To maintain water services and comply with Clean Water Act (CWA) regulations, water utilities routinely must make financial investments in critical infrastructure upgrades. To ensure compliance, water utilities work with the Environmental Protection Agency (EPA) to negotiate a years-long “implementation schedule” for pollution control measures that factors in community demographics, the financial health of the utility and/or municipality (such as existing amounts of municipal debt or bond ratings), and existing levels of pollution.
Financial Capability Assessment
On September 15, 2020, the EPA released a proposed revision to how it would impose timelines for utilities to come into compliance with National Pollution Discharge Elimination System regulations (NPDES), such as reducing sewage effluent releases during stormwater or flooding events. This document, the “Proposed 2020 Financial Capability Assessment for Clean Water Act Obligations” (FCA) laid out several methods for determining the ability of a community (i.e., the ratepayers of a utility) to pay for infrastructure upgrades and other capital expenditures without inequitably increasing the financial burden on low-income people and reducing access to clean water. The EPA invited public comment on the proposed guidance.
Importantly, the FCA itself does not result in a final schedule determination; rather, it guides negotiations between the EPA and the water utility toward a pathway for compliance. For instance, a schedule may be increased from 10 years to 25 years to reduce the financial burden on ratepayers. However, the schedule can’t be longer than the service lifespan, typically 30-40 years, though some treatment works have been in place longer.
The proposed 2020 FCA is comprised of two options to assess the financial health of a water utility. To determine overall affordability, both options use as indicators how much a resident pays for water as a percentage of household income, overall poverty levels in a community, and existing levels of debt or other socioeconomic factors in the community. Crucially, the first option also introduces a new metric that measures the cost of a typical water or wastewater utility bill as a percentage of the income of the bottom fifth of the area population. Instead of measuring just median household income, examining lowest quintile income more accurately captures the impact on the poorest residents who will be disproportionally affected.
In addition to the indicators under Option 1, the Option 2 introduces more complex dynamic cash flow forecasting models to better predict the future financial picture of a utility. This presents a better idea of future impacts rather than just one snapshot in time. For instance, a water utility may have a declining population base that would affect rate revenue, or high levels of debt in future years that could affect the ability to borrow more money now.
Blue Access Support
Blue Access supports the EPA’s efforts to more accurately capture financial data that describes communities’ ability to pay for critical water and wastewater infrastructure upgrades. The proposed FCA strikes a careful balance between identifying utility ratepayers’ ability to assume the burden of capital expenditures and associated operations and maintenance with clean water and healthy communities.
Blue Access Concerns
However, Blue Access did express concerns that broadening the toolkit to more holistically assess local funding capabilities and compliance with CWA obligations must not result in implementation schedules that are unduly burdensome to communities with untreated or unsafe water.
Specifically, the FCA guidance proposes to identify “additional considerations” for development of implementation schedules, including environmental justice and public health. However, it is unclear how the EPA proposes to address environmental justice concerns “beyond sequencing projects to mitigate impacts…as early as possible.”
Many communities with environmental justice concerns are also low-income or impoverished, thus more likely to receive longer implementation schedules for CWA compliance. The proposed FCA guidance should more proactively address how environmental justice will be balanced between CWA obligations and reducing the financial impact of those obligations. A community with a classified “high burden” that would otherwise have a schedule up to 25 years may also have pressing environmental justice issues related to the CWA (and water quality standards) that should be rectified sooner.
The proposed FCA guidance is a necessary and useful document for promoting public health and environmental protection without unduly burdening vulnerable populations. The final guidance is expected in Spring 2021.
To read the full Blue Access comments, click here.