United

Environmental Protection Office of Water EPA 816-R-98-006 

Agency 4606 July 1998

_____________________________________________________________________________

Guidance on Implementing

the Capacity Development

Provisionsof the Safe Drinking 

Water Act Amendments of 1996
TABLE OF CONTENTS

Preface 6

Section 1: Introduction to Technical, Managerial, and 8

Financial Capacity of Water Systems 

What is the overall purpose of this guidance document? 8

What is the statutory authority for this guidance document? 8

What is water system capacity? 8

What is water system capacity development? 9

How does the SDWA address capacity development? 9

What are the requirements for State Capacity Development Programs? 9

To which water systems do the SDWA’s capacity development provisions apply? 10

What is a public water system (PWS)? 10

What is a community water system (CWS)? 11

What is a nontransient, noncommunity water system (NTNCWS)? 11

What is a transient, noncommunity water system (TNCWS)? 11

What is technical capacity, and how can it be assessed? 11

What is managerial capacity, and how can it be assessed? 12

What is financial capacity, and how can it be assessed? 12

How are technical, managerial, and financial capacity related? 13

Section 2: Guidance on DWSRF Withholding Determinations 16

Related to State Programs For Ensuring that All New CWSs

and NTNCWSs Demonstrate Technical, Managerial, and

Financial Capacity

What is the purpose of this guidance? 16

What is the statutory authority for this guidance? 16

To whom does this guidance apply? 16

How will EPA use this guidance? 16
What do sections 1420(a) of the SDWA require States to do? 16

What constitutes a “new system”? 16

What must a State document in order for EPA to determine that a 20% withholding from 17

the State’s DWSRF allotment is not required?

What is a “basis of authority”? 17

What are some examples of a “basis of authority”? 17

What needs to be documented relative to the “basis of authority”? 17

Can the “basis of authority” for ensuring the demonstration of new system capacity rest at 18

the county or local level?

Who must certify that the State’s authority is sufficient to ensure the demonstration of new 18

system capacity?

What is a “control point”? 18

What are some examples of “control points”? 18

What must the plan for program implementation contain? 18

What will the schedule be for fiscal year 1999 withholding under sections 1420(a) and 19

1452(a)(1)(G)(i)?

Will unobligated funds from previous fiscal years be subject to the withholding? 19

What is a “holdback”, and what is its purpose? 19

In what situations would the “holdback” apply? 19

For what period does the “holdback” apply? 20

What is a formal “withholding”, and under what conditions would it apply? 20

How will formal withholding determinations be made for fiscal years 2000 and beyond? 20

What documentation must a state provide to demonstrate full, ongoing implementation of 21

its new systems program?

Section 3: Guidance on DWSRF Withholding Determinations 25

Related to State Capacity Development Strategies

What is the purpose of this guidance? 25

What is the statutory authority for this guidance? 25

To whom does this guidance apply? 25

How will EPA use this guidance? 25
What does section 1420(c) of the SDWA as amended require a State to do? 25

What are the elements that a State must consider, solicit public comment, and include as 25

appropriate?

What must a State document to demonstrate that it has met the basic requirements of 26

section 1420(c)?

What are the ongoing reporting requirements under the capacity development strategy 26

provisions?

Will these reports be a factor in DWSRF withholding determinations? 27

What should States that already have capacity development strategies do? 27

What is meant by a history of significant noncompliance? 27

Under what conditions will fiscal year 2001 withholding occur? 27

Will there be a “holdback” associated with the capacity development strategy provision 28

analogous to that associated with the new systems provision?

Under what conditions will fiscal year 2002 withholding occur? 28

Under what conditions will fiscal years 2003 and beyond withholdings occur? 28

What will be the basis of withholding decisions in subsequent fiscal years after a State has 28

demonstrated that it is developing and implementing a capacity development strategy? 

Section 4: Guidance on Assessment of Capacity for Purposes 31

of Awarding DWSRF Assistance

What is the purpose of this guidance? 31

What is the statutory authority for this guidance? 31

To whom does this guidance apply? 31

How will EPA use this guidance? 31

What limitations on DWSRF assistance does section 1452(a)(3)(A) impose? 31

Are there any exceptions to the limitations imposed by section 1452(a)(3)(A)? 31

What must a State document to comply with the requirement that DWSRF loan assistance 31

not be available to PWSs that lack technical, managerial, and financial capacity?

What must a State document to comply with the provision that DWSRF assistance can be 32

provided to a system in significant noncompliance only if the use of the assistance will

ensure compliance?

What must a State document to comply with the provision that DWSRF assistance can be 32

provided to a PWS that lacks technical, managerial, and financial capacity if the system

agrees to restructuring changes that the State determines are necessary to ensure system

capacity for long term SDWA compliance?
TABLES AND FIGURES

Tables

Table 1: Minimum Requirements to avoid DWSRF Withholding Related to

Ensuring That All New CWSs and NTNCWSs Demonstrate Technical,

Managerial, and Financial Capacity

22

Table 2: Potential Authorities and Control Points for Ensuring Technical,

Managerial, and Financial Capacity of New Systems

23

Table 3: DWSRF Withholding for New System Capacity Programs 24

Table 4: Minimum Requirements to Avoid DWSRF Withholding Related to State

Capacity Development Strategies

29

Table 5: DWSRF Withholding for Capacity Development Strategies 30

Table 6: Minimum Requirements for Assessment of Capacity for Purposes of

Awarding DWSRF Assistance

33

Figures

Figure 1: Ownership of Systems Serving Population 25-500

 Ownership of Systems Serving Population > 500

14

Figure 2: Technical, Managerial, and Financial Capacity 15

Attachments

Attachment 1: Worksheet for Assessing State Programs for Ensuring 34

Demonstration of New System Capacity

Attachment 2: Worksheet for Assessing Proposed State Capacity Development 42

Strategies for Existing Public Water Systems

Attachment 3: Response to Comments Received on Proposed Guidance Published 51

in the Federal Register on February 5, 1998
6

PREFACE

The Safe Drinking Water Act (SDWA) as amended in 1996 brings significant

improvements to the national drinking water program. Capacity development is an important

component of the Act's focus on preventing problems in drinking water. The capacity development

provisions offer a framework within which States and water systems can work together to ensure

that systems acquire and maintain the technical, financial, and managerial capacity needed to

achieve the public health protection objectives of the SDWA. 

The 1996 Amendments emphasize the technical, managerial, and financial capacity of water

systems. By enhancing and ensuring the technical, financial, and managerial capacity of water

systems, States will promote compliance with national primary drinking water regulations

(NPDWRs) for the long term. To avoid a withholding in its Drinking Water State Revolving Fund

(DWSRF) allotment, each State is required: 1) to ensure that new community water systems and

new nontransient noncommunity water systems demonstrate adequate capacity, and 2) to develop

and implement a strategy to assist existing systems in acquiring and maintaining capacity. 

This guidance is the result of a thorough stakeholder consultation process initiated by the

U.S. Environmental Protection Agency (EPA) and its National Drinking Water Advisory Council

(NDWAC). The NDWAC was established by the original Safe Drinking Water Act as a diverse

group of stakeholders to advise the Agency on drinking water issues. In order to most effectively

advise EPA regarding implementation of the capacity development provisions of the SDWA

Amendments of 1996, NDWAC established a Small Systems Working Group. The Small Systems

Working Group met on four occasions between February and July, 1997, each two days in length,

with the purpose of developing recommendations on how EPA should implement the capacity

development provisions of the SDWA Amendments of 1996. The Small Systems Working Group

consisted of 22 members representing small public water systems, environmental and public health

advocacy groups, State drinking water programs, public utility commissions, and other interest

groups. The Small Systems Working Group recommended to NDWAC, which in turn

recommended to EPA, that the Agency publish a combination of guidance and information to

facilitate the implementation of the capacity development provisions of the 1996 SDWA

Amendments. The working group, through the NDWAC, made specific substantive

recommendations regarding the content of the recommended guidance and information. 

The draft guidance and information was published for public comment on February 5,

1998. The comment period extended for 60 days, and approximately 50 parties submitted public

comments. EPA has attached a response to all public comments as an appendix to this guidance. 

Persons who wish may obtain a copy of all comments submitted may send a written request to

Peter Shanaghan, Small Systems Coordinator, Office of Ground Water and Drinking Water, 401

M Street SW, Washington, DC 20460 or call on 202-260-5813 or on email at

shanaghan.peter@epamail.epa.gov.

The NDWAC recommended information is being published separately as Information for
7

States on Implementing the Capacity Development Provisions of the 1996 Safe Drinking Water

Act Amendments. Another NDWAC recommended information document, Information for the

Public on Participating in the Preparation of Capacity Development Strategies, is also being

published separately. Both of these documents may be obtained by calling the Safe Drinking Water

Hotline at 1-800-426-4791.
 Section 1420(d): FEDERAL ASSISTANCE-(1) IN GENERAL. . . . (4) GUIDANCE FOR NEW 1

SYSTEMS- Not later than 2 years after the date of enactment of this section, the Administrator shall publish guidance developed in

consultation with the States describing legal authorities and other means to ensure that all new community water systems and new nontransient,

noncommunity water systems demonstrate technical, managerial, and financial capacity with respect to national primary drinking water

regulations.

 Section 1452(g)(3): GUIDANCE AND REGULATIONS.- The Administrator shall publish guidance and 2

promulgate regulations as may be necessary to carry out the provisions of this section...

Section 1452(a)(1)(G)(i): NEW SYSTEM CAPACITY.- Beginning in fiscal year 1999, the Administrator 3

shall withhold 20% of each capitalization grant made pursuant to this section to a State unless the State has met the

requirements of section 1420(a) (relating to capacity development)...

8

Section 1: Introduction to Technical, Managerial, and Financial Capacity of Water Systems

What is the overall purpose of this guidance document?

This guidance establishes national policy regarding implementation of the capacity

development related provisions of the SDWA, as amended.

Sections 2 and 3 of this guidance describe how EPA will assess State capacity development

programs for purposes of determining whether these programs meet the statutory requirements

contained in section 1420 of the Act and therefore whether the Agency is required to withhold

(according to sections 1420 and 1452(a)(1)(G)(i)) up to 20% of a State’s share of DWSRF

funding.

Section 4 of this guidance describes what States must document and submit to EPA to

demonstrate compliance with section 1452(a)(3) of the Act. This provision prohibits any

assistance under Section 1452, including direct grants from EPA, to systems lacking the technical,

managerial, and financial capacity for SDWA compliance.

What is the statutory authority for this guidance document?

The authority to produce this guidance is contained in SDWA sections 1420 and 1452.

First, under section 1420(d)(4), the Act directs EPA to publish guidance on legal authorities or

other means for ensuring that all new community water systems and new nontransient,

noncommunity water systems demonstrate adequate technical, managerial, and financial capacity.1

Section 2 of this guidance fulfills this requirement. Second, section 1452(g)(3) requires the

Agency to publish guidance and promulgate regulations as may be necessary to carry out the

provisions of section 1452. Section 1452(a)(1)(G)(i) requires EPA to withhold a percentage of a 2 3

State’s DWSRF grant unless the State has met the capacity development requirements of section

1420. The Agency has determined that guidance is necessary to implement the withholding

provision in a fair, rational, and consistent manner. 

What is water system capacity?

Water system capacity is the ability to plan for, achieve, and maintain compliance with

applicable drinking water standards. Capacity has three components: technical, managerial, and

financial. Adequate capability in all three areas is necessary for a system to have “capacity.” 
 Section 1452(a)(3): LIMITATION.- (A) IN GENERAL.- Except as provided in subparagraph (B), no 6

assistance under this section shall be provided to a public water system that- (i) does not have the technical,

managerial, and financial capability to ensure compliance with the requirements of this title; or (ii) is in significant

noncompliance with any requirement of a national primary drinking water regulation or variance. (B)

RESTRUCTURING.- A public water system described in subparagraph (A) may receive assistance under this section

if - (i) the use of such assistance will ensure compliance; and (ii) if subparagraph (A)(i) applies to the system, the

owner or operator of the system agrees to undertake feasible and appropriate changes in operation (including

ownership, management, accounting, rates, maintenance, consolidation, alternative water supply, or other

procedures) if the State determines that such measures are necessary to ensure that the system has the technical,

managerial, and financial capability to comply with the requirements of this title over the long term.

9

What is water system capacity development?

Capacity development is the process of water systems acquiring and maintaining adequate

technical, managerial, and financial capabilities to enable them to consistently provide safe drinking

water. The SDWA’s capacity development provisions provide a framework for States and water

systems to work together to ensure that systems acquire and maintain the technical, managerial,

and financial capacity needed to meet the Act’s public health protection objectives.

How does the SDWA address capacity development?

The SDWA as amended establishes a focus on capacity development through two major

provisions. First the law requires States to develop and implement programs to ensure that new

systems demonstrate capacity and to assist existing systems in acquiring and maintaining capacity. 

States failing to develop and implement such programs will have up to 20% of their DWSRF

allotment withheld.

Second, the law ties a water system’s eligibility to receive assistance under Section 1452 to

the system’s technical, managerial, and financial capacity. In short, the law prohibits DWSRF

assistance to a system which lacks the technical, managerial, and financial capacity to ensure

compliance with SDWA requirements. The only exception for systems lacking capacity is if they

agree to undertake changes in operations, such as changes in ownership, management, accounting,

rates, etc. These would apply if the State determines that the changes are necessary to ensure that

the system has the technical, managerial, and financial capacity to comply with the SDWA over the

long term. Section 1452(a)(3) establishes the prohibition on assistance to a system lacking the

capacity to ensure SDWA compliance unless the system agrees to restructuring changes to ensure

it has the necessary technical, managerial, and financial capacity to comply with the Act over the

long term. 

6

What are the requirements for state capacity development programs?

Section 1420 establishes the requirements for State programs. First, under section

1420(a), a State must develop a program to ensure that all new community water systems and new

nontransient noncommunity water systems demonstrate the technical, managerial, and financial

capacity to comply with all national primary drinking water regulations (NPDWRs) in effect, or
 Section 1420(a): STATE AUTHORITY FOR NEW SYSTEMS.- A State shall receive only 80% of the 7

allotment that the State is otherwise entitled to receive under section 1452 (relating to State loan funds) unless the

State has obtained the legal authority or other means to ensure that all new community water systems and new

nontransient, noncommunity water systems commencing operation after October 1, 1999, demonstrate technical,

managerial, and financial capacity with respect to each national primary drinking water regulations in effect, or

likely to be in effect, on the date of commencement of operations.

 Section 1420(c)(1): CAPACITY DEVELOPMENT STRATEGY.- Beginning four years after the date of 8

enactment of this section, a State shall receive only- (A) 90 percent in fiscal year 2001; (B) 85 percent in fiscal year

2002; and (C) 80 percent in each subsequent fiscal year of the allotment that the state is otherwise entitled to receive

under section 1452 (relating to state loan funds), unless the state is developing and implementing a strategy to assist

public water systems in acquiring and maintaining technical, managerial, and financial capacity.

Section 1452(a)(1) (G)(i):...the Administrator...shall withhold 10 percent for fiscal year 2001, 15 percent for

fiscal year 2002, and 20 percent for fiscal year 2003 if the State has not complied with the provisions of section

1420(c) (relating to capacity development strategies).

10

likely to be in effect on the date commencement of operations. Second, under section 1420(c), a 7

State must, by August 6, 2000, be developing and implementing a strategy to assist PWSs in

acquiring and maintaining technical, managerial, and financial capacity.8

Both sections 1420(a) and (c) and section 1452(a)(1)(G)(i) establish DWSRF withholding

requirements for States not meeting the capacity development provisions of section 1420(a) and

(c). States which fail to establish a functional program to ensure that systems commencing

operations after October 1, 1999 demonstrate technical, managerial, and financial capacity will

incur a 20% DWSRF withholding starting in fiscal year 1999. States which fail to develop and

implement a strategy will incur a 10% withholding in fiscal year 2001, 15% withholding in fiscal

year 2002, and 20% withholding for subsequent years.

To which water systems do the SDWA’s capacity development provisions apply?

Section 1420(a), the new systems provision, applies to all new CWSs and all new

NTNCWSs.

Section 1420(c), the capacity development strategy provision, applies to all PWSs, but

States must consider which systems they will focus on.

Section 1452(a)(3), the prohibition of assistance to PWSs which lack capacity, applies to

all PWSs eligible for DWSRF assistance, which are CWSs , nonprofit NTNCWS, and nonprofit

TNCWS. 

What is public water system (PWS)?

A PWS is a “system for the provision to the public of water for human consumption

through pipes or other constructed conveyances, if such system has at least fifteen service

connections or regularly serves an average of at least twenty-five individuals daily at least 60 days

out of the year.” (40 CFR 141.2) This category includes community water systems (CWSs),

nontransient noncommunity water systems (NTNCWSs), and transient community water systems

(TNCWSs). There are approximately 172,000 PWSs nationwide.
Additional information on technical capacity can found within Information for States on Implementing the 3

Capacity Development Provisions of the Safe Drinking Water Act Amendments of 1996.

11

What is a community water system (CWS)?

A CWS is a “public water system which serves at least 15 service connections used by

year-round residents or regularly serves at least 25 year-round residents.” (40 CFR 141.2) About

55,000 CWSs serve more than 246 million people.

Slightly more than 86 % of CWSs are “very small” (serving fewer than 500 persons) or

“small” (serving fewer than 3,300 persons). Although a significant majority of CWSs, these

systems serve just over 10 percent of the CWS service population. CWSs can be privately owned

or publicly owned. A substantial number of privately-owned systems are “ancillary systems” they

provide water as an ancillary function of their principal business. An example is mobile home

parks, which provide water as an adjunct to their principal business. Fifty-three percent of CWSs

serving between 25 and 100 persons are ancillary systems. Only 0.1 percent of CWSs serving

more than 10,000 persons are ancillary systems. See Figure 1. 

What is a nontransient noncommunity water system (NTNCWS)?

A NTNCWS is “a public water system that is not a community water system and that

regularly serves at least 25 of the same persons over 6 months per year.” (40 CFR 141.2)

NTNCWSs are generally commercial or institutional establishments having their own water supply

which serves 25 or more of the same people on a regular basis. Examples include schools,

factories, office and industrial parks, and major shopping centers. Approximately 20,000

NTNCWSs across the nation serve some 6 million people. Over 96 % of NTNCWSs use ground

water as their primary source. Ninety-nine percent of NTNCWSs are “very small” or “small”. 

Most are privately owned.

What is a transient, noncommunity water system (TNCWS)?

A TNCWS is a “non-community water system that does not regularly serve at least 25 of

the same persons over six months per year.” (40 CFR 141.2) TNCWSs are generally commercial

or not-for-profit establishments having their own water supply which serves 25 or more people per

day, but not the same people on a regular basis. Examples include restaurants, roadside stops,

campgrounds, and hotels.

What is technical capacity, and how can it be assessed?3

Technical capacity is the physical and operational ability of a water system to meet SDWA

requirements. Technical capacity refers to the physical infrastructure of the water system,

including the adequacy of source water and the adequacy of treatment, storage, and distribution

infrastructure. It also refers to the ability of system personnel to adequately operate and maintain

the system and to otherwise implement requisite technical knowledge.

A water system’s technical capacity can be determined by examining key issues and
Ibid. 4

Ibid.

5

12

questions, including:

C Source water adequacy. Does the system have a reliable source of drinking water? Is the

source of generally good quality and adequately protected?

C Infrastructure adequacy. Can the system provide water that meets SDWA standards? 

What is the condition of its infrastructure, including well(s) or source water intakes,

treatment, storage, and distribution? What is the infrastructure’s life expectancy? Does the

system have a capital improvement plan?

C Technical knowledge and implementation. Is the system’s operator certified? Does the

operator have sufficient technical knowledge of applicable standards? Can the operator

effectively implement this technical knowledge? Does the operator understand the

system’s technical and operational characteristics? Does the system have an effective

operation and maintenance program?

What is managerial capacity, and how can it be assessed?4

Managerial capacity is the ability of a water system to conduct its affairs in a manner

enabling the system to achieve and maintain compliance with SDWA requirements. Managerial

capacity refers to the system’s institutional and administrative capabilities.

Managerial capacity can be assessed through key issues and questions, including:

C Ownership accountability. Are the system owner(s) clearly identified? Can they be held

accountable for the system?

C Staffing and organization. Are the system operator(s) and manager(s) clearly identified? 

Is the system properly organized and staffed? Do personnel understand the management

aspects of regulatory requirements and system operations? Do they have adequate

expertise to manage water system operations? Do personnel have the necessary licenses

and certifications?

C Effective external linkages. Does the system interact well with customers, regulators, and

other entities? Is the system aware of available external resources, such as technical and

financial assistance?

What is financial capacity, and how can it be assessed?5

Financial capacity is a water system’s ability to acquire and manage sufficient financial

resources to allow the system to achieve and maintain compliance with SDWA requirements.
13

Financial capacity can be assessed through key issues and questions, including:

C Revenue sufficiency. Do revenues cover costs? Are water rates and charges adequate to

cover the cost of water?

C Credit worthiness. Is the system financially healthy? Does it have access to capital through

public or private sources?

C Fiscal management and controls. Are adequate books and records maintained? Are

appropriate budgeting, accounting, and financial planning methods used? Does the system

manage its revenues effectively?

How are technical, managerial, and financial capacity related?

Many aspects of water system operations involve more than one kind of capacity.

Infrastructure replacement or improvement, for example, requires technical knowledge,

management planning and oversight, and financial resources. A deficiency in any one area could

disrupt the entire effort. The relationship between the three areas of capacity is illustrated in Figure

2. Additional information on technical, managerial, and financial capacity and how they relate to

one another can be found in Information on Implementing the Capacity Development Provisions of

the Safe Drinking Water Act Amendments of 1996. 
Ownership of Systems Serving Population 25 - 500

(Percent of Systems)

Investor Owned

17.9%

Homeowners Association

14.1%

Other Privately Owned

4.8%

Mobile Home Park

27.5%

Institution

3.8% Other Ancillary

9.8%

Special District

3.3%

Other Government

18.6%

Ownership of Systems Serving Population > 500 

(Percent of Systems)

Investor Owned

13.0%

Homeowners Association 6.8%

Other Privately Owned 3.4%

Mobile Home Park

1.8%

Other Ancillary 1.2%

Special District 6.2%

Other Government

67.4%

Institution 0.1%

14

FIGURE 1

Note: Percentages do not add to100% due to rounding.
Managerial Capacity

$

Financial Capacity

$

C Ownership accountability

C Staffing and organization

C Effective external linkages

Short- and Long-term Planning

2

C Source water

adequacy

C Infrastructure

adequacy

(including source,

treatment,

storage,

distribution)

C Technical

knowledge and

ability to

implement it

Technical Capacity

S

C Revenue sufficiency

C Credit worthiness

C Fiscal management and controls

Figure 2

Technical, Managerial, and Financial Capacity
16

Section 2: Guidance on DWSRF Withholding Determinations Related to State Programs

For Ensuring that All New CWSs and NTNCWSs Demonstrate Technical, Managerial, and

Financial Capacity

What is the purpose of this guidance?

This guidance establishes national policy regarding implementation of the DWSRF

withholding related to new system capacity under sections 1420(a) and 1452(a)(1)(G)(i) of the

SDWA as amended. This guidance describes how EPA will assess State new system capacity

programs for purposes of determining whether these programs meet the statutory requirements

contained in section 1420(a) and therefore whether the Agency is required to withhold 20%

(according to sections 1420 and 1452(a)(1)(G)(i)) of a State’s share of federal DWSRF funding.

What is the statutory authority for this guidance?

Section 1420(d)(4) of the SDWA as amended requires EPA to publish this guidance.

To whom does this guidance apply?

This guidance applies to all States that receive grants to capitalize DWSRF’s under Section

1452.

How will EPA use this guidance?

EPA will use this guidance to determine whether or not a State has met the requirements of

section 1420(a). States failing to meet these requirements will incur a withholding of 20% from

their DWSRF allotment for fiscal year 1999 and beyond.

What does section 1420(a) of the SDWA as amended require a State to do?

A State must develop and implement a fully functional program to ensure that all new CWSs

and new NTNCWs commencing operations after October 1, 1999 demonstrate technical,

managerial, and financial capacity to comply with regulations in effect or likely to be in effect on the

date of commencement of operations. 

What constitutes a “new system”?

New systems include both CWSs or NTNCWSs being newly constructed as well as systems

which do not currently meet the definition of a PWS but which expand their infrastructure and

thereby grow to become CWSs or NTNCWSs. Systems not currently PWSs and which add

additional users and thereby become CWSs or NTNCWSs without constructing any additional

infrastructure are not “new systems” for purposes of section 1420(a) of the SDWA as amended. 

The Agency has considered a number of alternative definitions for “new system”. A

definition of “new system” which encompasses only newly constructed systems would overlook

those systems which grow through physical expansion to become PWS’s. The Agency believes that

there are a significant number of such systems and that they should be treated as equivalent to

newly constructed systems. On the other hand, a definition of “new system” that encompassed any

system which acquired enough users to qualify it as a PWS would be unreasonable since it would

capture systems such as small businesses which become PWS’s simply by virtue of adding a few

new employees, even though they make no physical modification whatsoever to their water system.

What must a State document in order for EPA to determine that 20% withholding from the

State’s DWSRF allotment is not required?
17

The State must document that it has implemented, or will implement by October 1, 1999, a

fully functional program to ensure that new systems demonstrate technical, managerial, and financial

capacity. The documentation must include:

C A basis of authority for ensuring that all such systems show technical, managerial, and

financial capacity. This could include State regulations, policies, or other implementing

authorities.

C Identification of at least one control point at which the State will execute its authority.

C A plan for program implementation which includes provisions for evaluating and verifying

program implementation in the future.

For a summary of these requirements, please see Table 1.

What is a “basis of authority”?

Section 1420(a) requires a State to show that is has the “legal authority or other means” to

ensure that all new CWSs and NTNCWSs demonstrate technical, managerial, and financial capacity

with respect to NPDWRs in effect, or likely to be in effect, on the date of commencement of

operations. Thus, a “basis of authority” is the legal authority or other means that serve as the legal

basis of the State program. The “basis of authority”, by definition, would also include the

implementing authorities (regulations, policies, guidance, etc.) that allow the basic legal authority to

be exercised.

What are some examples of a “basis of authority”?

A basis of authority could include State laws, regulations, policies, or other effective and

demonstrable means. For example, authority granted to the State primacy agency to implement the

federal Safe Drinking Water Act may serve as the basis of authority upon which to develop a fully

functional program to ensure new system capacity. Or, authority granted to a State water resource

management agency, through allocating water rights or controlling land development, may provide

a sufficient basis of authority on which to build a fully functional new system capacity program. 

Under either example, the authority should provide the applicable State agency with enforceable

authority to ensure the demonstration of new system capacity, whether through regulations,

policies, guidance, or other implementing authorities. Additional examples of the basis for such

authority are provided in EPA’s Information for States on Implementing the Capacity Development

Provisions of the 1996 Safe Drinking Water Act Amendments of 1996. See Table 2 for examples of

bases of authority.

What needs to be documented relative to the “basis of authority”?

C The State must document the actual implementing authority and underlying statutory

authority to ensure the demonstration of new system capacity. 

C The State must specify which agency is responsible for ensuring the demonstration of new

system capacity. This could be the State SDWA primacy agency, or any other designated

agency, but there must be a responsible agency (or combination of agencies with a clearly

defined lead agency).
18

C The responsible State agency (or combination of agencies) must possess and demonstrate

the actual authority to ensure that all new CWSs and new NTNCWSs demonstrate the

technical, managerial, and financial capacity to comply with all applicable SDWA

requirements. Collaborative arrangements among agencies for ensuring demonstration of

new system capacity must be documented through memoranda of understanding.

Can the “basis of authority” for ensuring the demonstration of new system capacity rest at

the county or local level?

The State is ultimately responsible for meeting the SDWA’s capacity requirements. 

Therefore, the State must have the final authority to determine whether a new system has

demonstrated technical, managerial, and financial capacity. However, in some States local

governments may exercise authorities, such as planning and zoning, which help form an effective

basis for a program requiring demonstration of capacity by new systems. EPA encourages States to

work closely with local governments in developing the State’s new system capacity program. When

appropriate, local authorities, exercised at the local level, could be an effective component of an

overall State program. However, the State must have the ultimate authority to determine whether

or not a new system has demonstrated capacity. For additional information see Information for

States on Implementing the Capacity Development Provisions of the Safe Drinking Water Act

Amendments of 1996.

Who must certify that the State’s authority is sufficient to ensure the demonstration of new

system capacity?

The State Attorney General (or a delegated department attorney) must certify, in writing,

that the state has the legal authority or other means to require demonstration of technical,

managerial, and financial capacity of new systems commencing operation after October 1, 1999 and

that the State’s mechanism for implementing this authority is duly enforceable. 

What is a “control point”?

A control point is a crux in a new system’s development at which a State (or other unit of

government) can exercise its authority to ensure the demonstration of new system capacity. 

Although local governments can be an important part of the process, each State shall demonstrate

to EPA that it has one or more clear control points of its own. 

A control point or set of control points taken together must allow for review of the entire

scope of the proposed new system development. Generic control points in the new system

development process are described in EPA’s Information for States on Implementing the Capacity

Development Provisions of the Safe Drinking Water Act Amendments of 1996.

What are some examples of “control points”?

Please see Table 2 of this document for examples of control points and their associated

bases of authority.

What must the plan for program implementation contain?

The plan for program implementation must show how the State’s program will be put into

effect to ensure that new systems commencing operations after October 1, 1999 demonstrate

technical, managerial, and financial capacity. The plan for program implementation must include a

schedule, with major milestones, for adoption and full implementation of necessary regulations,

policies, or other authorities to ensure that new systems commencing operation after October 1,
19

1999 demonstrate technical, managerial, and financial capacity. EPA strongly encourages states to

consider how they will assess and evaluate the success of their program in the years to come.

What will the schedule be for fiscal year 1999 withholding under sections 1420(a) and

1452(a)(1)(G)(i)?

Decisions regarding the new systems capacity related withholding for fiscal year 1999 will

be made by EPA at the time of award of the State’s fiscal year 1999 capitalization grant. A State

will avoid a 20% withholding for fiscal year 1999 if, at the time of the grant award during fiscal year

1999, the State has the necessary “basis of authority” (statutory authority or other means) and is in

the process of administrative rulemaking, or is otherwise developing implementing authorities with

a realistic schedule (based upon the state’s past performance in rulemaking or development of

implementing authorities) and expectation to have a fully functional program in place by October 1,

1999.

A State will face a “holdback” of 20% of its FY’99 allotment if, at the time of the grant

award during fiscal year 1999, the State lacks a “basis of authority” and/or a realistic schedule for

developing implementing authorities in order to have a fully functional program in place by October

1, 1999.

The 20% holdback will become a permanent withholding of 20% of its FY’99 allotment if

the State has not demonstrated, by September 30, 1999, that it will have a fully functional program

in place on October 1, 1999 to ensure the demonstration of technical, managerial, and financial

capacity by new CWSs and new NTNCWSs commencing operation after October 1, 1999. 

Will unobligated funds from previous fiscal years be subject to the withholding?

No, unobligated funds from previous fiscal years will not be subject to withholding.

What is a “holdback”, and what is its purpose?

A “holdback” is an informal, potentially temporary withholding of 20% of a State’s DWSRF

allotment. Unlike a formal “withholding”, a holdback does not entail a permanent loss of 20% of

the DWSRF allotment, nor does it initiate reallotment of those funds under section 1452 of the Act. 

Instead, “heldback” funds are made available to the State upon an EPA finding that a State has met,

or will meet, the conditions under sections 1420(a), 1452(a)(1)(G)(i), and this section of the

guidance by the end of fiscal year 1999.

The purpose of the “holdback” is to allow States additional time, before formal withholding

would apply, to assemble the statutory authority and implementing authorities needed to institute a

fully functional program by October 1, 1999. 

In what situations would the holdback apply?

The “holdback” would apply in two situations. First, 20% of a State’s DWSRF allotment

will be “heldback” if the State lacks the necessary statutory authority to implement a fully functional

program by October 1, 1999. Second, 20% of a State’s DWSRF allotment will be “heldback” if the

State has the statutory authority but is uncertain whether rulemaking or implementing authority

could be completed by October 1, 1999.

However, “heldback” funds will be awarded when and if, during FY’99, a State

demonstrates statutory authority and schedule for administrative rulemaking or other

implementing authority to conform with the October 1, 1999 deadline for having a functional

program in place.
20

For what period does the “holdback” apply?

The “holdback” applies only to fiscal year 1999. The statute would not allow the holdback

concept to be applied in any subsequent fiscal year. Section 1420(a) establishes a definite point in

time, October 1, 1999, after which states must have functioning programs in place to ensure the

demonstration of capacity by any new CWS or new NTNCWS commencing operation. Any state

lacking such a program at that definite point in time will lose 20% of its DWSRF allotment. Both

Sections 1420(a) and 1452(a)(G)(i) make clear that the withholding provision is applicable in

FY’99 and each subsequent fiscal year. Thus, a withholding determination must be made by EPA

each fiscal year. For FY’99, the state has until September 30, 1999 to demonstrate that it will have

a fully functioning program by October 1, 1999. For FY’00, and subsequent fiscal years, there can

be no holdback, since if there were that would mean that a state would not have in place a fully

functional program for some part of the fiscal year but would still receive 100% of its allotment for

that fiscal year. The law is clear that the fully functional program must be in place on October 1,

1999. If a state implements a fully functional program after October 1, 1999 then the first full

subsequent fiscal year would be the first opportunity for the state to once again receive 100% of its

DWSRF allotment.

What is a formal “withholding”, and under what conditions would it apply?

A formal “withholding” means that 20% of a State’s DWSRF allotment will be withheld and

reallotted according to section 1452 of the Act. 

For a State which fails to demonstrate a fully functional program, which includes statutory

authority and implementing regulations or other authorities by September 30, 1999, 20% of that

State’s allotment will be formally withheld.

How will formal withholding determinations be made for fiscal years 2000 and beyond?

Withholding will apply to the specific fiscal year allotment, and withholding determinations

will be based on the program status as of October 1 of the fiscal year in which funds become

available. For example, for fiscal year 2000 funds, withholding decisions will be based on State

program status as of October 1, 1999. This does not mean that regions will actually make the

withholding decisions on October 1. Rather, it means that whenever the capitalization grant is

awarded during the fiscal year, the region will evaluate what the status of the states new system

capacity program was on October 1 of the fiscal year.

A State will face a 20% withholding if it fails to demonstrate a fully functional

program. Also, for States which had demonstrated a fully functional program in the previous fiscal

year, a State will face a 20% withholding for the current fiscal year if it fails to demonstrate full,

ongoing implementation of its new systems program. 

The details of the applicable DWSRF withholding are given in table 3 of this

document.

What documentation must a state provide to demonstrate full, ongoing implementation of its

new systems program?

In the fiscal years following a state’s initial documentation of a fully functional program a

state must document that it is requiring a demonstration of technical, managerial, and financial

capacity by every new CWS and every new NTNCWS. This documentation of ongoing

implementation of the new systems program may be included with a given years capitalization grant
21

application or it may be provided in an entirely separate submittal. Documentation could consist of

summary statistics regarding the number of proposed new CWS’s and NTNCWS’s and the results

of their required capacity demonstrations.
22

Table 1: Minimum Requirements for Ensuring that All New CWSs and NTNCWSs

Demonstrate Technical, Managerial, and Financial Capacity

Minimum State Responsibility

Requirements

Basis of Authority The State must show that it has the “legal authority or other means” to ensure the

demonstration of technical, managerial, and financial capacity by new CWSs and new

NTNCWSs commencing operation after October 1, 1999. The State must demonstrate both

the underlying statutory or other legal authority and the actual implementing authority

(regulations, policies, etc.). The State attorney general must certify that the State has the

legal authority or other means to require demonstration of technical, managerial, and

financial capacity of new systems commencing operation after October 1, 1999 and that the

State’s mechanism for implementing this authority is duly enforceable.

Control Points The State must demonstrate that is has one or more clear control points in the new system

development process at which it can exercise its authority to ensure the demonstration of

capacity by new systems.

Program The State must present a plan for program implementation which includes a realistic

Implementation schedule for having in place by October 1, 1999 a fully functional program to ensure that all

new CWSs and new NTNCWSs commencing operation after 10-1-99 demonstrate technical,

managerial, and financial capacity. In each subsequent fiscal year the State must demonstrate

ongoing implementation of a fully functioning program. 
23

Table 2: Potential Authorities and Control Points for Ensuring the Technical, Managerial,

and Financial Capacity of New Water Systems

A. B. C.

Basis of Authority Control Points for Ensuring New

(Statutory or Other) System Capacity Agency Vested with Authority

State Authority for Drinking Water Quality State drinking water primacy agency

Facility plan review and permit*

Operating permit*

Operator certification

Construction requirements for wells

Source water protection plans

System planning requirements

State Authority for Economic Regulation of Approval of system’s financial structure (debt

Public Utilities and equity) State public utility commissions (PUCs)

Certificate of convenience and necessity*

Approval of system’s investments (ratebase)

Approval of initial rates and rate design

System planning requirements

State Authority for Water Resource

Management State water resource agency

Withdrawal and source development permits*

Approval of water rights

System planning requirements

Approval of environmental impact assessment.

State Authority for Revolving Loan Funds State financial assistance agency Eligibility and approval of grants and loans

State Authority for Planning and Growth

Management

State planning, growth management, or

development agency Review and approval of plans*

Regional planning councils (intrastate) Review and approval of plans

State Enabling Authority for Local Subdivision and platting regulations

Government 

Secretary of State

(or other State agency)

Authorization of local governments and districts

State financial control agency Authorization of local government financing

(public systems)

State Authority for Public Safety State fire marshal Permits and approvals related to fire protection

(or other agency) codes

Local Governmental Authority for Land-Use,

Planning, and Finances Municipalities, counties, and special districts Franchise approval*

Subdivision, zoning, and land-use approvals*

Construction permits and approvals

Local planning approvals

Authorization of local government financing

Federal Rural Utilities Authority Rural Utilities Service Approval of grants and loans

Interstate Authorities and Compacts River basin commissions

Basin withdrawal permits*

Basin planning and resource management

requirements

State Authorities to Regulate Related

Businesses

Banking regulators Loan approval by commercial lenders

Insurance regulators Insurance approval by insurers

*principal approval processes for creating a water system.

Table 3: DWSRF Withholding for New Systems Capacity Programs
24

Year Avoid 20% Withholding 20% Holdback 20% Withholding

FY 1999

Withholding applies to FY If State has statutory authority If State lacks statutory If State fails to demonstrate a

1999 allotment. and is in the process of authority, or functional program (statutory

Unobligated funds from is otherwise developing If State has statutory authority regulations or other

previous fiscal years will not implementing authorities with and is uncertain if rulemaking authorities) by September 30,

be subject to the withholding. a realistic schedule and (or development of other 1999.

administrative rulemaking, or authority and implementing

expectation to have a fully implementing authorities)

functional program by could be completed by

October 1, 1999. October 1, 1999.

Heldback funds are awarded

when and if , during FY’99, a

State demonstrates statutory

authority and schedule for

administrative rulemaking or

other implementing authority

to conform with October 1,

1999 requirement.

FY 2000 and beyond

Withholding will apply to the If State demonstrates a fully N/A If State fails to demonstrate a

specific fiscal year allotment. functional program (in the fully functional program (in

Withholding decisions will be case of previous year the case of previous year

based on the program status withholding), or withholding), or 

as of October 1 of the fiscal

year funds become available. If State demonstrates full If State fails to demonstrate

For example, for FY 2000 new systems program (if the of its new systems program

funds, withholding decisions State had previously (if it had previously

will be based on State demonstrated a fully demonstrated a fully 

programs as of October 1, functional program). functional program).

1999.

ongoing implementation of full, ongoing implementation
25

Section 3: Guidance on DWSRF Withholding Determinations Related to State Capacity

Development Strategies

What is the purpose of this guidance?

This guidance establishes national policy regarding implementation of the DWSRF

withholding related to capacity development strategies under sections 1420(c) and 1452(a)(1)(G)(i)

of the SDWA as amended. This guidance describes how EPA will assess whether States have met

the capacity development strategy requirements of section 1420(c) and therefore whether the

Agency is required to withhold a percentage of a State’s DWSRF allotment.

What is the statutory authority for this guidance?

The basis for this guidance is the EPA Administrator’s authority to issue guidance and

regulations under section 1452(g)(3) as necessary to implement the provisions of section 1452 of

the SDWA. This guidance is necessary to implement the DWSRF withholding provisions of section

1452(a)(1)(G)(i) of the SDWA, as amended.

To whom does this guidance apply?

This guidance applies to all States operating a DWSRF and seeking to avoid a 10%

withholding of their DWSRF allotment in fiscal year 2001, 15% in fiscal year 2002, and 20% in

each subsequent fiscal year.

How will EPA use this guidance?

EPA will use this guidance to determine whether a State has met the requirements outlined

in section 1420(c). States that fail to do so are subject to withholdings of DWSRF allotments

equaling 10% in FY 2001, 15% in FY 2002, and 20% in each subsequent fiscal year.

What does section 1420(c) of the SDWA as amended require a State to do?

In general, the State must be developing and implementing a strategy to assist PWSs in

acquiring and maintaining capacity to comply with the Act by August 6, 2000. Section 1420

requires that States consider, solicit public comment on, and include as appropriate in its capacity

development strategy several listed elements in the Act. Section 1420(c) also contains ongoing

reporting requirements related to capacity development with which States must comply. For a

more detailed discussion of what States must do to comply with section 1420(c), see Table 4 of this

guidance.

What are the elements that a State must consider, solicit public comment on, and include as

appropriate in its capacity development strategy?

Section 1420(c)(2) requires that States, in preparing their capacity development strategies,

consider, solicit public comment on, and include as appropriate the following:

A. The methods or criteria that the State will use to identify and prioritize the

PWSs most in need of improving technical, managerial, and financial

capacity.

B. A description of the institutional, regulatory, financial, tax, or legal factors

at the Federal, State, or local level that encourage or impair capacity

development.
26

C. A description of how the State will use the authorities and resources of this

title or other means to assist public water systems in complying with

NPDWRs, encourage the development of partnerships between public

water systems to enhance the technical, managerial, and financial capacity

of the systems, and assist public water systems in the training and

certification of operators.

D. A description of how the State will establish a baseline and measure

improvements in capacity with respect to NPDWRs and State drinking

water law.

E. An identification of the persons that have an interest in and are involved in

the development and implementation of the capacity development strategy

(including all appropriate agencies of Federal, State, and local

governments, private and nonprofit PWSs and PWS customers).

What must a State document to demonstrate that it has met the basic requirements of

§1420(c)?

! A State must certify that it solicited public comments on the five elements listed above as

part of the preparation of its capacity development strategy. The State must describe

relevant public comments and its responses to them.

! The State must describe which of the listed elements (A-E) the State has included or

excluded from its strategy, and why each element was included or excluded.

! The State must describe how the selected elements together can be rationally considered

to constitute a strategy to assist PWSs in acquiring and maintaining technical, managerial,

and financial capacity. 

! The State must describe how it will implement its strategy and evaluate its progress

toward improving PWS capacity.

What are the ongoing reporting requirements under the capacity development strategy

provisions?

! Each year, as a stand-alone submittal or as part of the state’s capitalization grant

application, the state must provide documentation showing the ongoing implementation of

the capacity development strategy. 

! Every 3 years, the State must submit to EPA a list of CWSs and NTNCWSs that have a

history of significant noncompliance and, to the extent practicable, the reasons for their

noncompliance. States submitted their first list in August, 1997. The next list will be due

August 6, 2000. The Agency has interpreted the statutory requirement in section

1420(b)(1) of “periodically update” to mean every 3 years. This interpretation is based

upon consultation with the states and the Agency considers it reasonable given the

requirement for a state report to the governor every 3 years in Section 1420(c)(3).
27

! By August 6, 2001 the State must report to EPA on the success of its enforcement

mechanisms and initial capacity development efforts in helping CWSs and NTNCWSs

having a history of significant noncompliance improve their capacity.

! Not later than 2 years after a State adopts a capacity development strategy, and every 3

years thereafter, the primacy agency must submit a report to the Governor on the efficacy

of the strategy and progress made toward improving the technical, managerial, and

financial capacity of PWSs in the State. The report shall also be made available to the

public.

Will these reports be a factor in DWSRF withholding determinations?

Yes. Failure to produce any of the reports will constitute a basis for withholding since

these reports, required under sections 1420(b)(3) and (c)(3), are considered part of the capacity

development strategy.

However, EPA will not base withholding determinations on any type of judgements or

inferences drawn from the reports regarding the relative merits or efficacy of a State capacity

development strategy. Further, the statute in section 1420(c)(4) explicitly prohibits EPA from

reviewing decisions of the State regarding any particular PWS, as part of a capacity development

strategy. Such State decisions regarding individual PWSs may not serve as basis for withholding

funds. 

What should States that already have capacity development strategies do?

EPA commends States which have already developed and implemented programs and

strategies to improve the technical, managerial, and financial capacity of PWSs. For purposes of

complying with the requirements of section 1420(c), States which have existing strategies must

certify that they considered and solicited public comment on the elements listed in section

1420(c)(2)(A-E). The purpose of this requirement is to solicit public involvement and ideas on the

state strategy in light of the new opportunities for regulatory flexibilities (e.g., variances and

exemptions) and in light of the new resources provided by the 1996 SDWA Amendments to

develop, revise and implement capacity development strategies and technical assistance. If the

State did not consider and solicit public comment on the listed elements at the time the strategy

was developed, it will need to do so prior to October 1, 2000. In addition, the State is still

required to meet the ongoing reporting requirements under sections 1420(b)(3) and (c)(3), listed

above. 

What is meant by a history of significant noncompliance?

A “history of significant noncompliance” means being in significant noncompliance (for

any single contaminant or for different contaminants) during any three quarters of the previous 3

years. This definition was developed in consultation with the states at the Winter Meeting of the

Association of State Drinking Water Administrators in February, 1997. It was the definition

utilized for purposes of developing the first required state list which was due to EPA on August 6,

1997.

Under what conditions will fiscal year 2001 withholding occur?

For fiscal year 2001, the withholding determination will be based on the program status as

of October 1, 2000. The withholding will apply to the fiscal year 2001 allotment. Unobligated

funds from previous fiscal years will not be subject to withholding. 
28

A State will avoid a 10% withholding from its DWSRF allotment if the State is developing

and implementing a strategy to assist PWSs in acquiring and maintaining technical, managerial,

and financial capacity. A State will incur a 10% withholding if it is not doing so.

Will there be a “holdback” associated with the capacity development strategy provision

analogous to that associated with the new systems provision?

No. The statute establishes a date certain, August 6, 2000, by which states must be

developing and implementing a capacity development strategy. Since the withholding for failure

to develop and implement a strategy does not begin until FY’01 (starting October 1, 2000), a

“holdback” would make no sense. If a state is not developing and implementing a strategy on

October 1, 2000, then they have failed to meet the statutory requirement and would have 10%

withheld from their allotment. The state could avoid a withholding the following fiscal year if

they are developing and implementing a strategy on or before October 1, 2001. 

Under what conditions will fiscal year 2002 withholding occur?

For fiscal year 2002, the withholding determination will be based on the program status as

of October 1, 2001. The withholding will apply to the fiscal year 2002 allotment.

A State will avoid a 15% withholding of its allotment if it is developing and implementing

a strategy to assist PWSs in acquiring and maintaining technical, managerial, and financial

capacity. A State will incur a 15% withholding if it is not doing so.

Under what conditions will fiscal year 2003 and beyond withholding occur?

For fiscal year 2003 and beyond, the withholding determination will be based on the

program status as of October 1 of the fiscal year. The withholding will apply to the fiscal year

allotment.

A State will avoid a 20% withholding of its allotment if it is developing and implementing

a strategy to assist PWSs in acquiring and maintaining technical, managerial, and financial

capacity. A State will incur a 20% withholding if it is not doing so.

What will be the basis of withholding decisions in subsequent fiscal years after a state has

demonstrated that it is developing and implementing a capacity development strategy?

Once a state has successfully demonstrated that it is developing and implementing a

capacity development strategy, then in subsequent fiscal years it can avoid withholding by

documenting ongoing implementation of the strategy. This documentation may be included with

the capitalization grant application or it may be provided in an entirely separate submittal. Such

documentation may consist of a concise narrative description of the major activities being

conducted and planned for under the states capacity development strategy. See Table 5 for a

summary of DWSRF withholding for capacity development strategies.
29

Table 4: Meeting the Requirements of Section 1420(c) - Capacity Development Strategy

Requirements State Responsibility

Consideration of The State must describe the issues it considered relative to each of the listed elements and

§1420(c)(2)(A-E) explain why each element was included or excluded from its capacity development strategy.

Public Comment The State must certify that it solicited public comment on the listed elements. The State must

also describe all relevant public comment and its response.

Capacity The State must show a rational basis for concluding that the chosen elements constitute a

Development strategy to assist public water systems in acquiring and maintaining capacity.

Strategy

Strategy The State must describe its current strategy implementation and plans for future

Implementation implementation. Each year, as a stand-alone submittal or as part of the state’s DWSRF

capitalization grant application, the state must provide documentation showing the ongoing

implementation of the capacity development strategy.

Ongoing Reporting Not later than 2 years after the date on which a State first adopts a capacity development

Requirements strategy, and every 3 years thereafter, the head of the State primacy agency shall submit to

the Governor a report on the efficacy of the strategy and progress toward improving the

capacity of public water systems in the State.

Every 3 years, the State must submit to the EPA Administrator a list of CWSs and

NTNCWSs that have a history of significant noncompliance, and to the extent possible, the

reasons for noncompliance.

By 2001, the State must submit to the EPA Administrator a report on the success of

enforcement mechanisms and initial capacity development efforts in helping systems in

significant noncompliance achieve and maintain capacity.
30

Table 5: DWSRF Withholding for Capacity Development Strategies

Year Avoid Withholding Withholding

FY 2001

Withholding will be based on the If State is developing and EPA will withhold 10% of the

program status as of October 1, implementing strategy State’s allotment if the State is not

2000. Withholding applies to FY developing and implementing a

2001 allotment. Unobligated funds strategy.

from previous fiscal years will not

be subject to the withholding.

FY 2002

Withholding will be based on the If State is developing and EPA will withhold 15% of the

program status as of October 1, implementing strategy. State’s allotment if the State is not

2001 developing and implementing a

strategy.

FY 2003 and beyond

Withholding will be based on the If State is developing and EPA will withhold 20% of the

program status as of October 1 of implementing State’s allotment if the State is not

the fiscal year. developing and implementing a

strategy. 
31

Section 4: Guidance on Assessment of Capacity for Purposes of Awarding DWSRF

Assistance 

What is the purpose of this guidance?

This guidance clarifies what procedures a State must document relative to its assessment

of technical, managerial, and financial capacity of PWSs seeking DWSRF loan assistance.

What is the statutory authority for this guidance?

The basis for this guidance is the EPA Administrator’s authority to issue guidance and

regulations under section 1452(g)(3) as necessary to implement the provisions of section 1452 of

the SDWA. Section 1452(a)(3) prohibits DWSRF assistance to PWSs that do not have the

technical, managerial, and financial capacity to comply with SDWA requirements.

To whom does this guidance apply?

This guidance applies to all States which operate a DWSRF program.

How will EPA use this guidance?

EPA will use this guidance to assure that States have in place and utilize procedures to

make certain that, consistent with section 1452(a)(3)(A), systems receiving DWSRF assistance

have the technical, managerial, and financial capacity to ensure compliance with SDWA

requirements and that no system in significant noncompliance with a NPDWR receives assistance

except as provided for in section 1452(a)(3)(B).

What limitations on DWSRF assistance does section 1452(a)(3)(A) impose?

Section 1452(a)(3)(A) imposes two significant limitations on DWSRF assistance to PWSs. 

First no assistance may be provided to a PWS that does not have the technical, managerial, and

financial capacity to ensure compliance with the requirements of the SDWA. Second, no

assistance may be provided to a PWS that is in significant noncompliance with any requirement of

a NPDWR. 

Are there any exceptions to the limitations imposed by section 1452(a)(3)(A)?

Yes. Section 1452(a)(3)(B) allows systems lacking capacity to receive DWSRF assistance

if the system agrees to undertake feasible and appropriate restructuring (such as changes in rates

or management, consolidation, alternative supply, etc.) if the State determines that such

restructuring is necessary to ensure that the system has the capacity to comply with SDWA

requirements over the long term. 

Section 1452(a)(3)(B) also allows a system in significant noncompliance to receive

assistance if the use of the assistance will ensure compliance.

What must a State document to comply with the requirement that DWSRF loan assistance

not be available to PWSs that lack technical, managerial, and financial capacity?

Each State must document the procedure it will use for evaluating the technical,

managerial, and financial capacity of PWSs seeking DWSRF assistance. The procedure must,

under any rational standard of judgement, be designed to objectively assess the technical,

managerial, and financial capacity of water systems for long-term compliance with the

requirements of the SDWA. This documented procedure must be available for public review

before being finalized. Once the procedure is finalized, it must be documented in the State
32

DWSRF Operating Agreement. For more information on assessment of technical, managerial,

and financial capacity, see Information for States on Implementing the Capacity Development

Provisions of the Safe Drinking Water Act Amendments of 1996.

With each year’s capitalization grant application or as a separate and previous submittal,

the State must summarize the results of assessments of system technical, managerial, managerial,

and financial capacity conducted in the preceding year. This information should include summary

statistics on the numbers, types, and sizes of systems assessed and the outcome of the

assessments. It should also include any changes in assessment methodology the State is planning

to make. 

What must a State document to comply with the provision that DWSRF assistance can be

provided to a system in significant noncompliance only if the use of the assistance will

ensure compliance?

Each State must document the procedure they will use for assessing whether DWSRF

assistance will ensure compliance of systems in significant noncompliance. This documented

procedure must be available for public review before being finalized. Once the procedure is

finalized, it must be documented in the State’s DWSRF Operating Agreement.

With each year’s capitalization grant application or as a separate or previous submittal, the

State must provide summary statistics on the numbers, types, and sizes of systems in significant

noncompliance to which the State provided DWSRF assistance in the preceding year. The State

should also summarize any changes in the assessment procedure it plans to make.

What must a State document to comply with the provision that DWSRF assistance can be

provided to a PWS that lacks technical, managerial, and financial capacity if the system

agrees to restructuring changes that the State determines are necessary to ensure system

capacity for long term SDWA compliance?

Each State must document the procedure they will use for assessing what are feasible and

appropriate restructuring changes that would be necessary to ensure that a system has the

technical, managerial, and financial capacity to comply with SDWA requirements over the long

term. This procedure must be available for public review before being finalized. Once the

procedure is finalized, it must be documented in the State’s DWSRF Operating Agreement.

With each year’s capitalization grant application or as a separate or previous submittal, the

State must provide summary statistics on the numbers, types, and sizes of systems that have been

required to undertake restructuring changes in order to be eligible for DWSRF assistance. The

State should also summarize any changes in the assessment procedure it plans to make.

For a summary of what a State must document to demonstrate that it has complied with

section 1452(a)(3), please see Table 6.

NOTE: No assistance authorized under Section 1452, including direct grants from EPA, may be awarded to

systems that lack capacity, unless such assistance will enable the system to obtain capacity.
33

Table 6: Minimum Requirements for Assessment of Capacity for Purposes of Awarding DWSRF

Assistance 

Requirements State Responsibility

Procedure to Assess Each State must document the procedure it will use for evaluating the technical,

Technical, Managerial, and managerial, and financial capacity of PWSs seeking DWSRF assistance. This

Financial Capacity for documented procedure must be available for public review before being finalized. 

Purposes of Awarding Once the procedure is finalized, it must be documented in the State DWSRF

DWSRF Assistance Operating Agreement. 

With each year’s capitalization grant application or as a separate and previous

submittal, the State must summarize the results of assessments of system technical,

managerial, managerial, and financial capacity conducted in the preceding year. 

This information should include summary statistics on the numbers, types, and sizes

of systems assessed and the outcome of the assessments. It should also include any

changes in assessment methodology the State is planning to make. 

Procedure for Assessing Each State must document the procedure they will use for assessing whether

Whether DWSRF Assistance DWSRF assistance will ensure compliance of systems in significant

Will Help to Ensure noncompliance. This documented procedure must be available for public review

Compliance for Systems in before being finalized. Once the procedure is finalized, it must be documented in

Significant Compliance the State’s DWSRF Operating Agreement.

With each year’s capitalization grant application or as a separate or previous

submittal, the State must provide summary statistics on the numbers, types, and

sizes of systems in significant noncompliance to which the State provided DWSRF

assistance in the preceding year. The State should also summarize any changes in

the assessment procedure it plans to make.

Procedure for Assessing What Each State must document the procedure they will use for assessing what are

Constitutes Feasible and feasible and appropriate restructuring changes that would be necessary to ensure

Appropriate Restructuring that a system has the technical, managerial, and financial capacity to comply with

Changes Necessary to SDWA requirements over the long term. This procedure must be available for

Develop Adequate Technical, public review before being finalized. Once the procedure is finalized, it must be

Managerial, and Financial documented in the State’s DWSRF Operating Agreement.

Capacity.

With each year’s capitalization grant application or as a separate or previous

submittal, the State must provide summary statistics on the numbers, types, and

sizes of systems that have been required to undertake restructuring changes in order

to be eligible for DWSRF assistance. The State should also summarize any

changes in the assessment procedure it plans to make.
34

ATTACHMENT 1

Worksheet for Assessing State Programs for 

Ensuring Demonstration of New System Capacity
35

Assessing Proposed State Programs for

Ensuring Demonstration of New System Capacity

State Reviewed: 

Date Completed: 

Reviewer: 

General Comments: 

 
36

Suggestions for Regions

C Use this sheet to guide your review of proposed State

programs for new system capacity.

C The questions contained within this worksheet focus on

program functionality.

C The questions are designed to assist you in evaluating

proposed State programs for purposes of making DWSRF

withholding decisions.

C This is not a checklist. Using these questions, you should

be able to identify major strengths and/or weaknesses of

proposed State programs.

C In order to avoid a 20 percent Drinking Water State

Revolving Fund (DWSRF) withholding, States must

ensure that all new community water systems (CWSs)

and all new nontransient, noncommunity water systems

(NTNCWSs) commencing operation after October 1,

1999, demonstrate technical, managerial, and financial

capacity.
37

Suggestions for States

C Use this sheet to help guide your description of your

capacity development program for new systems.

C This sheet may help you in developing your capacity

development program for new systems.

C The questions contained within this worksheet focus on

program functionality and ensure that the requirements of

the statute and guidance are met.

C This is not a checklist. Using these questions, you should

be able to identify major strengths and/or weaknesses of

your proposed program.

• In order to avoid a 20 percent Drinking Water State

Revolving Fund (DWSRF) withholding, States must ensure

that all new community water systems (CWSs) and all new

nontransient, noncommunity water systems (NTNCWSs)

commencing operation after October 1, 1999, demonstrate

technical, managerial, and financial capacity.
38

Basis of Authority

. Describe the State’s regulations, policies, or other implementing authorities.

. Identify the State or sub-State agencies responsible for implementing the regulations,

policies, or other authorities.

. What is the statutory basis for these regulations, policies, or other implementing

authorities?

. Describe the collaborative arrangements (if any) among the various agencies responsible

for implementing these regulations, policies, or other authorities. Identify the means (e.g.,

memoranda of understanding) used to document the collaborative arrangements among

agencies.
39

Control Points

. Describe each control point outlined in the State program and identify the agency

responsible for implementing that control point. Make special note of the control point(s)

that permit the State to directly exercise its authority to ensure the demonstration of

capacity in new CWSs and NTNCWSs.

. Describe the aspect(s) of capacity (technical, managerial, or financial) evaluated at each of

the control points listed above. Ensure that all aspects of capacity are evaluated.

. At each of the control points listed above, what specific action will the State or sub-State

agency take to ensure demonstration of technical, managerial, and financial capacity?
40

Plan for Implementation and Periodic Review

. How will the State evaluate the implementation and on-going effectiveness of its new

system capacity development program?
41

Overall Program Functionality

1. How does the State’s proposed program ensure that new systems

commencing operations after October 1, 1999 demonstrate

technical, managerial, and financial capacity?
42

ATTACHMENT 2

Worksheet for Assessing Proposed State Capacity Development

Strategies for Existing Public Water Systems
43

Assessing Proposed State Capacity Development

Strategies for Existing Public Water Systems

State Reviewed: _______________________________________________________________

Date Completed: _______________________________________________________________

Reviewer: ____________________________________________________________________

General Comments: ____________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________
44

C In order to avoid a 10 percent DWSRF withholding in 2001, a 15

percent withholding in 2002, and a 20 percent withholding in

subsequent fiscal years, States must develop and implement a

strategy to assist PWSs in acquiring and maintaining technical,

managerial, and financial capacity.

Suggestions for Regions

C Use this sheet to guide your review of proposed State strategies for

ensuring capacity in public water systems (PWSs).

C The questions are designed to assist you in reviewing proposed

State strategies for the purpose of making Drinking Water State

Revolving Fund (DWSRF) withholding decisions.

C This is not a checklist. However, using the following questions, you

should be able to assess State compliance with the Capacity

Development provisions of §1420(c) of the Safe Drinking Water

Act (SDWA), as amended in 1996.
45

C In order to avoid a 10 percent DWSRF withholding in 2001, a 15

percent withholding in 2002, and a 20 percent withholding in

subsequent fiscal years, States must develop and implement a

strategy to assist PWSs in acquiring and maintaining technical,

managerial, and financial capacity.

 

Suggestions for States

 

C Use this sheet to help guide your description of your capacity

development strategy for existing public water systems (PWSs).

C This sheet may help you in developing your capacity development

strategy for existing PWSs.

C The questions contained within this worksheet will help you to

ensure that the requirements detailed in both §1420(c) of the Safe

Drinking Water Act (SDWA) and the associated guidance are met.

C This is not a checklist. However, using the following questions, you

should be able to identify the major strengths and/or weaknesses of

your proposed capacity development strategy and make appropriate

adjustments.
46

 

Solicitation and Consideration of Public Comments

 

1. Describe how the State, in preparing its capacity development

strategy, solicited public comment on the program elements listed in

§1420(c)(2)(A-E) of the SDWA, as amended in 1996. 

2. Describe how the State considered public comment on the program

elements.
47

 

Program Elements

 

1. Describe how the State considered the appropriateness of each

program element listed in §1420(c)(2)(A-E) in deciding whether or

not to include the element in its capacity development strategy.
48

 

Strategy

 

1. Describe the basis on which the State believes that the program

elements it has chosen, when taken as a whole, constitute a strategy

to assist PWSs in acquiring and maintaining technical, managerial,

and financial capacity.
49

 

Implementation

 

1. Describe the State’s current implementation efforts for its capacity

development strategy.

2. Describe the State’s future plans for strategy implementation.
50

Note: EPA encourages States to include the methodology they plan to use to

assess the efficacy of their capacity development strategy as part of their

strategy. The inclusion of assessment methodology is not mandatory and

will not be a basis for withholding DWSRF funding in FY 2001. 

 

Future Considerations

1. Listing of systems with a history of significant noncompliance

(§1420(b)(1)).

 — States must prepare, update, and submit to the EPA Administrator a

list of community water systems and nontransient, noncommunity

water systems that have a history of significant noncompliance. States

must also, to the extent practicable, provide reasons for the

noncompliance of these systems. Under §1420(b)(3), failure to provide

this report in will serve as a basis for withholding.

 

Note: A system is considered to have a history of significant noncompliance

if it has violated one or more National Primary Drinking Water

Regulations (NPDWRs) in any three quarters within the last three

years.

 

2. Report to the EPA Administrator (§1420(b)(2)).

 — States must submit a report to the EPA Administrator by August 6,

2001, that details the success of enforcement mechanisms and initial

capacity development efforts in helping those PWSs listed as having a

history of significant noncompliance to improve their technical,

managerial, and financial capacity. Under §1420(b)(3), failure to

provide this report in FY 2001 will serve as a basis for withholding.

 

3. Report to the State Governor (§1420(c)(3)).

 — Not later than two years after a State develops a capacity development

strategy, and every three years thereafter, each State’s primacy agency

must submit a report to the State’s Governor and to the public that

details the efficacy of the State’s capacity development strategy and

that outlines the progress made towards improving the technical,

managerial, and financial capacity of PWSs in the State. Under

§1420(c)(1), failure to provide this report in will serve as a basis for

withholding.
51

ATTACHMENT 3

Response to Comments Received on Proposed Guidance

Published in the Federal Register on February 5, 1998
52

Response to Comments

Capacity Development Guidance

Introduction

Many commentors were concerned with whether an appropriate balance could be struck between

providing State flexibility while ensuring national program accountability in implementation. 

They stressed the need for EPA to acknowledge State program diversity in capacity development,

and that only limited or no oversight by EPA would be necessary.

The Agency recognizes, respects, and encourages diversity in state capacity development

programs. The guidance is designed to foster and facilitate the development of capacity

development programs that are diverse in approach and which address the unique needs and

circumstances of different states. However, while the law clearly contemplates such flexibility, it

also clearly establishes what states must do regarding capacity development if they wish to avoid a

capacity development related withholding from their DWSRF. The guidance provides a simple,

objective framework for EPA to use in assessing whether or not a state has done what the law

requires in order to avoid a capacity development related DWSRF withholding.

EPA has no desire or intention to expand oversight of state capacity development

programs beyond what is necessary for purposes of making DWSRF withholding decisions. 

 

Many commentors suggested that EPA needed to more clearly define and describe the role of

guidance vis-a-vis regulation. 

The purpose of this guidance is to explain how EPA interprets the capacity development

provisions of SDWA, as amended, and, specifically, what States must do to avoid mandatory

withholding of DWSRF funding under those provisions. Unlike regulation, guidance does not

generally establish binding requirements apart from the statute it addresses. However, in the

context of a statute that mandates grant withholding under certain circumstances, guidance

interpreting those provisions effectively establishes conditions for the receipt of those funds and

thus can have a mandatory effect similar to a regulation. Thus, in the context of a guidance that

interprets a statute that mandates withholding of funds under certain conditions, there may not

be a significant difference in operational effect between a regulation and a guidance which

outlines how the agency will implement the mandatory withholding.

Some commentors were concerned that EPA misrepresented the stakeholder process which

contributed to this guidance. Another commentor claimed that States were inadequately

represented.

The Agency believes that its description of the stakeholder process which was published,

on February 5, 1998, as part of the preamble to the draft guidance is accurate and does not

misrepresent that process. Of the 22 members of the NDWAC Small Systems Working Group,

only 2 submitted minority opinions to the full NDWAC. These minority opinions expressed the

belief that EPA lacked the statutory authority to issue guidance related to capacity development

strategies. The full NDWAC considered these minority opinions but voted overwhelmingly to
53

support the Working Groups majority recommendations.

The Agency believes that states were adequately represented on the Working Group. Of

the 22 members, 5 represented state drinking water programs (4 were senior officials from state

drinking water programs and 1 represented the Association of State Drinking Water Program

Administrators). 

Many commentors requested clarification on definitions of technical, managerial, and

financial capacity and what is meant by “foreseeable future” in the definition of capacity. 

The final guidance provides more detailed definitions of technical, managerial, and

financial capacity. The Working Group generally felt, and EPA believes, that in defining and

considering water system capacity, a long-term view is essential. For example, the SDWA

establishes requirements for promulgation of a number of significant regulations over the next

several years and sets up a process to continually identify and evaluate additional contaminants

for possible regulation. Thus it is reasonable to consider the ability of a system to address

additional, new regulatory requirements beyond those already in place when considering that

systems capacity. Such an assessment is useful even if the details of future regulatory

requirements are not yet known. If a system appears to have little or no ability to address any

future additional regulatory requirements, then it may be appropriate to begin assisting that

system in developing additional capabilities.

New Systems Guidance

Many of the commentors indicated that the definition of “new system” is unclear or

ambiguous.

The final guidance clarifies the definition of “new system”. New systems include both

CWSs or NTNCWSs being newly constructed as well as systems which do not currently meet

the definition of a PWS but expand their infrastructure and thereby grow to become CWSs or

NTNCWSs. Systems not currently PWSs and which add additional users and thereby become

CWSs or NTNCWSs without constructing any additional infrastructure are not “new systems”

for purposes of section 1420(a) of the SDWA as amended. 

 

The Agency has considered a number of alternative definitions for “new system”. A

definition of “new system” which encompasses only newly constructed systems would overlook

those systems which grow through physical expansion to become PWS’s. The Agency believes

that there are a significant number of such systems and that they should be treated as equivalent

to newly constructed systems. On the other hand, a definition of “new system” that

encompassed any system which acquired enough users to qualify it as a PWS would be

unreasonable since it would capture systems such as small businesses which become PWS’s

simply by virtue of adding a few new employees, even though they make no physical

modification whatsoever to their water system.
54

Many commentors expressed concern or sought clarification regarding the basis for holdback

or withholding decisions starting in FY’99. 

A “holdback” is an informal, potentially temporary withholding of 20% of a State’s

DWSRF allotment. Unlike a formal “withholding”, a holdback does not entail a permanent loss

of 20% of the DWSRF allotment, nor does it initiate reallotment of those funds under section

1452 of the Act .The purpose of the “holdback” is to allow States additional time, before

formal withholding would apply, to assemble the statutory authority and implementing

authorities needed to institute a fully functional program by October 1, 1999. 

Based upon the comments received, the Agency is including a number of significant

changes in the final guidance. First, for any given fiscal year the withholding will apply to that

years allotment only. Unobligated funds from previous fiscal years will not be subject to

withholding. Second, for FY’99, the agency will not holdback funds from a state having the

statutory authority for new systems but is in the process of rulemaking or otherwise developing

implementing authorities (so long as the process for developing these implementing authorities

is on a realistic schedule and the state expects to have a fully functional program by 10-1-99). 

Third, the Agency is clarifying that in FY’00 and beyond, the withholding decision will be based

on the state program status on October 1 of the fiscal year.

A few commentors questioned the authority of EPA to use “control points” for purposes of

making withholding determinations.

The statute is clear that states must have a program which achieves a specific result as of

a date certain. That result is requiring demonstration of technical, financial, and managerial

capacity by all new community water systems and new nontrasient noncommunity water

systems commencing operation after October 1, 1999. By asking the state to describe its

control points, EPA is merely asking how the state plans to meet the statutory requirement. If

the state fails to meet the statutory requirement, EPA must withhold 20% of the states DWSRF

allotment. EPA will not judge the relative merits or likely efficacy of a states chosen control

points, so long as the control points can be rationally judged to potentially achieve the

statutorily required endpoint. 

Several commentors express concern relative to “turnaround time.” Will there be sufficient

time to address issues which arise during EPA review in time to receive 100% of monies.

The Agency strongly encourages states to work closely with their EPA Regional office

starting early in the development of their new systems program. States can receive 100% of

their allotment in FY’99 if they have the legal authority and a realistic (based on past

performance) schedule for rulemaking or otherwise developing implementing authorities such

that they expect to have a fully functional program in place by October 1, 1999.

Commentors requested that EPA allow states to grandfather existing authorities versus

requiring extensive regulatory, statutory, etc. revisions.
55

States can use any existing authorities that might be appropriate to build a program. 

The statute focuses on the outcome states must achieve; new systems commencing operation

after October 1, 1999 mut be required to demonstrate capacity. If existing authority can

accomplish this end result then it can certainly be used.

A number of comments from states and regions were received with opinions on whether

requiring a statement of some type from the state Attorney General regarding the states legal

authority for new systems should be required.

The Agency has carefully considered this issue and has concluded that an Attorney

General’s statement will be required. Such a decision is consistent with long standing Agency

policy and practice relative to requirements for states to demonstrate legal authorities. Because

the Attorney General is responsible for the entire body of state law, he/she is in the best position 

to certify that the authority being claimed is in fact available to be exercised. Therefore, the

guidance requires that the State Attorney General (or a delegated department attorney) must

certify, in writing, that the state has the statutory authority to require demonstration of

technical, managerial, and financial capacity of new systems commencing operation after

October 1, 1999 and that the State’s mechanism for implementing this authority is duly

enforceable.

A couple of commentors ask the basis for EPA assessing ongoing implementation in future

years.

The withholding determination related to the new systems program must be made each

year. Once a state has demonstrated a functional program, future years assessment is necessary

to ensure ongoing implementation of the program. In the fiscal years following a state’s initial

documentation of a fully functional program a state must document that it is requiring a

demonstration of technical, managerial, and financial capacity by every new CWS and every

new NTNCWS. This documentation of ongoing implementation of the new systems program

may be included with a given year’s capitalization grant application or it may be provided in an

entirely separate submittal. Documentation could consist of summary statistics regarding the

number of proposed new CWS’s and NTNCWS’s and the results of their required capacity

demonstrations.

The concept of “future capacity” raised a number of concerns from commentators.

The law requires only that systems be required to demonstrate capacity with respect to

regulations in effect or likely to be in effect on the date of commencement of operations. 

However, the Agency strongly encourages states to consider system capacity in the context of

the foreseeable future. EPA believes, that in defining and considering water system capacity, a

long-term view is essential. For example, the SDWA establishes requirements for promulgation

of a number of significant regulations over the next several years and sets up a process to

continually identify and evaluate additional contaminants for possible regulation. Thus it is

reasonable to consider the ability of a new system to address additional, new regulatory
56

requirements beyond those already in place when considering that systems capacity. Such an

assessment is useful even if the details of future regulatory requirements are not yet known. If a

new system appears to have little or no ability to address any future additional regulatory

requirements, then it may be appropriate to work with the developer of the system to ensure

that the system will have the capacity it needs for the long term.

Some commentors expressed concern about proposed requirements for program evaluation.

The Agency has deleted the proposed requirements for program evaluation. However,

the Agency continues to strongly encourage states to consider how they will assess and evaluate

the success of their program in the years to come.

Capacity Development Strategy Guidance

Many commentors stated their belief that EPA does not have statutory authority to issue

guidance related to capacity development strategies.

 The basis for this guidance is the EPA Administrator’s authority to issue guidance and

regulations under section 1452(g)(3) as necessary to implement the provisions of section 1452

of the SDWA. This guidance is necessary to implement the DWSRF withholding provisions of

section 1452(a)(1)(G)(i) of the SDWA, as amended. This guidance establishes national policy

regarding implementation of the DWSRF withholding related to capacity development strategies

under sections 1420(c) and 1452(a)(1)(G)(i) of the SDWA as amended. This guidance

describes how EPA will assess whether States have met the capacity development strategy

requirements of section 1420(c) and therefore whether the Agency is required to withhold a

percentage of a State’s DWSRF allotment.

Many commentors expressed concern regarding the proposed scope of EPA review of state

strategies.

The Agency believes that it has proposed the narrowest and most limited review possible

which is still consistent with the requirements of the statute. Section 1420 requires that States

develop and implement a strategy to assist public water systems in acquiring and maintaining

technical, managerial, and financial capacity. In preparing the strategy, the statute requires that

states consider, solicit public comment on, and include as appropriate several listed elements in

the Act. Section 1420(c) also contains ongoing reporting requirements related to capacity

development with which States must comply. The Agency’s proposed review of state capacity

development strategies is narrowly focused on ensuring that these statutory requirements are

met.

Several commentors suggested that the proposed requirement that States proactively solicit

public comment and provide their response to all significant comments seemed overly

prescriptive. 
57

The Agency agrees that the terms “proactively” and “significant” may be subjective and

therefore has deleted them. The requirement now reads “a state must certify that it solicited

public comments...The state must describe relevant public comments...”.

Some commentors suggested that use of the term “rational basis” was unclear and overly

subjective.

The Agency does not agree with the assertion that a “rational basis” test is subjective. 

The guidance merely states that the state must describe how the selected elements together can

be rationally considered to constitute a strategy to assist PWSs in acquiring and maintaining

technical, managerial, and financial capacity. Section 1420(c)(1) clearly establishes the

requirement that a state develop and implement a strategy to assist PWSs in acquiring and

maintaining capacity. The guidance simply asks states to describe a rational basis on which

their proposed strategy meets the statutory requirement. The Agency does not propose to, in

any way, review the relative merits or potential efficacy of a state strategy. The Agency needs

only to have a rational basis on which to conclude that the state has in fact met the statutory

requirement and therefore the Agency is not required to withhold a percentage of the states

DWSRF allotment.

Some commentors suggested that EPA define federal factors which may encourage or impair

capacity development, so as to save States the effort of having to do so.

The Agency believes that only individual states are capable of defining the federal factors

they find to encourage or impair capacity development. Information for States on

Implementing the Capacity Development Provisions of the 1996 SDWA Amendments

provides some ideas on the types of issues at the federal, state, and local level that might be

considered. 

A number of commentors stressed that capacity development strategies should not be required

to cover every public water system in the State, and that the State should have the flexibility to

focus on which public water systems are most in need of assistance. 

The statute simply requires that a state develop and implement a strategy to assist public

water systems in acquiring and maintaining technical, managerial, and financial capacity. The

statute further requires that in preparing the strategy, the state must consider, solicit public

comment on, and include as appropriate the methods or criteria that the state will use to identify

and prioritize the public water systems most in need of improving capacity. The Agency

believes that state strategies should be capable of addressing all types of public water systems

but that the state need not attempt to develop a strategy which addresses every individual

system. Rather, the state should identify and prioritize those specific systems or classes of

systems most in need of improving their technical, managerial, and financial capacity. 

Some commentors stated that the strategy should only be required to solve existing compliance

problems, and not prevent future compliance problems, while others suggested that States
58

should go beyond merely looking at systems with a history of significant noncompliance (SNC).

As noted earlier the statute simply requires states to develop and implement a strategy to

assist PWSs in acquiring and maintaining capacity. There is no statutory requirement regarding

which systems a strategy must address. States are free to focus their attention and resources

where they believe it will yield the greatest return. However, the Agency strongly believes that

the capacity development strategy offers states a very powerful tool to help prevent

noncompliance. Prevention of noncompliance is a major theme of the 1996 SDWA

amendments and is reflected in numerous provisions of the law. Public health protection is

much better served by preventing noncompliance than by waiting for it to occur and then trying

to correct it.

Some commentors inquired as to what action a State should take against a system which lacks

some element of capacity. 

The Agency believes strongly that capacity development programs should seek to build

and enhance the underlying institutional capabilities of systems. Systems which appear to have

limited capacity should receive a high priority for technical and other assistance to help them

assess how best to acquire and maintain the capacity they need. The Agency notes that the

statute speaks of “acquiring and maintaining” capacity. Clearly Congress understood that

adequate system capacity is a dynamic concept and that capacity is not a simple matter of

“having it” or “not having it”. 

A number of commentors expressed concern regarding the proposed requirements for

documentation of the strategy and documentation of ongoing strategy implementation.

The Agency has simplified and streamlined the strategy documentation and reporting

requirements. Documentation regarding the strategy itself may be provided as a stand-alone

submittal or as part of the states capitalization grant application. Similarly, documentation

regarding ongoing strategy implementation may be provided as a stand-alone submittal or as

part of the states capitalization grant application.

Some commentors expressed concern over the contents and role of EPA review of the report to

the governor and the reports to the Administrator required under section 1420. 

For purposes of DWSRF withholding determinations, EPA’s review of these reports will

only extend to whether or not the reports have been prepared and submitted as required by the

statute. Failure to produce any of the reports will constitute a basis for withholding since these

reports, required under sections 1420(b)(3) and (c)(3), are considered part of the capacity

development strategy.

However, EPA will not base withholding determinations on any type of judgements or

inferences drawn from the reports regarding the relative merits or efficacy of a State capacity

development strategy. Further, the statute in section 1420(c)(4) explicitly prohibits EPA from

reviewing decisions of the State regarding any particular PWS, as part of a capacity

development strategy. Such State decisions regarding individual PWSs may not serve as basis
59

for withholding funds. 

There are three major reports required. Every 3 years, the State must submit to EPA a

list of CWSs and NTNCWSs that have a history of significant noncompliance and, to the extent

practicable, the reasons for their noncompliance. States submitted their first list in August,

1997. The next list will be due August 6, 2000. The Agency has interpreted the statutory

requirement in section 1420(b)(1) of “periodically update” to mean every 3 years. This

interpretation is based upon consultation with the states and the Agency considers it reasonable

given the requirement for a state report to the governor every 3 years in Section 1420(c)(3).

By August 6, 2001 the State must report to EPA on the success of its enforcement

mechanisms and initial capacity development efforts in helping CWSs and NTNCWSs having a

history of significant noncompliance improve their capacity.

Not later than 2 years after a State adopts a capacity development strategy, and every 3

years thereafter, the primacy agency must submit a report to the Governor on the efficacy of the

strategy and progress made toward improving the technical, managerial, and financial capacity

of PWSs in the State. The report shall also be made available to the public.

A number of commentors questioned the definition of “history of significant noncompliance”.

A “history of significant noncompliance” means being in significant noncompliance (for

any single contaminant or for different contaminants) during any three quarters of the previous 3

years. This definition was developed in consultation with the states at the Winter Meeting of

the Association of State Drinking Water Administrators in February, 1997. It was the definition

utilized for purposes of developing the first required state list which was due to EPA on August

6, 1997. The Agency believes the definition has proven effective and useful and we expect to

retain it.

Assessment for SRF

A number of commentors expressed concern relating to the documentation and reporting

requirements associated with the limitations on DWSRF assistance imposed by Section

1452(a)(3)(A).

Section 1452(a)(3)(A) imposes two significant limitations on DWSRF assistance to

PWSs. First no assistance may be provided to a PWS that does not have the technical,

managerial, and financial capacity to ensure compliance with the requirements of the SDWA. 

Second, no assistance may be provided to a PWS that is in significant noncompliance with any

requirement of a NPDWR. Section 1452(a)(3)(B) allows systems lacking capacity to receive

DWSRF assistance if the system agrees to undertake feasible and appropriate restructuring (such

as changes in rates or management, consolidation, alternative supply, etc.) if the State determines
60

that such restructuring is necessary to ensure that the system has the capacity to comply with

SDWA requirements over the long term. Section 1452(a)(3)(B) also allows a system in

significant noncompliance to receive assistance if the use of the assistance will ensure

compliance.

In order to ensure that this provision is implemented, the Agency believes it is necessary

to require states to document the procedures they will use to make the necessary judgements

about systems. The Agency also believes that to ensure ongoing implementation of these

provisions states should be required to report each year on the numbers of systems to which

these procedures were applied and the outcomes of the assessments.

 

A number of commentors expressed concern about whether SNC-listed PWSs could be funded

for projects unrelated to the cause of SNC as long as an enforceable agreement was in place to

address SNC issue.

The Agency believes that sufficient flexibility exists in the statute and guidance to allow

states to make special case-by-case determinations.