1 March 2, 2012

 MEMORANDUM

Eastern Research Group, Inc. 

110 Hartwell Avenue

Lexington, MA 02421

Date: March 2, 2012 

To: James Covington, EPA 

From: Cal Franz, ERG 

Re: Calculation of Debt Service Coverage Ratio under 100 Percent Cost Pass-Through 

In the Economic Analysis for Final Effluent Limitation Guidelines and Standards for the Airport Deicing 

Category, EPA stated that it intended to calculate the impact of the rule on airport debt service coverage 

ratio under the assumption of zero cost pass-through and 100 percent cost pass-through. 

In that document, EPA presented the pre-regulatory DSCR calculation as: 

pre

pre

pre Debt Service

Net Revenues

DSCR 

EPA assumed that under 100 percent cost pass-through, airport rates and charges would change such that: 

Change in Rates and Charges Annualized Capital Costs Annual O&M Costs post  

Because the incremental compliance costs were exactly equal to the increased rates and charges, EPA 

mistakenly assumed the net revenue in the numerator of the post-regulatory DSCR would be unchanged 

and therefore incorrectly calculated post-regulatory DSCR as: 

Debt Service Annualized Bond Payment

Net Revenues

DSCR pre

pre

post

 

However, the debt service component of the incremental annualized compliance costs (i.e., annualized 

capital costs) reflected in the increased rates and charges is not an operating cost and therefore should not 

be subtracted from net revenues. 

The correct calculation for post-regulatory DSCR under EPA’s stated assumption that inceased rates and 

charges are exactly equal to annualized compliance costs is: 

Debt Service Annualized Bond Payment

Net Revenues Annualized Capital Costs

DSCR pre

pre

post 

 

EPA therefore underestimated post-regulatory DSCR under the 100 percent cost pass through 

assumption: 

 The denominator in the DSCRpost equation EPA calculated is exactly equal to the denominator in 

the DSCRpost equation EPA should have calculated. 
2 March 2, 2012

 The numerator in the DSCRpost equation EPA calculated (net revenuespre) is smaller than the 

numerator in the DSCRpost equation EPA should have calculated (net revenuespre + annualized 

capital costs). 

Thus, DSCRpost in the equation EPA calculated is smaller than DSCRpost in the equation EPA should have 

calculated. 

For the purposes of the final Airport Deicing effluent guidelines, EPA did not recalculate DSCRpost to 

correct this error. After examining the effect of the error on the results, EPA concluded that because it 

underestimated post-regulatory DSCR under the 100 percent cost pass-through assumption: 

 Airports are more likely to fail the DSCR test as calculated than as it should have been calculated; 

 Any airport that passes the DSCR test as calculated would also pass the DSCR test as it should 

have been calculated. 

In addition, under the option selected to serve as a basis for the promulgated rule, no airports failed the 

DSCR test either assuming zero cost pass through or 100 percent cost pass through. 

Therefore recalculating the post-regulatory DSCR test as it should have been calculated assuming 100 

percent cost pass-through: 

 would not change any conclusions EPA drew about the ability of airports to incur additional debt 

under the promulgated rule, 

 nor would it change any results reported in the supporting economic impact documentation. 

Finally, the above discussion only relates to the calculation of post-regulatory DSCR under the 

assumption of 100 percent cost pass-through. It does not apply to post-regulatory DSCR under the 

assumption of zero cost pass-through, which was correctly calculated.