in their 1996 review of the Act) to
address small community affordability problems without an initial determination
that the SDWA is incapable of working in small and/or low-income communities.
Under the Safe Drinking Water Act, Congress set the nation's drinking water
policy, and directed EPA to deal with poor and small communities' affordability
problems by implementing cost-benefit, variance technology, affordability
determinations, exemptions, funding and other provisions authorized in the Act.
We don't see this panel or EPA with the authority to trump, rewrite, or limit
implementing what Congress has directed in the Act.
• Consolidation Policy
EPA's authority to form consolidation policy is limited under the SDWA to the
provisions in the SRF, enforcement, and variance sections. Policy
recommendations outside the limited federal scope should be resisted. NRWA
supports consolidation when it will result in the greatest public health protection
for the consumers. We believe this is what EPA Assistant Administrator Tracy
Mehan envisioned when he coined the term "appropriate consolidation."
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However, many consolidation polices do not result in the greatest public health
protection of consumers, but, rather, result in other objectives such as: (1)
decreasing the number of drinking water systems in the country so that the
regulatory burden is decreased; or (2) eliminating the universe of systems that are
not considered "viable" by some arbitrary standard. The latter objective leaves
many of the poorest families with public drinking water that may be better than no
access to public water, but not as good as the system considered viable; it limits
incremental public health improvements for systems below the "viable" standard
by eliminating that public water supply.
Under the small system variance section, a state retains full discretion to determine
if a system should be consolidated before it is granted a variance, so there is
neither authority nor need for EPA policy. Small communities support a common-
sense consolidation policy (i.e., consolidate when doing so would result in the
greatest public health protection). In other words, if a system is out of compliance
and the rule is determined unaffordable, the system should be allowed to choose
the more economical option (either the variance technology or consolidation).
Both options ensure equal public health protection because implantation of the
most economical solution ensures that the extra funds will be retained for needs
necessary for survival (e.g., health care, food, etc).
Consolidation and Limiting Local Choice
Communities will choose to consolidate when it is in their self-interest (when it
makes economic sense). Rural Water has assisted and promoted consolidation of
hundreds of water systems when it made sense and had local support. We are
aware that EPA continues to study and analyze "barriers to consolidation" and
other issues. EPA and other organizations continually study this theory, but rarely
do they consider the perspective of local citizens or communities when they make
their conclusions.
The NDWAC panel report recommends that consolidation is "probably the most
effective long-term compliance option for small systems...This approach is being
increasingly implemented to achieve cost reduction and greater water management
expertise." This statement leads NRWA to believe that the panel assumes
consolidation, as a rule, results in cheaper water service because economies of
scale are realized. The report calls for new consolidation initiatives at the state,
local, and federal level. The reality of consolidation is that in certain instances
consolidation results in cheaper water service and in other instances it results in
more expensive water service. The report, at best, glosses over and, at worst,
omits this very important concept.
Small communities do not resist consolidation when it is in their best interest.
Local governments can, and will, act on behalf of their own self-interest; this was
not recognized by the panel. For example, the panel finds that, "while Federal and
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State policies have increasingly emphasized the benefit of consolidation,
significant political, geographical and business barriers have prevented widespread
consolidation." This idea has been raised for years without evidence. We
continually ask for the list of communities that would be better off if they
consolidated but are unwilling. No such empirical evidence is presented in this
report nor have we ever seen such evidence.
The private water industry and the environmental community have long supported
consolidation incentives. In some cases, consolidation incentives put into law can
create unfair legal structures favoring privatization. For example, in the 1996 Act,
a system that consolidates may avoid some civil enforcement fines. However, no
such avoidance of fines exists if a system chooses to comply through some other
means like treatment or new source water. It is unfair to allow only one
compliance option when it is not necessarily the most economical.
Small communities support retaining all local government authority over
consolidation, cooperation, and restructuring decisions. This assures the best
possible decisions for the local citizens. Considering all the complexity of
determining local public health policy (cost, benefits, tradeoffs, etc.), there is no
better mechanism for determining the best local public health policy than the local
citizens' choice.
• Dual Standards
The NDWAC panel misleadingly reports that variance technologies are not
protective of public health. For example the report states that, "variance
technology does not result in water quality that meets EPA standards," and "more
water systems will be permitted to operate with water that does not meet the
desired EPA MCL national standard and the double standard issue will be
exacerbated." The SDWA does not include a provision for a "desired" MCL - it
authorizes regulations that include MCLs and small system variances technology -
and does not value one method of compliance over another. Furthermore, under
the Act, using variance technology is part of the "national standard." The report's
so called "dual standard issue" is something contrived. Both the MCL level and
the protection of public health level are safe. Variance technology is just an option
to comply with the regulations not a separate standard. It makes even more sense
considering that the MCL is not based on public health or safety, but based on
"feasibility" (or affordability) of large water systems. Similarly, Congress has
provided small systems with a method of compliance - small system variance
technologies and other means - which is NOT a dual standard. Furthermore,
variances provide the most public health protection possible and must be reviewed
periodically until affordable technology can be identified.
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LIWAP and Federal Funding to Individual Households
NRWA does not support the recommendation for a LIWAP program or a new
water tax. Major problems with the suggested approach include difficulty making
the program work in very small communities: the need for major legislative
reform; significant new monies to fund the program; and the fact that funding for
this program would compete with drinking water initiatives and other funding
priorities.
A water tax does not solve the problem of keeping EPA's rules affordable and
workable. More appropriately, EPA should move in the direction of advocating
more consumer choice of water quality and water rates. A water tax removes more
discretion and choice from the local level about how to use their limited resources.
Local governments (water and wastewater systems) are owned and operated by the
local citizens - the people that we are trying to protect. They are the branch of
government most responsive to and most representative of the will of the public.
By their very nature, they strive to take every possible action to protect consumers
— themselves. However, every small community faces unlimited challenges and
needs, with limited financial, administrative, and technical resources. They also
need to ensure these resources are most effectively allocated to the most pressing
needs.
Further, the law regulates communities, not individuals. Federal funding programs
designed to assist with safe drinking water (SDWA) should retain the emphasis on
providing funds to the entity they regulate (i.e., community/water systems). This
retains the traditional federal/state/local governing structure, which has all sorts of
checks and balance mechanisms. This should not be eroded. Local governments
initiated their drinking water system without mandates, and are interested in
continuing as the primary source for community welfare with regard to drinking
water.
Principally, taxpayer subsidies should be prohibited from large profit generating
companies or companies paying profits for shareholders/investors. Such subsidies
should be reserved for identified social and welfare objectives. We believe that the
distinction in mission between public and private (maximizing profit vs. providing
for public welfare) is the core principal that should be recognized in funding
programs designed to assist communities with drinking water safety. While
maximizing profit is a noble virtue and as "American" as safe water, we do not
think that taxpayers should help the cause of large privately owned systems.
Changing or Re-prioritizing Local, State and Federal Programs
Small communities are not convinced that local and state government are
administering ineffective programs and need new oversight or redirection of their
polices. The report concludes "new and expanded State leadership is essential to
promote cooperation among small systems." How can the panel make this
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NDWAC Affordability Recommendations, July 2003
conclusion without first identifying a state that is not fully taking an adequate
leadership role over its communities? No states have been identified in the report.
The panel has supported major policy initiatives based on vague evidence of the
need for such changes. For example the report recommends "all options that
achieve full regulatory compliance need to be considered prior to and during the
small system variance process." We assume this is a recommendation that
something new is needed, however, we are not sure just what is needed and by
whom. Further, it is not clear what "full" regulatory compliance means versus
"compliance."
The panel report also concludes that, "since cooperative efforts are very effective
in helping small system affordability problems, a larger share of loan and grant
(principal and interest forgiveness) portions of the DWSRF should go toward
supporting these cooperative efforts." We have not seen the evidence that
cooperative efforts are "very effective" to the point that the state government's
current use of the SRF funding needs to be changed. Also, this recommendation
allows for "cooperative effort" to trump public health in awarding funding. We
strongly believe that public health should be the priority of SRF funding and not be
second to cooperative efforts. If cooperative efforts result in the most public
health improvement, they should qualify, but priorities in distributing money
should be clear and based on public health merit. This is presently the policy in all
50 states, and does not need to be changed.
While we agreed to the importance of existing education principle requirements,
we are concerned about the vagaries of words like "meaningful."
> Meaningful local public education and local public participation effort
> Meaningful review for the system applying for a variance
> Meaningful incentives for assessing whether cooperative efforts are feasible
We do not support more or new federal oversight but rather support retaining all
current state and local authority.
The panel recommends the "expanded use of the private sector and large central
utilities" to assist in the solution to affordability. However what is "expanded
use."
Much of the terminology used in the panel's report is largely subjective and will
likely
have widely varying meanings in the future. We see no agreement on the meaning
of these terms and see them as problematic, especially if they are interpreted to
have some recommendation for legal policy.
The Work Group recommends that the "USDA's water program and 7 U.S.C. 1926
(b) should not be modified to be similar to EPA's programs." This would be a
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disservice to low-income rural populations trying to improve drinking water
quality. We have not seen any problematic conflict between the mission of EPA
and USDA. If anything, USD A has a more effective program in advancing public
health because their mission is more focused on "assisting" rural low-income
populations and basic public health, versus EPA's focus on "enforcing"
compliance with the regulatory requirements.
Consideration of Dual Standards
The Work Group should have given more consideration to the use and EPA
application of dual standards. EPA has routinely excluded certain categories of
public water systems from having to comply with NPDWRs. These examples,
while resulting in different outcomes all serve to illustrate examples of dual
standards. Some cases result in outright exclusion from regulation; in others,
differentially applying the regulation or imposing different regulatory requirements
clearly documents that today's implementation of the SDWA involves a system of
dual standards. Existing cases of dual standards include:
> Trihalomethanes - EPA concluded that small system resources would best be
spent on maintaining and improving microbiological quality and safety rather
than imposing regulatory requirements to reduce TTHM levels. EPA
established two different standards based solely on system size, for a
substance that was considered to present a carcinogenic risk.
> The 1998 Revised TTHM Standard as Part of the DBP Rule - The revised
TTHM standard was promulgated in 1998 as part of the Disinfection By-
products Rule (DBP) which lowered the TTHM MCL to 0.08 mg/L and
applied to both community and non-community water systems of all sizes.
[63 Fed. Reg. 69390, 69465; December 16, 1998] However, systems serving
more than 10,000 people had a compliance deadline of December 31, 2001;
for those serving fewer than 10,000 people, the compliance deadline is no
later than December 31, 2003. [40 CFR 141.64(b)] Thus, a dual standard for
TTHM remains in effect until the end of 2003.
> Synthetic Organic Chemicals Rules - In the final SOC rule, EPA decided to
impose the SOC regulatory requirements to a subset of the previously
excluded class of non-community water systems, but to continue to exclude
non-community systems, that served transient populations such as
campgrounds, parks and gas stations.
> Lead and Copper - The lead and copper rule represents another instance
where EPA elected to exclude coverage from transient non-community
systems.
> Radon - In 1999, EPA proposed the NPDWR for radon and to apply this new
contaminant standard only to CWSs. [64 Fed. Reg. 59246, 59255; November
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2, 1999] As already noted, EPA justified its decision to exclude these systems
by relying on Congress' objective in passing the 1996 Amendments - "to
focus regulations on the most significant problem." EPA decided to exclude
the TNCWS
> Radionuclides - EPA expressed a desire to rely on §1412(b)(6)(A) to exclude
from the radionuclides rule, NTNCWSs because of the disparity between their
specific costs and benefits. EPA estimated that the cost per cancer case
avoided by regulating NCNTWSs would greatly exceed one hundred million
dollars, well above the Agency's historical cost cut-offs for regulation,
therefore, EPA elected not to regulate NTNCWSs.
> Arsenic - EPA's arsenic standard undertook a risk analysis very similar to the
one performed on radionuclides but in this case came to a different
conclusion. In its June 22, 2000 proposal, EPA proposed not to extend
coverage to NTNCWSs and concluded, based on its analysis of the quantified
benefits of bladder cancer reduction from lowered exposure to arsenic in
drinking water, that "regulation of arsenic in NTNCWSs provides only very
limited opportunity for national risk reduction." By the time it promulgated
the final arsenic rule in January 2001, EPA had changed its mind.
Given the overall thrust of the 1996 Amendments to provide EPA with greater
latitude in prioritizing regulation and in fashioning individual rules to maximize
health benefits while being sensitive to costs, it is understandable that EPA has
continued its past practice of chiseling out categories of water systems where it is
able to make a considered judgment that regulation will not provide cost-effective
benefits. It follows that if EPA has the authority to apply only certain portions of a
regulation to a category of water systems, or more significantly outright exclude a
category of water systems from coverage, then issuing variances for unaffordable
regulations is in the Agencies best interest to promote the most effective increase
in public health protection.
3.0 Conclusion
When valuing the merits of this report and its recommendations, it is important to remember that
NRWA is the only member of the panel that represents small communities and their customers
(or citizens) democratic voice. We represent over 22,000 communities and their local governing
structure. No other organization on the NDWAC affordability panel is directly accountable to
small communities or their customers. Private water systems that "sell" water to people for a
profit do not represent local communities, no more than any other community business. The
broad range of interests that have participated on the panel have offered some helpful advice in
their subject matter areas of expertise, but do not necessarily always represent the needs of the
local community. This must be remembered when considering terminology of "minority" and
"majority" positions in the final NDWAC report, and issues of paternalism. This report
represents a consensus among the highest percentage of small communities (over 50 percent of
small communities across the U.S.).
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In 1996, Congress envisioned a new law with provisions to assist small communities as
described by Senator Baucus on the Senate Floor, "The bill provides special help to small
systems that cannot afford to comply with the drinking water regulations and can benefit from
technologies geared specifically to the needs of small systems. Here is how it would work. Any
system serving 10,000 people or fewer may request a variance to install special small system
technology identified by EPA. What this means is that if a small system cannot afford to comply
with current regulations through conventional treatment, the system can comply with the act by
installing affordable small system technology " There are thousands of such communities in the
U.S.; to date, EPA has not allowed any one of them the opportunity to use variance technology.
If Congress' prescribed solution to the affordability problem is unworkable because EPA can't
determine variance technology policy ("reasonable" affordability standards, contaminant
concentrations that are protective of public health, and alternative variance treatment methods)
then this should be clearly stated and reported to Congress. Until such time that Congress
determines they need to rewrite the Act, we should assume they meant what they passed in 1996.
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Additional Comments
filed by
Councilmember Makia Epie
Cedar Hill, Texas
On behalf of the National League of Cities I found it necessary to vote against the
recommendation of the Work Group to enact a Low Income Water Assistance Program and
abstain from supporting the recommended changes to the Drinking Water State Revolving Fund
(DWSRF) allocation formula.
Support for Enactment of a LIWAP
In principal, it is very likely that the NLC membership would support a proposal to provide
assistance to low-income households for water and sewer services if funding for the assistance
comes from sources other than a tax on water. NLC voted "no" because we currently have no
policy on this recommendation and I believe it important to secure the prior support of our
members. It is necessary to make clear, however, that under no circumstances would NLC
support a proposal to fund a LIWAP with a "water tax." On this matter we have very clear and
unequivocal policy.
Proposed Changes to the DWSRF
The determination of allocation formulas is the ultimate in political decision making. As would
be the case with any broadly based organization - and NLC represents 16,000 municipalities
across the nation - formula changes would undoubtedly adversely affect as many of our
members as such changes would benefit others. Furthermore, no information was presented to
the work group on the impact of the proposed formula changes or even whether the
recommendation would accomplish its intended objective. As an organization, we rarely engage
on this issue and would prefer not to do so now either.
I appreciate the opportunity that was afforded NLC to participate in the Affordability Work
Group and wish to thank the NDWAC and EPA for including us in these deliberations.
Makia Epie
Councilmember
Cedar Hill, Texas
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Appendix 2
Final NDWAC Affordability
Work Group Roster
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National Drinking Water Advisory Council
Small Systems Affordability Work Group
Final Roster
Work Group Members
Kevin Brown
Director, Division of Drinking Water
UtahDepartment of Environmental Quality
Salt Lake City, UT
David Mome
President, SB Water Co.
G.P.M. Associates Inc.
Cheny Hill, NJ
Stephen Cooke
University of Idaho
Department of Agricultural Economics
& Rural Sociology
Moscow, ID
Makia Epie
City Council
Cedar Hill, TX
Diana Niedle
Public Policy Associate
Consumer Federation of America
Washington, DC
Erik Olson
Senior Attorney
Natural Resources Defense Council
Washington, DC
Bruce Florquist
Director, Public Works Department
City of Rawlins
Rawlins, W Y
John Gaston
CH2M HILL
Oakland, CA
Jerry Gilbert
Consulting Engineer
J. Gilbert, Inc.
Orinda, CA
Merl Hackbart
Professor of Finance and Public Administration
University of Kentucky
Lexington, KY
Saeid Kasraei
Program Manager
Maryland Department of the Environment
Water Supply Program
Baltimore, MD
Laurie Marin
Utilities Planner
Nez Perce Tribe
Lapwai, ID
Bob Raucher
Stratus Consulting Inc.
Boulder, CO
Velma Smith
Campaign for Safe and Affordable Drinking Water
Washington, DC
Blanca A. Surgeon
Rural Development Specialist - Environmental
Rural Communities Assistance Corporation
Santa Fe, NM
John Trax
Sr. Environmental Engineer
National Rural Water Association
Easton, MD
Olivia Wein
Staff Attorney
National Consumer Law Center
Washington, DC
John S. Young, Jr.
Vice President, Engineering
American Water Works Service Company, Inc.
Voorhees, NJ
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Work Group Alternates
Jerry Biberstine
(Alternate for John Trax)
Senior Environmental Engineer
National Rural Water Association
Littleton, CO
Carol Kocheisen
(Alternate for Makia Epie)
Principal Legislative Counsel
National League of Cities
Washington, DC
EPA Designated Federal Official
Amit Kapadia
Environmental Engineer
U.S. EPA - OGWDW/SRMD/LAB
1200 Pennsylvania Ave., NW (4067M)
Washington, DC 20460
Lei. 202/564-4879
Fax 202/564-3752
E-mail kapadia.amitfSlepamail.epa.gov
RESOLVE Facilitation Team
Jeff Citrin
Facilitator
Lei. 202/965-6388
Fax 202/338-1264
E-mail i citrin@resolv.org
Marci DuPraw
Senior Mediator
Lei. 202/944-2300
Fax 202/338-1264
E-mail mdupraw@resolv. org
Paula Moreno
Senior Program Secretary
Lei. 202/965-6218
Fax 202/338-1264
E-mail pmoreno@,resolv. org
RESOLVE, Inc.
1255 23rd St., NW, Suite 275
Washington, DC 20037
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Appendix 3
National Drinking Water Advisory Council
Ground Rules
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NATIONAL DRINKING WATER ADVISORY COUNCIL
WORKING GROUP GROUND RULES
BACKGROUND: Each Working Group under the National Drinking Water Advisory
Council (NDWAC) will follow the ground rules set out in this document Federal Advisory
Committee Acts (FACA) requirements allow working group members to participate fully in the
discussion of a specific issue without being appointed NDWAC members At least one member
of the Council will be a part of each working group to facilitate the flow of information back to
the full Council It must be noted that no working group can provide recommendations
directly to the EPA. The recommendations of a working group must be made to the full
Council at their scheduled meetings. The Council will consider the recommendations and
can either pass them on as they received them, amend the recommendations to reflect their
deliberations or not forward the recommendations after discussion.
GROUND RULES:
EACH WORKING GROUP:
¦ Will have a mission statement.
¦ Will have an agenda for each meeting.
¦ Will set the agenda for its next meeting at the end of meeting.
¦ Will have balanced membership.
¦ Will have at least one member from the NDWAC membership as a working member.
That member will report activities of the working group to the full Council.
¦ Will have an assigned EPA staff person to help coordinate meetings and provide a record
of proceedings.
¦ May assign a facilitator to help the flow of meetings (this may or may not be the EPA
staff assigned to the group).
¦ Will advise the full Council, not EPA Therefore, all recommendations must first go to
the full Council.
¦ Will give sufficient notice of meetings to the public and Council members, following the
requirements set forth in the GSA Regulation on FACA meeting notices (15 days prior to
meeting).
¦ Will provide equal rights to each member, holding one vote per assigned member.
¦ Work group members will attend all meetings. In an emergency, members can send an
alternate, but they cannot vote. Alternate will be a peer of the member. In an emergency
situation, an Association staff member may sit in, but this will be allowed only once
throughout the duration of the working group. Notification to the DFO should be made
as soon as possible.
¦ Will allow any group member to file a minority report.
¦ All Council members will receive agenda and summaries of each working group meeting.
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Appendix 4
Operating Protocols of
the NDWAC Affordability Work Group
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National Drinking Water Advisory Council
Work Group on National Small Systems
Affordability Criteria
Final Operational Protocols
1. MISSION
The purpose of the National Drinking Water Advisory Council (NDWAC) Work Group
on National Small System Affordability Criteria is to:
Provide advice to the NDWAC as it develops recommendations for the U.S.
Environmental Protection Agency (EPA) on National Small Systems Affordability
Criteria as required under the Safe Drinking Water Act (SDWA). In particular the
Work Group will make recommendations on:
• the Agency's national level affordability criteria, the methodology used to
derive the criteria and the approach to applying these criteria to national
primary drinking water regulations;
• alternative approaches to those used to-date by the Agency; and
• the role of alternate strategies - including funding mechanisms and possible
legislative actions - that would enable small systems to achieve and
maintain current and future compliance.
In addition, the Work Group will explore barriers and opportunities for small system
compliance and make recommendations that relate to the overall charge. In developing
these recommendations, Work Group members will need to bear in mind the structure
of the Safe Drinking Water Act and the limitations of readily available data and
information sources.
2. PARTICIPANTS
a. Representation Work Group individuals were selected based on the expertise and
experience needed to provide balanced advice to the NDWAC and hence to EPA
on issues related to national-level small systems affordability criteria. At least
three members of the NDWAC will be members of the Work Group in order to
facilitate the flow of information between the Work Group and NDWAC.
b. Alternates. Work Group members are expected to participate in all meetings or
conference calls to the greatest extent possible. In the event that this is
impossible, any Work Group member may designate one alternate, subject to
approval by the NDWAC, to participate in his or her place. The alternate must be
a peer of the member, and must have similar expertise and perspective, and/or the
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ability to fully represent the member. Only the Work Group member or his or her
designated alternate may participate in Work Group meetings. If neither the
member nor his or her designated alternate can attend, there will be no
representative at the table for that particular seat. In an emergency, a
representative Association member may sit in on behalf of a member (the
Designated Federal Official (DFO) should be notified as soon as possible), but
this will be allowed only once throughout the duration of the Work Group.
Alternates cannot vote.
3. DECISION MAKING
a. Consensus. The Work Group will strive to reach consensus, where possible.
Consensus is defined as "all can live with the recommendation." Work Group
decisions will be made only with the concurrence of all members present at a
given meeting, except for agreement on any final products delivered to the
NDWAC which will require consensus of all members. If consensus cannot be
reached a report will be drafted by Work Group members, assisted by the
facilitator. The report will describe the issues where consensus was not reached
and provide the perspective of all Work Group members who contribute material
to the report. This report will be submitted to the NDWAC as part of the product
delivered to the NDWAC.
EPA recognizes the complex and controversial nature of the subject matter that
will be discussed by the Work Group and would not expect consensus to be
reached on all issues. For areas where consensus can be reached, EPA will
carefully consider such consensus recommendations. Where consensus cannot be
reached, the Work Group would be expected to present the range of views
expressed, along with a discussion of the potential pros and cons associated with
the various alternative approaches.
b. Agreement and Product(s). Agreement of the Work Group on any written
document or other product(s) of the Work Group intended for delivery to the
NDWAC will be considered products of the Work Group. Pre-consensus draft
materials should neither be considered nor characterized as products of the Work
Group.
4. PROCEDURES
a. FACA. The Work Group is established by the NDWAC, a Federal Advisory
Committee established under, and complying with, the requirements of the
Federal Advisory Committee Act (FACA).
b. Notice of Open Meetings. Consistent with FACA requirements, meetings of the
NDWAC Work Group will be announced in the Federal Register prior to each
meeting (at least 15 days) and will be open to the public.
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c. Meeting Summaries. Draft summaries of the Work Group meetings will be
developed by the facilitator for approval by Work Group members. Meeting
summaries will be made available to the public only after approval by the Work
Group members. Completed meeting summaries will be loaded onto the EPA
web site (www.epa.gov).
d. Agendas. Meeting agendas will be drafted by the facilitator in consultation with
the NDWAC Work Group members. Agenda items will be identified at each
meeting for the subsequent meeting. A draft agenda will be distributed in
advance of each meeting for review by Work Group members. It will be
reviewed at the beginning of each meeting and will be refined, if necessary, and
approved.
e. Relationship to NDWAC. This Work Group has been formed to address specific
issues (see mission statement) and to make recommendations to the NDWAC (not
directly to EPA). The Work Group is not authorized to make decisions for the
NDWAC. All NDWAC members will be notified of the date and time of Work
Group meetings, and will be provided with agendas and written summaries for all
Work Group meetings/conference calls.
f NDWAC Receipt of Work Group Products. The recommendations or other
products of the Work Group must be made to the full NDWAC at one of its
scheduled meetings. The NDWAC will consider the recommendations and may
either pass them on to EPA unchanged, or may amend them to reflect their own
recommendations, or may, after discussion, choose not to forward them at all.
g. Facilitator. A neutral facilitator will facilitate the Work Group meetings and work
with Work Group members to ensure that the process runs smoothly. The
facilitator serves at the will of the Work Group, NDWAC and EPA and may be
dismissed or replaced by another as determined by the Work Group, NDWAC
and EPA. The role of the facilitator typically includes: developing draft agendas,
focusing meeting discussions, working to resolve any impasses that may arise,
preparing meeting summaries, working with Work Group members to support
between-meeting activities, working with the EPA staff in locating and circulating
background materials, and other appropriate functions.
h. Electronic Communication Electronic communication mechanisms will be
utilized to the greatest extent possible for the sharing of information outside of
Work Group meetings, including distribution of meeting agendas and summaries.
For any Work Group member who is unable to participate in electronic
communication, others means of communication will be utilized (fax and hard
copy mail). The purpose of electronic communications is to reduce paperwork,
delay, and expense of mailing or faxing.
i. Attendance at Meetings. All Work Group members are expected to make a good
faith effort to attend Work Group meetings and participate in conference calls.
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j. Caucus. Any subset of Work Group members may confer privately during or
after a Work Group meeting as needed. The facilitator may also confer privately
with Work Group members during or after meetings.
k. Observers. Work Group meetings are open to observation by the public.
Observers are any non-Work Group attendees at meetings. Only the Work Group
members (or their designated alternate) will be seated at the table and participate
in discussions unless the facilitator acknowledges an observer.
1. Committees. The Work Group may establish committees to assist it in carrying
out its mission. Committees may consist both of individuals who are members of
the Work Group ("decision-making members") and individuals who are not
("guest members"). Only those committee members who are also members of the
Work Group will participate in committee decision-making. The committees
shall strive to operate by consensus in generating recommendations or advice to
the full Work Group. Should consensus not be forthcoming, the committee may
produce majority and minority reports; guest members may submit or contribute
to such reports.
Committees may decide to recruit additional individuals to join the committee if
deemed necessary for carrying out the committee's mission by a majority of the
decision-making committee members participating in the committee meeting or
conference call where the suggestion is discussed. The committee must inform
the full Work Group promptly of any changes in the committee's composition.
All NDWAC members, Work Group members, and other known interested parties
will be notified of conference call dates and times. Committee meetings and
conference calls are open to observers, provided that the number of observers
does not interfere with the work of the committee and provided that sufficient
conference-call lines are available. RSVPs are requested to enable planners to
obtain sufficient call-in lines. In the event that conference call lines are limited,
available lines will be allotted to the following groups in priority order: committee
members, including both decision-making and guest members and key staff
supporting committee work; other Work Group members; NDWAC members;
other interested parties.
m. Public Comment. Meeting agendas will set aside time for the specific purpose of
taking public comment. Observers will be asked to indicate their interest in
making public comment ahead of time on a sign-up sheet provided at each
meeting for this purpose.
n. Changes to Procedural Protocols. These Procedural Protocols may be revised
with the consensus of the Work Group and with approval by the NDWAC and the
Designated Federal Officer.
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5. SAFEGUARDS FOR THE PARTIES
a. Good Faith All parties agree to act in good faith in all aspects of the Work Group
deliberations. In order to encourage the free and open exchange of ideas, views
and information prior to decisionmaking, members agree not to use specific
offers, positions or statements made by another member during non-public
discussions for any other purpose not previously agreed to in writing by the
members involved. It is the hope that other attendees at Work Group meetings
also voluntarily comply with this provision. Personal attacks and prejudiced
statements will not be tolerated.
b. Right to Withdraw. Any party may withdraw from the Work Group at any time
without prejudice. However, it is requested that the member wishing to withdraw
communicate the reasons for withdrawal.
c. Others' Positions. Members agree not to characterize the position of any other
party in public statements or in discussions with the media (even if that party
withdraws from the Work Group). To the extent feasible, members will refer
others to approved meeting summaries for information about the Work Group's
discussions.
d. Interactions with the Press. Recognizing that the way in which Work Group
discussions or the statements or positions of Work Group members are publicly
characterized may affect the optimal functioning of the Work Group, wherever
possible Work Group members (and their alternates) will refer inquiries from the
press regarding the overall process of the Work Group and its deliberations to the
facilitator(s) or to approved meeting summaries. If a Work Group member does
engage in discussion with the press, he or she will refrain from characterizing the
views of, or attributing comments to, other Work Group members.
6. SCHEDULE
The Work Group is expected to meet up to five times (in Washington DC) and to hold
several conference calls between September 2002 and February 2003.
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Appendix 5
Illustration of Two Possible Approaches for
Small System Drinking Water Determinations
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Illustration of Two Possible Approaches for Small System
Drinking Water Affordability Determinations:
EPA's Current "Expenditure Margin" Approach
And
An Alternative "Incremental" Approach
drafted by
Bob Raucher
[This Appendix is included because it illustrates two potential approaches to making
affordability determinations; the analyses and conclusions herein were not agreed to by the full
committee]
revised draft of January 3, 2003
1.0 Overview of Approaches
This paper provides a brief discussion and illustration of two possible approaches to determining
whether regulatory actions under the SDWA should trigger a potential designation of small
system variance technologies. The two approaches are (1) EPA's current approach, utilizing an
"expenditure margin" concept, and (2) an "incremental" approach that examines how estimated
household annual compliance costs for any future rule compare to a specified affordability
threshold.
For either approach, there are multiple variations that are possible (e.g., for how to define what
concepts and/or specific dollar values are useful indicators of what is "affordable"). In order to
keep the discussion manageable, this paper relies on simple descriptions and illustrations of the
two basic approaches. Some potential variations on each theme are offered as well. We also use
rounded numbers to help keep the illustrations easy to follow.
Finally, it should be noted that this discussion of affordability is separate from the SDWA's
requirement that EPA assess the benefits and costs of proposed and final drinking water
regulations. It is presumed here that EPA will: (1) conduct suitable benefit-cost analyses of the
regulatory options, (2) provide decision makers, stakeholders, and the public with clear
presentations of the incremental costs and incremental benefits of potential MCL options, on
system size basis, and (3) use the comparison of incremental net benefits in selecting a suitable
Maximum Contaminant Level (MCL), in accordance with the statute.31
31
It is also noted that if EPA finds a need to designate a small system variance technology — based on using either
of the affordability determination approaches discussed below — then the Agency may need to recalculate the
national benefits and costs of the rulemaking to account for a reasonable projection for how many small systems
might receive a technology variance from primacy agents. It is conceivable (but unlikely) that such a recalculation
of national level benefits and costs would significantly alter the level Agency selects for an MCL based on the
benefit-cost findings.
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1.1 EPA's Current "Expenditure Margin" Approach
The current approach used by EPA includes 4 basic elements:
1. An overall total affordability threshold that reflects a judgment of how much a median income
household (in a median small water system) can or should afford to pay — in total — for water
supply services. EPA currently defines its affordability threshold at 2.5 percent of median
household income (MHI). Using round numbers, MHI is $40,000 per year, and thus EPA
estimates a total affordability threshold of nearly $1,000 per household per year.
2. An expenditure baseline that is intended to reflect the baseline water supply costs borne by the
median household (in the median small system). Data collected from the 1995 Community
Water System Survey (CWSS) on water system revenues suggest median households pay
roughly $200 per year on water — which amounts to roughly 0.5 percent of their incomes.
The expenditure baseline is intended to be updated to reflect increases in typical household water
bills over time. Updates are intended to reflect newly promulgated regulations and other
requirements associated with sustainable and secure water system service provision. The recent
arsenic rule, for example, would add approximately $12 per year to the expenditure baseline,
based on the current EPA approach to estimating such expenditure baseline updates.32
3. An expenditure margin, which is simply the difference between the total affordability
threshold ($1,000) and the expenditure baseline ($200). This expenditure margin is intended to
reflect how much households can still afford — above and beyond baseline (current) water bills —
and still remain below the total affordability threshold. The expenditure margin is now
approximately $800 per household per year (but would decline by roughly $12 if arsenic were
included in the updated baseline).
4. Estimated annual compliance costs per household for each technology designated as Best
Available Technology (BAT) for a given rule. Currently, if there is one (or more) BAT that has
a per household estimated cost that is less than the "expenditure margin" (i.e., under $800 per
year), the rule is considered "affordable" for that small system size category.
How the current approach is applied
Step 1: The current approach compares the incremental cost of a new rule under consideration to
the expenditure margin (currently about $800) to determine if the incremental cost pushes the
median household (in the median system) above the total affordability threshold.
Step 2: If none of the BATs is estimated to cost less than the expenditure margin (currently $800
per year per household), then (and only then) would EPA proceed to determine whether there
32
The current EPA approach for adding regulatory costs to the expenditure baseline entails taking the total national
level compliance cost estimate (by size class) and dividing it across all Community Water Systems (CWSs) in the
size category. For example, EPA expects an average small system with arsenic above the MCL (about 5 percent of
the CWSs in the size class) will bear a compliance cost for arsenic on the order of $240 per household per year.
Spread over 100 percent of CWSs, this translates to $12 average cost for the smallest system size class (5.0 percent
* $240).
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was a variance technology that exists. A variance technology exists only if it costs enough less
than the BATs to be considered affordable (i.e., under $800 per year per household) and yet
delivers useful contaminant reductions (sufficient contaminant reductions to provide useful
health protection, although probably less removal than the BATs).
Step 3: If none of the BATs are affordable, and if EPA finds and designates a variance
technology, then (and only then) do State primacy agents have the option to consider whether
small systems in their domain may apply to use the variance technology for compliance.
Step 4: States that are willing to consider the variance technology provisions can then determine
whether any systems in their domain will be granted permission to use the variance technologies,
based on decision criteria of the State's choosing insofar as the decision process is in accordance
with applicable laws (e.g., requiring public hearings).
1.2 An Incremental Approach
A suggested alternative to the current EPA method (of a cumulative expenditure margin) entails
use of a blended approach:
• First, an incremental perspective would be applied at the federal level to determine
whether EPA should proceed to try to identify and designate a possible variance
technology for a given rulemaking.
• Second, the incremental approach would be combined with a strong recommendation that
States apply a more system-specific assessment of cumulative costs (using an approach
similar in concept to the current EPA method) to account for any system-specific
circumstances that might render the incremental approach too lenient or too strict for a
particular community water system (CWS).
The incremental approach includes 2 basic elements:
1. An incremental affordability threshold that reflects a judgment of how much a median income
household (in a median small water system) can or should afford to pay — for any given
individual new rule — for water supply services.
One potential incremental affordability threshold may be a given percentage of median
household income, with a possible threshold value of 1.0 percent of MHI (although other
variations in concepts or values can be applied, as illustrated later in this paper). The 1.0 percent
of MHI threshold translates to approximately $400 per year per rule. This would imply that if a
median household were to have to devote 1.0 percent or more of its annual income to cover the
expense of complying with a single drinking water regulation, then that rule might not be
affordable.
2. Estimated annual compliance costs per household for each technology designated as BAT for
a given rule. If there is one (or more) BAT that has a per household estimated cost of under
$400 per year (assuming use of the "twice current water bill" threshold), then the rule is
considered "affordable" for that small system size category.
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How the incremental approach might be applied
Step 1: The incremental approach entails a simple comparison of the incremental cost of a new
rule under consideration to the incremental affordability threshold. Under the current
illustration, the incremental affordability threshold is about $400 per rule (although other values
can be selected instead, as per the illustrations provided under Sections 2.0 and 3.0, below).
The US EPA activities under this blended incremental approach are then identical to what is
done under the current approach (except that the dollar-value threshold may be different,
depending on how the affordability threshold is set under either approach).
Step 2: Under the current illustration, if none of the BATs is estimated to cost less than $400 per
year per household, then (and only then) would EPA proceed to determine if a variance
technology exists. A variance technology exists only if it costs enough less than the BATs to be
considered affordable (i.e., under $400 per year per household) and yet delivers useful
contaminant reductions (sufficient contaminant reductions to provide useful health protection,
although probably less removal than the BATs).
Step 3: As under the current approach , if none of the BATs are affordable, and if EPA finds and
designates a variance technology, then (and only then) do State primacy agents have the option
to consider whether small systems in their domain may apply for use of the variance technology
for compliance.
Step 4: If EPA has designated a variance technology, then States that are willing to consider the
variance technology provisions can determine whether any systems in their domain will be
granted permission to use the variance technologies, based on decision criteria of the States'
choosing insofar as the decision process is in accordance to applicable laws (e.g., requiring
public hearings).
An important aspect of the blended incremental option is that the Work Group would strongly
encourage that State primacy agencies consider system-specific factors that affect how
cumulative water bills and/or community income levels affect the State's system-level
assessments for potentially granting technology variances. For example:
• A particular water system may have compliance costs that exceed $400 per household
(i.e., the federal-level incremental test as applied nationally to the median system), but
might not deserve a variance because of other relevant circumstances (e.g., the
community is relatively affluent, and/or the baseline water costs are very low).
• Alternatively, a specific CWS may have estimated compliance costs that are moderate
(i.e., less than the incremental threshold applied to the national median system and
prompting EPA's specification of a variance technology), but this CWS might still be
deserving of a technology variance (e.g., if the community is relatively poor, and/or if
other regulations or water supply factors make baseline water costs very high).
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2.0 ILLUSTRATIONS OF THE TWO BASIC APPROACHES
Simple numerical illustrations are provided below to reveal how the two approaches might work.
The basic scenario has the following assumptions:
1. Median household income in the median system is $40,000 per year.
2. Baseline water cost at the median is $200 per year.
3. The least expensive BAT for contaminant X costs $401 per household per year.
2.1 EPA's Current Approach, As Is
The total affordability threshold is 2.5 percent of MHI, or roughly $1,000. The expenditure
baseline is $200 per year, implying an available expenditure margin of $800 (i.e., $1,000 - $200
= $800).
Given that the cost of the least expensive BAT (which costs $401) is less than the available
expenditure margin of $800, the rule is deemed "affordable" for small systems and no variance
technology is investigated. No technology variances are available to any systems.
2.2 EPA's Current Approach, But Total Affordability Threshold Changed to 1.5 percent
of MHI
The total affordability threshold is 1.5 percent of MHI, or roughly $600. The expenditure
baseline is $200 per year, implying an available expenditure margin of $400 (i.e., $600 - $200 =
$400).
Given that the cost of the least expensive BAT (which costs $401) is greater than the available
expenditure margin of $400, the rule is deemed "////affordable" for small systems. Therefore
EPA investigates less costly, less effective technologies to see if any can be classified as
"affordable" (i.e., costing $400 or less per year) and still provide worthwhile contaminant
reductions.
If EPA identifies and designates a variance technology, then it is up to the States to consider
whether they wish to enable small systems in their domain to apply. If so, they then go through
applicable procedures (including public meetings) to determine whether individual communities
will be granted technology variances.
2.3 Blended Incremental Approach, with Incremental Threshold Set at 1.25 percent of
MHI
The incremental affordability threshold is 1.25 percent of MHI, or roughly $500. Given that the
least expensive BAT (which costs $401) is less expensive than the threshold, the rule is deemed
"affordable" for small systems and no variance technology is investigated. No technology
variances are available to any systems.
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2.4 Blended Incremental Approach, with Incremental Threshold set at 1.0 percent of MHI
The incremental affordability threshold is 1.0 percent of MHI, or roughly $400. Given that the
cost of the least expensive BAT (which costs $401) is greater than the threshold, the rule is
deemed "////affordable" for small systems. Therefore EPA investigates less costly, less effective
technologies to see if any can be classified as "affordable" (i.e., costing $400 or less per year)
and still provide worthwhile contaminant reductions.
If EPA identifies and designates a variance technology, then it is up to the States to consider if
they wish to enable small systems in their domain to apply. If so, they then go through
applicable procedures (including public meetings) to determine whether individual communities
will be granted technology variances.
Under the blended approach, States would be strongly encouraged to consider several system-
specific factors — including cumulative effects of multiple regulations, and community income
levels — in determining whether or not a particular small system applying for a technology
variance should be granted one.33 The recommended approach would encourage States to use
the cumulative impact approach embodied in EPA's current approach, but to apply it using the
State's knowledge of system-level circumstances (rather than based on national median values or
the diluted average costs of compliance with other regulations).
For example:
• A small system may have estimated compliance costs of less than the $400 per year used by
EPA as its incremental affordability threshold, but that system might still be considered
deserving of a variance if:
• Baseline costs were notably above the $200 baseline that EPA estimated for the
median national system (e.g., because of the impacts of multiple regulations on
that particular CWS), or
• Other factors exist that result in high baseline water service costs (e.g., expensive
water rights), or
• Median household income was well below the national median of $40,000.
• Likewise a system with an incremental per-household regulatory compliance cost higher than
EPA's $400 estimate might not be found deserving of a technology variance if, for example:
• The median income was above the national median level, and/or
• Baseline costs were well below the national estimated median of $200 per household,
and/or
33
The state also should take into consideration practical opportunities for feasible consolidation and ensure that
there is full opportunity for public education, discussion, and an informed community decision regarding the
possible variance.
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• Through public education and discourse, most community members expressed strong
interest in forgoing the variance and instead wished to meet the MCL.
3.0 VARIATIONS ON THE TWO BASIC APPROACHES
Either of the two basic approaches outlined above can be modified using alternative definitions,
data, and/or concepts for "affordability." Ultimately, these choices affect the dollar thresholds
and likelihood that the variance technology provision might become applicable for a given
rulemaking.
3.1 Variations on the Current EPA Approach
Numerous variations are possible to the current approach. Many of the options are embodied in
the charge questions provided by EPA. For each of the 4 basic elements defined above, there are
variations under consideration. For example:
1. For the total affordability threshold, key alternatives revolve around whether 2.5 percent of
MHI is justified and appropriate — why not 1.5 percent of MHI or 3.5 percent of MHI?
Additional variations revolve around the questions of why use median household income (as
opposed to the 25th percentile household), or why use the median water system (as opposed to a
CWS with higher than average costs or lower than typical incomes)?
According to EPA's "White Paper" and staff presentations, EPA's selection of 2.5 percent of
MHI is based (in large part) on estimated costs for two options EPA believes reflect willingness
to pay (WTP) for averting behaviors for waterborne risk avoidance — bottled water or point of
use (POU) devices. EPA calculated a bottled water cost of $550 per year per household, and
about $220 to $330 per year for POU devices (reducing its prior high end POU cost estimate
downward from $500). However, the dollar amounts applied by EPA appear to be overstated for
these options, especially bottled water (for which $260 appears to be a more accurate estimate).34
EPA selected 2.5 percent of MHI because that threshold would keep bottled water and POU
"affordable" under their expenditure margin approach. If baseline water costs were up to $250
per household and bottled water might cost $550, then total water expenditures would be $800
($250 + $550). A 2.0 percent of MHI threshold would not guarantee these approaches would fit
under the cap, so 2.5 percent was selected to ensure there was ample room to find POU and
bottled water "affordable" technologies.
However, using the same logic but more refined estimates of POU and bottled water costs, a total
affordability threshold of 1.5 percent of MHI would provide ample room in the expenditure
margin for POU or bottled water. Using 1.5 percent of MHI, the total affordability threshold is
roughly $600. Subtracting an expenditure baseline of $200 (or even $250 as a higher estimate)
leaves an available expenditure margin of $400 (or at least $350) — ample room to
accommodate POU or bottled water costs (which are likely to be under $300 per year).
34
For example, Cotruvo (forthcoming) estimated from interviewing major bottled-water distributors that a typical
household customer uses 5 gallons per week, for a typical annual expenditure of $260 (at $1 per gallon). EPA's
calculation of $550 is based on 2 liters per day and 3 persons per household; whereas median conditions imply 1.1
L/day and 2.6 persons per household, or $262 per year, very close to the Cotruvo estimate.
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Apart from the empirical questions about the cost of bottled water and POU, a more fundamental
issue is that it is unclear that these expenditures predominantly reflect WTP to avert waterborne
health risks (as opposed to providing users with water of better aesthetic quality, for example).
In addition, other concepts might be considered as well for the basis of total affordability.
Comparisons to international water bills in one such alternative. Another is looking at trade-offs
low-income households may need to make if their water bills increase. If WTP for risk
reductions are to be used as a benchmark, then another metric to consider are the data on what is
called the "value of a statistical life" (VSL) — a misnomer for an approach - controversial to
some members — that is intended to reflect data on trade-offs people make between statistically
low-level risks of fatality and money (or time).35
35
These tradeoffs can be based on either WTP to reduce risks (e.g., by pursuing risk-reducing actions like use of
seat belts, purchasing cars with air bags, deploying smoke detectors, and so forth), or willingness to accept added
compensation in order to engage in higher-risk activities (typically, accepting higher wages for occupations with
above average risks).
The VSL approach is not without controversy. Critics of the approach have fundamental ethical concerns about the
government making decisions based upon a presumed value of human life. They also believe that the studies upon
which VSL is based are outdated and biased, noting among other objections, that: (1) the studies purport to measure
the value of life, generally based upon blue-collar workers' "agreement" to work at a job entailing elevated risk,
when there was little or no evidence that the workers actually understood those risks; (2) many workers studied were
likely vulnerable to economic duress, so their decisions were not truly reflective of the value they placed on their
lives; (3) the studies do not evaluate the value people put on the lives of their children or spouses, which are likely to
be higher; (4) the studies generally evaluate risk of sudden death from an accident, not a slow and painful death,
accompanied by substantial dread, such as would accompany death from cancer and whose avoidance might be
valued higher; (5) the studies are extremely limited in the number and types of people evaluated, and do not, for
example, consider people who are likely to be willing and able to pay more for reducing risks than many blue collar
workers; (6) the dollar values derived are subject to manipulation through "discounting," latency period values
reductions, and use of other accounting gimmicks to reduce the presumed value of life. Finally, the critics note that
many benefits are not quantifiable, including non-fatal cancers and illnesses, pain and suffering, and other harms
that cannot be captured with dollar figures.
Proponents of the VSL approach, on the other hand, note that the approach does not value life per se, but instead
explores choices made by individuals with respect to decisions that reflect their attitudes and values about risk.
They also note that there is a wealth of solid empirical research in the peer reviewed literature, and the methods and
data are constantly being updated with newer and improved studies that tend to confirm the older results.
Accordingly, the VSL concept is used routinely by EPA and other federal agencies tasked with reducing risks to
health and safety, and such applications have been widely reviewed and broadly endorsed by the Science Advisory
Board (SAB) and others.
An interpretation of the VSL data - as made by one Work Group member — suggests a per household annual WTP
in the neighborhood of $200 to $250 per year. This is based on a high baseline risk of 1 in 1000 risk of immediate
fatality, and applying a 99 percent risk reduction. Lower dollar levels apply if one assumes lower baseline risks, or
less risk reduction from the rulemakings, or if the risk is for a delayed onset premature fatality (e.g., due to
latencies), or for a health endpoint less severe than immediate death.
Another Work Group member believed that even if VSL were an appropriate metric, this was a substantial
underestimate. This member noted for example that the National Academy of Sciences (NAS) found that the lung
and bladder cancer risks alone from arsenic at the new EPA standard of 10 ppb is actually over 3 in 1000, and at 20
ppb is about 7 in 1000. See, NAS, Natural Resources Defense Council (NRDC),^4rs
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NDWAC Affordability Recommendations, July 2003
2. For the expenditure baseline there are options for whether (or how) to account for
infrastructure needs, the impact of cumulative regulations, security upgrades, possible subsidies,
and long-term system sustainability. Alternative approaches on any or all of these aspects of the
expenditure baseline might affect that dollar value appreciably.
3. For compliance costs, EPA's variance technology analysis currently uses the costs estimated
for a system at a relatively high influent concentration (e.g., 50 ppb for arsenic). How this value
for influent conditions is selected by EPA for other contaminants is unclear (arsenic was based
on the pre-existing MCL, but other forthcoming regulations may not provide such a benchmark).
One alternative could be to consider an average concentration across all the CWSs expected to
be above a potential MCL (this would lower compliance costs and make activation of the
variance technology provisions less likely).
3.2 Variations of the Incremental Approach
The primary variation on the incremental approach pertain to how to define the incremental
affordability threshold. In the illustration offered above, a threshold was based on 1.0 percent of
MHI (implying an incremental affordability threshold of $400). This and other possible metrics
or benchmarks to consider include:
• A fixed percent of MHI, such as 1.0 percent of MHI (which amounts to roughly $400). This
metric is easy to adjust over time, as MHI data are readily available to track presumable
increases in income. (If 0.75 percent of MHI is used instead of 1.0 percent the threshold
becomes $300 per year, etc.).
• Advantages of this approach include the fact that it is simple to comprehend and
easy to implement. It can be readily updated over time, using readily available
data to reflect changes in median household income. Also, there is some intuitive
appeal for the concept that when a median household spends more than 1 percent
of its gross income on any one regulatory action, that the Agency then consider
that the rule may be unaffordable and seek a variance technology.
• The dollar value implied by the 1.0 percent of MHI benchmark (approximately
$400) per year seems like a suitable target. It is less restrictive than EPA's
current approach, but also would not be likely to throw the door too widely open
to variance technologies. Also, the dollar amount is high enough to ensure that
POU and bottled water can remain as affordable technologies for routine or
variance technology compliance, respectively. Finally, the dollar amount is
similar (or a bit higher than) the other useful benchmarks as described below.
found that there would also be reductions in adverse health effects that were not quantifiable from the arsenic rule.
These included many cancers (skin, kidney, nasal passages, liver, and prostate), and non-quantifiable reductions in
many non-cancer effects such as cardiovascular, pulmonary, immunological, neurological, and endocrine effects.
See EPA Final Arsenic NPDWR, 66 Fed. Reg. 6976, at 7012 & Table III.E-3 (January 22, 2001). None of these are
considered in the VSL calculation above, this member noted, so the actual benefits of the rule are likely higher.
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• Possible disadvantages of this approach include deciding what per cent of MHI to
apply — a decision that will always entail some degree of arbitrariness no matter
what approach or level is selected.
• A VSL-based estimate of WTP. Variations include a pure VSL estimate (which would
amount to between $200 and $250 per year, as discussed in last paragraph of footnote 5),
or VSL with a "political adjustment factor" that would increase it (e.g., to about $300 to
$400 per year). The VSL-based estimates provide a WTP-based benchmark for risk
reductions and are well suited to incremental interpretation.
• Advantages of this approach include the fact that it is based on a true incremental
WTP-based concept for risk reduction. The VSL literature is extensive in
scholarly journals, and it has been widely applied, reviewed, and accepted
throughout government for environment, health and safety rule-makings.
• Disadvantages include some controversy over the VSL concept (as articulated by
some organizations), and legitimate concerns about possible shortcomings in a
subset of the studies that provide a portion of the empirical data from the
literature. The use of any "political adjustment factor" might be seen as arbitrary.
The approach might also be seen as confusing (or a veiled attempt at replacing)
the affordability provisions of the Act with the benefit-cost provisions.
• Overall, the VSL-based approach is probably ill-advised as the mechanism for
determining affordability. However, VSL-based information is probably well
suited for providing one of several useful benchmark dollar values to take into
consideration when applying another affordability threshold concept (e.g., the
values implied by VSL are in the range of 0.5 percent to 1.0 percent of MHI).
• A "tripling of current water bills" approach, which would imply an incremental threshold
value of about $400. That is, the new total bill would be $600 (three times $200), and so
the increment due to the new rule would be $400 above the baseline current water bill
($600 - $200 = $400). The tripling of water bills concept is meant to reflect the "sticker
shock" concept that would apply to households faced with sizable water bill increases.
(An alternative variation would be a "doubling" of water bills, implying an incremental
affordability threshold of $200.)
• Advantages of this approach include its simplicity, and the political reality
associated with consumer responses to sticker shock of the magnitude implied by
a doubling or tripling of water bills.
• The disadvantages include concerns about how arbitrary the approach might be, in
addition to the fact that as water bills grow over time, the threshold would
increase even more rapidly (e.g., if baseline water bills went from $200 to $300
because of rules and/or other factors over time, then the tripling concept would
push the incremental threshold from a current level near $400 up to $600).
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• Overall, the tripling of water bills approach is probably ill-advised as the
mechanism for determining affordability. However, water bill-related sticker
shock information is probably well suited for providing one of several useful
benchmark dollar values to take into consideration when applying another
affordability threshold concept (e.g., the value implied by water bill tripling is
approximately the same value as 1.0 percent of MHI).
• A bottled water or POU-based cost of averting behavior for waterborne risks. This would
imply a cost of about $220 to $330 per year — based on a suitable update to EPA's initial
bottled water cost estimate — as an increment above what households pay for tap water
services.
• Advantages of this approach are that it may reflect an averting behavior-based
estimate of WTP for reducing water-related risks.
• Disadvantages of this approach are that it is unclear that POU or bottled-water
purchases are primarily made for water safety reasons (survey data indicate
aesthetics are typically more important in the purchase decision). Further, the
data are for those households who do make these purchases, and may not reflect
typical consumer choices made by median or lower income households. Also,
any such purchases that are made for health and safety purposes may reflect a
total rather than an incremental WTP.
• Overall, the bottled water and POU purchase cost approach is probably ill-advised
as the mechanism for determining affordability. However, empirical information
is probably well suited for providing one of several useful benchmark dollar
values to take into consideration when applying another affordability threshold
concept (e.g., the value implied by a typical purchase is roughly the same as 0.5
percent to 0.9 percent of MHI).
Also, use of a 1.0 percent MHI threshold would keep POU and bottled water
alternatives "affordable" so that they may be considered suitable technologies for
routine or variance compliance, respectively (i.e., POU as potential BAT, bottled
water as potential variance technology).
3.3 Potential Options to Adjust or Update the Incremental Threshold Over Time
Some Work Group members were interested in whether the affordability threshold (regardless of
approach) should be updated over time, and/or tailored in some fashion for each specific
rulemaking.
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Appendix 6
American Water Works Association Manual Ml:
Principles of Water Rates, Fees, and Charges (fifth ed.),
Chapter 16: Low-Income Affordability Rates
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AWVVA MANUAl
Chapter 16
Low-Income
Affordability Rates
GENERAL CONSIDERATION
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AppropnaUly dMfiud programs:. onentod toward alfordability is-ni©6 ili&lmo
and lower income ¦ help both the taifeted customers arid the utility. When customers;
have trouble poyuiff utility bills, the coat to the utility is manifested in nt(m««d
anvaraffa, lato paymento. dnecomieetaon notice®, and service termination# The
wwoeiated incraoaed col (action coot* and had debt write-oflfe increase all other
iruHtafiierh- bill*.
liii'rcMS»*i.l nonpuyiiitfiil and laid debt write-off i* also a concern to potential
purchasers of a utility'* bond#—particularly revenue, bonda. As bad debt increases,
costs to oilier ratepayers rb*. creating concern about the tiffonlability of wat«r
eervice to nil customers Security for the bond* (the revenue itreani" may be bruufrhl
into question. p»rhap* ultimately incmaffiug the utility's coat. of borrowing
Common Affordability Piograms
AffisrdabOity profmmr are int«iiM to provide water to cuetooMra who an.I»>*«able to
pay tor nerwre Lifeline rule* are Mien thought of iv providing a minimal amount of
Water at a reduced ccs-t to all cinrtaroelli, indwf.ietiilt.tit of income level or ability to p»y
126
146
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NDWAC Affordabilitv Recommendations, July 2003
I3» mNv-lUJf 'PWATBR SATBs, PHEE. ANT JHAlWa-
Aa di»cuai»ed in I hi? .hapten nil form® of low-income afford ability nrt« alternative*! ai«
iarreted only to tkM who m» deHited by ^peuifie criteria aa requiring at-eietaiice
A number of different iimpkmr implemented acro«H the court try {to viile rate
ui»iatanct» cturtoiLieiv The*e prograow tarj?pt iow-meoiin* ctiatonien* and sdicuild nut
Im< in a do available to all nnitoiDera. Participant h may bo required lo provide hoiui-
form of income verification
Affordable rale altertm t ivee «po typirully developed an port of h larger program
Theue program* frequently include -uch etrmefiei" as arrearage fatgivimei'r and
budget bOling W»tw rate uffbHtability program* can include the Mnrii^;
Straight discount. A Kraigtu discount mrnlvM an aerac-the-board reduction
or discount on the total water bill The discount ciui be n eet percentage for oQ eligible
cuntotEiars, vary bv income level with larger divcetmte for more impoverished
riiBtoTEorn, or can be discounted for total amotmta of tin? water bill over some s#t level
iliKcimnt variable (ungei portion* Rather than discounting the entire bill,
only thii" portion based on use 1? discounted The Used portion of the bill v led
iintaock«i This method provider greater dollar dineounta cturtnniet? that iw
greater amount* of w«i*r, te may I*. most helpful to larger families ihnt require
mans water, Under this program, the writer rate is reduced for eligible (wt«Dm The
program can ml so be modified to provide diacounl* only for use up i« « certain level
per month or up to a specified use per family memlwr Tin* would reduce wasteful ijKk'
by providing no discount for ascewow consumption
l)i*eoiint Hxeil rminimum > portion. Another alternative i> to discount only
the tiled portion uf the bill, i.e ., I he meter charge, service rluuye. or demand clinrpe
HiL» method roii provide the overall reductions? that nmy be required to make service
alfhrdabte yet maintain ineentivw to conserve- By duijiif normal, rather than
di Mounted rates for writer u*», there in no incontive to w«wte discount priced water.
Frrrcnlajft1 of Income. A panentage of income plan m-uully involves a
wn«ni tJiat ie» customers for earvfce based on a percentage of their individual
iuconif. Tliie tan include u system where i-ueiotijere hIwuvk pav a predetermined
percentage of income that w eoni-idered nffwdablo An alternative to tlu* i« a lyBtetu
whore n percentage of h typical bill in determined based on tlie income level That
percentage i j then applied te all l>ill»- 'r inula r to a discount program' If customer
um more water, the bill inereasea; if they conserve, they save even more.
Fixed rmlit*, In eitnationii when* awuiaitce 10 provided to water eo maimer*
who tuny not tw direct, custonserv y of th»«* utflitkn have
already &ced the wrties of afford ability. Nearly evory etate regulatory comauuaiori
ha? utldrue-i'd the ie*ue of uiTordnble onergy Mile and the ability of low income
container* to pay thowe bilk. Low-income diecownla, conmjnwr ametance pngnun«,
budgiil billing, ^aivetv of ciwrtomer charges, and lili-iirio r«t^H ore caniiiniri in the
energy industry
Ontflide North Americn, low income discounte, lifeline rates, otid nfTordable
vrnler program* nre common [-"or example, thrcugii vnmue lending a^Tnciea, the US
147
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NDWAC Affordabilitv Recommendations, July 2003
I.' W tM' ¦ .ME aFFv-RBABILITT RATEt 131
government provides n*KKtanc« to lews affluent eanntriM to make wnier aervice
available a! mere affordable pruw. Within North America, an increasing number cf
w.tler utilities have adopted nfTordttliiliiy projrnuns It is not uncommon to find some
element# of afforilahility rales in many major dtiet
POLICY ISSUES
Low-income afFirdability alternatives are intended to address eoctal ussiuw<, mid
utility involvement in mich ismiee may be rontroverxial Moogh each utility nwi)«
to decide whether or tint tl will participate in such program*. an mcrejufing utimber
«f utilities in* mldredaiiig wnrer aJfbrdahility a. their rate*
These types at rat© alternative^ should be considered when a utility's eoet of
water s j h%h and eonw euetomern have problems paying their bill Ind iiiatioTO of to
scenario can kdudr rUitig taeremra^v^, higher eelleeimn coete, and mot* frequent
vliuuiffV for jioiipa.vniunt In making' this determination, the coil of service unalwis
should be done final without any affcrdability conaide rations During the rate design
portion of the analyst e, aflTordubility MnoitotiMm isan be taken to account, The
rale analyst l-heti can meneure lbs effects of nfferdabillty iJicnmlww and better
quantity any discount# and smtn-sidies involved
Low'income rata typically require Rome degree of eubei dy The question of
which emstflinar group* should provide rJi.¦ «ubairiy needs to be addre^wd Utilities
should rei-opruze that adopting more affordable ratea can reduce the utility's coete if
the kw income rate? refill in increased coHectujns and reduced collection costs
"Hie lirfl up«fl to eoiuBder w at w)ml point, a water bill becomes tm affordable
While then? is no clear miww to this question. the following guidelines can help
utilities moke such o determination
• The Safe Drinking Water Act tS 154?» established * pedal lensunw In
eemmunitiefi where the average residential water bill exceeds 2 percent of
median income
• The US Depart niK&t of Agriculture has a program to provide Rinds for water
and wantBwatar systems Loans «i» made for projects where the residential
water hills are 1 5 pwrcent of (he community's median income Grants are
awarded for costs m rarceffs of 1 5 percent
• The AWWARF report, Water AflhrdahtUty Program.',, that propiw
should not be based on median income but on rsl.ee that, cause water bills to
exceed 2 percent of income for impoverished household* Because «f the
font* on impoverished households, ti tDHfflnt of 2 percent was selected to
determine if water service crerta were burdensome
Different-measures of poverty can be us*d t.a determine eligibility These include
Aid to Fuinilipn with Dependent Children iAFDO, Supplemental Socuil Security
Income 'SSIj, mituiuum wajfe incoruea, atid US poverty level. Many of tiieee
riifiartirtui vary with family ei«e.
Ba»ed tin the remxltn of national water and wantewater rate --urveyv, billx have
become nriilTordnlite for low incoine householde in -'me of our tivyor ntie?, For thoee
living on SSI, water and wastewater bills esceeded 6 percent of income lor these
houeehold h ui a niimlwr of clliee
Periinpfl tlie bif^Ri issue mvolved witli nllnrdable rate programs is hcFW Iro
lei ermine eligibility I "il1 itien are often utiejiw about gnihenrsj?, ailminiuterine, and
verifying income dam Fortonately. « niimber of ewU-tinr programa ran help
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NDWAC Affordabilitv Recommendations, July 2003
13-2 1PLES I>r WATBE EaTKv FREc. aNI ?BtA»aa-
Olhttr utilities!, including many eWtric, gta, telephone. or cable television
eanipaiue#, offw discount programs based an income. Many are wilUnfr to ebaiv Uiir
data with municipal water or winrtrntcr utilities
A number of ifiooma bused jroveramenf actual at ic* pTOjzramii are already in
I dm-1' Proof of olifibjl ity in one or man- of tlioee program* often provide adequate
in caste verilieaunn Thee* programs include
• AFDT
• SSI
• LIHJlAP " Low I si rcLUf Home Energy Ajtedstanc# Progriuu <
• Medicaid
• Food stamp*
Utilities must a I ho decide tin- qumitity of water to discount If on Iv n portion if
to he discounted, it ta tiecwsaary to determine a minimum sanitary level of water use
Mmimnni wotw ratjuirttmmta vw>' by family rise. further cnmplicatinp tide analgia
ADVANTAGES AND DISADVANTAGES
Advantage »fadepttri£ ulfordfi hie rate prograuiH indude
• providing a here-aity af life j7 r»l with Water rnrwurViifioTi goals if a discount aiKoitfa^M--
WftlItlflll USB
• requiring wubaidy from other nttopaytif*, although tin * is tppfcnliy minimal
• erwatmjf aotmviriy1 over water utility ijarticipaiion in nodal program*
• implementing and adnuniHt ermfr afford nble rate programs can be eoatly and
difhiiilt
EXAMPLE
Two lifeline rule example* are duviii'ped m tlue usu-lion rtwl urtion to the rate for 11
tutiumum volume* of u»e utid r&dtiction to the monthly eervica eharfo, It let «jsuffi«4
tlw minimum sanitary needw for a family ia 6,0 W gnltoiie per month, Tli# utility has
also determined tliat 200 families with annuo! income* at or below C6,(KK) should be
Misihle for rpwuil liMino ratwa. Becauw a low eligibility level whf nelected, it vw
decided the mrmu.nl water bill «himld be no more than 1.6 percent of the annual
income Tin- limitation results in a maximum annual water bill of $75 Table 16-1
preaenta this data ap well a» the calculation of the water bill under current rates A
reduction of M8 por year ie nt*wary to make wnter offbrdable ilie taiptwj
runt rimer group.
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NDWAC Affordabilitv Recommendations, July 2003
U-WIMO ME aFFOR3>AB1L1T7 RATEt 133
Table 16-1 Requirements foe affordable rates
Item
iiiiMtittiy
Minim li ill sanitary lis*
i'li^rihil i ty < Hiitnu :>1 iim'Mrn t
Llitribb cuitoDitn
Maximum aiiiiiiul water bill
Hi -5 pWWBt .111IIKill tOCMM'
tjii,'I'mi faby^ar
5.1X10 1'fiVilirmUl
ranitni 1:1 m
i'Xi
$75 per ynr
Cumin I. Annual Chute"
KnU, $
Ub», guT
Celt. t
Onfiumptwn fhari'f-
SuTVtt# «ll«rg»
Total
N»r**Miry reduction i»r >>wr
(l.«3ttAh*tl* >ul
4.2A
0O.W)
12
50.ii>
H«j2S
33 2J»
Tiibli' 16-2 hIiows tini rakulntioii for two o|itioiu> l« make the w«tor InII
nlfunl/ibL' to eligible ctuttomin*. Option i ri'tliio'i the Uu't en-d rttte or coiwiuuptJoh
component of the bill Becaiiise only tlie minimum eanilarj1 u*e ahoiihJ be Unladed,
thia reduction (lppiifr* oiJv to the find &,000 per month. Option 2 rvdute* ihe
wm» cluirgw component ofihe bill. This option ptwid(« the ii*»8Mry hill rwltti-ttori
ami ft ill allowc can lamer* to redute UseLi' hill* tlirmi{rh ccrieervniioti.
Bwjuuh* afforduhUity uptUrns rwlut* revenue*. r«tw ch«nwl to other euetcitne**
will have to be adj Limed to recover tlie required revenue* Table 16 3 shown ihe
l»tftitial revenue induction of all eligible auiotiiw applying for the lifeline mw. Hie
uLilatyV projected euvmpe in euIleetiDii casta train n lifeline rate li( nlsso shown Net
sNMrtu have to Ih> recovered through increases m tlie metered rote* or xorvu* duu>n-
to other euetomere. A.- i-huwn in Llue example. the elfwi is minimal.
Table 16-2 Calculation of lifeline rate options
Qprtl alt 1 Brduit CoOMUll|,itjull ClwifJ^e
Current annual coti> iimplicn char}'*
$fi7JSB
Reductmo r*qurr*d
$33 as
lit si red cenMimpttob nv«nu(
&U.M
Ctlrnlation of lifeline metered rite
B*v«iium dsetrtd
kh.«o
Cons mn plian. f ta no! < si'
60
k«t*. #
n 41
Option 2 Kfdutt Suvin fharff
Cumin annual «m1» iri omiuv sll^fciUtjf utMU.
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NDWAC Affordabilitv Recommendations, July 2003
134 PMNCIPLBf >F WaTHR fiATRt, PEES, AND ('ELaRO®-
Tatiie 16-3 Effect on oth« eJwgM
It* in
All him! t'l'VeUUe rcducttou p« cUslDiUi'f
t&S:2S!
Ciistomtra *HgiM»
2W
ftMWiil annual r»v«nu« l$s*
Li-en savlnjpi In collection cost*
lncr«aiir in oilier rat*« ntukd
$5,458
Lif»lkue> Rates
UNh
Curreut JiuUi.
gal < m th
pthousgol
Option 1*
Option 2*
locUiifljlet
FiimI H/M
(1 K>4S.
04100
nMfl4
0
Nut l".inin
0.8464
O.WM
Next 1485,90#
OJ0S3T
C 7ik<-
and bud dobt grow. Bpciulsi1 water i» coiundored a uocc»Bait>; utilities m«.y determine
that to provide uiiiiuitJil quantitiev t<> euHtoiiH>i'H that- eeiuriot afford
wnrrtwr wife if a proper utility function In d fust«nw>rt
receive the h«ni»fLt»
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NDWAC Affordability Recommendations, July 2003
152
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NDWAC Affordability Recommendations, July 2003
Appendix 7
Gilbert's Affordability Gap Graph
- Developed by Work Group Member Jerry Gilbert -
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NDWAC Affordability Recommendations, July 2003
HOUSEHOLD AFFORDABILITY GAP
(B)
w/ Improvement x
m _m hb
Now
T ^
Larqe System
Lifeline Rate
^fo 20 30
'
Affordability Gap -
Paid By Assistance or B )
40 50
HOUSEHOLD INCOME $1000/YR.
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