CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

STUD Y
CBO Publication

CONGRESSIONAL

BUDGET OFFICE

Second and D Streets, S.W.

Washington, D.C. 20515

S U M M A R

September 1995

THE SAFE DRINKING WATER ACT: A CASE STUDY OF

AN UNFUNDED FEDERAL MANDATE

State and local officials have voiced strong opposition in recent years to the growing number of federal requirements. At the local level, environmental requirements are perceived to be particularly onerous, and the Safe

Drinking Water Act (SDWA) is often cited as one of the more burdensome requirements. According to a new

study by the Congressional Budget Office (CBO), The Safe Drinking Water Act: A Case Study of an Unfunded

Federal Mandate, the SDWA has resulted in fairly modest costs for most households. Cost estimates from the

Environmental Protection Agency (EPA) and available survey data on costs at the local level indicate that most

households—approximately 80 percent—are expected to incur costs of less than $20 per year to treat their drinking

water according to the standards specified by the SDWA's existing rules. Moreover, comparing EPA data with

available local estimates does not provide evidence that EPA has significantly underestimated local compliance

costs.

Average household costs are modest for most communities, but some could face very high household costs—

in excess of $100 per year—under existing drinking water standards. Households served by small water systems

are particularly likely to face high costs. Furthermore, compliance costs could increase significantly over time. In

fact, four rules that are currently proposed under the SDWA could more than triple compliance costs.

In addition to considering cost, CBO examined available data on benefits from drinking water regulations.

That examination revealed that benefit-to-cost ratios vary widely by categories for contaminants and system sizes.

For example, the cost per expected cancer case avoided—that is, the cost to prevent a single case of cancer—ranges

from $500,000 for regulating the pesticide ethylene dibromide and its co-contaminants to more than $4 billion for

regulating the pesticides atrazine and alachlor. Conclusions about the merits of drinking water standards are

limited by a great deal of uncertainty underlying estimates of both costs and benefits. However, in some cases the

cost per expected cancer case avoided would need to be decreased by a factor of 10 or more to fall within the

range that is generally considered reasonable.

One benefit of federal drinking water standards is the assurance that all water systems meet minimum health

standards. A potential disadvantage of federal requirements, however, is that uniform requirements may cause

some localities to take actions that do not make sense for their specific community-such as testing for chemicals

that are not used in their area or undertaking treatment measures for which the costs far outweigh the benefits. An

important question, therefore, is whether the SDWA provides sufficient flexibility to adjust requirements in those

cases.

The SDWA provides EPA and the states with several tools that are designed to allow them to provide

flexibility to water systems. Those measures of flexibility, however, have not been widely used. Furthermore,

numerous barriers prevent more widespread use of those measures. Such barriers include constraints on resources,

concerns about public perception, and the effect that those measures might have on protecting public health.

The Unfunded Mandates Reform Act of 1995 requires CBO to estimate the costs that proposed legislation

will impose on state and local governments as well as the private sector. The SDWA case study highlights some

of the challenges involved in fulfilling that responsibility. Those challenges include estimating the additional, or

incremental, costs that a mandate imposes above and beyond the expenditures that state and local governments

would have made in its absence, lack of detail on the specific requirements that will be imposed as a result of the

legislation, lack of data on costs at the legislative stage, and limited time available to conduct the necessary

analyses. As a result of those complicating factors, cost estimates constructed at the legislative stage will be much

less precise than examinations conducted after the law or regulation has taken effect.

Questions about the study should be directed to Terry Dinan of CBO's Natural Resources and Commerce

Division at (202) 226-2940. The Office of Intergovernmental Relations is CBO's Congressional liaison office and

can be reached at 226-2600. For additional copies of the study, call the CBO Publications Office at 226-2809.
THE SAFE DRINKING WATER ACT:

A CASE STUDY OF AN

UNFUNDED FEDERAL MANDATE

The Congress of the United States

Congressional Budget Office
NOTES

Numbers in the text and tables of this study may not add to totals because of rounding.

All data on local expenditures are in the fiscal years used by local governments, which end

on June 30. All references to legislation are in calendar years.
Preface

T

he Congressional Budget Office (CBO) prepared this report at the request of the

then Chairman of the Senate Committee on Governmental Affairs. The report uses

data provided by the Environmental Protection Agency (EPA), the American

Water Works Association, and local communities to examine the cost of treating drinking

water according to the standards set under the Safe Drinking Water Act (SDWA). It also

discusses available data on the benefits that result from treating drinking water and examines the actual use of legislative provisions that are meant to provide the EPA and the

states with flexibility in enforcing the requirements of the SDWA.

Terry Dinan of CBO's Natural Resources and Commerce Division wrote the study

under the supervision of Jan Paul Acton and Roger Hitchner. CBO analysts Kim Cawley,

Teri Gullo, and Matthew Eyles made valuable comments, and Aaron Zeisler and Kim

Wegbreit provided assistance with data analysis. Outside CBO, James McFarland, John

Cromwell, Robert Raucher, and Robert Stavins provided valuable assistance and reviews.

In addition, several staff members of the EPA's Office of Drinking Water and the Bureau

of the Census provided useful information.

Paul L. Houts edited the report, and Leah Mazade provided editorial assistance.

Angela McCollough typed the drafts. Kathryn Quattrone, Christian Spoor, and John

McCarty prepared the study for publication.

June E. O'Neill

Director

September 1995

Contents

ONE

TWO

THREE

FOUR

SUMMARY

INTRODUCTION

Study Objectives 7

Measuring the Incremental Cost of Unfunded

Federal Mandates 2

Data on the Costs and Benefits of the Safe

Drinking Water Act 2

Background on Drinking Water Regulations

and Trends in Cost 3

TOTAL NATIONAL ESTIMATES OF SDWA COSTS

Limitations on Data 9

Total Cost Estimates for Existing and

Proposed Rules 10

HOUSEHOLD COSTS OF DRINKING WATER

TREATMENT

EPA Data on Costs at the Household Level 13

Survey Data on Local Costs 75

Comparison of National and Local Estimates

of SDWA Costs 27

PLACING SDWA COST ESTIMATES IN CONTEXT

Costs Relative to Benefits 25

Treatment Costs Relative to Other Cost Factors 31

Local Cost Estimates of the Safe Drinking Water Act

Compared with Fiscal Capacity 32

IX

13

25
vi THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

FIVE

SIX

APPENDIX

FLEXIBILITY UNDER THE SAFE DRINKING

WATER ACT

Provisions in the Law 35

Actual Use of Provisions for Flexibility 36

Restructuring as Another Option to Reduce Costs

35

38

IMPLICATIONS FOR PROVIDING COST ESTIMATES

UNDER THE UNFUNDED MANDATES REFORM

ACT OF 1995

Measuring the Incremental Cost of a Federal Mandate 42

Uncertainty About the Regulations That Will Result

from Legislation 42

Limited Data Sources 43

Limited Time 43

Method Used to Construct Estimates of Per Capita Local

Expenditures on Drinking Water 45

39
CONTENTS

TABLES

1.

2.

3.

4.

Annual Cost of Treatment According to Standards

Specified by the Safe Drinking Water Act

Average Household Cost for Monitoring and Compliance,

by Size of System and Number of Treatments

Average Household Cost Under the Proposed Rules

by Size of System

Cost per Health Effect Avoided for Selected Rules and

Contaminants

11

16

18

26

FIGURES

1.

2.

3.

4.

5.

6.

7.

Annual Local Expenditures for Water Supply Measured

on a Per Capita Basis, 1957-1991 6

EPA's Estimate of the Annual Costs of Complying

with Final and Proposed Rules Under the Safe

Drinking Water Act 12

Distribution of Households by EPA Estimates of the

Cost of Monitoring and Treating Drinking Water

According to Existing SDWA Standards 14

Mandates Covered by Surveys of U.S. Cities and Counties 20

Distribution of Households by Average Per-Household

Cost of Treating Drinking Water According to Existing

SDWA Standards: 1993 Versus 1997 Municipal

Expenditure Survey Data 23

Distribution of Households by Average Per-Household

Cost of Treating Drinking Water According to Existing

SDWA Standards: 1997 Municipal Expenditure Survey

Data Versus EPA Data 24

Distribution of Municipalities by Average Per-Household

Cost of Treating Drinking Water According to Existing SDWA

Standards as a Share of Median Household Income 33

Distribution of Municipalities by Average Per-Household

Cost of Treating Drinking Water According to Existing SDWA

Standards as a Share of Average Residential Property Value 34
viii THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

BOXES

1. Existing and Proposed Rules Under the Safe Drinking

Water Act as of September 1994 4

2. Quality Control Steps and Remaining Limitations of

the Municipal Expenditure Survey Data 22

3. Definitions and Requirements Regarding Intergovernmental

Mandates Under the Unfunded Mandates Reform Act of 1995 40
Summary

S

tate and local officials have voiced strong opposition in recent years to the growing number

of federal requirements. At the local level,

environmental requirements are perceived to be particularly onerous. Critics of those so-called "unfunded mandates" argue that they place a large burden on local governments, the federal government

frequently underestimates local costs, the costs of

such mandates sometimes outweigh their benefits,

and often the mandates lack the flexibility to accommodate important differences in local conditions.

The Congressional Budget Office (CBO) examined

available data to determine the validity of those criticisms with respect to the Safe Drinking Water Act

(SDWA). The SDWA was enacted in 1974 and requires all public water systems to meet drinking water standards and monitoring requirements that the

Environmental Protection Agency (EPA) has developed.

CBO chose to use the SDWA as a case study of

the unfunded mandates issue because the SDWA has

been identified as one of the more burdensome federal mandates. In addition, examining its local cost

impact is relatively easy because only a limited

amount of federal aid is provided to drinking water

systems. Consequently, one does not need to try and

separate federally funded costs from locally funded

costs for most systems. Even with that simplifying

feature, this case study highlights many of the difficulties in measuring the costs and benefits of federal

mandates. Data on costs and benefits are limited. In

addition, no reliable method exists to estimate the

incremental cost of the SDWA-that is, the additional

expenditures that federal standards require water systems to make above and beyond the expenditures that

they would have made to ensure safe drinking water

without such standards. Despite those difficulties,

this study reaches several conclusions.

To Date, the SDWA Has

Resulted in Fairly Modest

Costs for Most Households

Although the SDWA has been cited as a particularly

burdensome mandate, available data do not indicate

that it has imposed high costs on most households.

Cost estimates from the EPA and available data on

actual experiences with costs at the local level both

indicate that most households—approximately 80 percent-are expected to incur costs of less than $20 per

year to treat their drinking water to meet the standards specified by the existing rules of the SDWA.

Moreover, comparing EPA data with available local

estimates does not reveal that the EPA has underestimated local compliance costs.

The limited available data indicate that the Safe

Drinking Water Act currently places a small fiscal

burden on most municipalities, accounting for less

than 0.1 percent of median household income or average residential property values. Although those

results are important, this study did not examine the

cumulative effect that multiple federal mandates have

on municipalities.
x THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Average household costs are modest for most

communities, but some could face very high household costs-in excess of $100 per year-under existing

drinking water standards. Households served by

small water systems are particularly likely to face

high costs. Furthermore, compliance costs could increase significantly over time. In fact, four rules that

are currently proposed under the SDWA could more

than triple compliance costs.

Benefit-to-Cost Ratios

Vary Widely by Categories

for Contaminants and

System Sizes

For both existing and proposed regulations for carcinogens in drinking water, CBO examined available

data on the cost per cancer case avoided—that is, the

cost to prevent a single case of cancer. Those data

indicate that the cost per cancer case avoided varies

greatly among contaminants. For example, the average cost per cancer case avoided (averaged for all

system sizes) is estimated at $500,000 for regulating

the pesticide ethylene dibromide and its co-contaminants compared with more than $4 billion for regulating the pesticides atrazine and alachlor. In addition,

the cost per cancer case avoided tends to increase

sharply as the size of the system decreases. For example, in the category for the largest-sized systems,

the expected cost per cancer case avoided because of

the proposed regulation of adjusted gross alpha emitters (which primarily reduces exposure to the radionuclide polonium) is $600,000 compared with more

than $1 billion for the category for the smallest-sized

systems.

Conclusions about the merits of drinking water

standards are limited by a great deal of uncertainty

underlying estimates of both costs and benefits.

However, in some cases the cost per cancer case

avoided would need to be decreased by a factor of 10

or more to fall within the range that is generally considered reasonable.

The most costly rule currently proposed is the

Disinfectants/Disinfection By-Product (D/DBP)

Rule. The degree to which that rule would reduce the

risk of cancer is extremely uncertain. The EPA estimates that the average cost per cancer case avoided

ranges between $867,000 and $8.7 billion in the initial stage of the rule and between $840,000 and $19

billion in the extended stage.

The second most costly rule currently proposed is

the Enhanced Surface Water Treatment (ESWT)

Rule, which is designed to prevent the outbreak of

waterborne gastrointestinal diseases. Using an estimate of medical costs and lost wages as a measure of

benefit, the benefits are expected to exceed the average cost per case of waterborne disease avoided as a

result of complying with the proposed initial phase of

the ESWT rule (averaged for all systems). That assessment, however, is based on limited data on the

potential risk of waterborne diseases.

The EPAfs and States1 Use of

Legislative Tools to Provide

Flexibility to Water Systems

Has Been Limited

One benefit of federal drinking water standards is the

assurance that all water systems meet minimum

health standards. A potential disadvantage of federal

requirements, however, is that uniform requirements

may cause some localities to take actions that do not

make sense for their specific community-such as

testing for chemicals that are not used in their area or

undertaking treatment measures for which the costs

far outweigh the benefits. An important question,

therefore, is whether the SDWA provides sufficient

flexibility to adjust requirements in those cases.

The SDWA provides the EPA and the states with

several tools that are designed to allow them to provide flexibility to water systems. Those measures of

flexibility, however, have not been widely used. Furthermore, numerous barriers prevent more wide-
SUMMARY

spread use of those measures. Such barriers include

constraints on resources, concerns about public perception, and the effect that those measures might

have on protecting public health.

The SDWA Case Study

Highlights Challenges That

CBO Faces in Providing State

and Local Cost Estimates

The Unfunded Mandates Reform Act of 1995 requires CBO to estimate the costs that proposed legislation will impose on state and local governments as

well as the private sector. The SDWA case study

highlights some of the challenges involved in fulfilling that responsibility. Because mandates are often

designed to achieve goals that state and local governments share, a particularly difficult issue is how to

estimate the additional, or incremental, costs that a

mandate imposes—above and beyond the expenditures that state and local governments would have

made in its absence.

Estimating state and local costs at the legislative

stage is more difficult than estimating the cost of current and proposed standards under the SDWA for at

least three reasons. First, legislation is often broad

and lacks the specifics, which are developed through

the regulatory process, to project costs. Second,

many of the sources of data used in this study are not

available at the legislative stage. Third, often only a

very limited amount of time is available to collect

information on projected state and local costs. As a

result of those complicating factors, cost estimates

constructed at the legislative stage will be much less

precise than examinations conducted after the law or

regulation has taken effect.

Chapter One

Introduction

I

n the past several years, a growing movement

has attempted to draw attention to the costs that

state and local governments bear in complying

with federal requirements. At the local level, environmental laws are regarded as particularly burdensome. For example, in two surveys that were designed to draw attention to the cost that federal mandates impose on local governments, over half of the

mandates on which localities provided information

were environmental ones.1 The Congressional Budget Office (CBO) examined the Safe Drinking Water

Act (SDWA) as a case study of federal mandates.

The SDWA requires all public water systems to comply with drinking water standards and monitoring

requirements developed by the Environmental Protection Agency (EPA).

CBO chose to use the SDWA as a case study of

federal mandates for two reasons. First, it has often

been cited as a particularly onerous mandate.2 Second, examining the local cost impact is relatively

easy because only limited offsetting federal funds

have been provided to localities; hence, separating

local from federal cost shares is unnecessary.

1. See the U.S. Conference of Mayors, Impact of Unfunded Federal

Mandates on U.S. Cities (Washington, D.C.: U.S. Conference of

Mayors, October 1993); and National Association of Counties, The

Burden of Unfunded Mandates: A Survey of the Impact of Unfunded Mandates on American Counties (Washington, D.C.: National Association of Counties, October 1993).

2. For example, see "Costly Federal Mandates Spur Protest," Washington Post, October 27, 1993, p. A3.

The increasing concern about the costs that federal mandates impose on state and local governments

has led the Congress to pass legislation-the Unfunded Mandates Reform Act of 1995—that would

make it harder to enact additional unfunded mandates. That legislation allows Members of Congress

to raise a point of order against intergovernmental

mandates that exceed a $50 million threshold unless

funding is provided to pay fully for the mandate. The

legislation also requires CBO to estimate the cost of

federal mandates to state and local governments.

The analysis of the SDWA conducted in this

study does not represent the types of cost estimates

that CBO will make under the Unfunded Mandates

Reform Act. Rather, this study is a much more complete analysis that examines both costs and benefits

using data that are typically not available at the legislative stage. (See Chapter 6 for a more complete discussion of the requirements of the Unfunded Mandates Reform Act of 1995 and the challenges that

CBO faces in providing state and local cost estimates.)

Study Objectives

Critics of unfunded mandates argue that the number

of mandates that the federal government has imposed

on state and local governments has increased while

the amount of federal aid has declined and that those
2 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

mandates displace local priorities. Furthermore, they

argue that the federal government has often underestimated the cost of complying with those mandates;

the costs of the mandates sometimes outweigh the

benefits; the mandates have placed a large burden on

local governments; and the federal mandates are inflexible, requiring localities to do things that do not

make sense for their particular communities.

Conversely, proponents of federal mandates argue that they prevent states and localities from imposing costs on citizens or businesses outside their

boundaries and that they ensure that citizens are

guaranteed a minimum level of safety (such as clean

drinking water) or rights (such as access to public

facilities for handicapped people) regardless of where

they live or travel. In addition, uniform national

standards may be more efficient than multiple state

or local standards in some cases, such as for companies that have plants in different locations. Finally,

uniform standards may prevent local governments

from setting lower safety or environmental standards

in order to attract businesses to their area.

In this study, CBO examines whether some of the

criticisms that have been made of federal mandates

are valid for the SDWA. Specifically, it examines

whether the SDWA:

o Has imposed large costs on households,

o Has costs that exceed benefits,

o Has imposed a large fiscal burden on municipalities, and

o Lacks flexibility to allow regulators to adjust the

act's requirements based on the specific circumstances of individual communities.

In addition, CBO examines whether the available

data on the SDWA show that the federal government

has underestimated the actual costs of compliance.

Finally, CBO uses the SDWA to draw conclusions

about the challenges that it faces in providing state

and local cost estimates.

Measuring the Incremental

Cost of Unfunded Federal

Mandates

Many federal mandates are designed to achieve a

goal that state and local governments share. Consequently, many state and local governments would

take actions toward achieving that goal without a federal mandate. The true cost of the mandate, therefore, is the incremental cost that the mandate imposes

on state and local governments. For example, most

communities strive to provide their residents with

safe drinking water. They would undertake some

testing and treatment of their drinking water even

without federal requirements. Calculating the incremental cost of the SDWA requires subtracting the

cost of treatment and testing that communities would

have undertaken without the mandate from the total

treatment and testing costs that they incur once the

mandate is in place. Unfortunately, no accurate

method is available to determine what communities

would have done if no federal requirements had been

in force.

Because the actions that communities would

have taken without a mandate are unknown, cost estimates of mandates typically reflect total, not incremental, costs. Those cost estimates, therefore, generally overstate the cost of the mandate. For example,

when the EPA estimates the cost of the SDWA, it

typically does not attempt to exclude the costs of

testing and treatment that communities would have

undertaken without federal drinking water standards.

Data on the Costs and

Benefits of the Safe

Drinking Water Act

Three primary sources provide information about the

cost of the SDWA:
CHAPTER ONE INTRODUCTION 3

o Census data indicate actual expenditures for

drinking water by local governments in the

United States. Although those data reflect actual

costs at the national level, they do not provide a

breakdown of what share of the costs are the result of drinking water treatment, as opposed to

delivery.

o Engineering models are used to construct cost

estimates based on assumptions about treatment

design characteristics and cost components. An

advantage of those estimates is that they may be

designed to represent costs at the national level.

However, they have two major limitations. The

costs generated by those models depend on numerous assumptions and may not accurately reflect actual costs. In addition, those estimates do

not account for the actions that communities

would have undertaken in the absence of drinking water standards~that is, they reflect total, not

incremental, costs.

o Data on actual costs at the local level are available in the form of case studies and surveys. The

most comprehensive source of data on actual local costs (and the one used in this study) is a municipal expenditure survey that was conducted by

Price Waterhouse for the United States Conference of Mayors and the National Association of

Counties. That survey, however, was not designed to be representative at the national level,

has numerous quality control limitations, and

also reflects total-not incremental-costs.

Data on benefits are even more limited than those

on costs. Estimates of benefits do not accompany

local estimates of actual costs for particular communities in the municipal expenditure survey. The

EPA is the primary source of information on benefits.

In some cases, the EPA provides information on the

number of health effects (such as cases of cancer or

gastroenteritis) that may be avoided as a result of the

regulation. In other cases, it is only able to estimate

the number of people who will avoid exposure to a

contaminant.

Although the data on both costs and benefits are

limited, careful examination and comparison of the

available data reveal important insights into the magnitude of the burden that the SDWA places on local

communities and the potential sources of local discontent.

Background on Drinking

Water Regulations and

Trends in Cost

Local governments treated their drinking water to

ensure acceptable taste and odor and to prevent the

outbreak of acute waterborne disease long before the

Environmental Protection Agency was established

and the SDWA was enacted. The initial federal action concerning drinking water was the establishment

of the Public Health Service (PHS) Hygienic Laboratory in 1901.3

 That laboratory investigated infectious

diseases. In 1914, the PHS established criteria to test

drinking water that interstate carriers used. Over

time, those standards began to be applied to water

that was distributed by municipalities, and such standards were revised in 1925, 1946, and 1962. By

1971, a large number of states had officially adopted

or were using the PHS drinking water standards.

However, the federal enforcement authority was limited to prohibiting interstate carriers from using water

from a system that failed to comply with standards.

Several events led to the passage of the SDWA in

1974, which considerably expanded the federal role

in protecting drinking water. First, although waterborne diseases had been virtually eliminated since

the 1930s, they began to reemerge during the 1960s.

One explanation for that reemergence was that states

switched often limited resources away from drinking

water safety programs to deal with water pollution

following the inception of the federal water pollution

program in 1948. In response to the reemergence of

waterborne disease, the Bureau of Water Hygiene of

The discussion on drinking water treatment before the passage of

the SDWA and the factors that led to its passage is drawn from

Thomas J. Douglas, "Safe Drinking Water Act of 1974-History

and Critique," Environmental Affairs, vol. 5 (Summer 1976); statement of Robert W. Fri, Deputy Administrator, Environmental Protection Agency, before the Subcommittee on Public Health and

Environment of the House Committee on Interstate and Foreign

Commerce, March 8, 1973; and Congressional Quarterly, Almanac:

93rd Congress, 2nd Session-1974, vol. 30 (1974), pp. 423-426.
4 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Boxl.

Existing and Proposed Rules Under

the Safe Drinking Water Act as of September 1994

Following the 1986 amendments to the Safe Drinking

Water Act, the Environmental Protection Agency

(EPA) issued seven major rules (referred to as "existing rules" in this study). In addition, EPA has proposed four more rules.

Existing Rules

The EPA has issued rules for both individual contaminants, such as fluorides, and groups of contaminants, such as inorganic compounds. Each of the

final rules is listed below. The Phase II rule is broken

down into synthetic organic compounds and inorganic

compounds. The date in parentheses indicates when

the rule was published in the Federal Register. Rules

generally become effective 18 months after they are

published.

Fluoride (April 2, 1986). Fluorides occur naturally

and are added during the treatment process in many

water systems. Amounts greater than two parts per

million can have harmful effects, ranging from discoloration and pitting of teeth to bone and skeletal damage. Systems must test for fluoride. If it is found to

be above allowable levels, they must change their operations or take other actions to lower the level.

Phase I Volatile Organic Compounds (July 8,

1987). Volatile synthetic organic chemicals (VOCs)

are man-made compounds used for a variety of industrial and manufacturing purposes in the form of products such as solvents, degreasers, and dry cleaning

chemicals. VOCs have adverse effects on the liver,

kidneys, and nervous system, and they may cause cancer in humans. Water systems must sample for VOCs.

When the compounds are found, the source of the

VOCs must be removed or treatment must be undertaken.

Surface Water Treatment Rule (June 29, 1989).

The rule for treating surface water requires treatment

to control bacteria and other microbes that are difficult to detect and pose immediate health risks. This

rule covers all surface water systems and groundwater

systems that are under the direct influence of surface

water. The rule requires affected systems to disinfect

and install a subset of systems to filter their water.

Total Coliform Monitoring (June 29, 1989). Total

coliform monitoring requirements affect all community water systems. Systems are required to conduct

monthly tests for coliform bacteria, which indicate

whether potentially harmful bacteria may be in the

water. Over the years, bacteria from sewage and animal wastes have presented the most frequent and immediate health risks to community water supplies.

Phase II Synthetic Organic Compounds (January

30, 1990, for 14 Contaminants; July 1, 1991, for

One Contaminant). This rule covers Phase II synthetic organic compounds (SOCs) and nonvolatile

man-made compounds, primarily pesticides and polychlorinated biphenyls. Adverse health effects from

exposure to SOCs include damage to the nervous system and kidneys and risk of cancer. Vulnerable water

systems must test for SOCs. If the contaminants are

found, the source of the SOCs must be removed or the

water supply must be treated to remove them.

Phase II Inorganic Compounds (January 30,1990,

for 19 Contaminants; July 1, 1991, for Four Contaminants). Phase II inorganic compounds (lOCs)

may be naturally occurring in geological structures or

they may be caused by mining, industrial, or agricultural activities. In large amounts, these chemicals can

damage the liver, kidney, nervous system, circulatory

system, blood, gastrointestinal system, bones, or skin.

the PHS undertook a study of 969 public water systems in 1969. That study played an important role in

generating Congressional interest in legislation on

drinking water and the ultimate passage of the

SDWA. It indicated deficiencies in the quality of

drinking water, the capacities of purifying and distribution systems, and the surveillance of water systems

by state and local officials. Furthermore, the study

noted that many of the Public Health Service's drinking water standards had been based on insufficient

data and that they did not cover many contaminants

found in drinking water.
CHAPTER ONE INTRODUCTION 5

All community water systems must monitor for regulated lOCs. If lOCs are found, their level must be

adequately reduced or treatment must be undertaken.

Lead and Copper (June 7, 1991). Lead and copper

contamination generally occurs after water has left the

public water system. Therefore, testing for it should

be done at household faucets. Water systems must

target homes with a high risk of lead and copper contamination and conduct tests in those locations. If

contamination is found, water systems must reduce

the corrosiveness of the water or replace materials

containing lead under the control of the water system.

Water systems are not required to replace customers'

pipes containing lead.

Phase V SOCs and lOCs (July 25, 1992). See the

description above of Phase II SOCs and lOCs.

Proposed Rules

The EPA has proposed four rules that are not yet final.

The Radionuclides Rule and the Sulfate Rule cover

compounds that the EPA was specifically required to

regulate under the 1986 amendments. The Disinfectants/Disinfection By-Product Rule is one of the first

group of 25 substances for which EPA is required to

set standards.

Radionuclides Rule. The Radionuclides Rule sets

standards for radon-222, radium-226, radium-228,

uranium, and adjusted gross alpha emitters. Those

radionuclides are classified as Group A human carcinogens; in addition, uranium is toxic to kidneys.

People can be exposed to radionuclides by drinking

tap water that contains them or by inhaling radionuclides released into indoor air from tap water. The

proposed rule on radionuclides primarily affects

groundwater systems.

Disinfectants and Disinfection By-Products. Disinfectants (such as chlorine) are used by over 90 percent

of surface water systems and less than one-half of

groundwater systems to prevent diseases caused by

microbiological contaminants. Although disinfection

provides important benefits, the disinfectants themselves can react with organic materials in water supplies to form disinfection by-products. Such byproducts may ultimately increase the risk of cancer.

Stage I of the proposed rule would require systems to

use existing treatment processes to remove precursors

(for example, total organic carbon) of disinfection byproducts. Stage II would require systems serving

more than 10,000 people to undertake testing and

treatment for disinfection by-products. An extended

Stage II would expand those requirements to all systems.

Enhanced Surface Water Treatment Rule. The rule

on enhanced surface water treatment (ESWT) would

expand the controls established under the Surface Water Treatment Rule. Additional controls are proposed

because of new evidence that exposure to microbial

contaminants in surface waters may be significantly

greater than previously believed. In addition, requirements under the proposed rule for disinfectants and

disinfection by-products may result in greater risk

from microbial contaminants. Under the proposed

rule, an "interim" ESWT rule would require additional

controls for systems serving more than 10,000 people.

A "long-term" ESWT rule would extend those requirements to all systems.

Sulfate Rule. The primary adverse health effect of

ingested sulfate is diarrhea in unacclimated individuals, who include infants and new residents and visitors

to high-sulfate areas. The Environmental Protection

Agency is proposing four options for regulating sulfate. The preferred option, Option 1, is an alternative

to central treatment. Under that option, a system may

comply by providing the exposed population with alternative water supplies, establishing and maintaining

a public education program, and carrying out a public

notice program. Under that option, systems may still

opt for central treatment, and almost all large systems

are expected to do so.

In addition to the reemergence of waterborne diseases, the passage of the SDWA stemmed from a

concern about introducing many new chemical pollutants into water supplies following World War II

and the belief that treatment technology for drinking

water was not advancing rapidly enough to address

those types of pollutants. Two reports-one by the

Environmental Defense Fund and the other by the

EPA—linked certain pollutants found in drinking water with cancer. Those reports provided the final impetus needed to pass the SDWA.
6 THESDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Figure 1.

Annual Local Expenditures for Water Supply Measured on a Per Capita Basis, 1957-1991

1992 Dollars

140

120

100

80

60

40

20

1986 Amendments

Interim Rule Under the Passed

SDWA Becomes Effective

Voluntary Standards Revised

by the Public Health Service

Safe Drinking Water

Act Passed

1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990

SOURCE: Congressional Budget Office calculations based on data from the Environmental Protection Agency and the Bureau of the Census.

NOTES: Local expenditures were divided by estimates of the population served by publicly owned community water systems.

SDWA = Safe Drinking Water Act.

In 1974, the Congress passed the SDWA and directed the EPA to define national interim regulations

for primary drinking water while final regulations

were being developed. The interim regulations codified existing health standards; they were promulgated

in December 1976 and became effective in mid1978. Another rule-the total trihalomethane regulation-was issued in 1979 and became effective 18

months later. Trihalomethanes are cancer-causing

by-products that may form when drinking water is

treated with chlorine. The interim regulations and

the total trihalomethane rule were the only national

regulations covering drinking water in effect before

the 1986 amendments to the Safe Drinking Water

Act were passed.

The 1986 amendments directed the EPA to develop regulations for 83 specific contaminants as

well as regulations mandating filtration (for those

water systems supplied by surface water sources) and

disinfection (for all water from public water supplies).4

 In addition, the law required the EPA to regulate 25 additional contaminants every three years.

Since 1986, the EPA has issued seven major regulations that establish standards for either a specific

contaminant or groups of contaminants. Under those

rules, the EPA sets standards—called maximum contaminant levels-for each contaminant. All of the

seven rules are now in effect. Moreover, four regulations are currently in the proposal stage. Two of the

proposed rules would be phased in, either having less

rigorous requirements or only covering large systems

in the initial phase. (See Box 1 on pages 4 and 5 for

a listing of the existing and proposed rules.)5

4. Environmental Protection Agency, Estimates of the Total Benefits

and Total Costs Associated with Implementation of the 1986

Amendments to the Safe Drinking Water Act (March 1990).

5. Rules that are now in their final form are referred to as "existing

rules" in this report. The EPA refers to those rules as "final rules."
CHAPTER ONE INTRODUCTION 7

To date, no federal aid has been provided to

drinking water systems for the explicit purpose of

helping them to comply with the SDWA requirements. Since 1940, however, the Department of Agriculture's Rural Development Administration has

provided loans to drinking water systems in rural areas or in cities or towns having populations of 10,000

or less. A grant program was added in 1966. Although most of those funds have been used to build

infrastructure for water delivery, the program does

not preclude recipients from using the funds to build

drinking water treatment facilities.

Average per capita local water expenditures by

publicly owned water systems (net of federal funds

and adjusted for inflation) have increased significantly, rising from $67 in 1957 to $132 in 1991 (see

Figure I).6 Using the average household size in those

Note that in some years, real (inflation-adjusted) per capita expenditures decreased because nominal per capita expenditures increased less than the inflation rate.

To figure per capita costs, CBO divided local expenditures for water supply in each year by an estimate of the population served by

locally owned public water systems. That estimate was based on

Bureau of the Census data on the percentage of households served

by public and private community water systems and on information

about the percentage of community water systems that are publicly,

rather than privately, owned (see the appendix for details on how

per capita costs were constructed). CBO obtained the latter information from the EPA's Federal Reporting Data System.

years would bring those costs to $223 per household

in 1957 and $343 in 1991.

Increased treatment of drinking water is a factor

that could explain at least part of the increase over

the 1957-1991 period. However, numerous other

factors could contribute to the increase as well. In

addition to the need to treat their drinking water, water systems face rising costs for replacing and upgrading their aging infrastructure for water delivery

and may be forced to use higher-cost water supplies

as populations grow and low-cost supplies are depleted. In addition, increases in household income

affect the demand for water.7

7. Models of residential demand for water have generally found income to have a small but statistically significant effect. The magnitude of that effect varies with the model, the region of the country, and the price rate structure. However, most estimates indicate

that a 10 percent increase in income would result in an increase in

water consumption of between 1 percent and 2 percent. For example, see Michael Niegwiadomy and David Molina, "Comparing

Residential Water Demand Estimates Under Decreasing and Increasing Block Rates Using Household Data," Land Economics,

vol. 65, no. 3 (August 1989); and Michael Niegwiadomy and David

Molina, "A Note on Price Perception in Water Demand Models,"

Land Economics, vol. 67, no. 3 (August 1991).

Chapter Two

Total National Estimates

of SDWA Costs

T

wo organizations provide engineering-based

estimates of the total cost of meeting federal

requirements for safe drinking water: the Environmental Protection Agency and the American

Water Works Association (AWWA), a group of major suppliers of drinking water. The EPA estimates

that water systems will spend $1.4 billion a year to

comply with existing Safe Drinking Water Act rules

that go beyond preexisting voluntary guidelines. The

AWWA estimates that same cost to be $2.3 billion

per year. If proposed rules are passed in their current

form, those costs could increase substantially. In

fact, the total cost of treating water according to

SDWA standards would eventually triple based on

the EPA's cost estimates and more than quadruple

based on the AWWA's estimates.

Limitations on Data

A primary limitation of the engineering-based estimates of costs provided by the EPA and the AWWA

is that they generally reflect total-not incremental--

costs. That is, some water systems that do not currently meet a standard would choose to treat their

water even without the regulation, and the EPA and

AWWA data do not reflect that outcome. Similarly,

they do not deduct monitoring costs for communities

that would have chosen to test for regulated contaminants without federal requirements.

The second major drawback to engineering-based

models is that they are founded on numerous assumptions. The accuracy of the estimates depends on

the realism of the modeling and the validity of those

assumptions, which include the following:

o The occurrence of contaminants and the type of

water system in which they exist (surface water

or groundwater, large or small).

o The actual number of treatment units. Information is available on the number of water systems

in the United States. However, some systems

have multiple treatment units, and estimates of

the total number of treatment units differ.

o The treatment technologies that water systems

would choose. The type of treatment that a community ultimately chooses will depend on numerous factors, including the characteristics of its

source water, the treatment equipment that is currently in place, and the availability of land.

o The cost of purchasing and operating given technologies. Large variations in cost may occur as a

result of many factors, including operator capability, availability of financing, and the cost of

labor and land.

o The cost of monitoring water quality. Actual

monitoring costs will vary based on the number
10 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

of waivers granted, local laboratory costs, and the

analytic methods used.

Engineering-based cost estimates may ultimately

prove to be quite different from the costs that specific

water systems incur to treat their drinking water according to the level of federal standards. Nevertheless, by making assumptions about how communities

will respond to a regulation, engineering analyses can

provide some understanding of the cost of a regulation as it is being developed.

Total Cost Estimates for

Existing and Proposed Rules

Both the EPA and the AWWA have recently published engineering-based estimates of the total annual

cost of treating drinking water according to federal

standards specified by the Safe Drinking Water Act.

The EPA estimates that water systems will spend

$1.4 billion per year to comply with existing standards, and the AWWA estimates that water systems

will spend $4.1 billion (see Table 1). The AWWA's

estimate is built on EPA data on the occurrence of

contaminants, choice of technology, and unit treatment costs. Its estimate is higher than the EPA's for

two main reasons. First, the AWWA uses different

assumptions about the number of treatment units.

Second, its estimate includes the cost of complying

with some standards that the EPA excludes-specifically some of the Phase II standards.

The EPA issued the Phase II Rule after the Congress passed the 1986 amendments to the SDWA.

Many of the standards set under that rule merely formalized (or sometimes strengthened) standards that

existed earlier-first under the standards established

by the Public Health Service in 1962 and then under

the interim rules issued by the EPA in 1976. Because

those standards had been in effect for a long time, the

EPA assumed that most water systems were already

complying with them before the Phase II Rule was

promulgated.1 Therefore, in estimating the cost of

the rule, the agency included only the additional cost

that the rule imposed-that is, the cost resulting from

standards that were strengthened. The AWWA, however, included the full cost of meeting all of the

Phase II standards. If the AWWA's estimate of the

total cost of all existing rules was adjusted to include

only the additional cost of the Phase II regulations, it

would drop to $2.3 billion—approximately 60 percent

more than the EPA's total cost estimate.

The primary reason for the difference between

those two estimates is alternative assumptions about

the number of treatment units. If the AWWA had

developed its own assumptions about the technologies that would be chosen and the cost of purchasing

and operating those technologies, then the divergence

between the two estimates could be much greater.

If the EPA's assumption that systems were complying with voluntary rules (or would have eventually done so on their own) is correct, the practice of

excluding the relevant portion of the costs of the

Phase II Rule from the estimate of the cost of the

SDWA is consistent with the notion of identifying an

incremental cost. Consequently, the Congressional

Budget Office attaches more significance to the

AWWA's $2.3 billion per year estimate than to its

$4.1 billion per year estimate. Except for the portion

of the Phase II regulations, the EPA's cost estimates

do not deduct the cost of actions that water systems

might undertake on their own. As a result, $1.4 billion to $2.3 billion per year should be viewed as a

range of estimates of the total cost that water systems

will bear to comply with SDWA regulations that

went beyond pre-SDWA standards. The incremental

cost of those regulations could be substantially less,

but it cannot be estimated.

In addition to estimating the cost of treating water to the standards required by the existing rules discussed above, the EPA has also published estimates

of the total cost of four proposed rules. The proposed

rules are for radionuclides, disinfectants and disinfection by-products, enhanced surface water treatment, and sulfate. Adopting those rules in their current form could more than double or triple the esti1. However, the belief that many water systems were not meeting

those standards was one of the factors that led to the passage of the

SDWA in 1974 (see the statement of Robert W. Fri, Deputy Administrator, Environmental Protection Agency, before the Subcommittee on Public Health and Environment of the House Committee

on Interstate and Foreign Commerce, March 8, 1973).
CHAPTER TWO TOTAL NATIONAL ESTIMATES OF SDWA COSTS 11

Table 1.

Annual Cost of Treatment According to Standards Specified by the Safe Drinking Water Act

(In millions of 1992 dollars)

EPA AWWA

Fluoride

Phase I (VOCs)

Surface Water Treatment Rule

Total Chloriform Monitoring

Phase II SOCs

Phase II lOCs

Lead and Copper

Phase V SOCs and lOCs

All Existing Rules

Radionuclides

Radon

Radium-226

Radium-228

Adjusted gross alpha emitters

Uranium

Disinfectants/Disinfection By-Product (D/DBP) Rule

Stage I

Stage II (Large systems only)d

Stage II (All systems)6

Enhanced Surface Water Treatment Rule

Interim rule (Large systems only)f

Based on Stage I D/DBP

Based on Stage II D/DBP

Long-term rule (All systems)

Based on Stage I D/DBP

Based on Stage II D/DBP (All systems)

Sulfate

Existing Rules

Proposed Rules

1,431.1

280

48.6

8.7

53.4

80.7

1,064

1,820

2,631

402

746

519

927

80

4,099.0b

1,917

n.a.

n.a.

n.a.

n.a.

n.a.c

n.a.c

n.a.c

n.a.c

n.a.c

n.a.c

n.a.c

n.a.

SOURCE: Congressional Budget Office based on data from the Environmental Protection Agency and American Water Works Association.

NOTES: Costs listed are the estimated compliance cost when rules are in effect. All the existing rules are expected to be in effect in 1995.

EPA = Environmental Protection Agency; AWWA = American Water Works Association; VOCs = volatile organic compounds; SOCs

= synthetic organic compounds; lOCs = inorganic compounds; n.a. = not available.

a. The AWWA does not provide individual estimates of the Phase II SOCs and lOCs. Those two costs are combined. Furthermore, the

AWWA estimate includes the total cost of complying with Phase II requirements, and the EPA estimate includes only the additional cost

(because of increased stringency over interim rules). The AWWA estimate of the additional cost of the Phase II requirements is $255.9

million.

b. If only the additional cost of the Phase II requirements is included, the AWWA total estimate is reduced to $2,273.6 million.

c. The D/DBP rule and the Enhanced Surface Water Treatment Rule were proposed under a negotiated rule-making process. The EPA cost

estimates, therefore, represent consensus numbers, and industry has not published independent estimates.

d. Proposed Stage II covers systems serving more than 10,000 people. Costs listed include Stage I costs.

e. Extended Stage II covers all systems. Costs listed include Stage I costs.

f. The proposed interim rule covers systems serving more than 10,000 people.
12 THESDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Figure 2.

EPA's Estimate of the Annual Costs of Complying

with Final and Proposed Rules Under the Safe

Drinking Water Act

Billions of 1992 Dollars

Final Rules Final Rules plus

Proposed

Initial Phase

Final Rules plus

Proposed

Extended Phase

SOURCE: Congressional Budget Office calculations based on

data from the Environmental Protection Agency.

NOTE: The proposed initial phase comprises the cost of the proposed rules in their initial stage. It takes in the radon rule,

Stage I of the rule for disinfectants and disinfection byproducts (D/DBP), and the rule for enhanced surface water treatment (ESWT) for large systems only. The proposed extended phase comprises the cost of the proposed rules once they are extended. It takes in the radon

rule, Stage II of the D/DBP rule for all systems, and the

ESWT rule for all systems.

mated cost of treating drinking water according to the

SDWA-specified standards (see Figure 2). Note,

however, that those rules could change significantly

before they are completed. In addition, the SDWA

requires the EPA to regulate 25 additional contaminants every three years.

The AWWA projects substantially higher costs

for one of the proposed radionuclides~radon~than

the EPA does. The AWWA has estimated that the

proposed standard for radon will cost $1.9 billion in

1992 dollars.2 EPA has estimated the annual cost to

be $280 million in 1992 dollars. Differences in assumptions about unit treatment costs are the primary

source of the difference in cost estimates.3 If the

AWWA's cost estimates for radon are used, the proposed rules would increase the cost of treating drinking water more than threefold in the proposed initial

stage and nearly fivefold in the proposed extended

stage.4

4.

RCG/Hagler Bailly, Estimating the National Costs of Compliance

with Drinking Water Regulations: A Users Guide and Research

Protocol, prepared for the American Water Works Association

(Boulder, Colo.: RCG/Hagler Bailly, February 1995), p. 10.

RCG/Hagler Bailly, The Cost of Compliance with the Proposed

Federal Drinking Water Standards for Radionuclides, prepared for

the American Water Works Association (Boulder, Colo.: RCG/

Hagler Bailly, October 1991), p. 6-2.

This estimate is based on a comparison with the EPA's estimate of

the cost of the existing rules.
Chapter Three

Household Costs of

Drinking Water Treatment

E

stimates of total national costs of treating

drinking water are useful, but it is also important to understand how those costs affect individual households. Using available data from the

Environmental Protection Agency, the Congressional

Budget Office estimated the percentage of households that are expected to fall into different categories of average annual costs. In addition, CBO analyzed available survey data on expenditures that municipalities made to comply with the Safe Drinking

Water Act.

Both the EPA data and the municipal expenditure

data revealed similar results. Over 80 percent of

households are expected to incur relatively modest

costs—less than $20 per year—to treat drinking water

according to the existing standards specified by the

SDWA. Furthermore, a comparison of actual expenditures of municipalities with the EPA's estimates for

systems serving more than 10,000 people did not reveal evidence that the EPA has greatly underestimated the actual cost of treatment. That comparison,

however, is limited, since the survey on municipal

expenditures was not designed to be representative at

the national level.

Although most households are expected to have

modest costs, some households could have much

greater costs-some in excess of $100 per year. The

households most likely to face such high costs are

ones that are served by small systems in need of

treatment. Finally, though per-household costs are

currently modest, they could rise significantly under

the proposed rules. Like the existing rules, the proposed rules are most likely to impose high average

household costs on small systems.

EPA Data on Costs at the

Household Level

Understanding the costs of mandates at the national

level, though important, provides little insight into

how households in communities of different sizes

and with different types of water systems might be

affected. Using data provided by the EPA, CBO

grouped households according to categories of potential annual drinking water treatment and monitoring

costs (see Figure 3). Although those data reflect the

EPA's expectations about the variation and range of

potential costs, the data are highly speculative. They

are based on numerous assumptions (described in

Chapter 2) and may ultimately prove to be quite different from actual costs. In addition, those costs reflect the total cost of treating drinking water according to the standards specified by the SDWA and do

not reflect the incremental cost of the SDWA. In

other words, the costs are not net of the cost of treatment measures that communities would have chosen

to undertake in the absence of federal standards. Finally, they are based on the assumption that all existing systems comply with the regulations. In reality,

some small systems may choose to merge with larger
14 THESDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Figure 3.

Distribution of Households by EPA Estimates of the Cost of Monitoring and Treating

Drinking Water According to Existing SDWA Standards

60

50

40

30

20

10

Percentage of Households

0-5 5-10 10-20 20-30 30-50 50-100

Average Annual Household Costs (In 1992 dollars)

100-200 200-3,040

SOURCE: Congressional Budget Office calculations based on data from the Environmental Protection Agency.

NOTE: EPA = Environmental Protection Agency; SDWA = Safe Drinking Water Act.

systems rather than undertake costly treatment (see

the discussion of restructuring in Chapter 5).

Nearly 70 percent of households would be expected to have a cost of less than $10 per year as a

result of monitoring and treating drinking water according to the standards specified by the existing

rules of the SDWA; 86 percent would be expected to

incur a cost of less than $20 per year. Less than 4

percent of the households would be expected to incur

a cost of more than $100 per year, and less than 1

percent could have costs greater than $300 per year.1

Those costs can be compared with an average expenditure for drinking water of $352 per household in

1991.2 Therefore, treatment is a relatively small

In calculating these costs, capital equipment was annualized over a

20-year period at a 7 percent interest rate. Monitoring costs were

averaged over an 18-year period. Actual monitoring costs will be

much higher in initial years than in later years. As discussed

above, the cost of meeting only a subset of the Phase II standards is

included. The EPA assumes that most water systems were already

complying with the voluntary public health guidelines that preceded passage of the SDWA. The costs therefore do not include

the cost of meeting the share of the Phase II standards that merely

codified those guidelines.

component of total expenditures for drinking water

for most households.

Although the EPA data suggest that the great majority of households would have a cost of less than

$20 dollars a year, they also show that some water

systems could incur substantial costs to meet the

standards specified in the SDWA. Households with

the highest compliance costs tend to be those served

by small water systems that need one or more types

of treatment. As indicated in Table 2 on pages 16

and 17, the compliance cost for the average household generally decreases significantly as the size of

the system increases for a given number of treatments and type of system (surface or ground). For

example, groundwater systems that serve from 25 to

100 people and require two types of treatment are

predicted to have an average household cost of $984.

That average cost falls to $337 for groundwater sysThis average expenditure is based on Bureau of the Census data.

See the discussion in Chapter 1.
CHAPTER THREE HOUSEHOLD COSTS OF DRINKING WATER TREATMENT 15

terns that serve from 100 to 500 people and also require two treatments.

In addition, per-household costs tend to be higher

for surface water systems than for groundwater systems. For instance, a groundwater system in the

smallest-sized category that needs one type of treatment is expected to have an average cost of $338. A

surface water system in the same size category that

also needs one treatment is expected to have an average cost of $577.

As Table 2 also reveals, a very small percentage

of the population is expected to fall into the highest

categories for average household costs. For instance,

0.01 percent of the population is served by a surface

water system that requires two types of treatment and

is expected to incur an average household cost of

$1,087.

Nevertheless, household costs, as shown in Figure 3 and Table 2, could increase significantly if the

proposed regulations were to go into effect. CBO

used information available from EPA documents to

develop estimates of the average per-household costs

for affected systems under three of the proposed rules

for categories of different system sizes (see Table 3

on pages 18 and 19). All three of the proposed rules

tend to impose higher average per-household costs on

small communities than on large communities. In

general, the percentage of the population that falls

into categories for very high compliance costs is

fairly small for each rule but not insignificant. Of the

population served by community water systems, 3

percent are expected to require treatment under the

Disinfectants/Disinfection By-Product (D/DBP) Rule

and are served by systems in which the average cost

of treatment per household for that rule exceeds

$100. Note that the full range of actual costs associated with the proposed rules will be greater than the

range of average costs for affected systems in each

size category.3 In addition, actual costs may differ

from the EPA's estimates.

Preferably, the cumulative cost of the existing

and proposed rules for individual systems should be

3. EPA documents do not provide sufficient data to indicate the full

range of costs estimated for the proposed rules (analogous to the

full range of costs for existing rules shown in Figure 5 on page 23).

examined. For example, are the specific systems that

are expected to incur high average per-household

costs under the existing rules also expected to incur

high costs under the proposed rules, or are those that

are likely to have high costs under the D/DBP rule

also likely to have high costs under the Enhanced

Surface Water Treatment (ESWT) Rule or the radon

rule? If systems are likely to incur high costs under

multiple rules, would one type of treatment technology be able to address both problems? EPA does not

currently have that type of information. Therefore,

the cumulative cost of existing and proposed rules

cannot be examined, and the full financial impact of

existing and proposed rules on individual systems is

unknown.

Survey Data on Local Costs

In an attempt to draw attention to the cost of unfunded federal mandates, the U.S. Conference of

Mayors and the National Association of Counties

each commissioned Price Waterhouse to survey their

members about their total costs for complying with

such requirements. Most of the mandates that cities

and counties were asked about were environmental

ones. (See Figure 4 on page 20 for a list of the mandates that the surveys covered.) CBO obtained those

survey results (referred to here as the municipal expenditure survey) and analyzed the expenditures that

cities and counties reported for 1993 and 1997 as

necessary to meet the standards specified by the

SDWA.

The Data: Quality Control

and Limitations

The municipal expenditure survey asked cities and

counties to report the expenditures they had made in

fiscal year 1993 to comply with each of the existing

rules (listed in Box 1) and an "other" mandate category. (Some cities and counties listed their costs for

proposed rules or for testing or research in the

"other" category.) In addition, the survey asked both

cities and counties to report the total expenditures

that they expected to make to comply with each existing rule for five additional years-1994 through
16 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Table 2.

Average Household Cost for Monitoring and Compliance, by Size of System and Number of Treatments

(In 1992 dollars)

Groundwater

Compliance Cost

Percentage of

Systemsb

Percentage of

Population0

Compliance Cost

Percentage of

Systems6

Percentage of

Population0

Compliance Cost

Percentage of

Systemsb

Percentage of

Population0

Compliance Cost

Percentage of

Systems5

Percentage of

Population0

Compliance Cost

Percentage of

Systems6

Percentage of

Population0

Compliance Cost

Percentage of

Systems6

Percentage of

Population0

Compliance Cost

Percentage of

Systems6

Percentage of

Population0

No Treatment3

171

18.47

0.37

45

10.26

0.86

18

3.10

0.78

8

3.13

1.98

4

1.48

2.93

2

0.75

4.08

1

0.28

3.46

1 Treatment

338

21.22

0.42

91

14.62

1.22

39

4.85

1.22

21

3.90

2.47

16

1.62

3.22

13

0.35

1.89

8

0.11

1.34

2 Treat- 3 Treatments ments

25 to 100 People

984 1,194

2.43 0.02

0.05 d

100 to 500 People

337 437

1.51 0.01

0.13 d

500 to 1,000 People

144 189

0.50 d

0.12 d

1,000 to 3,300 People

84 n.a.

0.36 n.a.

0.23 n.a.

3,300 to 10,000 People

50 n.a.

0.14 n.a.

0.28 n.a.

10,000 to 25,000 People

38 n.a.

0.03 n.a.

0.15 n.a.

25,000 to 50,000 People

n.a. n.a.

n.a. n.a.

n.a. n.a.

No Treatment3

171

0.15

d

45

0.26

0.03

18

0.02

d

9

0.03

0.02

4

0.17

0.36

2

0.20

1.09

1

0.12

1.41

Surface Water

1 Treatment

577

0.64

0.01

291

0.61

0.06

340

0.42

0.11

22

0.62

0.42

33

0.74

1.52

30

0.39

2.14

19

0.23

2.80

2 Treatments

1,087

0.64

0.01

467

0.36

0.04

225

0.59

0.15

130

0.67

0.45

90

0.66

1.36

42

0.17

0.96

31

0.10

1.24

3 Treatments

2,402

0.03

d

1,009

0.01

d

458

0.01

d

306

0.02

0.01

188

0.02

0.05

143

0.01

0.04

50

d

0.03

(Continued)
CHAPTER THREE HOUSEHOLD COSTS OF DRINKING WATER TREATMENT 17

Table 2.

Continued

Groundwater

Compliance Cost

Percentage of

Systems6

Percentage of

Population0

Compliance Cost

Percentage of

Systems6

Percentage of

Population0

No Treatment3

1

0.02

0.49

1

0

0.12

1 Treatment

5

0.05

1.09

4

0.02

0.65

2 Treatments

50,000 to

n.a.

n.a.

n.a.

75,000 to

n.a.

n.a.

n.a.

3 Treatments

75,000 People

n.a.

n.a.

n.a.

100,000 People

n.a.

n.a.

n.a.

No Treatment3

1

d

0.09

1

d

1.11

Surface Water

1 Treatment

5

0.10

2.02

13

0.07

2.01

2 Treatments

21

0.11

2.31

24

0.03

0.90

3 Treatments

84

d

0.09

n.a.

n.a.

n.a.

100,000 to 500,000 People

Compliance Cost

Percentage of

Systems6

Percentage of

Population0

Compliance Cost

Percentage of

Systems6

Percentage of

Population0

Compliance Cost

Percentage of

Systems6

Percentage of

Population0

e

0.03

1.80

e

d

d

n.a.

n.a.

n.a.

4

0.03

2.26

3

d

0.69

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

500,000 to

n.a.

n.a.

n.a.

More than

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

1 Million People

n.a.

n.a.

n.a.

1 Million People

n.a.

n.a.

n.a.

e

0

4.22

e

d

3.89

e

d

4.00

12

0.12

8.54

5

0.03

6.15

4

0.01

7.00

27

0.06

3.93

10

0.01

2.27

9

d

2.00

154

d

0.20

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

SOURCE: Congressional Budget Office based on data from the Environmental Protection Agency.

NOTE: n.a. = not applicable (no systems fell into this category).

a. Costs in the no-treatment category represent monitoring costs only.

b. Indicates the percentage of community water systems and nontransient, noncommunity water systems that are expected to fall into this

category for average household compliance cost.

c. Indicates the percentage of the population served by community water systems or nontransient, noncommunity water systems that are

expected to fall into this category for average household compliance cost.

d. Less than 0.005 percent of the systems or population was expected to fall into these cost categories.

e. Estimated costs for this category were less than $1.
18 THESDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Table 3.

Average Household Cost Under the Proposed Rules

25 to 100 to

100 500

by Size of Affected System (In

System Size (Peoole served)

500 to 1,000 to

1,000 3,300

1992 dollars)

3,300 to 10,000 to

10,000 25,000

Disinfectants/Disinfection By-Product Rule

Average Cost per

Household3

Percentage of

Population"

Cumulative

Percentage of

Population0

Average Cost per

Household8

Percentage of

Population"

Cumulative

Percentage of

Population0

223 204

0.02 0.07

0.02 0.09

Enhanced Surface

445 250

0.01 0.04

0.01 0.05

199 164

0.21 0.69

0.30 0.99

Water Treatment Rule

212 72

0.16 0.62

0.21 0.83

186 57

2.10 2.81

3.09 5.91

45 29

2.15 2.91

2.98 5.89

Radon Rule

Average Cost per

Household"1

Percentage of

Population"

Cumulative

Percentage of

Population0

260 99

0.30 1.00

0.30 1.30

47 26

0.51 1.15

1.81 2.96

17 15

1.12 1.15

4.08 5.24

(Continued)
CHAPTER THREE HOUSEHOLD COSTS OF DRINKING WATER TREATMENT 19

Table 3.

Continued

System Size (People served)

25,000 to 50,000 to 75,000 to 100,000 to 500,000 to More than

50,000 75,000 100,000 500,000 1 Million 1 Million

Disinfectants/Disinfection By-Product Rule

Average Cost per

Household3

Percentage of

Population5

Cumulative

Percentage of

Population0

Average Cost per

Household3

Percentage of

Population5

Cumulative

Percentage of

Population0

Average Cost per

Householdd

44

3.79

40

3.11

36

3.14

31

10.10

23

4.07

9.96

10

20

3.26

17

3.44

13.22 16.66

Radon Rule

9 8

18

11.11

27.78

27

10.30

16

11.51

39.29

87

26

7.72

9.70 12.81 15.96 26.06 36.36 44.08

Enhanced Surface Water Treatment Rule

15

7.08

46.37

Percentage of

Population5

Cumulative

Percentage of

Population0

0.84 0.38 0.21 0.87 0.30 0.14

6.08 6.46 6.67 7.54 7.83 7.97

SOURCE: Congressional Budget Office based on data from the Environmental Protection Agency.

a. Calculated as the total cost for that size category divided by the number of affected systems in the size category divided by the median

population in the category multiplied by the average household size (2.6 people). All capital costs were annualized over 20 years using a 7

percent interest rate.

b. Percentage of population that is served by affected systems in that size category.

c. Cumulative percentage of population served by affected systems in the stated size category or smaller-sized categories.

d. Calculated by the EPA based on the average flow per system size category and an assumption of 100,000 gallons used per household per

year.
24 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Figure 6.

Distribution of Households by Average Per-Household Cost of Treating Drinking Water

According to Existing SDWA Standards: 1997 Municipal Expenditure Survey Data Versus EPA Data

Percentage of Households

Municipal Expenditure IS pPA nata

Survey Data

 trM uaia

5-10 10-20 20-30 30-50

Average Annual Household Costs (In 1992 dollars)

50-100 100-699

SOURCE: Congressional Budget Office based on data from the Environmental Protection Agency and the municipal expenditure survey

commissioned by the U.S. Conference of Mayors and the National Association of Counties.

NOTES: SDWA = Safe Drinking Water Act.

The figure compares EPA data with 1997 data from the municipal expenditure survey for the subset of systems serving more than

10,000 people.

The Results

The 1997 costs reported in the municipal expenditure

survey for systems serving more than 10,000 people

appear somewhat higher, but not radically different

from, the costs indicated by EPA data for like-sized

systems (see Figure 6). Based on the municipal expenditure survey, 91 percent of households are expected to incur an average annual cost of less than

$30 in 1997, whereas the EPA estimates that 95 percent of households will have costs of less than $30.

Moreover, 66 percent of households would incur annual costs of less than $10 based on municipal expenditure data as opposed to 82 percent based on

EPA data.

The available data do not provide evidence of

any extreme differences in local and national estimates of the total cost of treating drinking water.

That observation, however, must be balanced by a

recognition of the considerable limitations of the municipal expenditure data, particularly that the survey

was not designed to be representative at the national

level.
Chapter Four

Placing SDWA Cost Estimates

in Context

E

xamining the magnitude of the cost of treating

drinking water is useful, but it is important to

place those costs in an appropriate context as

well. In the following discussion, the Congressional

Budget Office compares the cost estimates for drinking water treatment with available data on benefits.

That comparison reveals that costs relative to benefits vary widely among contaminants and system

sizes and in some cases appear extremely large-for

example, more than $4 billion per cancer case

avoided. In addition, CBO considers treatment costs

relative to other costs facing drinking water systems.

Finally, CBO compares local estimates of the cost of

complying with the Safe Drinking Water Act with

local measures of fiscal capacity. That comparison

reveals that the cost of treating drinking water according to the standards specified under the existing

rules of the SDWA is expected to impose a modest

fiscal burden on most municipalities.

Costs Relative to Benefits

Whether costs of a regulation are "too large" or not

depend, of course, on the benefits that result from the

regulation. Regulations are generally thought to be

too costly when the cost of complying with them exceeds the value of the benefits received. However,

measuring costs and benefits can be very difficult.

Information on the benefits associated with the

SDWA is limited. CBO used information available

in Environmental Protection Agency documents and

applied a consistent method to calculate the cost per

cancer case avoided from several carcinogens that are

regulated, or proposed to be regulated, under the

SDWA (see Table 4). The cost per cancer case

avoided varies enormously among contaminants. For

example, the cost per cancer case avoided averaged

for all water systems varies from $0.5 million under

the standard for the pesticide ethylene dibromide and

co-contaminants to $4.3 billion for regulating the

pesticides atrazine and alachlor under the Synthetic

Organic Compounds (SOCs) Rule.

In addition, the cost per cancer case avoided generally declines (sometimes drastically) as the size of

the system increases. For example, the cost per cancer case avoided as a result of regulating 1,2 dichloropropane falls from $135 million for the category for the smallest-sized systems to $13.2 million

for systems serving between 10,000 and 25,000 people. That decline primarily takes place because unit

treatment costs decrease as system size increases.

Two of the proposed regulations are expected to

reduce the risk of cancer: the Disinfectants/Disinfection By-Products Rule and the Radionuclides

Rule. However, the EPA is uncertain about how

much the risk of cancer would be reduced by the proposed D/DBP rule. Based on differing estimates

about the baseline cancer risk associated with disinfection by-products, the EPA estimates that the average cost per cancer case avoided ranges between

$867,000 and $8.67 billion in the initial stage of the
26 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Table 4.

Cost per Health Effect Avoided for Selected Rules and Contaminants (In millions of 1992 dollars)

System Size (People served)

Rule/Contaminant

Radionuclides (Proposed)

Radon: MCL = 300 pCi/L

Cases avoided (Per year)

Cost per case avoided

Radium-226: MCL = 20 pCi/L

Cases avoided (Per year)

Cost per case avoided

Radium-228: MCL = 20 pCi/L

Cases avoided (Per year)

Cost per case avoided

Adjusted gross alpha

emitters: MCL = 15 pCi/L

Cases avoided (Per year)

Cost per case avoided

Volatile Organic Compounds

(All combined)

Cases avoided (Per year)

Cost per case avoided

Synthetic Organic Compounds

EDB and co-contaminants

Cases avoided (Per year)

Cost per case avoided3

1 ,2 dichloropropane

Cases avoided (Per year)

Cost per case avoided3

Atrazine and alachlor

Cases avoided (Per year)

Cost per case avoided

25 to

100

8.41

8.9

0.000485

663.1

0.00016

754.2

0.001253

1,047.8

0.21

59.0

2.223

2.2

0.0054

135.5

n.a.

n.a.

100 to 500 to

500 1 ,000

Carcinogens

25.74 6.26

4.0 5.5

0.001306 0.001047

255.4 80.8

0.000492 0.010422

245.7 91.4

0.01 0.02

173.3 191.6

0.55 0.62

18.3 10.0

7.108 7.314

0.8 0.5

0.0166 0.017

47.6 25.7

n.a. n.a.

n.a. n.a.

1 ,000 to

3,300

13.01

2.7

0.001458

170.8

0.019338

62.8

0.05

145.4

1.45

5.3

15.369

0.4

0.0358

19.7

n.a.

n.a.

3,300 to

10,000

6.6

1.9

0.37

22.1

0.05

40.9

0.04

115.5

2.83

2.6

20.167

0.4

0.047

18.1

n.a.

n.a.

10,000 to

25,000

6.23

1.5

0.87

12.0

0.05

36.8

0.19

63.7

3.66

1.5

19,652

0.3

0.0458

13.2

n.a.

n.a.

Noncarcinogens (Acute effects)

Surface Water Treatment Rule

Cases avoided (Per year)

Cost per case avoided

(In thousands of dollars)

222

161.1

925 1 ,972

32.3 12.2

5,423

7.5

11,882

6.8

12,517

3.9

(Continued)
CHAPTER FOUR PLACING SDWA COST ESTIMATES IN CONTEXT 27

Table 4.

Continued

Rule/Contaminant

Radionuclides (Proposed)

Radon: MCL = 300 pCi/L

Cases avoided (Per year)

Cost per case avoided

Radium-226: MCL = 20 pCi/L

Cases avoided (Per year)

Cost per case avoided

Radium-228: MCL = 20 pCi/L

Cases avoided (Per year)

Cost per case avoided

Adjusted gross alpha

emitters: MCL = 15 pCi/L

Cases avoided (Per year)

Cost per case avoided

Volatile Organic Compounds

(All combined)

Cases avoided (Per year)

Cost per case avoided

Synthetic Organic Compounds

EDB and co-contaminants

Cases avoided (Per year)

Cost per case avoided3

1 ,2 dichloropropane

Cases avoided (Per year)

Cost per case avoided3

Atrazine and alachlor

Cases avoided (Per year)

Cost per case avoided

Surface Water Treatment Rule

Cases avoided (Per year)

Cost per case avoided

(In thousands of dollars)

Svstem Size (People served)

25,000 to 50,000 to 75,000 to 1 00,000 to

50,000 75,000 100,000 500,000

500,000 to

1 Million

More than

1 Million

Average for

All Systems

Carcinogens

4.64

1.4

0.65

13.4

0.03

41.5

0.19

56.8

3.24

1.1

0

b

0

b

n.a.

n.a.

12,236

2.8

2.44

1.3

0.34

12.3

0.73

1.4

0.1

13.5

4.11

1.2

0.58

12.5

0.01 0.004399 0.029058

46.2

0.11

62.3

1.63

1.1

0

b

0

b

n.a.

n.a.

Noncarcinogens

9,819

2.7

16.5

0.08

12.4

0.79

1.1

0

b

0

b

n.a.

n.a.

(Acute effects)

10,669

3.3

35.1

0.32

13.2

6.12

0.8

0

b

0

b

n.a.

n.a.

7,970

10.7

1.3

1.4

0.18

16.6

0.00706

75.7

0.18

8.7

3.04

0.8

0

b

0

b

n.a.

n.a.

5,296

10.0

0

a

0

a

0

0

0.22

0.6

3.85

1.0

0

b

0

b

n.a.

n.a.

4,263

22.8

79.46

3.6

3.1

14.2

0.210914

45.5

1.4

39.5

27.99

2.4

71.833

0.5

0.1676

24.6

0.0024

4,258.0

83,194

7.1

SOURCE: Congressional Budget Office based on data from the Environmental Protection Agency.

NOTES: All capital costs were annualized over a 20-year period using a 7 percent interest rate.

MCL = maximum contaminant level; pCi/L = picocuries per liter; EDB = ethylene dibromide; n.a. = not available.

a. Monitoring costs were not included in these calculations.

b. Not applicable.
28 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

rule. In the extended stage, the incremental cost per

cancer case avoided is expected to be between

$840,000 and $19 billion.1

In some cases, the proposed standards for radionuclides may result in extremely high costs per cancer case avoided. For example, the standard proposed for adjusted gross alpha emitters (which is primarily designed to reduce the risk of exposure to the

radionuclide polonium-210) would cost more than $1

billion per cancer case avoided for systems in the

smallest-sized category.

Although considering the costs per cancer case

avoided is useful, it is important to realize that those

estimates are highly uncertain. They are based on the

best available data, but those data are limited. For

example, the occurrence data used in estimating the

cost per cancer case avoided for the SOCs are not

based on a nationwide survey. Those data indicate

where and at what levels a contaminant is expected to

be found. A nationwide estimate of occurrence was

obtained by piecing together many sources of information (none of which was designed to be representative at the national level) and by using considerable

judgment.2 Given that uncertainty, the actual costs

per cancer case avoided could either exceed or fall

below the estimates provided.

Unfortunately, CBO does not have sufficient information to provide ranges—which would account

for the uncertainty-around most of the estimates of

costs per cancer case avoided.3 However, unless the

uncertainty is great enough to reduce the cost per

cancer case avoided by a factor of 10 or more, the

Environmental Protection Agency, Regulatory Impact Analysis of

Proposed National Primary Drinking Water Regulations: Disinfectants/Disinfection By-Products Rule (May 1994), p. 5-7.

Environmental Protection Agency, Regulatory Impact Analysis of

Proposed National Primary Drinking Water Regulations for Synthetic Organic Compounds (April 1989), p. 1-2.

The one exception to this situation is radon. Based on EPA data,

the number of cancer cases avoided because of the proposed standard for radon could range from 37 to 243. See Environmental

Protection Agency, Report to the United States Congress on Radon

in Drinking Water (February 1994), p. 7-14. That range of cancer

cases avoided results in costs per cancer case avoided (averaged for

all systems) that range from $7.6 million to $1.1 million. If the

American Water Works Association's estimate of the annual cost of

meeting the radon standard is used, then the cost per cancer case

avoided would lie between $52 million and $7.9 million.

cost per cancer case avoided for some contaminants—

or for some categories of system sizes—will be

greater than the amount that is generally thought of

as reasonable. For example, two reviews of studies

that measure the value that individuals place on an

avoided statistical death found that the values ranged

between $0.6 million and $10.9 million in 1992

dollars.4

Extremely large costs per cancer case avoided,

however, would not necessarily result in extremely

large cost savings if the standard was eliminated. For

example, although the cost per cancer case avoided

for the standard for atrazine and alachlor is estimated

at more than $4 billion, the total cost of meeting that

standard (for all systems) is estimated at $10.2 million. The high cost per cancer case avoided in this

case is the result of the extremely small number of

cases avoided (0.0024 per year) rather than a very

high level of expenditures.

Noncarcinogens can be grouped into two types of

health effects-acute and chronic sublethal. Acute

adverse health effects addressed by drinking water

regulations fall into two major categories: those

from exposure to microbial contaminants, such as

giardia and cryptosporidium, and those from exposure to chemical substances.5

 One of the main acute

health effects of concern from exposure to microbial

contaminants is gastrointestinal disorders, such as

gastroenteritis.6 The symptoms may range from mild

See Ann Fisher, Loraine G. Chestnut, and Daniel M. Violette, "The

Value of Reducing Risks of Death: A Note on New Evidence,"

Journal of Policy Analysis and Management, vol. 8, no. 1 (Winter

1989), pp. 88-100; and W. Kip Viscusi, "Mortality Effects of Regulatory Costs and Policy Evaluation Criteria," Rand Journal of Economics, vol. 25, no. 1 (Spring 1994), pp. 94-109.

In addition, recent research has examined whether regulations that

reduce risks directly (for example, by decreasing the level of contaminants in drinking water) can cause offsetting increases in risk

by lowering the income that individuals have to spend on health.

This research indicates that regulation that costs more than $50

million per life saved can have an adverse effect on mortality because of the offsetting effect. See Viscusi, "Mortality Effects of

Regulatory Costs and Policy Evaluation Criteria."

Environmental Protection Agency, Total Benefits and Total Costs

Associated with Implementation of the 1986 Amendments to the

Safe Drinking Water Act (March 1990), p. 2-8.

Gastroenteritis is an inflammation of the stomach and intestine. It

can result in loss of appetite, nausea, vomiting, cramps, and diarrhea.
CHAPTER FOUR PLACING SDWA COST ESTIMATES IN CONTEXT 29

to severe and incapacitating and generally last from

one to four weeks. In some cases, gastrointestinal

disorders caused by microbial exposure may result in

death, particularly for individuals with weakened immune systems. The Surface Water Treatment Rule is

aimed at avoiding exposure to microbial contaminants in surface water systems.

As is the case with carcinogens, the cost per

avoided acute health effect varies by system size under the Surface Water Treatment Rule (SWTR), with

the largest costs incurred by the smallest systems (see

Table 4). Unlike the carcinogens that were examined, the lowest cost per case avoided occurs in

medium-sized systems. In the original analysis of

the SWTR, the estimated economic cost associated

with waterborne giardiasis was based on a study of

costs incurred during an outbreak of waterborne giardiasis in 1983 that occurred in Scranton, Pennsylvania. That study estimated that the medical cost and

the cost of time lost from work were in the range of

$1,678 to $2,532 per case (measured in 1992 dollars).7

 If those medical costs and lost wages are used

as a measure of the benefits of avoided incidences of

gastroenteritis obtained by waterborne giardia, the

cost per case avoided exceeds the benefits in all categories of system sizes.

The proposed Enhanced Surface Water Treatment Rule is designed to provide increased protection from infection resulting from microbial contaminants. The general public's concern about the

risk from microbial contaminants increased significantly following an outbreak of waterborne disease

in Milwaukee, Wisconsin, in 1993. That outbreak

was caused by the presence of cryptosporidium. As

a result of the outbreak, 400,000 people suffered

stomach upsets and diarrhea and 104 people died.

Although the Milwaukee incident drew public attention to the threat posed by cryptosporidium, the

EPA's analysis of the costs and benefits of the proposed ESWT rule is based on the extent to which it

will result in the control of giardia, not cryptosporidium.

The EPA has focused on giardia because severe

deficiencies in data (resulting, in part, from analytic

problems in measuring the presence of cryptosporidium) limit the EPA's ability to evaluate treatment

techniques that might control cryptosporidium or to

predict the extent to which the proposed ESWT rule

would decrease the presence of cryptosporidium.

The EPA is currently working on an analytic method

that will allow water systems to detect the presence

of cryptosporidium. In addition, it has proposed a

rule on collecting information (the Information Collection Rule) that will provide much better data on

the presence of microbial contaminants and hence

the ultimate costs and benefits of the ESWT rule.

Based on the limited data that are currently

available, the EPA estimates that the initial phase of

the rule (which will apply only to systems serving

more than 10,000 people) will cost $391 million per

year and reduce the number of cases of giardia infection by 400,000 to 500,000.8

 That range in the

number of cases of giardia infections avoided results

in an average cost of between $978 and $782 per

case avoided. Based on that information, the average cost per case avoided by the proposed rule

would be less than the measures of benefits described above.

The proposed ESWT rule (in the initial phase) is

expected to result in a more favorable benefit-to-cost

ratio than the SWTR for two reasons. First, given

current information, the SWTR appears to have

been based on an underestimate of the extent of microbial risk. That underestimate would, therefore,

result in an overestimate of the cost per case of waterborne disease avoided. Second, microbial risks

may increase from treatment modifications undertaken to comply with tighter standards for disinfection by-products.9

 It is important to understand

that the measures of cost per case avoided in both

the SWTR and the ESWT rule are based on limited

data on the actual incidence of waterborne diseases.

In both cases, incidence is predicted using samples

that were not designed to represent the nation as a

whole.

Environmental Protection Agency, Regulatory Impact Analysis for

the National Primary Drinking Water Regulations: Interim Enhanced Surface Water Treatment Rule (May 25, 1994), p. 1-7.

8. Ibid., pp. 1-3 to 1-7.

9. Ibid.
30 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Only a few chemical contaminants are regulated

based primarily on their acute effects-for example,

nitrate, nitrite, copper, and sulfate. Only sulfate,

however, is estimated to be present at levels for

which establishing a maximum contaminant level

(MCL) will result in avoiding cases of acute adverse

effects. The primary adverse effect associated with

sulfate is diarrhea. That effect appears to be transient: exposed individuals become acclimated to

high sulfate levels over time.10 The EPA does not

report the cost per avoided acute health effect expected under the proposed regulation for sulfate because of inadequate data on the relationship between

exposure and incidence of diarrhea.11

The EPA has been unable to develop estimates of

"cases avoided" for contaminants regulated on the

basis of chronic sublethal health effects. The primary reason cited for the lack of such estimates is the

"absence of accepted dose-response relationships to

allow for the determination of the number of cases of

a particular adverse health effect caused by different

exposure levels."12 As an alternative, the EPA has

examined the number of people whose exposure will

be reduced from a level above an MCL to a level in

compliance with an MCL as a result of a regulation.

The EPA has examined the cost per reduction in exposure to three contaminants-cadmium, fluoride,

and lead.13 That examination revealed large differences in the cost of reductions in exposure among

contaminants and among different-sized systems.

Evaluating the cost of reduced exposure and

comparing such costs among contaminants is difficult, however, for two reasons. First, the reduction in

adverse health effects that will result from decreased

exposure is unknown. Second, the types of adverse

health effects from different contaminants vary

widely. For example, the major chronic health effect

10. Environmental Protection Agency, Total Benefits and Total Costs

Associated with Implementation of the 1986 Amendments to the

Safe Drinking Water Act, p. 2-8.

11. Environmental Protection Agency, Regulatory Impact Analysis for

the National Primary Drinking Water Regulations: Sulfate (August 31, 1994).

12. Environmental Protection Agency, Total Benefits and Total Costs

Associated with Implementation of the 1986 Amendments to the

Safe Drinking Water Act, p. 2-5.

13. Ibid., p. 5-3.

from exposure to cadmium involves the kidney,

whereas exposure to lead is particularly problematic

for children and can result in numerous effects, including delayed neurological and physical development, impaired cognitive development, adverse reproductive effects, and interference with vitamin D

metabolism.14 Because of the inability to attach

meaningful evaluations to costs per reduction in exposure, those data are not presented.

Ideally one should compare the incremental benefits of a federal mandate with the incremental costs.

In other words, the costs associated with each treatment that communities would not have undertaken in

the absence of federal drinking water standards

would be compared with the benefits of that treatment. Unfortunately, available data do not permit

CBO to make such a comparison. Given the extremely high cost per cancer case avoided for some

contaminant and size categories, however, some of

those treatments would probably never have been

undertaken without federal requirements.

The large variation in costs relative to benefits

among different-sized systems and contaminants is

not surprising given the process by which the EPA

sets drinking water standards. First, the EPA establishes maximum contaminant level goals (MCLGs).

"MCLGs are nonenforceable health-based goals

which are set at the level at which no known or anticipated adverse effects on the health of persons occur

and which allows an adequate margin of safety."15

Next the SDWA directs the EPA to set the enforceable MCL as close to the MCLG as is feasible, "taking costs into consideration." The legislative history

of the SDWA, however, directs the EPA to base feasibility on what is affordable to large systems.16

Given that large systems generally have lower unit

treatment costs than small systems, that process will

inevitably result in smaller systems' having higher

costs per health effect avoided than larger systems

do. In addition, although the SDWA directs the EPA

to take costs into account in determining the feasibil14. Ibid., p. 2-6.

15. Environmental Protection Agency, Technical and Economic Capacity of States and Public Water Systems to Implement Drinking

Water Regulations (September 1993), p. 22.

16. Ibid.
CHAPTER FOUR PLACING SDWA COST ESTIMATES IN CONTEXT 31

ity of meeting a standard, it does not direct the EPA

to weigh the cost of meeting a standard against the

anticipated benefits.

Treatment Costs Relative to

Other Cost Factors

As discussed above, meeting drinking water standards may impose a large per-household cost on

some systems, particularly small systems. But treatment is only one of the multiple costs that water systems bear. According to the National Regulatory

Research Institute, the need to replace and upgrade

an aging water delivery system and the need to meet

growing water demand associated with population

growth and economic development are expected to

be the primary factors increasing the cost of water in

the foreseeable future.17 Based on trends established

during the 1971-1991 period, CBO projected that

capital expenditures by drinking water systems over

the 1992-2012 period would total $220 billion in

1992 dollars.18 In comparison, the EPA estimates

that $8.8 billion in 1992 dollars in capital expenditures will be necessary to meet the standards set by

the existing SDWA requirements. However, the cost

of proposed rules could add more than $17 billion in

additional capital requirements based on the EPA's

estimates and $24.3 billion based on the American

Water Works Association's estimates.19

As discussed above, the EPA estimates that the

annual cost (for both capital and operations and

maintenance) of meeting the standards set by the existing SDWA regulations will be $1.4 billion. The

AWWA projects that cost to be $2.3 billion (or $4.1

billion, if the costs of meeting all the Phase II standards are included). Those costs can be compared

with total national expenditures of $28.6 billion in

1991 (measured in 1992 dollars) for providing community drinking water-that is, they represent 5 percent to 8 percent of total expenditures on drinking

water. The EPA's estimate of the total annual cost of

meeting existing and proposed standards (in their

extended form) is $5.4 billion, or 19 percent of total

community drinking water expenditures in 1991.

The AWWA's estimate of the cost of meeting

existing and proposed standards is $8 billion, or 28

percent of total drinking water expenditures in

1991.20 Because the cost of providing drinking water

is moving upward over time, the actual percentage of

total expenditures required to treat drinking water

according to SDWA standards should be less than

indicated here. For example, based on current trends,

total expenditures on drinking water would be $34

billion in 2001.21 Based on that estimate, the cost of

treating drinking water according to the levels specified by existing and proposed standards (in their extended form) would be 16 percent of total drinking

water expenditures based on EPA data and 23 percent

based on AWWA data.

17. National Regulatory Research Institute, Meeting Water Utility Revenue Requirements: Financing and Ratemaking Alternatives (November 1993), p. 13.

18. Projections were made based on Bureau of the Census data on capital expenditures by publicly owned community water systems.

CBO increased the data by 19 percent to account for the expenditures of privately owned community water systems. That adjustment was based on information from the EPA's Federal Reporting

Data System and is consistent with the approach used by the Environmental Protection Agency.

19. The EPA estimates that the proposed radon rule will result in $1.6

billion in additional capital requirements. In addition, it estimates

the capital requirements associated with the D/DBP rule and the

ESWT rule to be $11.2 billion and $4.5 billion, respectively. The

AWWA estimates that the radon rule will result in $8.6 billion in

additional capital expenditures. The D/DBP rule and the ESWT

rule were developed using a negotiated rule-making process in

which the AWWA and EPA worked together. Consequently, the

AWWA did not develop independent estimates.

20. That figure includes the AWWA's estimate of complying with all

of the new standards established following the 1986 amendments

($2.3 billion), the AWWA's estimate of the cost of the proposed

radon rule ($1.9 billion), the joint EPA and AWWA estimate of the

ultimate annual cost of the D/DBP rule ($2.6 billion) and the

ESWT rule ($0.9 billion), the EPA's estimate of the annual cost of

the proposed Sulfate Rule ($80 million), and the EPA's estimates of

the cost of the proposed Radionuclides Rule other than for radon

($191 million).

21. The $34 billion estimate was obtained by assuming that total expenditures continue to rise at the rate established over the 1957-

1991 period.
32 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Local Cost Estimates of the

Safe Drinking Water Act

Compared with

Fiscal Capacity

Identifying costs on a per-household basis is one step

toward understanding the magnitude of the burden

that SDWA regulations place on local governments

and their residents. An additional step is to place

those costs in the context of the fiscal burden that it

places on the community.

Critics of unfunded mandates argue that they impose too large a fiscal burden on local communities.

The measure of fiscal burden that has been frequently

used to make this argument, however, is misleading.

Many case studies of unfunded mandates compare

the cost of complying with environmental requirements to the municipality's budget, either total budget or locally raised revenues.

Yet both of those measures can be deceptive.

The types of services that municipalities provide vary

greatly and, therefore, so do the sizes of their budgets

and the amount of revenue that they collect. For example, some cities fund elementary and secondary

schools, and others do not. Some operate hospitals,

and others do not. The share of a budget (or of local

revenues) that complying with a mandate requires

may say more about the type of services that a municipality provides than about the cost of compliance.

Municipalities that spend a higher share of their budget to comply with a mandate do not necessarily have

a larger burden than those that spend a smaller share

of their budget. They may just provide fewer other

services.

Comparing cost estimates with a municipality's

"fiscal capacity" rather than its spending or revenues

is a better indicator of burden. Measures of fiscal

capacity should ideally reflect the municipality's potential to raise revenue, rather than the amount of

revenue that it actually raises. Municipalities have

the potential to raise revenue from both residents and

nonresidents. The potential to raise revenue from

residents is based on the residents' income or assessable wealth. The potential to raise revenue from nonresidents depends on the municipalities' ability to tax

nonresidents through such mechanisms as business

property taxes, local sales taxes, and earnings taxes.22

Over 95 percent of all public water systems finance their system by user fees, or direct charges to

their customers, and nearly all systems with more

than 10,000 customers do so.23 Although nearly all

systems rely on user fees as a source of revenue,

some systems may supplement that revenue by general tax revenue. Unfortunately, data on how much

supplementing occurs are not available.

Because systems may use a combination of user

fees and property taxes to finance SDWA expenses,

CBO examined two alternative measures of fiscal

burden as a means of placing the costs reported by

the municipal expenditure survey in context. The

first measure looks at the per-household cost of treating drinking water according to SDWA standards

relative to median household income. That measure

reflects the municipality's ability to raise revenue

through user fees. The second measure of fiscal burden looks at the per-household cost of treating drinking water according to SDWA standards relative to

the average residential property values in the municipality. That measure may reflect not only residents'

wealth but also the municipality's potential to tax

nonresidents.24

For 1993, none of the municipalities included in

the subset of municipal expenditure survey respondents used by CBO reported per-household SDWA

compliance costs for the existing rules that exceeded

1 percent of median household income. Over 93 per22. Helen Ladd and John Yinger, America's Ailing Cities: Fiscal

Health and the Design of Urban Policy (Baltimore: Johns Hopkins

University Press, 1991).

23. Environmental Protection Agency, Final Descriptive Summary:

1986 Survey of Community Water Systems (October 1987), p. 33,

and American Water Works Association, Water Industry Data Base

(Washington, D.C.: AWWA, 1992), p. 65, indicate that all systems

that serve more than 10,000 customers charge user fees. However,

neither survey covers all systems in that size category.

24. See Helen Ladd, Andrew Reschovsky, and John Yinger, "City Fiscal Condition and State Equalizing Aid: The Case of Minnesota,"

in National Tax Association/Tax Institute of America, Proceedings

of the Eighty-Fourth Annual Conference on Taxation, 1991 (Columbus, Ohio: NTA-TIA, 1992), pp. 42-49.
CHAPTER FOUR PLACING SDWA COST ESTIMATES IN CONTEXT 33

Figure 7.

Distribution of Municipalities by Average Per-Household Cost of Treating Drinking Water

According to Existing SDWA Standards as a Share of Median Household Income

Percentage of Municipalities

0.00001 to 0.005 0.005 to 0.01 0.01 to 0.05 0.05 to 0.1 0.1 to 0.5

Percentage of Median Household Income

0.5 to 1.0 1.0 to 3.5

SOURCE: Congressional Budget Office calculations based on data from the Environmental Protection Agency, the Bureau of the Census, and

the municipal expenditure survey commissioned by the U.S. Conference of Mayors and the National Association of Counties.

NOTES: SDWA = Safe Drinking Water Act.

The figure compares 1993 and 1997 expenditure data from the municipal expenditure survey with 1990 data on median household

income from the Bureau of the Census.

cent of municipalities had per-household costs that

were less than 0.1 percent of median household income (see Figure 7). For 1997, two municipalitiesor 1.2 percent of the 166 municipalities for which

data were available—projected per-household costs of

complying with existing rules that exceeded 1 percent of median household income. The remaining

communities reported per-household costs that were

less than 1 percent of median household income.

Furthermore, over 87 percent of communities reported costs that were less than 0.1 percent of their

median household income.

For 1993, over 99 percent of the municipalities

reported per-household SDWA compliance costs for

the existing rules that were less than 0.1 percent of

their average residential property value (see Figure

8). For 1997, the number of municipalities projecting a cost that was less than 0.1 of their average residential property value fell to 96 percent. One municipality (0.6 percent of the 166 municipalities for

which data were available) projected a cost that was

1.8 percent of its average residential property value.

The cost of meeting SDWA standards relative to

median household income is a useful summary measure of fiscal burden for a municipality. It does not

depict, however, the full distribution of burden experienced by individual households. Because some

households may have income levels that are well below the median, increases in user fees will place a

larger burden on them than the summary statistic indicated. Similarly, households with incomes that are

above the median value will experience a fiscal impact that is less than that indicated by the summary

statistic. Costs that are passed on to households in

the form of property taxes do not share that characteristic because property taxes are levied as a percentage; in short, households with lower property

values will pay a smaller amount. Because of that

difference, the share of drinking water treatment

costs that are passed on to households in the form of
34 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Figure 8.

Distribution of Municipalities by Average Per-Household Cost of Treating Drinking Water

According to Existing SDWA Standards as a Share of Average Residential Property Value

Percentage of Municipalities

0.00001 to 0.001 0.001 to 0.005 0.005 to 0.01 0.01 to 0.05 0.05 to 0.1 0.1 to 0.5

Percentage of Average Residential Property Value

0.5 to 1.8

SOURCE: Congressional Budget Office calculations based on data from the Environmental Protection Agency, the Bureau of the Census, and

the municipal expenditure survey commissioned by the U.S. Conference of Mayors and the National Association of Counties.

NOTES: SDWA = Safe Drinking Water Act.

The figure compares 1993 and 1997 expenditure data from the municipal expenditure survey with 1990 data on average residential

property values from the Bureau of the Census.

user fees will be more regressive-that is, they will

affect low-income households proportionately more

than high-income households-than costs that are

passed on to households through residential property

taxes.
Chapter Five

Flexibility Under the

Safe Drinking Water Act

A

factor that led to the passage of the Safe

Drinking Water Act in 1974 was a desire to

have all public water systems meet certain

health standards. A downside of imposing uniform

requirements on drinking water systems, however, is

that uniform requirements may cause some localities

to take actions that do not make sense for their particular communities—such as testing for chemicals that

have not been used in their area or undertaking treatment measures for which the costs far outweigh the

benefits.

An important question is whether the SDWA

provides sufficient flexibility to adjust requirements

in those cases and therefore minimize unjustified

costs. Current provisions in the law and the regulations are meant to provide the Environmental Protection Agency and the states with the ability to be flexible with the requirements that they place on communities. In reality, however, many of those provisions

are rarely used. Nevertheless, in some cases, the

EPA and the states may use the enforcement process

to achieve flexibility in dealing with communities.

Provisions in the Law

responsibility, and the EPA may step in only under

special circumstances. To gain primacy, states must

obtain approval from the EPA. That approval is

granted when states meet certain criteria. States with

primacy receive funds to aid them in their oversight

capacity. In 1995, $70 million was provided to states

for that purpose.

Several provisions in the law are meant to provide the EPA and the states with the ability to be

flexible with the requirements that they impose on

communities.

o Variances are meant to provide some flexibility

for dealing with water systems that have exceptionally dirty source water. Variances may be

granted to systems that have used the "best technology, treatment techniques, or other means,

which the Administrator finds are generally

available (taking costs into consideration)" and

are still unable to meet the maximum contaminant level defined by the EPA.1

 Before a state

may grant a variance, it must find that the variance will not result in "an unreasonable risk to

health."2

The federal government and the states share responsibility for enforcing the SDWA. The federal government, through the EPA, has the authority to enforce

drinking water standards in states that do not have

"primacy." States with primacy take on enforcement

Memorandum from Joan Z. Bernstein, General Counsel, Environmental Protection Agency, to Victor J. Kimm, Deputy Assistant

Administrator, Office of Drinking Water, May 21, 1979, p. 1.

2. Ibid.
36 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

o Exemptions may be granted to systems that are

unable to meet a maximum contaminant level

"due to compelling factors." Those compelling

factors may include economic difficulty. Systems may be granted an exemption only if they

were already in operation on the effective date of

the MCL and if the state determines that the exemption will not result in an "unreasonable risk

to health."3 In addition, states must issue a compliance schedule when they grant an exemption.4

o Waivers for sampling requirements for specific

contaminants may be granted to systems that are

deemed to be unlikely to have that contaminant

in their source water. States may issue areawide

waivers that cover several systems or even all

systems in the state. Use waivers may be granted

when it is determined that a contaminant was not

used, manufactured, or stored in the area. Susceptibility waivers may be granted when the geological conditions, the use of the land, and previous test results indicate that an area is not susceptible to a particular contaminant.

o Grandfathering may be used to allow systems to

use data that was collected before the time monitoring requirements were in effect to satisfy their

initial sampling requirements for a contaminant.

Systems that are allowed to use grandfathered

data to meet their initial sampling requirements

may then begin their sampling requirements with

the repeat sampling schedule.5 Repeat sampling

requirements are generally less frequent, and

therefore less costly, than initial sampling requirements.

o Composite sampling offers a way for small systems (those serving less that 3,300 people) to

reduce their monitoring costs by pooling their

samples with other systems. States may allow

composite sampling for no more than five sampling points. Larger systems may also use composite sampling to pool samples taken from different points in the system.6

Actual Use of Provisions for

Flexibility

Although variances and exemptions give states the

option to offer flexibility to systems in theory, in reality they are not frequently used. No variances and

only 15 exemptions were issued between January

1990 and March 1994.7 Given that approximately

200,000 public water systems are subject to federal

regulations, that is a strikingly small number.

Variances and exemptions can be difficult to

grant for several reasons.8 First, it can be costly for a

state to set up a program to carry them out. Second,

it can be difficult to determine that granting them

will not create an "unreasonable risk." Third, variances may be granted only after a technology is already in place. Systems are reluctant to install a

technology unless they are sure that it will allow

them to meet the required maximum contaminant

level. Fourth, economic infeasibility is a criterion

under which exemptions may be granted. However,

there is no clear agreement on what is considered

"affordable." The EPA offers that, "as a rule of

thumb, a total annual household water bill becomes

unaffordable when it is greater than 2 percent of median household income."9

 It does not indicate, however, what level of median household income should

be considered-national, state, county, or other. Finally, states may be reluctant to grant exemptions

even when they think they are warranted because

they are concerned about the public perception of

such an action.

3. Ibid., p. 2.

4. Memorandum from Michael B. Cook, Director, Office of Drinking

Water, Environmental Protection Agency, to Regional Water Supply Branch Chiefs, February 20, 1987.

5. Environmental Protection Agency, "Consolidated Rule Summary

for the Chemical Phases" (draft, October 1992).

6. Ibid.

7. Information contained in the Environmental Protection Agency's

Federal Reporting Data System, August 1994.

8. The reasons discussed in this chapter are based on discussions with

EPA staff, representatives of the Association of State Drinking

Water Administrators, and state officials.

9. "National Primary Drinking Water Regulations; Final Rule," Federal Register, vol. 56, no. 20 (January 30, 1991), pp. 3570-3571.
CHAPTER FIVE FLEXIBILITY UNDER THE SAFE DRINKING WATER ACT 37

Although only a small number of exemptions are

granted, the EPA and the states often use the enforcement process to accomplish the goals that exemptions were to achieve. As part of the enforcement

process, the EPA or a state may set up a compliance

agreement with a system that allows it a period of

time to comply.

Seven states have approved waiver programs,

and 14 states have informal, in-place programs. In

addition, 26 states are developing wavier programs

but cannot yet grant waivers. Some states expect to

reduce testing costs substantially through the use of

waivers. For example, Minnesota expects to reduce

its monitoring costs by $18 million during the 1993-

1995 compliance period~56 percent of what it would

expect to spend on the sampling in the absence of a

waiver program. It spent $240,000 developing a waiver program and expects to spend approximately

$23,000 to operate it each year. Since the state assumes the laboratory costs for water systems, the

waiver program will result in significant savings to

the state.10

Other states that have approved monitoring programs foresee problems in using them effectively.

For example, New York State had a monitoring program approved by the EPA in the summer of 1994.

Michael Burke, the director of the Bureau of Public

Water Supply Protection in New York State, cites a

lack of resources as a major impediment in granting

waivers. He says that the state has difficulty affording the manpower that an intensive process of collecting data (such as those on chemical use, source

protection, soil, and hydrological conditions) requires

in order to grant waivers. He also indicates that the

systems that are most in need of waivers, primarily

small systems, are least likely to be able to undertake

that effort themselves.

Although waiver programs are expected to result

in significant savings in some states, not all states

have them and some important barriers limit their

use. Developing the waiver programs takes up limited state resources. Determining what contaminants

have been used in an area and examining the susceptibility of water sources can be a very expensive process. States that conduct monitoring tests for water

systems are the ones that are most able to benefit

from the waiver process. In those cases, the upfront

costs that the state incurs to establish a waiver program will result in lower testing costs for the state. If

states require the systems themselves to gather the

data to justify a waiver, some systems may find it

less expensive to conduct the monitoring than to

qualify for a waiver.

The EPA believes that most states allow grandfathered data but that such data are successful in lowering systems' costs for only some groups of contaminants. Grandfathered data are available because the

EPA either required or encouraged the monitoring of

unregulated contaminants in order to obtain occurrence data to be used when those contaminants were

regulated. For some groups of contaminants, such as

volatile organic compounds, the availability of

grandfathered data can greatly reduce the amount of

initial sampling that is required. For other groups of

contaminants, such as inorganic compounds (lOCs)

and synthetic organic compounds, availability of

grandfathered data does not generally reduce sampling costs. In the case of lOCs, that failure is because the frequency of initial and repeat sampling

requirements is the same.

In the case of SOCs, it is because early monitoring was not required for some of the contaminants

that were ultimately regulated. Given the analytic

methods for testing, having to test for the subset of

contaminants for which grandfathered data are unavailable is not substantially less expensive than testing for the entire group.11

Although no data are available on the number of

states that allow systems to undertake composite

samples, the EPA believes that a significant number

of states do not allow it. Some states may be reluctant to allow composite sampling for two reasons.

First, they require additional resources to determine

when composite sampling has occurred and to ensure

that it was done properly. Second, since composite

sampling leads to the dilution of samples, it may result in cases in which systems are not required to engage in more frequent monitoring when they have

10. Environmental Protection Agency, Summaries of Selected State

Waiver Programs (April 1994).

11. Environmental Protection Agency, "Consolidated Rule Summary

for the Chemical Phases."
38 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

contaminant levels at which such monitoring would

otherwise be required.

Restructuring as Another

Option to Reduce Costs

In addition to the high average household cost of

treating drinking water, some small systems face

other problems, including deteriorated physical infrastructure, lack of access to capital, limited customer

and rate bases, and limited technical and management capabilities. The combination of those factors creates viability problems for small systems.

"Restructuring" is one option that the EPA has advocated for dealing with small systems that cannot afford to comply with SDWA requirements. The EPA

uses the term "restructuring" to refer to a variety of

operations and ownership changes that systems can

adopt to improve their viability. Those options include informal purchasing cooperatives among systems, mutual aid networks, contract operations and

maintenance, and wholesale purchase of water, as

well as actual consolidation of ownership.12

Although the EPA estimates that 50 percent of

small systems could benefit from restructuring, numerous barriers can prevent restructuring from taking

place. Those barriers include lack of incentives for

viable systems to acquire troubled systems, local

concerns about loss of control, and in some cases loss

of water rights when consolidation occurs.13 The

EPA is urging states to develop viability programs.

It would like those programs to contain approaches to

prevent new nonviable systems from forming; systematically assess the viability of existing systems;

promote restructuring or otherwise provide for improving the effectiveness of systems needing such

improvement; and compel restructuring of nonviable,

seriously noncompliant systems that are unwilling to

take the steps necessary to achieve compliance.14

12. Peter E. Shanaghan, "Small Systems and the SDWA Reauthorization," Journal of the American Water Works Association (May

1974), p. 56.

13. Ibid.

14. Ibid., p. 57.
Chapter Six

Implications for Providing Cost Estimates

Under the Unfunded Mandates

Reform Act of 1995

T

he increasing concern in recent years about

the costs that federal requirements impose on

state and local governments has led the Congress to pass legislation that will make it harder to

enact new unfunded mandates (see Box 3). The Unfunded Mandates Reform Act of 1995 (Public Law

104-4) requires the Congressional Budget Office to

estimate the cost of intergovernmental mandates on

state and local governments. The Safe Drinking Water Act case study highlights some of the challenges

that CBO will face in providing those estimates:

o The law requires CBO to estimate the incremental cost of a mandate-that is, the additional cost

that the mandate imposes above and beyond the

cost of actions that states and localities are already taking or would undertake on their own

before the requirements take effect. It is often

difficult, or impossible, to isolate the incremental

component of cost.

o The ultimate cost of a mandate is often a function

of the specific requirements of the implementing

regulations. Those details are not available when

CBO is preparing cost estimates, which is the

time the legislation is proposed.

o The data available at the time legislation is proposed are often extremely limited. The accuracy

of CBO's estimate, therefore, will be limited by

the lack of data.

o CBO often has limited time to prepare cost estimates-particularly for amendments and markedup versions of bills.

As a result of those challenges, CBO's cost estimates will inevitably be imprecise. For example,

although CBO's estimate of the cost of the 1986

amendments to the SDWA was based on the best information available from the Environmental Protection Agency and local communities at that time, it is

considerably lower than the ultimate cost that current

information indicates. CBO estimated that water systems would be required to make between a total of

$3.3 billion and $4.6 billion (in 1992 dollars) in capital investments to comply with the amendments' requirements. Based on more recent data, the EPA

now estimates that water systems will spend $8.8

billion on capital investments to meet the existing requirements that resulted from the 1986 amendments.

Furthermore, an additional $13.8 billion to $20.8 billion could be necessary to meet proposed regulations

(in their extended form) that are directly required by

the 1986 amendments.1

1. This estimate includes a range of $ 1.6 billion (estimate of the Environmental Protection Agency) to $8.6 billion (estimate of the

American Water Works Association) in capital to comply with the

radon rule, $1 billion to meet the capital requirements imposed by

other radionuclides, and $11.2 billion to meet capital requirements

associated with the Disinfectants/Disinfection By-Products Rule.

Radionuclides were one of the 83 contaminants that the EPA was

specifically required to set standards for under the 1986 amendments. In addition to naming 83 specific contaminants, those

amendments directed the EPA to issue regulations for 25 additional

contaminants every three years. The Disinfectants/Disinfection

By-Products Rule is one of the first group of 25 contaminants that

the EPA chose to regulate.
40 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Box 3.

Definitions and Requirements Regarding Intergovernmental

Mandates Under the Unfunded Mandates Reform Act of 1995

Definition of an Intergovernmental Mandate

A definition of an intergovernmental mandate may be

found in Title I of the Unfunded Mandates Reform

Act of 1995. The Congress has not yet provided

greater interpretation. The Congressional Budget Office (CBO) has paraphrased the definition below.

An intergovernmental mandate is defined as any

provision in legislation, statute, or regulation that (1)

would impose an enforceable duty upon state, local, or

tribal governments, except when it is a condition of

federal assistance or a duty arising from participation

in a voluntary federal program; or (2) would reduce or

eliminate the amount of authorization of appropriations for federal financial assistance for the purpose of

complying with previously imposed duties. Legislation, statutes, or regulations that relate to duties arising from participation in voluntary programs may be

considered intergovernmental mandates under a number of circumstances if those provisions were to increase the stringency of conditions of assistance or

place caps on or decrease federal funding and if the

state, local, or tribal governments lacked authority

under the program to amend their financial or programmatic responsibilities to continue providing required services, and if the program is one under which

more than $500 million is given to state and local governments under permanent authority.

Legislative Accountability and Reform1

Exemptions. The act exempts from the procedural

point of order mandates that enforce the constitutional

1. The description of the requirements under the Unfunded

Mandates Reform Act of 1995 were drawn from the Congressional Quarterly (April 15, 1995), pp. 1087-1089.

rights of individuals; prohibit discrimination on the

basis of race, color, religion, sex, national origin, age,

handicap, or disability; require compliance with federal grant-related accounting or auditing procedures;

provide for disaster assistance; are necessary for national security or the implementation of treaties; are

designated by the President as emergency legislation;

or are related to various Social Security programs.

Committee Reports. The act requires any authorizing committee that approves a bill or joint resolution

containing a federal mandate to draw attention to the

mandate in its report. The report must describe the

costs and benefits of the mandate, including direct

costs to state, local, and tribal governments, and identify any newly created or existing sources of federal

funding that will help pay for the mandate. If the

committee intends for an intergovernmental mandate

to be partly or entirely unfunded, it must explain why

it is appropriate for any of the costs to be borne at the

state or local level.

Cost Estimates. The act requires the authorizing committee to submit the bill to CBO for an estimate of a

mandate's costs. That estimate must either be included in the committee's report or the committee

should insert it into the Congressional Record. The

CBO cost estimate must be provided for any intergovernmental mandate that would cost $50 million or

more in the fiscal year in which it takes effect, or in

any of the subsequent four fiscal years. The CBO

report must include an estimate of any increased authorization levels in the bill that would help pay for

the mandate. If there are such authorizations, CBO

must estimate the new budget authority required to

comply with the mandate for up to the first 10 years

that the mandate is in existence. CBO must submit an

explanation if it is unable to estimate the cost. To the
CHAPTER SIX PROVIDING COST ESTIMATES UNDER THE UNFUNDED MANDATES REFORM ACT 41

extent practicable, CBO must also submit cost estimates of mandates in amended legislation.

Requests to CBO. The act requires CBO, at the request of a committee, to study proposed mandates

with a significant budgetary impact on state and local

governments. The committees can also ask CBO to

estimate costs beyond a five-year period and to look at

the disproportionate effect a mandate may have on

particular regions.

Point of Order. The act allows any member of the

House or Senate to raise a point of order against a bill

or joint resolution that contains an intergovernmental

mandate without a CBO cost estimate, unless that estimate cannot be made. Members can also raise a point

of order in either chamber against a bill, joint resolution, amendment, motion, or conference report in

which the costs of the intergovernmental mandate are

to exceed the $50 million threshold, unless funding

was provided to pay fully for the mandate.

Appropriations. The act allows any Member of the

House or Senate to raise a point of order against any

provision in an appropriation bill, resolution, amendment, or conference report containing an unfunded

intergovernmental mandate. Such a point of order

would affect only a single provision rather than the

entire legislation.

Underfunded Mandates. The act requires federal

agencies to determine whether there are sufficient

funds to carry out mandates under their jurisdictions.

If the funds are insufficient, they must notify the appropriate Congressional authorizing committees within 30 days of the beginning of the fiscal year. The

agency can then submit a reestimate, based on consultations with state, local and tribal governments, that

the amount appropriated is sufficient to pay for the

mandate. Alternatively, it must submit recommendations for implementing a less costly mandate or making the mandate ineffective for the fiscal year. The

Congress then has 30 days to consider the recommendations under expedited procedures. If the Congress

takes no action within 60 days, the mandate will be

abolished. State, local, and tribal governments may

continue to comply, voluntarily, with a mandate that

has been terminated by the federal government for

lack of funds.

Review of Federal Mandates

The act authorizes funds for the Advisory Commission on Intergovernmental Relations to issue various reports on mandates on state and local governments and private business. First, the commission

must issue a preliminary report within nine months on

the role of federal mandates and the effect on state,

local, and tribal governments. The report must make

recommendations to the President and the Congress

on easing mandates-including terminating impractical, obsolete, or redundant ones-simplifying them,

making them more flexible, and temporarily suspending mandates that are not vital but that create fiscal

difficulties for state, local, or tribal governments. Second, the commission must complete a study on intergovernmental mandates within 18 months. The study

will have to consider the feasibility of measuring both

the direct and the indirect costs and benefits of mandates. It will also consider the feasibility of measuring

the direct and indirect benefits of federal assistance

and tax benefits to state, local, and tribal governments.

Finally, the commission must report to the Congress

and the President on federal court cases involving intergovernmental mandates. The commission is to submit its first report within four months of the bill's enactment and a subsequent report by March 15 every

year.
42 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

Measuring the Incremental

Cost of a Federal Mandate

As discussed in Chapter 1, measuring the true cost of

a federal mandate involves measuring the incremental cost that the mandate imposes on state and local

governments. Because many federal mandates are

designed to achieve a goal that state and local governments share, many state and local governments

would take certain actions toward achieving that goal

even without a federal mandate. The incremental

cost of the mandate, therefore, is the additional cost

that it imposes on state and local governmentsabove and beyond the expenditures that they would

have made in its absence.

In some cases, incremental aspects of cost might

be readily identified. For example, if a state or locality already has a requirement in place that is as stringent (or more so) than the proposed federal requirement, then the incremental cost of the federal requirement on that state or locality will frequently be

negligible.

Calculating the incremental cost may be considerably more complicated if a state or locality has a

requirement that is less stringent than the federal requirement. For example, if a federal mandate specifies a more stringent standard for drinking water than

an existing state standard, then calculating the incremental cost will require an understanding of the

available technologies for treatment as well as the

nature of equipment currently installed in systems.

Meeting a more stringent standard could either involve modifying or completely replacing a treatment

facility. If a treatment facility is completely replaced, then the incremental cost that it imposes on

the community will depend on the remaining life of

the facility that it replaces. If the replaced facility is

at the end of its useful life, then the incremental cost

of the mandate would be the cost of building a new

facility that meets the federal standard minus the cost

of building a new facility that meets the less stringent

state standard. Conversely, if the treatment facility

that is replaced is a new one, then the incremental

cost of the mandate is the entire cost of building the

new facility. Calculating the incremental cost of

mandates in that case requires knowledge about the

age of the existing stock of treatment systems. That

information, however, is often not available.

Finally, calculating the incremental cost ideally

entails not only netting out the costs of actions that

state and localities are currently undertaking, but also

the future actions that they would chose to undertake

on their own. For example, as information about the

potential risks from drinking water contaminants becomes available through the research that is conducted as part of the process of developing both

drinking water legislation and implementing regulations, communities might decide to undertake additional treatment on their own, regardless of federal

requirements. Theoretically, CBO would like to deduct the cost of future actions that communities

would choose to undertake on their own from the

cost of the federal mandate. Predicting those costs,

however, is an intractable problem.

Determining the incremental cost of a mandate is

extremely difficult. It involves making assumptions

about the technological choices that governments

will make, the cost of implementing those choices,

and possibly the age of the existing stock of equipment. Estimating incremental costs also requires

making assumptions about the future actions that

states and local governments would have undertaken

without federal requirements. Such assumptions will

inevitably be arbitrary.

Uncertainty About the

Regulations That Will Result

from Legislation

CBO cost estimates are made at the time legislation

is proposed for enactment. However, legislative language is often broad and lacks the specifics needed to

project future costs. Executive branch agencies usually develop those specifics through the regulatory

process. For example, when the SDWA was passed

in 1974, it did not specify what contaminants to regulate or at what level standards should be set, although

it did direct the Administration to do so. The ultimate cost of the SDWA, of course, has hinged on

those details. Because of the uncertainty about the
CHAPTER SIX PROVIDING COST ESTIMATES UNDER THE UNFUNDED MANDATES REFORM ACT 43

specific regulations that will result from legislation,

cost estimates that are made at the legislative stage

will be speculative and will usually have to encompass a wide range of possible regulatory alternatives.

In addition to the uncertainty about the specifics

of the implementing regulations, both legislation and

regulations may be challenged in court. In those

cases, important details may not be clarified for a

long period of time, making it even more difficult to

predict costs.

Limited Data Sources

This study has examined available data on the cost

that localities incur to comply with the current final

and proposed standards under the SDWA. As is emphasized throughout the study, the data available to

calculate that cost are limited. The engineeringbased estimates of cost provided by the Environmental Protection Agency and the American Water

Works Association rest on numerous assumptions

that may ultimately prove to be incorrect. The locally provided cost estimates are based on surveys

that are not designed to be representative at the national level, have poor quality control, and in which

the respondents may have an incentive to make

worst-case assumptions about future costs. Those

limitations exist even though the SDWA has been in

place for over two decades, many of the regulations

have been finalized, the EPA and industry have devoted a great deal of effort and funding to generating

cost estimates, and some localities have actually undertaken some of the necessary investments.

When cost estimates are generated at the legislative stage, the limitations on data are much greater.

The sources of information used in this study are typically not available: engineering analyses are usually

developed only as the specific regulations are

formed, and little—if any-information on the costs

that municipalities would actually experience may be

available from census data or case studies.

The primary source of information for cost estimates developed at the legislative stage is often the

views and judgments of federal, state, and local officials or others in the regulated community. Often, a

different set of individuals must be contacted for

each legislative proposal. In addition, the most informed people in the regulated community may have

an interest in the outcome of the legislative debate

and may therefore have an incentive to either over- or

underestimate costs.

Limited Time

CBO devoted a considerable amount of time and resources to the task of assessing the costs and benefits

of the Safe Drinking Water Act in this study. Gathering the appropriate data from a variety of sources,

taking steps to assess and improve the quality of the

data, and normalizing data obtained from different

sources so that estimates may be compared appropriately are very time-consuming tasks.

An additional factor complicates the process of

constructing the state and local cost estimates that

CBO is required to make under P.L. 104-4: in some

cases, the estimates will need to be provided in a very

short time period. CBO will try to identify issues

early on in the legislative process and in that way

maximize the amount of time and effort that it can

devote to constructing cost estimates. In spite of

those efforts, however, major amendments can be

adopted in the final stages of the process, leaving

little time to conduct a thorough analysis of their

implications.

Although state and local cost estimates can be an

important ingredient in a legislative debate, the methodological challenges in estimating the incremental

component of state and local costs, the uncertainty

about the details of the implementing regulations, the

lack of data at the legislative stage, and the short time

frame under which those estimates must be produced

will limit CBO's ability to provide accurate estimates. As a result of such complicating factors, cost

estimates constructed at the legislative stage will be

less precise than examinations conducted after the

law or regulation is in effect.

Appendix

Method Used to Construct Estimates

of Per Capita Local Expenditures

on Drinking Water

T

he Congressional Budget Office calculated

average per capita local expenditures on

drinking water by dividing Bureau of the Census data on total expenditures by local drinking water

systems by an estimate of the population served by

municipally owned water systems. The estimate of

the population served was based on Census Bureau

data on the percentage of households served by public and private community water systems and on information about the percentage of community water

systems that are publicly, rather than privately,

owned. (The latter information was obtained from

the Environmental Protection Agency's Federal Reporting Data Systems.)

Since 1940, the Department of Agriculture's Rural Development Administration (RDA) has provided

loans to drinking water systems in rural areas or in

cities or towns having populations of 10,000 or less.

The department added a grant program in 1966. To

reflect only local expenditures, CBO subtracted the

value of the subsidies provided through the RDA program from the total expenditures that are reported by

the Census Bureau. To calculate the grant equivalent

of federal loans, CBO subtracted the net present

value of payments that communities were required to

make on loans provided by the RDA from the net

present value of alternative loan payments that they

would have had to make if they had not received

RDA loans.

Since 1982, the RDA has provided loans at three

different interest rates, depending on the median

household income of the community. The highest

interest rate is a "market rate" that corresponds to the

Bond Buyer's 11-Bond Index. The 11-Bond Index is

based on a set of 11 general obligation bonds maturing in 20 years and having a Moody's Investor Service rating of Aa. An "intermediate rate" and a "poverty rate" lie below the market rate. Before 1982,

loans were offered at either 4.5 percent or 5 percent,

depending on the year. The communities that receive

RDA loans will generally not have a sufficient credit

rating to receive the market rate indicated by the 11-

Bond Index. In addition, RDA loans are generally

for 40 years, a longer time period than communities

can obtain elsewhere.

The Bond Buyer's Revenue Bond Index was used

as an estimate of the alternative rate that communities might have obtained without RDA loans. That

index uses 25 bonds maturing in 30 years with

Moody's ratings ranging from Baal to Aal. The

Revenue Bond Index was thought to represent a conservative assumption about the alternative market

rate that communities might expect. That index began in 1979; thus, earlier rates were estimated based

on the relationship between the 11-Bond Index and

the Revenue Bond Index over the 1979-1993 period.

Because the alternative loan would probably be for a

shorter period than the RDA loan, it was necessary to

make an assumption about the rate at which the borrowing communities discounted future loan payments. For simplicity, CBO assumed that the communities' discount rate was equal to the rate indicated

by the Revenue Bond Index. CBO then calculated

the grant equivalent of each loan as the net present

value of the payments under the alternative loan mi-
46 THE SDWA: A CASE STUDY OF AN UNFUNDED FEDERAL MANDATE September 1995

nus the net present value of payments under the RDA grant equivalent. Communities would obviously not

loan. During the 1957-1968 period, the interest rate accept the RDA loan unless it presented a positive

charged on loans offered under the RDA exceeded benefit relative to their alternative. Hence, in those

the alternative market interest rate. In those cases, cases the grant equivalent was constrained to zero,

the method described above resulted in a negative