EPA Issues Long-Awaited Update to CWA Financial Capability Assessment

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The COVID-19 pandemic has elevated fiscal concerns of water and sewer service providers, with many states imposing a moratorium on the collection of delinquent bills and the termination of service. The affordability of water and sewer service has also been a central topic in environmental justice discussions. In the midst of this heightened interest, the United States Environmental Protection Agency (“EPA”) released its long-awaited proposed updates to its Clean Water Act (“CWA”) affordability guidance. The pre-publication version of its 2020 Financial Capability Assessment for CWA Obligations (“2020 FCA”) was released on September 15, 2020. The proposal builds on EPA’s prior guidance, issued in 1997, as well as its 2014 Financial Capability Assessment Framework. The purpose of the guidance is to establish criteria for EPA consideration of the impact of water quality, stormwater, and drinking water requirements on affordability. This information can then be used to prioritize different regulatory requirements and establish longer compliance schedules in permits and enforcement actions.

While the 2020 FCA builds on EPA’s 1997 guidance, it expands the realm of information to be considered to better reflect the realities for a community’s most impoverished residents. The proposal includes new metrics to inform a community’s water infrastructure implementation schedule, including indicators that more accurately reflect how much low-income communities can afford to pay for water infrastructure upgrades. Additionally, the 2020 FCA lays out two alternative approaches for assessing financial capability that a community may choose to employ.

The first alternative adopts the residential indicator approach from the 1997 guidance but expands it to include the consideration of other factors to account for the impacts on the most financially vulnerable populations. These factors include water costs, household incomes, impacts on populations in service areas with incomes in the lowest quintile (rather than a historic focus on median household income), and other poverty indicators. Importantly, this alternative also allows a community’s total water costs (wastewater, stormwater, and drinking water) to be considered when negotiating an implementation schedule for CWA obligations.

The second alternative uses a dynamic financial and rate model to evaluate the impacts of rate increases over time, including for customers with incomes in the lowest quintiles. Under the proposal, communities will also be able to submit additional information to inform affordability discussions including such metrics as unemployment rates, debt service coverage ratio, debt to income ratios, and population trends.

EPA includes 16 specific questions on which it requests feedback in the proposal to ensure that any final guidance captures a broad range of affected communities. Once published in the Federal Register, the proposal will be open for a 30-day public comment.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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