**ENVIRONMENTAL PROTECTION AGENCY**

**40 CFR Part 35**

**\[EPA-HQ-OW-2006-0765; FRL-XXXX-X\]**

\[RIN 20XX-XXXX\]

**NPDES Permit Fee Incentive for Clean Water Act Section 106 Grants;
Allotment Formula**

**AGENCY:** Environmental Protection Agency (EPA).

**ACTION:** Final Rule

**SUMMARY:** This final rule revises the allotment formula contained in
EPA's Clean Water Act (CWA) Section 106 Water Pollution Control grant
regulations to include a financial incentive for States to collect
adequate National Pollutant Discharge Elimination System (NPDES) permit
fees. EPA is amending its existing CWA Section 106 grant allotment
regulation (40 CFR 35.162). This amendment provides the Agency with the
flexibility to allot separately an amount up to three percent of the FY
2007 base funds annually appropriated by Congress for CWA Section 106
grants to States, beginning in FY 2009. The incentive will be set-aside
for allotment in this manner only if funds allotted to the States under
40 CFR 35.162(b) are greater than the amount allotted in FY 2007.

**DATES:** This rule is effective on \[[insert date of publication in
the Federal Register]{.underline}\].

**ADDRESSES:** EPA has established a docket for this action under Docket
ID No. **EPA-HQ-OW-2006-0765**. All documents in the docket are listed
in the [www.regulations.gov](http://www.regulations.gov/) index.
Although listed in the index, some information is not publicly
available, e.g., CBI or other information whose disclosure is restricted
by statute. Certain other material, such as copyrighted material, is
publicly available only in hard copy. Publicly available docket
materials are available either electronically through
[www.regulations.gov](http://www.regulations.gov/) or in hard copy at
the Water Docket, EPA/DC, EPA West, Room 3334, 1301 Constitution Ave.,
NW, Washington, DC. The Public Reading Room is open from 8:30 a.m. to
4:30 p.m., Monday through Friday, excluding legal holidays. The
telephone number for the Public Reading Room is (202) 566-1744, and the
telephone number for the Water Docket is (202) 566-2426.

**FOR FURTHER INFORMATION CONTACT:** Lena Ferris, Office of Water,
Office of Wastewater Management, 4201M, Environmental Protection Agency,
1200 Pennsylvania Avenue, N.W., Washington, D.C. 20460; telephone
number: (202) 564-8831; fax number: (202) 501-2399; email address:
[*ferris.lena@epa.gov*](mailto:ferris.lena@epa.gov) .

**SUPPLEMENTARY INFORMATION:**

**I. GENERAL INFORMATION**

**AFFECTED ENTITIES:** State Agencies that are eligible to receive
grants under Section 106 of the Clean Water Act (CWA).

**II. BACKGROUND**

Section 106 of the CWA authorizes the EPA to provide grants to State and
interstate agencies[^1] to administer programs for the prevention,
reduction, and elimination of water pollution, including the development
and implementation of groundwater protection strategies. Section 106(b)
of the CWA directs the EPA Administrator to make allotments "in
accordance with regulations promulgated by him on the basis of the
extent of the pollution problem in the respective States." EPA's
regulations implementing Section 106 can be found at 40 CFR 35.160 et
seq. EPA's current allotment formula for Section 106 grants includes an
allotment ratio for each State based on six components selected to
reflect the extent of the water pollution problem in the respective
States. These six components are surface water area, ground water use,
water quality impairment, potential point sources, nonpoint sources, and
the population of urbanized areas. (40 CFR 35.162 (b)(1)(i). By
including a component related to point sources, EPA recognizes the
important role they play in determining the extent of pollution in a
State.

EPA proposed this rule amending the CWA Section 106 allotment formula on
January 4, 2007 (72 FR 293) and requested comments from interested
parties. EPA received 717 comments on the proposed rule. A summary of
the significant public comments and the Agency's responses are included
in this preamble in Section III below. This preamble also summarizes the
two changes to the final rule which EPA determined necessary. These
changes involve delaying implementation of this rule until FY 2009 and
changing the base fiscal year which the Agency will use to determine if
an allotment for this purpose should be made. EPA's responses to all
comments received on this rulemaking are included in the docket
described above.

This final rule amends the State allotment formula to incorporate
financial incentives for States to implement adequate NPDES fee
programs. The Clean Water Act prohibits the discharge of any pollutant
except in compliance with other provisions of the statute. 33 U.S.C. §
1311(a). One of these provisions is CWA Section 402, under which
pollutant discharges can be authorized by an NPDES permit. 33 U.S.C. §
1342(a). The U.S. Environmental Protection Agency (EPA) oversees the
NPDES program and also approves applications from States to administer
and enforce the NPDES program in that State. Currently, 45 States are
authorized by EPA to administer all or some parts of the NPDES program.

State water quality programs are funded with a mixture of State and
federal dollars. The growing complexity of water quality issues has
prompted more States to implement NPDES permit fee programs. An
estimated 41 States currently have permit fee programs in place, with
such fees paying for all or a portion of the cost of the State's permit
program.

A number of States still operate their permit programs with little or no
reliance on permit fees. States can address permit program budget
shortfalls through the implementation of permit fee programs that
collect funds to cover the cost of issuing and administering permits.
Funding permit programs with the support of permit fees allows States to
use CWA Section 106 funds for other critical water quality programs.

EPA is committed to making our State surface water protection programs
more sustainable through better resource management. As State Agencies
carry out most of the day-to-day aspects of water quality functions,
their responsibilities are expanding while they are simultaneously
facing increasingly severe funding constraints. As a nation, billions of
federal funds under the Water Pollution Control grants, together with
State resources, have been spent to establish and maintain adequate
measures for the prevention and control of surface and groundwater
resources. Federal and State governments cannot carry out this
responsibility alone. EPA is committed to finding effective and
efficient solutions to maintaining sustainable State water pollution
control programs that continue to provide this nation with clean and
protected water. All levels of government and the private sector must
share in this commitment.

The purpose of this rule is to encourage States to voluntarily collect
NPDES permit fees adequate to meet their program costs while protecting
the core 106 funding for those States that currently do not, or choose
not to, qualify for the incentive. This amendment to the allotment
formula is designed to provide an incentive for States to move toward
greater sustainability in the way they manage and budget for
environmental programs and to shift part of the financial burden to
those who benefit from NPDES permits. No State is required to collect
permit fees under this rule. To ensure that no States receive a
reduction from their current allotment amount, no funds will be set
aside for this permit fee incentive unless funds designated for
distribution under 40 CFR 35.162(b) are greater than funds set aside in
FY 2007.

The amount of any permit fee incentive allotment set-aside would be
limited to three percent of the funds allotted under 40 CFR 35.162(b) in
FY 2007. And, in order to ensure that the incentive to each qualifying
State is modest, the rule caps the maximum share of the incentive at 50%
of the amount a State received under 40 CFR 35.162(b) in the previous
year. Total funds allotted under 40 CFR 35.162(b) in FY 2007 were
approximately \$173.9 million. As a result of this rule, beginning in FY
2009, EPA would allot the State and interstate CWA 106 grant funds in
the following order: 2.6 percent will be set-aside for allotment to the
eligible interstate agencies in accordance with the existing interstate
allotment formula in 40 CFR 35.162(c); next, funds may be allotted for
specific water pollution control elements under 40 CFR 35.162 (d); next,
funds may be allotted to States in accordance with the permit fee
incentive allotment formula under 40 CFR 35.162(e); and finally, the
balance will be allotted to the States in accordance with the existing
allotment formula under 40 CFR 35.162(b).

The only States which will be eligible for this set-aside are those
States which have been authorized by EPA to implement the NPDES program
by the first day of the fiscal year, October 1, for which funds are
appropriated by Congress. Under this rule, these States must also submit
annually, by October 1, a certification to EPA which meets the following
two requirements. First, the certification must include the total
percentage of NPDES program costs recovered by the State through permit
fee collections during the most recently completed State fiscal year,
and a statement that the amount of permit fees collected is used by the
State to defray NPDES program costs. This rule defines NPDES program
costs as all activities relating to permitting, enforcement, and
compliance. Second, the certification must include a statement that
State recurrent expenditures for water quality programs have not
decreased from the previous State fiscal year, or indicate that a
decrease in such expenditures is attributable to a non-selective
reduction of the programs of all executive branch agencies of the State
government. The concept of non-selective reduction is derived from the
statutory requirements related to maintenance of effort from Clean Air
Act Section 105 grants and EPA's implementing regulations found at 40
CFR 35.146. Under the Clean Air Act, EPA is prohibited from awarding
grants to air pollution control agencies if State recurrent expenditures
are not at least equal to such expenditures during the preceding State
fiscal year. EPA can still award a grant even if there are decreases in
such expenditures if EPA determines that the reduction is attributable
to a non-selective reduction of all State programs. This situation would
occur, for example, when a State legislature enacts budget cuts across
all State agencies and does not target the air program. EPA is adopting
a similar approach in this rulemaking.

After EPA determines the number of eligible States which have met the
certification requirements, each State will be able to receive up to a
full share of the set-aside amount. EPA will determine the amount of a
full share by dividing the set-aside amount by the number of eligible
States which have met the certification requirements. A full share will
be the same amount for each State. The percent of a full share that each
State will receive, however, will be determined by the following
formula, based on the certification information described above.

> \(A\) A State will receive 25 percent of a full share if that State
> has collected permit fees which equal or exceed 75 percent of total
> State NPDES program costs; or
>
> \(B\) A State will receive 50 percent of a full share if that State
> has collected permit fees which equal or exceed 90 percent of total
> State NPDES program costs; or
>
> \(C\) A State will receive a full share if that State has collected
> permit fees which equal 100 percent of total State NPDES program
> costs.

In other words, in its certification, a State must inform EPA of its
total NPDES program costs and the percentage of which are recovered
through permit fees. EPA would use the information from this
certification to determine any additional amount a State would receive
in its Section 106 grant based on this financial incentive allotment
formula. If, for example, a State's total NPDES program costs are \$1
million, and the State collected \$750,000 in NPDES permit fees, a State
would receive 25% of a full share in addition to the grant amount
allotted to it under the current CWA Section 106 allotment formula.

**III. RESPONSE TO COMMENTS**

**A. EPA's Authority to Issue this Rule**

Multiple commenters questioned the Agency's authority to create the
incentive program for various reasons. The Agency maintains that it
clearly has the legal authority to establish conditions for the
distribution of grant funding consistent with the approach reflected in
the rule. Section 106(b) of the CWA states: "*From the sums appropriated
in any fiscal year, the Administrator shall make allotments to the
several States and interstate agencies in accordance with regulations
promulgated by him on the basis of the extent of the pollution problem
in the respective States.*" 33 U.S.C. 1256(b). EPA complies with this
statutory requirement and makes allotments on the basis of the extent of
the pollution problem in the States. EPA has codified this basis at 40
CFR 35.162(b)(1), which list six components the agency takes into
account to determine this allotment: surface water area, ground water
use, water quality impairment, potential point sources, nonpoint
sources, and population of urbanized areas. We also list associated
elements, sub elements, and supporting data for each component. This is
not, however, the only basis the agency uses to make allotments to the
States, and we do not read the above statutory provision as requiring
that the extent of pollution be the only basis for the allotment
process. Section 106(b) does not state that allotments shall be made
*only* on the basis of the extent of pollution. Thus, we do not read
this language to prohibit other bases for the overall allotment of
Section 106 grant funds. Further, the statutory language includes the
phrase \"\[*f*\]*rom* the sums appropriated, the Administrator shall
make allotments \[emphasis added\]...\", implying that not all of the
funds appropriated must be allotted on this basis.

In fact, EPA has promulgated other bases for allotting 106 funds. For
example, our regulation at 40 CFR 35.162(b)(2) imposes a funding floor;
40 CFR 35.162(b)(4) includes an inflation adjustment; 40 CFR
35.162(b)(5) imposes a cap on funding increases; and 40 CFR 35.162(b)(6)
imposes a cap on the component ratio of the six elements. In addition,
we allot to the interstate agencies based on a percentage of funds
appropriated for Section 106 purposes (40 CFR 35.162(c)). Finally, we
also have the ability to use an alternative allotment formula when the
appropriations process indicates that some of the Section 106 funds
should be used for specific water pollution control elements. 40 CFR
35.162(d).

Other language in Section 106 also lends support to our interpretation
of our authority. Section 106(c) authorizes the Administrator to pay
States for their water quality programs two different ways, whichever is
the lesser: either the allotment under 106(b) or \"the reasonable costs
as determined by the Administrator of developing and carrying out a
\[State\] pollution program\....\" Section 106(g) allows EPA to reallot
any sums allotted under 106(b) when funds originally allotted are not
paid to the State. This reallotment is not required to be conducted in
accordance with 106(b). Both of these provisions indicate to EPA that
Congress gave the Agency flexibility to allot to the States and
interstates not only on the basis of the extent of pollution in the
States but also on the basis of other factors. Further, because the
permit fee rule is related to fees charged to dischargers, it does, in
fact, fit within the extent of pollution basis used in the current
allotment formula. Under the current allotment formula found at 40 CFR
162(b), one of the six components evaluated is the number of potential
point sources. Similarly, the incentive allotment is based in part on
evaluating the number of point sources in a State and collection of fees
from dischargers. Finally, no State has challenged the allotment
formulae summarized above that have been implemented by EPA for several
years.

Two commenters, citing 40 CFR 35.162(d), stated that EPA lacks the
authority to engage in the rulemaking absent Congressional authorization
and that we failed to consult with States as required under this
provision. We disagree. No Congressional action is required to execute
this rulemaking (see discussion above). The President's FY 2007 Budget
Request for EPA did include language directing EPA to promulgate this
rule, but that language was never enacted into statute. As stated above,
EPA has the statutory authority to promulgate this rule under Section
106 of the Clean Water Act. In addition, EPA will submit the final rule
to Congress in accordance with the Congressional Review Act.

Regarding the applicability of 40 CFR 35.162(d), this rule does not fall
within the scope of that provision because this rule does not allot a
portion of the funds for a specific water pollution control element,
such as assessment of impaired water bodies. (See, Table 1 of 40 CFR
35.162, Formula Component No. 3). The provision at 40 CFR 35.162(d) was
promulgated to address a situation like that which occurred in FY 2006
in which the both the President's Budget Request and EPA's Appropriation
targeted Section 106 grants funds to support enhanced water quality
monitoring efforts. As EPA stated when it promulgated 40 CFR 35.162(d),
the application of 35.162(d) is limited to "situations where the
appropriations process has indicated that funds should be used for a
specific purpose" (71 FR 17 (January 3, 2006)). Because this rule does
not fall within this situation, any consultation requirement is not
applicable.

**B. EPA's Rulemaking Process**

Commenters also questioned whether the Agency complied with all
applicable statutory and executive order reviews relating to the
rulemaking process. EPA maintains we met all of our obligations and have
even gone beyond that which is required.

Some commenters asserted that EPA did not adequately consult with the
states on the details of the rulemaking as required in Executive Order
(EO) 13132, "Federalism". We disagree that this rule has federalism
implications that would trigger the requirements of Executive Order
13132. Actions that have "federalism implications" are defined in the
Executive Order to include regulations and regulatory policies that have
"substantial direct effects on the States, on the relationship between
the national government and the States, or on the distribution of power
and responsibilities among the various levels of government." This rule
is a voluntary incentive that does not have substantial direct
compliance costs on States. Nor will this rule substantially impact the
relationship between the national government and the States or the
distribution of power between the national government and the States, as
contemplated under the Executive Order.

These commenters also suggested that EPA failed to consult under EO
13132. Although this EO is not applicable, EPA, in fact, took several
steps to ensure that input from the States was solicited and considered.
State representatives nominated by the Association of State and
Interstate Water Pollution Control Administrators (ASIWPCA) and the
Environmental Council of the States were provided an opportunity to
provide input at the outset of rule development. EPA held a series of
work group teleconferences in 2006 and discussed the proposed rule with
attendees at the 2006 annual ASIWPCA meeting. EPA carefully considered
feedback received during work group meetings prior to the publication of
the proposed rule. As a result of the comments received from the States
and other entities prior to publication of the proposed rule, the
proposal was modified significantly.

Some commenters asserted that EPA did not comply with Executive Order
12866, as amended by Executive Order 13258 and Executive Order 13422. We
disagree. The rule does not constitute a "significant regulatory action"
under Executive Order 12866. EPA disagrees with assertions that the rule
will have an annual effect on the economy of \$100 million or more or
adversely affect in a material way the economy, a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local, or tribal governments or communities.

Additionally, some commenters asserted that this rule does not meet the
"compelling public need" test included in Executive Order 12866. EPA
disagrees that Executive Order 12866 contains a test that mandates
Agency rules have a compelling public need. The requirements of the
Executive Order are clearly distinct from the "Statement of Regulatory
Philosophy and Principles" that contains the compelling public need
language. Further, as explained above, this rule is not a "significant
regulatory action" that would trigger the requirements of Executive
Order 12866.

A few commenters contended that EPA has not complied with the Unfunded
Mandates Reform Act (UMRA) and the Regulatory Flexibility Act (RFA), as
amended by the Small Business Regulatory Enforcement Act (SBREFA). We
disagree. By their terms, UMRA and the RFA apply to rulemakings as
defined in 5 U.S.C. 553(b). Grant rules are expressly excluded from the
coverage of 5 U.S.C. 553(b) by the provisions of 5 U.S.C. 553(a).
Because this is a grant rule, by definition this rule is not subject to
the RFA or Sections 202 and 205 of UMRA. Additionally, UMRA generally
excludes from the definition of "Federal intergovernmental mandate"
duties that arise from participation in a voluntary federal program,
such as the fee incentive program established by this rule.

**C. Financial Impact of Proposed Rule**

Many commenters expressed concerns regarding the potential financial
impact of the proposed rule. Commenters' concerns included: that the
costs of working to qualify for the incentive would exceed the value of
the incentive, that increased permit fees would adversely impact small
communities and businesses, and that States may see a decline in general
revenue funding from their legislatures if they begin collecting permit
fees. Many of the comments drew conclusions based on the premise that
EPA was requiring States to impose permit fees on point
source-dischargers.

The incentive program is voluntary. It is designed to encourage States
to consider establishing or expanding permit fee programs. However,
States are under no obligation to apply for these funds. Each State
should continue to make their permit fee decisions based on sound
economic and programmatic information.

As a result of comments received during the development of the proposed
rule, EPA did make changes prior to the proposal of the rule to promote
responsible decision making regarding permit fees and participation in
the incentive program. EPA established the pool at a modest amount (no
more than three percent of FY 2007 core program funding). The Agency
considers the incentive pool to be sufficient to generate State interest
but not large enough to significantly impact the amount of core Section
106 funding available. The incentive pool will not be taken from
existing core program funding but will only be created from State grant
increases above FY 2007 levels. No State will receive reduced funding as
a result of this rule. The total incentive will never exceed
approximately \$5.2 million. Future increases in Section 106 funding
above FY 2007 levels may be distributed through the current distribution
mechanism using the allotment formula found at 40 CFR 35.162.

Some comments also focused on the challenges that States may potentially
encounter in attempting to comply with the rule, including collection
and reporting of cost information to EPA in a timely manner. EPA will
work with the States to provide assistance in applying for a share of
the incentive. As necessary, EPA will provide any clarifications on the
application process, including guidance and Q&A documents. The Agency
postponed rule implementation until FY 2009 year to provide States
additional time to establish new or expand existing permit fee programs.

Multiple commenters objected to the use of grant "set-asides." The
comments suggested that designating funds for specific purposes
eliminates State flexibility to use the funding to address the highest
State priorities. As use of approximately 85 percent of State grant
funding is still at the discretion of the States (with EPA approval),
EPA has ensured that States continue to have wide latitude in targeting
funding according to State priorities. EPA has designated the remaining
funding to address Administration priorities and to ensure that the
funds are used as Congress intended.

**D. State Discretion and the Role of State Legislatures and General
Funds**

Commenters provided information regarding how States fund their NPDES
programs, and the restrictions that some States face in implementing or
expanding permit fee programs. Some noted that their NPDES permits are
funded through States' general revenue. Some commenters expressed
concerns that the proposed rule would interfere with State discretion
regarding how States manage and fund State water quality programs.
Commenters also noted that it may be difficult or even impossible to
receive legislative approval for implementation of a permit fee system
or increases in existing fees.

EPA emphasizes that the incentive program is voluntary. The incentive
program promotes the use of permit fees as a mechanism for funding water
quality activities. EPA recognizes that there are a number of revenue
streams that States may employ to support State water quality programs,
including federal support, State general funds, and revenue from those
who benefit from the activity (permit fees). EPA also recognizes that
there may currently be limitations in place that prevent States from
increasing permit fees or implementing permit fee programs in time to
qualify for the incentive in FY 2009.

Ultimately, States have the option to collect fees and apply for the
incentive funds or to choose other mechanisms for funding their
activities. States that do not qualify for the incentive during the
first year that it is available will not be precluded from receiving a
share of the incentive in future years.

Recovering permit program costs through fees will make resources
available for other water quality program activities, creating a net
increase in the amount of funds that States can devote to addressing
their water quality priorities. A State may choose not to apply for
funds if State officials decide that meeting the qualifying threshold is
not in the best interest of the State. EPA intentionally limited the
size of the incentive pool to protect core funding for all States, in
recognition of the fact that not every State will qualify or attempt to
qualify for the incentive program.

**E. Objective and Intent of Proposed Rule**

Many commenters stated that EPA has not clearly articulated the
objective of the rule or demonstrated that the incentive will serve the
intended purpose of shifting more of the financial burden for program
operation to NPDES permit holders. As stated above, the purpose of this
rule is to encourage States to voluntarily collect NPDES permit fees
adequate to meet their program costs. This rule is designed to provide
an incentive for States to move toward greater sustainability in the way
they manage and budget for environmental programs and to shift part of
the financial burden to those who benefit from NPDES permits.

**F. Promoting Water Quality Protection**

Some commenters contended that the creation of an incentive pool would
limit funding to State water quality programs, thereby potentially
adversely impacting a State's ability to protect and improve water
quality. These comments were based on the belief that the incentive pool
represents a reduction in 106 funding and may signal EPA's intent to
eliminate all federal funding for State water quality programs in the
future. EPA has ensured that the rule creates an incentive that is
sufficient to encourage States to increase or maintain the
sustainability of their water quality programs while protecting core 106
funding for those States that currently do not, or choose not to,
qualify for the incentive. The incentive pool will be created only from
program funding increases above FY 2007 funding levels (up to three
percent of FY 2007 core program funding) and can only be applied to
support Section 106 eligible activities. In addition, following
distribution of incentives to qualifying States, all remaining incentive
funds will be distributed to all States through the existing formula (40
CFR 35.162(b)).

Some commenters also stated that EPA has failed to demonstrate that the
incentive program will have a positive environmental impact. EPA
acknowledges that States which fail to qualify for the incentive will
receive fewer grant dollars than if all of the funds were distributed
through the existing formula. However, EPA does not believe that this
will negatively impact a State's ability to protect water quality or
unfairly penalize those States that are currently unable to qualify for
the incentive. Ultimately, the Agency believes that the new fee revenue
that States will generate, coupled with the incentive, may significantly
increase the available funding for water quality programs, justifying
EPA's decision to set aside a modest portion of 106 funding. EPA also
believes that this increase in available funding will allow States to
build more sustainable water quality programs that are better equipped
to address water quality problems.

**G. Impact on Non-Authorized States**

Some commenters expressed concern regarding the impact of the proposed
rule on non-authorized States. EPA reiterates that base grant funding
for State water quality programs is protected under this rule. The
incentive pool will be created only from future State Section 106
increases greater than FY 2007 funding. The total incentive will never
exceed approximately \$5.2 million. Therefore, the amount of funding
diverted from any one State as a consequence of this rule will be
relatively modest, should not adversely impact a State's ability to
effectively implement their water quality program, and should not be a
pivotal factor in any State delegation decision.

**H. Permit Fees for EPA-Regulated Dischargers**

Some commenters noted that the rule does not apply to federal
facilities, tribal lands, and other EPA-regulated dischargers in
non-authorized States. EPA reiterates that this rule is not solely
intended to collect fees. It is intended to support the implementation
of high quality NPDES programs in authorized States while at the same
time build more sustainable State water programs. EPA does not collect
user fees in non-authorized States. In addition, the distribution of
permit program responsibilities among the non-authorized States and EPA
varies by State. While none of the non-authorized States issue permits,
many carry out a number of permit program-related activities.

**I. Resources Needs Gap**

A few commenters were concerned that EPA's focus on permit fees detracts
from efforts to address the resources needs gap identified in the State
Water Quality Management Resource Analysis Task Force's Interim 2002
report. EPA agrees that action needs to be taken to address the resource
needs gap and believes that this rule responds directly to the State
Resource Analysis Report. The Agency asserts that if States establish or
expand permit fee programs to qualify for the incentive funds
established under this rule, they will ultimately realize a net increase
in the amount of funding available for their water quality programs. EPA
also believes that recovering all or most of program costs through
permit fees represents a more sustainable approach to program management
and budgeting.

**J. Measuring the Success of NPDES Programs**

A few commenters stated that the success of NPDES programs should be
measured by improvements in water quality, rather than the amount of
permit fees a State generates. EPA agrees with this position and does
not consider the criteria set forth in today's rule regarding permit
program costs recovered to be an environmental measure of NPDES program
success or a measure of NPDES program adequacy. The purpose of this rule
is to encourage States to voluntarily collect NPDES permit fees adequate
to meet their program costs.

**K. Self-Certification and Reporting Requirements**

Many commenters stated that the proposed rule would impose a significant
administrative burden on the States. Additionally, some commenters
indicated that the incentive would not be sufficient to justify the
expenses necessary to meet the certification requirements of the
proposed rule. In addition to ensuring the integrity of the incentive
program, EPA believes the reporting required under the incentive program
will help States to understand and document program costs and identify
more opportunities to ensure program sustainability.

The rule provides for a modest incentive to further encourage States to
establish or expand their permit fee programs. EPA anticipates that the
additional revenue streams created from both the extra fees and the
incentive awards will provide sufficient revenue to generate interest
among States and cover the costs of creating or expanding a permit fee
program and meeting all accounting and reporting requirements outlined
in this rule. Since this rule establishes a voluntary incentive program,
EPA advises States to carefully analyze all options before pursuing any
fee strategy.

**L. Defining NPDES Activities**

Some commenters requested clarification and definitions for several
terms used in the proposed rule, including "NPDES program" and an
"adequate" NPDES fee program. As necessary, EPA will provide additional
guidance regarding those activities the Agency considers to be included
in the program's scope.

**M. Current Status of State NPDES Programs**

Some commenters provided information regarding the current status and
structure of, and funding mechanisms for State NPDES programs. This
information is included in the comments which can be founded in the
public docket, available at www.regulations.gov.

**N. Alternatives to Proposed Incentive**

Some commenters suggested alternatives to the proposed rule. While the
Agency has determined that some of these suggestions are not viable,
others are not mutually exclusive of the rule we are finalizing today.
EPA commits to continue to work with the States on these ideas.

**Conclusion**

After careful evaluation of the comments received, the Agency has
decided to finalize this rule with only two minor modifications: 1)
changing the implementation date of the rule from FY 2008 to FY 2009
(e.g., beginning October 1, 2008) and 2) changing the base fiscal year
the Agency will use to determine if a permit fee allotment is made from
FY 2006 to FY 2007.

**IV. STATUTORY AND EXECUTIVE ORDER REVIEWS**: Under Executive Order
12866 (58 FR 51735, October 4, 1993), this rule is not a "significant
regulatory action" and is therefore not subject to OMB review. Because
this rule is not subject to notice and comment requirements under the
Administrative Procedures Act or any other statute, it is not subject to
the Regulatory Flexibility Act (5 U.S.C. Section 601 et.) or Sections
202 and 205 of the Unfunded Mandates Reform Act of 1999 (UMRA) (Pub.L.
104-4). In addition, this rule does not significantly or uniquely affect
small governments. Although this rule proposes to create new binding
legal requirements, such requirements do not substantially and directly
affect Indian Tribes under Executive Order 13175 (63 FR 67249, November
9, 2000). This rule will not have federalism implications, as specified
in Executive Order 13132 (64 FR 43255, August 10, 1999). This rule is
not subject to Executive Order 13211, "Actions Concerning Regulations
that Significantly Affect Energy Supply, Distribution, or Use" (66 FR
28355, May 22, 2001), because it is not a significant regulatory action
under Executive Order 12866. This rule does not involve technical
standards; thus, the requirements of Section 12(d) of the National
Technology Transfer and Advancement Act of 1995 (15 U.S.C. Section 272
note) do not apply. This rule does not impose an additional information
collection burden under the provisions of the Paperwork Reduction Act of
1995 (44 U.S.C. Section 3501 et seq.). The Congressional Review Act, 5
U.S.C. Section 801 et seq., generally provides that before certain
actions may take effect, the agency promulgating the action must submit
a report, which includes a copy of the action, to each House of the
Congress and to the Comptroller General of the United States. EPA will
submit a report containing this rule and other required information to
the U.S. Senate, the U.S. House of Representatives, and the Comptroller
General of the United States prior to publication of the rule in the
Federal Register. A major rule cannot take effect until 60 days after it
is published in the Federal Register. This action is not a "major rule"
as defined by 5 U.S.C. 804(2). This rule will be effective on \[[insert
date of publication in the Federal Register]{.underline}\].

**LIST OF SUBJECTS IN 40 CFR PART 35**

Environmental protection, Administrative practices and procedures,
Environmental program grants, Water pollution control.

Dated:

Benjamin H. Grumbles,

Assistant Administrator, Office of Water.

EPA amends 40 CFR Part 35 as follows:

1\. The authority for citation for part 35, Subpart A continues to read
as follows:

AUTHORITY: 42 U.S.C. 7401 et seq.; 33 U.S.C. 1251 et seq; 42 U.S.C. 300f
et seq; 42 U.S.C. 6901 et seq; 7 U.S.C. 136 et seq; 15 U.S.C. 2601 et
seq; 42 U.S.C. 13101 et seq; Pub.L 104-134, 110 Stat. 1321, 1321-299
(1966); Pub.L. 105-65, 111 Stat. 1344, 1373 (1997).

2\. Section 35.162 is amended by adding paragraph (e) to read as
follows:

§ 35.162 Basis for allotment.

**\* \* \* \* \***

\(e\) *Permit fee incentive allotment formula**.*** If there is an
increase above the FY 2007 level in the total amount of funds allotted
to States under subsection (b)*,* EPA may award this increase as the
permit fee incentive allotment to eligible States in accordance with
this section. The amount of this annual allotment shall not be greater
than three percent of the funds allotted under paragraph (b) of this
section in FY 2007, and any funds above this amount shall be allotted to
States under paragraph (b) of this section.

> \(1\) Each eligible State may receive up to a full share of this
> allotment, as determined by the following formula. A full share is the
> allotment amount divided by the number of eligible States:
>
> \(i\) A State will receive 25 percent of a full share if that State
> has collected permit fees which equal or exceed 75 percent of total
> State NPDES program costs; or
>
> \(ii\) A State will receive 50 percent of a full share if that State
> has collected permit fees which equal or exceed 90 percent of total
> State NPDES program costs; or
>
> \(iii\) A State will receive a full share if that State has collected
> permit fees which equal 100 percent of total State NPDES program
> costs.

\(2\) The maximum share to any State under this subsection shall not
exceed 50 percent of the State's previous year's total Section 106
allotment determined under paragraph (b) of this section.

\(3\) Any funds left remaining after all shares have been allotted under
this subsection will be re-allotted to the States under paragraph (b) of
this section.

\(4\) In order for a State to be eligible for this incentive, a State
must: be authorized by EPA to implement the NPDES program by the first
day of the federal fiscal year, October 1, for which the funds have been
appropriated; and submit to EPA a certification meeting the requirements
of paragraph (e)(5) of this section.

\(5\) The certification required under paragraph (e)(4) of this section
must meet the following requirements:

\(i\) The certification must be submitted annually to EPA by October 1;
and

\(ii\) The certification must include the total percentage of NPDES
program costs, as defined in paragraph (e)(6) of this section, recovered
by the State through permit fee collections during the most recently
completed State fiscal year, and a statement that the amount of permit
fees collected is used by the State to defray NPDES program costs; and

\(iii\) The certification must include a statement that State recurrent
expenditures for water quality programs have not decreased from the
previous State fiscal year or indicate that a decrease in such
expenditures is attributable to a non-selective reduction of the
programs of all executive branch agencies of the State government.

\(6\) NPDES program costs are defined as all permitting, enforcement,
and compliance costs.

[^1]: CWA Sections 106 and 518 authorize EPA to award such grants to
    eligible Indian Tribes, but this rule does not affect those grants.