Public water, wastewater, and stormwater utilities face an array of compliance obligations under the federal Clean Water Act (CWA) that require investment in upgrades and maintenance of critical wastewater infrastructure. These utilities also face the prospect of replacing water infrastructure as it approaches the end of its useful life. These infrastructure projects involve enormous costs that are ultimately borne by ratepayers. Those with the lowest incomes feel the burden most acutely.

On September 15, 2020, the U.S. Environmental Protection Agency released for comment its Proposed 2020 Financial Capability Assessment Guidance (Proposed 2020 FCA), signaling a change in how the agency considers the financial burdens when developing implementation schedules for CWA permits and consent decrees applicable to public utilities. If adopted in its current form, the Proposed 2020 FCA promises utilities that financial capability assessments will better consider the economic impact of CWA obligations on low-income populations and will provide greater flexibility in how these assessments are conducted. These changes are, in no small part, the result of a substantial stakeholder engagement process that included submission to EPA of an April 2019 report by the American Water Works Association, the National Association of Clean Water Agencies, and the Water Environment Federation.

The 2020 Proposed FCA builds on—rather than discards—EPA’s existing financial capability assessment guidance: the 1997 Combined Sewer Overflows - Guidance for Financial Capability Assessment and Schedule Development (1997 FCA Guidance) and the 2014 Financial Capability Assessment Framework for Municipal Clean Water Act Requirements (2014 FCA Framework). Under the existing guidance, EPA employs a two-phased approach to evaluating a municipality’s ability to bear the cost of projects required by the CWA:

• Phase 1 – Residential Indicator (RI): The RI entails calculation of the per-household cost of CWA projects expressed as a percentage of median household income (MHI). Costs exceeding 2% of MHI are assigned a “high” (as opposed to medium or low) RI.
• Phase 2 – Financial Capability Indicator (FCI): The FCI requires an evaluation of a utility’s overall financial health and the demographics of its ratepayers.

Based on the RI and FCI, EPA then uses a matrix to determine whether a set of proposed CWA projects impose a low, medium, or high financial burden on the utility and its community. That burden then serves as a basis for determining—either in a permit or consent decree—the length of time over which a utility must implement a series of CWA-driven projects. The implementation schedule is set with the objective of avoiding excessive burdens on utilities and their ratepayers.

The Proposed 2020 FCA provides two alternatives for assessing a utility’s financial capability. The first alternative retains the RI and FCI, while adding a Lowest Quintile Residential Indicator (LQRI) and Poverty Indicator (PI) to the assessment process. LQRI reflects the cost per low-income household, expressed as a percentage of the lowest quintile income. PI uses five benchmarks to evaluate the prevalence of poverty in a utility’s service area. The second alternative marks a more drastic departure from EPA’s prior financial capability approach, using financial and rate modeling in conjunction with the PI score.

EPA also proposes that, under either approach, a utility may use additional metrics to provide EPA with a more complete picture of its financial capabilities and the financial impact of CWA projects on ratepayers. The additional metrics include drinking water and asset management costs, stormwater management costs, customer assistance programs, unemployment, and population trends. Consideration of these additional metrics may help EPA and a utility conduct a more holistic assessment of the impact of permit or consent decree terms on a community so that they can develop an appropriate implementation schedule.

EPA released the 2020 Proposed FCA in order to obtain comments from the public. Comments will be due 30 days after the publication of a notice in the Federal Register, which has not yet occurred.

Beveridge & Diamond’s lawyers possess unparalleled experience representing public wastewater and stormwater utilities in NPDES permit and consent decree negotiations, and in litigation. This experience positions our team to provide counsel that reflects the unique legal, financial, and political issues that utilities face. If you have any questions about EPA’s financial capability guidance or other issues that impact water utilities, please contact the article’s authors.