March 2, 2012 1 

# 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 Cover age Ratio under 100 Percent Cost Pass-Through

In the Economic Analysis for Final Effluent Limitation Gu idelines and Standards for the Airport Deicing Category , EPA stated that it intended to calculate the imp act of the rule on airport debt service coverage ratio under the assumption of zero cost pass-th rough and 100 percent cost pass-through.

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

pre pre pre Service Debt Revenues Net DSCR 

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

Costs M & O Annual Costs Capital Annualized Charges and Rates in Change 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:



### Payment Bond Annualized Service Debt Revenues Net DSCR

pre pre post 

###  

However, the debt service component of the increm ental annualized compliance costs (i.e., annualized capital costs) reflected in the increas ed rates and charges is not an operating cost and therefore should not be subtracted from net revenues.

The correct calculation for post-regulatory DSCR u nder EPA’s stated assumption that inceased rates and charges are exactly equal to annualized compliance costs is:

Payment Bond Annualized Service Debt Costs Capital Annualized Revenues Net DSCR

pre pre post  



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

 The denominator in the DSCR post equation EPA calculated is exactly equal to the denominator in the DSCR post equation EPA should have calculated.March 2, 2012 2  The numerator in the DSCR post equation EPA calculated (net revenues pre ) is smaller than the numerator in the DSCR post equation EPA should have calculated (net revenues pre + annualized capital costs).

Thus, DSCR post in the equation EPA calculated is smaller than DSCR post in the equation EPA should have calculated.

For the purposes of the final Airport Deicing e ffluent guidelines, EPA did not recalculate DSCR post 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 ba sis for the promulgated rule, no airports failed the DSCR test either assuming zero cost pass th rough or 100 percent cost pass through.

Therefore recalculating the post-regulatory DSCR t est as it should have been calculated assuming 100 percent cost pass-through:

 would not change any conclusions EPA drew about the ability of air ports 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.