GAO/RCED-00-206R TMDL Regulations

United States General Accounting Office

Washington, DC 20548

Resources, Community, and

Economic Development Division

B-285593

June 21, 2000

The Honorable Bud Shuster

Chairman, Committee on Transportation

and Infrastructure

House of Representatives

Subject: Clean Water Act: Proposed Revisions to EPA Regulations to Clean Up

Polluted Waters

Dear Mr. Chairman:

This report responds to your request that we assess economic and compliance issues

associated with two recently proposed rulemakings by the Environmental Protection

Agency (EPA). The first proposed rule would revise the total maximum daily load

(TMDL) program, which is authorized by the Clean Water Act. The TMDL program is

intended to ensure that the nation’s waters are of sufficient quality for the protection

and propagation of fish, shellfish, and wildlife, and for recreation in and on U.S.

waters. TMDLs are used to restore water quality by identifying how much pollution a

body of water can receive and still meet its standards. The amount of pollution

entering the water is then reduced to that level. The proposed revisions add

requirements to clarify and strengthen how TMDLs are established, and to provide

added assurance that plans for cleaning up waters are implemented.

The second proposed rule would revise EPA’s National Pollutant Discharge

Elimination System (NPDES) program that controls the discharge of pollutants from

“point” sources of pollution (i.e., entities such as industrial facilities and municipal

wastewater treatment plants that discharge pollutants through a discrete point such

as a pipe). The revisions would expand EPA’s authority to issue permits in certain

circumstances and would require new large or expanding dischargers to obtain from

other dischargers a certain level of reductions in pollutants being released to a

polluted water before they begin discharging to that water. In addition, the revisions

would allow, under certain circumstances, the use of point source discharge permits

to control pollution from a number of agricultural and silvicultural activities that have

generally been treated as “nonpoint” sources. These revisions are intended to help

states and EPA in developing and implementing TMDLs, and hence were issued at the

same time as the proposed TMDL regulation. States are primarily responsible for
B-285593

2 GAO/RCED-00-206R TMDL Regulations

implementing the TMDL, NPDES, and other Clean Water Act programs. EPA issues

policy and guidance for these programs and implements them when a state fails to do

so or is not delegated program authority.

TMDLs were first required by the Clean Water Act in 1972 but were the subject of

little attention by EPA and the states in subsequent years. For its part, EPA first

issued regulations governing states’ development of TMDLs in 1985 but did little to

enforce them. In recent years, lawsuits alleging inaction by EPA and the states have

spurred increased attention to the development of TMDLs by imposing judicial

deadlines on some states. As stated in EPA’s proposed regulations, the revisions to

the TMDL and NDPES regulations “revise, clarify, and strengthen” current regulatory

requirements for these programs.

Certain statutes governing federal rulemaking activities generally require EPA to

evaluate the economic impacts of proposed regulations. If a preliminary economic

analysis indicates that certain thresholds of costs have been met, additional detailed

economic analyses are required. The Office of Management and Budget (OMB) has

issued a “Best Practices” document, and EPA has guidance for conducting such

economic analyses. The Regulatory Flexibility Act requires an agency to prepare an

“initial regulatory flexibility analysis” if it determines that a proposed regulation will

have “a significant economic impact on a substantial number of small entities.”

1

In

addition, if on the basis of a preliminary analysis, an agency determines that a

proposed regulation includes a federal mandate that may result in expenditure of

$100 million or more by state, local, and tribal governments in the aggregate, or by

the private sector, in any one year, the Unfunded Mandates Reform Act of 1995

requires more detailed analyses of costs, benefits, and alternatives. A similar

directive is imposed on agencies by Executive Order 12866.

On the basis of its economic analyses, EPA concluded that neither proposed

regulation would result in expenditures by governments and the private sector in

excess of $100 million in any one year and, therefore, did not conduct more detailed

analyses under the Unfunded Mandates Reform Act. With respect to the Regulatory

Flexibility Act, EPA determined that because neither proposed regulation directly

regulates small entities, neither would have a significant economic impact on a

substantial number of small entities.

As requested, this report assesses (1) the reasonableness of EPA’s economic analyses

for the two proposed regulations and (2) whether EPA’s determinations under the

Unfunded Mandates Reform Act of 1995 and the Regulatory Flexibility Act were

adequately supported. The report summarizes the information provided to your staff

during our briefing on June 21, 2000, and formally transmits the charts (which

provide more detail) presented during that briefing (see enc. I).

To prepare the information in this report, we reviewed EPA’s proposed regulations

on Water Quality Planning and Management and the National Pollutant Discharge

1

Small entities generally include small businesses, small nonprofit enterprises, and small governmental

jurisdictions.
B-285593

3 GAO/RCED-00-206R TMDL Regulations

Elimination System and Antidegradation Policy and associated economic analyses.

We used standard economic principles as criteria to assess the reasonableness of the

methodology and key economic assumptions that EPA used in its economic analyses.

We also reviewed the extent to which the methodology and key assumptions were

consistent with OMB’s “Best Practices” and EPA’s guidance on conducting economic

analyses. In addition, we reviewed public and industry comments on the proposed

regulations and EPA’s economic analyses. To assess the agency’s compliance with

the Unfunded Mandates Reform Act of 1995 and the Regulatory Flexibility Act, we

reviewed the statutes and their legislative history and case law. We interviewed

officials responsible for the analyses in EPA, agency attorneys, and officials involved

in EPA’s final cost analyses. We also interviewed officials with OMB’s Office of

Information and Regulatory Affairs, cognizant officials at the U.S. Department of

Agriculture, and other interested parties.

In summary, we found limitations with EPA’s economic analyses of the proposed

regulations for the TMDL and NPDES programs that raise questions about their

reasonableness and about the determinations that EPA has based on them. Of

particular consequence, the outcomes of the analyses were heavily influenced by a

number of key assumptions. In the case of the TMDL program, for example, the

agency assumed that states are essentially in full compliance with current

regulations, or will be as a result of existing statutory and regulatory requirements.

Therefore, EPA estimated only the costs that would result from the new requirements

in the proposed regulations. However, compliance with existing TMDL regulations

has been problematic, and future compliance in the absence of the proposed

regulation is uncertain. We found similar uncertainties with key “baseline”

assumptions that affect the cost estimates associated with the proposed NPDES

regulation. For example, EPA assumed that 30 states have, or will have, adequate

enforceable authorities over silviculture, and that these states would therefore incur

no costs as a result of the regulation. However, EPA’s proposed regulation did not

specify the types of controls that would be adequate to control silvicultural sources

of pollution. Without such information, state foresters and forestry experts

expressed concern to us that costs could be incurred as a result of additional control

requirements. In addition, the key water quality data available to EPA to identify the

number of waters not meeting standards and the number of TMDLs that will be

needed are incomplete, inconsistently collected by states, and sometimes based on

outdated and unconfirmed sources.2

As a result of these limitations, EPA’s cost

estimates are subject to substantial uncertainty. Under these circumstances, it would

have been appropriate for EPA to assess the effect of different assumptions on the

agency’s cost estimates. Finally, EPA provided little information on the benefits

associated with the proposed regulations. While EPA’s proposed regulation may well

have benefits, without information on both costs and benefits, it is difficult to confirm

that the regulation is economically justified.

2

For example, in 1996 (the most recent national data available), states assessed only 6 percent of ocean

shoreline; 19 percent of rivers and streams; 40 percent of lakes, ponds, and reservoirs; and 72 percent

of estuaries.
B-285593

4 GAO/RCED-00-206R TMDL Regulations

Given the uncertainties surrounding EPA’s cost estimates, we disagree with EPA that

the agency’s analyses adequately supported its determinations under the Unfunded

Mandates Reform Act of 1995 that more detailed analyses of costs, benefits, and

alternatives were not needed for either of the proposed regulations. However, in the

case of the requirements for additional analyses under the Regulatory Flexibility Act,

case law supports EPA’s determination that because its proposed revisions to both

regulations do not directly regulate small entities, additional analyses were not

required. Specifically, several court decisions have ruled in analogous situations that

agencies’ regulations were not subject to the Regulatory Flexibility Act’s

requirements for additional analysis. For example, one case addressed regulations

under the Clean Air Act dealing with national ambient air quality standards. The

court ruled that EPA’s action establishing the standards did not directly regulate

small entities; instead the costs to small entities would be imposed in the future by

discretionary state actions implementing the standards. The principle set forth in this

and other cases is applicable to the TMDL proposed regulation because the TMDL

proposed regulation does not itself regulate small entities and any costs incurred by

small entities in the future will be imposed by future discretionary state action

implementing the regulations. Similarly, courts have held that where a proposed

regulation does not impose any regulatory requirements at all on any entities, but

instead expands agency authority to take future discretionary action, no initial

regulatory flexibility analysis is required. Such is the case with the NPDES proposed

regulation.

Agency Comments

We provided a draft of this report to EPA and OMB for their review and comment.

The Branch Chief for Natural Resources in OMB’s Office of Information and

Regulatory Affairs provided oral comments, and characterized them as minor and

editorial in nature. These comments have been incorporated throughout the report

as appropriate. EPA’s June 16, 2000, letter agreed with our conclusions about the

agency’s compliance with the requirements of the Regulatory Flexibility Act, but

expressed a number of concerns with other matters discussed in the draft report.

Among its key points, EPA said we inappropriately faulted the assumptions used by

the agency in preparing its analysis, particularly as it relates to EPA’s key “baseline”

assumption that states are essentially in full compliance with current regulations, or

will be as a result of existing statutory and regulatory requirements. EPA maintains

that its assumption of full compliance was appropriate and consistent with OMB and

EPA guidance. Our disagreement with EPA is not whether the agency was permitted

under guidance to assume full compliance but rather that this key assumption was

not accompanied by alternative--and potentially more realistic--assumptions about

future compliance. Both EPA’s guidance and OMB’s 1996 “Best Practices” recognize

that full compliance is often not a reality and that the degree of compliance with

existing regulations can significantly affect the results of a cost analysis. We

continue to believe that analyses of alternative compliance rates were needed and

that such analyses would likely have indicated a range of possible costs exceeding

those estimated by EPA. We also continue to believe that in the absence of such

analyses, EPA cannot conclude with reasonable assurance that the annual costs of
B-285593

5 GAO/RCED-00-206R TMDL Regulations

each proposed regulation would not exceed the $100 million threshold set forth in the

Unfunded Mandates Reform Act.

As a related matter, EPA also said that in addressing uncertainties about information

central to its analyses, particularly water quality data, it complied with OMB’s “Best

Practices” that under such circumstances, “. . . each agency shall base its decisions on

the best reasonably obtainable information.” However, we believe that EPA used a

narrow set of assumptions that do not sufficiently take into account the extent of

these uncertainties and their potential effect on the outcome of its analyses. An

appropriate course of action would have been to assess alternative assumptions

about these factors. Such an approach would have presented a more realistic picture

of the range of potential costs.

EPA’s comments and our point-by-point responses are provided in enclosure II.

-----

As requested, this report will not be distributed until 7 days after its issuance date

unless you publicly announce its contents earlier. At that time, we will send copies of

this report to the Honorable Carol M. Browner, EPA Administrator; the Honorable

Jacob J. Lew, OMB Director; and other interested parties. We will make copies

available to others on request.

Please contact me at (202) 512-6111 if you or your staff have any questions. Key

contributors to this report were Chuck Bausell, Hal Brumm, Steve Elstein, Tim

Guinane, Karen Keegan, and Trish McClure.

Sincerely yours,

Peter F. Guerrero

Director, Environmental Protection Issues

Enclosures - 3
Enclosure I

6 GAO/RCED-00-206R TMDL Regulations

Briefing to the House Transportation

and Infrastructure Committee

Review of Two EPA Proposed Regulations Regarding

Water Quality Management

June 21, 2000

Review Objectives

• Assess the reasonableness of EPA’s economic analyses of

its proposed revisions to regulations on Water Quality

Planning and Management (the “TMDL regulation”) and the

National Pollutant Discharge Elimination System Program

and Federal Antidegradation Policy (the “NPDES

regulation”).

• Assess whether EPA’s determinations that it was not

required to conduct further analyses under the Regulatory

Flexibility Act (Reg. Flex.) and the Unfunded Mandates

Reform Act of 1995 (UMRA) are adequately supported.
Enclosure I

7 GAO/RCED-00-206R TMDL Regulations

Scope and Methodology

To meet our review objectives, we

• reviewed documents supporting EPA’s economic analyses

for the two proposed revisions, and public and industry

comments on the rules and EPA’s analyses;

• applied standard economic principles and Office of

Management and Budget (OMB) Best Practices and EPA

guidance on how to prepare economic analyses;

• analyzed statutory language, legislative history, and case

law regarding Reg. Flex. and UMRA; and

• interviewed officials from EPA, OMB, the U.S.Department of

Agriculture, and other interested parties.

Background: Water Quality Management

• The Clean Water Act includes provisions for addressing

both point and nonpoint sources of pollution.

• The control of point sources is done through a regulatory

program known as NPDES that requires issuing permits to

entities that discharge pollutants directly to surface waters to

control the amount and toxicity of pollutants entering the

waters.

• The act does not provide for a federal regulatory program

for the control of nonpoint sources. Instead, states are to

control them through management programs, such as

requiring certain activities to apply practices that minimize or

reduce the amount of pollutants reaching waters. (These

are referred to as “best management practices.”)
Enclosure I

8 GAO/RCED-00-206R TMDL Regulations

Background: The TMDL Program

• Section 303 of the Clean Water Act contains provisions to

address waters that do not meet water quality standards.

• First, states must identify waters that do not meet

standards on what is referred to as a “303d list.”

• Next, states develop total maximum daily loads (TMDL)

for those waters to reduce the amount of pollutants

entering the water so that water quality standards can be

attained.

• EPA is required to develop a list and TMDLs if states fail to

do so.

• EPA must approve state-developed lists and TMDLs.

• TMDLs were required by the 1972 act. EPA first issued

regulations for the program in 1985 and guidance in 1991.

Background: The TMDL Program

• As of 1999, about 20,000 waters were identified as not

meeting standards on states’ 303d lists, and EPA estimates

these waters could require up to 40,000 TMDLs.

• There is widespread recognition that implementation of the

TMDL program has only recently begun. At the time of

proposal, not all states had submitted 303d lists, and EPA

did not vigorously enforce the requirement to submit TMDLs

until recently.

• According to EPA, currently all states have submitted 303d

lists and the process to establish TMDLs is underway. In

addition, EPA officials told GAO that in 17 lawsuits alleging

state and EPA inaction, courts have established judicially

enforceable deadlines for states to develop TMDLs.
Enclosure I

9 GAO/RCED-00-206R TMDL Regulations

• In 1996, EPA established an advisory committee to make

recommendations for improvements and possible regulatory

changes to the TMDL program; its recommendations included

that

• an implementation plan should be required with each TMDL;

• TMDL development should occur within 15 years of a water

being listed; and

• EPA should strengthen its technical guidance and support to

improve states’ capacity in developing TMDLs.

Background: The TMDL Program

Background: Reg. Flex. and UMRA

Agencies must comply with a number of statutory

requirements when proposing regulations, including:

• The Regulatory Flexibility Act (5 U.S.C. 601-612) requires

an initial regulatory flexibility analysis unless the agency

determines that a proposed regulation will not have a

significant economic impact on a substantial number of

small entities.

• Title II of the Unfunded Mandates Reform Act of 1995 (2

U.S.C. 1531-1537) generally requires an analysis of costs,

benefits, and alternatives for proposed regulations that

include a federal mandate that may result in expenditures of

$100 million or more by state, local, and tribal governments

in the aggregate, or by the private sector, in any one year.
Enclosure I

10 GAO/RCED-00-206R TMDL Regulations

Executive Order 12866 also sets forth principles of regulation

and directs agencies to conduct certain analyses in

rulemaking:

• Agencies should assess the potential costs and benefits of

available regulatory alternatives when deciding whether and

how to regulate.

• Agencies should select those approaches that maximize net

benefits, among other factors like environmental quality, and

base their decisions on the best obtainable information

concerning the need for, and consequences of, the intended

regulation.

• Similar to UMRA, agencies must conduct benefit-cost

analyses for regulations expected to result in a $100 million

annual effect on the economy or that are otherwise

economically significant.

Background: Executive Order 12866

Background: Information on Conducting

Economic Analyses

OMB Best Practices

• OMB has used its January 1996 “Best Practices”

document as general criteria for reviewing economic

analyses, including the analyses of the two proposed

EPA regulations.

EPA Guidance

• EPA has a number of draft guidance documents that its

offices use at their own discretion.

• EPA used a April 1998 draft for their analyses of these

proposed regulations.
Enclosure I

11 GAO/RCED-00-206R TMDL Regulations

EPA’s Proposed Revisions to Regulations

on Water Quality Management Programs

On August 23, 1999, EPA proposed revisions to regulations

on the TMDL and NPDES programs with the intent:

• (for the TMDL program) to clarify and strengthen how

TMDLs are established so they can more effectively

contribute to improving the nation’s water quality, and to

achieve “reasonable assurance” that an established TMDL

will be implemented and that water quality standards will be

attained.

• (for the NPDES program) to achieve reasonable further

progress toward attaining water quality standards in

impaired waters (i.e., waters that do not meet standards)

prior to EPA approval or establishment of a TMDL.

EPA’s Proposed Revisions Affecting the TMDL Program

The primary changes to the TMDL program include requiring

the states to

• establish a more comprehensive format for lists identifying

waters that do not meet standards,

• consider specific factors when prioritizing their listed waters,

• establish a 15-year schedule in which to develop TMDLs for

waters once listed,

• include 10 specific elements in a TMDL, and

• develop implementation plans that include 8 elements such

as demonstrating “reasonable assurance” that a TMDL will

be implemented.

EPA’s Proposed Revisions to Regulations

on Water Quality Management Programs
Enclosure I

12 GAO/RCED-00-206R TMDL Regulations

• The reasonable assurance requirement is intended to help

ensure that pollutant reduction allocations in a TMDL will be

implemented such that water quality standards will be

attained and maintained. This means that

• for point sources, states will issue enforceable NPDES

permits and

• for nonpoint sources (like farms), states must

demonstrate that controls are likely to be implemented,

such as through state regulations.

EPA’s Proposed Revisions to Regulations

on Water Quality Management Programs

Summary of EPA’s Analysis of

Proposed TMDL Rule

• EPA estimated the annual cost that states would incur in

implementing the proposed TMDL revisions to be between

$10.3 million and $24.4 million per year (in 1999 dollars)

from 1999 through 2015; EPA did not quantify or monetize

benefits; it briefly mentioned potential benefits in the

proposed rule.

• The areas in which EPA estimated costs included

• developing implementation plans ($5.3 million to $14.3

million per year),

• administrative costs to the states resulting from public

participation requirements ($4.8 million to $9.5 million

per year), and

• administrative costs to EPA such as for reviewing

implementation plans (about $18,000 annually).
Enclosure I

13 GAO/RCED-00-206R TMDL Regulations

• According to EPA, these are the costs that states would

incur as a result of the proposed regulations. The amounts

do not include costs to meet current regulations, consent

decrees, and state commitments.

• Much of the TMDL process is already required in current

regulations.

• As of the date of EPA’s economic analysis (December,

1998), consent decrees in about 12 states set courtordered schedules for developing TMDLs.

• Most other states have submitted schedules to EPA for

developing TMDLs for currently listed waters, within a

specified timeframe.

• No costs to the private sector were estimated because

the proposed rule only changes requirements applicable

to states and tribes.

Summary of EPA’s Analysis of

Proposed TMDL Rule

• In estimating the costs of the proposed regulation, EPA

made several key assumptions:

• All states are either in full compliance, or will be, with

current TMDL program requirements (i.e., TMDLs for

currently listed waters will be developed) because (1)

states are committed to developing TMDLs under either

a consent decree or through commitments made to EPA,

or (2) because of the threat of a lawsuit for inaction.

• In the future, there will be no increase in the current

listing of about 20,000 water bodies.

• The private sector will incur no additional costs as a

result of the proposed revisions.

Summary of EPA’s Analysis of

Proposed TMDL Rule
Enclosure I

14 GAO/RCED-00-206R TMDL Regulations

Limitations in EPA’s Analysis Raise Concerns

About Usefulness of Cost Estimates

• Limitations in EPA’s economic analysis raise concerns

about its usefulness for decision-making. Our concerns

relate to EPA’s

• assumption of full compliance with existing regulations,

• use of key water quality and cost data that are of limited

quality, and

• exclusion of

• costs to other federal agencies,

• private sector costs,

• an analysis of a lower discount rate, and

• analysis of benefits.

• EPA’s analysis does not include costs that states will incur

to comply with current TMDL requirements because EPA

states that those costs are the result of existing statutory

and regulatory requirements and not the result of this

proposed rule.

• EPA’s April 1998 guidance for conducting economic

analyses states that such an assumption of full compliance

is reasonable in many cases. In particular, it states that

unless noncompliance is known and can be reasonably

estimated, the analysis should assume full compliance with

an existing regulation in the baseline.

EPA Assumed Full Compliance

Despite Uncertainty
Enclosure I

15 GAO/RCED-00-206R TMDL Regulations

EPA Assumed Full Compliance

Despite Uncertainty

• Nonetheless, EPA’s guidance does allow discretion as to

whether full compliance with existing regulations should be

assumed in the analysis. For example, the guidance also

states that:

• “If it is known that there is noncompliance with an existing regulation

that is being tightened (i.e, replaced with a more stringent

regulation), then the analysis should be performed in two stages, if

possible. First, the incremental benefits and costs associated with

attaining full compliance with the existing regulation should be

estimated. The analysis should then estimate the costs and benefits

of moving from full compliance with the existing regulation to full

compliance with the tighter regulation.”

• Furthermore, both EPA’s guidance and OMB’s January

1996 “Best Practices” for conducting economic analyses

recognize that full compliance is often not a reality and that

the degree of compliance with existing regulations can

significantly affect the results of the analysis.

EPA Assumed Full Compliance

Despite Uncertainty

• Although EPA assumed full compliance, we believe there is

substantial uncertainty about whether the states are, or will

be, in full compliance with requirements to develop TMDLs

for impaired waters, given that

• only about 1,300 of the up to 40,000 needed TMDLs had

been received and approved by EPA through FY1999,

• certain state commitments regarding schedules to

complete TMDLs are nonbinding and may be dependent

on availability of state funding,

• states could be further burdened by additional possible

listings of impaired waters and required TMDLs (and

implementation plans), and

• funding for the TMDL program was not a priority until FY

1998 and competes with many other priority activities

such as NPDES permitting and enforcement.
Enclosure I

16 GAO/RCED-00-206R TMDL Regulations

• OMB’s Best Practices further states that when uncertainty

exists about the baseline (or the way the world would look

absent the regulation), sensitivity analyses may be

warranted.

• In addition, OMB officials told us that in this particular case,

where substantial uncertainty exists about the level of

implementation of current regulations, ideally it may have

been appropriate to do sensitivity analyses of alternative

compliance rates.

• Given the uncertainty associated with the rate of

compliance, we believe that sensitivity analyses to assess

the effect of alternative compliance rates on the cost

estimate would have been appropriate.

• Such analyses would likely have indicated a range of

possible costs exceeding those estimated by EPA.

EPA Assumed Full Compliance

Despite Uncertainty

EPA Assumed Full Compliance

Despite Uncertainty

• In addition, there is reason to believe that the proposed

regulations would accelerate compliance with existing

regulations. EPA officials told GAO that the proposed rule

will make the TMDL program more effective and will reduce

the uncertainty associated with achievement of water quality

goals.

• If so, both the benefits and costs associated with

achieving such compliance more quickly should be

attributed to the proposed regulations, rather than

existing regulations. These costs are not included in

EPA’s cost estimate.

• Finally, USDA officials told GAO that in assessing the costs

of the proposed rule, they would assume that states are not

in compliance with existing TMDL regulations.
Enclosure I

17 GAO/RCED-00-206R TMDL Regulations

Cost Estimates Are Based on

Incomplete Water Quality Data

There are several questions regarding the quality of the data

EPA used in its analysis.

• The data EPA used to estimate the number of impaired

waters and required TMDLs are, in some respects,

incomplete and unreliable.

• GAO recently reported that states’ assessments of water

quality are generally based on a small percentage of

monitored waters, may rely on outdated or unconfirmed

data, and are conducted inconsistently across states.

• EPA’s own cost analysis acknowledges that additional

monitoring in future years will “undoubtedly” identify

additional impaired waters.

Cost Estimates Are Based on

Incomplete Water Quality Data

• These limitations add to the uncertainty surrounding EPA’s

cost estimate because the estimate

• does not account for the potential future listings of

additional waters needing TMDLs and implementation

plans.

• is based on data that are in some cases unreliable.

• Given these limitations, a sensitivity analysis to assess the

effect of data uncertainty on the cost estimate would have

been appropriate.
Enclosure I

18 GAO/RCED-00-206R TMDL Regulations

• EPA did not include the costs that other federal agencies

might incur as a result of the proposed rule.

• USDA officials told GAO that their workload may

increase in several areas as a result of the proposed

regulation, including providing technical support to EPA,

states, and farmers (e.g., developing water quality

management plans).

• The estimate for the cost states would incur to do an

implementation plan for a TMDL was based on data from a

single state official.

• EPA did not verify whether these data were

representative of all states.

• As a result, EPA’s estimate of the cost to do an

implementation plan may not be representative of costs

incurred by other states.

Certain Costs Not Included or Not Verified

EPA Did Not Consider Private Sector

Costs Likely to be Incurred

• EPA did not include the costs that certain private sector

entities will likely incur as a result of the proposed

regulations because, according to EPA officials, these costs

would be incurred anyway under existing regulations and/or

entities will voluntarily implement controls.

• However, major changes from the proposed regulations

include the emphasis on TMDL implementation through the

implementation plan, and the reasonable assurance

provision. These provisions are intended to provide added

assurance that water quality standards will be met.

• As a result of states’ implementation of reasonable

assurance, nonpoint sources such as farms will likely incur

costs to control discharges to water bodies.

• USDA officials told GAO that they believe the private sector

will incur additional costs as a result of the proposed rule.
Enclosure I

19 GAO/RCED-00-206R TMDL Regulations

EPA Did Not Assess the Effect of a

Lower Discount Rate

• EPA did not assess the effect of a lower discount rate on

estimated costs.

• EPA used a 7-percent (real) discount rate--the rate OMB

recommends--to discount future costs to the present.

• However, OMB’s Circular A-94 (economic guidance)

also recommends that agencies use alternative discount

rates to assess the effect of discounting on the present

value of benefits and costs.

• According to OMB officials, EPA analysts usually

conduct sensitivity analyses of the discount rate using a

lower rate.

• Because many costs (and benefits) associated with

implementing TMDLs will occur well into the future, a

sensitivity analysis using a lower rate would be appropriate.

EPA Did Not Estimate Benefits

• Executive Order 12866 states that agencies shall assess

both the benefits and costs for significant regulatory actions,

regardless of whether the regulation is economically

significant or not--EPA’s rule was deemed significant by the

agency because it addressed “novel legal or policy issues”.

• EPA did not quantify (and monetize) the proposed rule’s

benefits and, as a result, its analysis does not indicate

whether the expected benefits of the rule outweigh expected

costs.

• EPA officials stated that because the proposed rule was not

economically significant (i.e., would not have an annual

effect on the economy of $100 million or more) they did not

believe they were required to quantify the benefits of the

proposed rule. Instead, the benefits were briefly mentioned

in the proposal for the rule.
Enclosure I

20 GAO/RCED-00-206R TMDL Regulations

• OMB officials told us that ideally federal agencies should

assess both benefits and costs of proposed regulations to

compare the net benefits of alternative regulatory actions.

• Although EPA’s proposed regulation may have benefits,

without a monetary estimate of both the benefits and costs,

we cannot confirm that the rule is economically justified (i.e.,

that it would have positive net benefits).

• EPA officials told GAO that under OMB’s Best Practices, the

agency is not required to quantify benefits.

• Nonetheless, we believe it is good economic practice to

express both benefits and costs in comparable dollar terms

in order to identify net benefits.

• In any case EPA’s qualitative discussion of the proposed

regulation’s potential benefits was very limited.

EPA Did Not Estimate Benefits

Summary of Proposed Revisions

to the NPDES Program

EPA’s Proposed Revisions Affecting the NPDES Program

The primary changes to the NPDES program include

• requiring new large or significantly expanding dischargers

to obtain an “offset” (or pollutant reduction) of 1.5 times

their proposed discharge before discharging to an impaired

water,

• giving states and EPA, under certain circumstances,

discretionary authority to require discharges of stormwater

from forestry activities to have a NPDES permit,

• giving EPA authority to designate certain sources, including

some animal feeding operations and aquatic animal

production facilities, as needing NDPES permits in cases

where EPA develops a TMDL, and
Enclosure I

21 GAO/RCED-00-206R TMDL Regulations

(changes to NPDES continued)

• providing EPA authority to object to, and ultimately reissue,

expired and state-issued permits that have been

administratively-continued for discharges to impaired waters

in NPDES-authorized states where there is no TMDL or the

permit contains limits that are inconsistent with a TMDL.

Summary of Proposed Revisions

to the NPDES Program

Summary of EPA’s Analysis of

Proposed Revisions to NPDES Program

• EPA estimated the annual costs to private entities and federal

and state governments in implementing the proposed NPDES

regulation to be between $17.2 million and $65.2 million per year

(1999 dollars) from 1999 to 2015; EPA did not quantify/monetize

benefits; it briefly discussed them.

• The major areas in which EPA estimated costs were

• the construction industry/other storm water dischargers for

obtaining offsets ($11.33 to $41.76 million per year),

• the silvicultural industry to implement pollutant controls

($3.45 million to $12.93 million per year),

• animal feeding operations and aquatic animal production

facilities to implement pollutant controls ($1.92 million to

$9.58 million per year), and

• federal and state governments’ administrative costs

($0.515 million to $ 0.964 million per year).
Enclosure I

22 GAO/RCED-00-206R TMDL Regulations

Summary of EPA’s Analysis of

Proposed Revisions to NPDES Program

• To estimate the costs of the proposed regulation, EPA made

several key assumptions:

• The silvicultural industry will incur additional control costs

in just 20 states because 30 states already have, or will

have, comprehensive and enforceable state laws and/or

programs that would be used instead of NPDES to

control pollutants from silvicultural operations.

• Existing federal and state authority is sufficient to control

discharges from silvicultural operations on public lands.

• Firms required to obtain offsets would essentially incur

no delay in finding an offset to reduce discharges.

• EPA would invoke its authority to issue permits to animal

feeding operations and aquatic animal production

facilities in only limited instances.

Limitations in EPA’s Analysis Raise

Concerns About Usefulness of Estimates

• Limitations in EPA’s analysis raise concerns about its

usefulness for decision-making. Our concerns relate to

EPA’s

• assumption that federal agencies and most states have

or will have (and use) enforceable authorities to control

discharges from silvicultural operations,

• exclusion of costs to control activities such as

regenerating harvested sites, and controlling pests/fire,

• assumption that firms would incur no delay in obtaining

offsets,

• use of key water quality data that are of limited quality,

and

• exclusion of analyses of

• a lower discount rate and

• benefits.
Enclosure I

23 GAO/RCED-00-206R TMDL Regulations

EPA Assumed Majority of States Have

Adequate Controls for Silviculture

• Based on an Environmental Law Institute study, EPA

assumed that 30 states would incur no costs for silvicultural

controls because 20 have enforceable authorities and 10

will develop such authorities by 2008.

• This assumption is subject to substantial uncertainty:

• EPA’s proposed rule does not specify the criteria by

which states’ forest regulatory programs will be deemed

sufficiently comprehensive and adequate.

• Forestry experts and several state foresters in states

with comprehensive authorities told GAO that states

could incur additional costs if EPA requires states to

adopt more stringent regulatory standards.

• In addition, there is uncertainty about whether current

state programs are adequate and effective at controlling

discharges from silvicultural sources.

EPA Assumed Majority of States Have

Adequate Controls for Silviculture

• Some of the states with existing authorities have

waters currently listed as impaired by silviculture; it is

unclear whether these impairments are result of

ineffective controls, lack of enforcement, or poor

practices before authority was established.

• An official from the Environmental Law Institute told

GAO that there are essentially no national data on the

effectiveness of current state silvicultural best

management controls.

• EPA’s estimate of 10 states developing authorities was

based on the rate of program development in the 1990’s,

with no clear evidence that such a rate is likely to continue.

• Given this uncertainty, sensitivity analysis on the rate of

program development would have been appropriate.
Enclosure I

24 GAO/RCED-00-206R TMDL Regulations

• EPA assumed that federal and state agencies have

adequate authority to control discharges from silviculture on

federal and state lands.

• However, according to an EPA official, the proposed

regulation does not preclude EPA from permitting

silvicultural sources on federal lands (i.e., after developing a

TMDL for impaired waters).

• In addition, it is not clear that existing federal or state

authorities are always implemented. For example, a USDA

official told GAO that it is optimistic to assume that federal

agencies will implement BMPs in all cases.

• As a result, EPA’s cost estimate does not account for the

possibility that permits might be required to reduce

discharges on public forest lands.

EPA Assumed Public Landowners Have

Adequate Authority for Silviculture

EPA’s Control Cost Estimate Focuses

Primarily on Timber Harvesting

• EPA’s estimate of the cost of applying best management

practices for silviculture is primarily based on the volume

and acres of timber harvested in counties with impaired

waters. The cost of applying best management practices for

certain other activities are not reflected in this cost estimate.

Other possible activities are:

• post-harvest site preparation and artificial regeneration

of trees. EPA’s proposed regulation states that site

preparation activities may cause significant adverse

impacts on water quality; and

• pest and fire control.
Enclosure I

25 GAO/RCED-00-206R TMDL Regulations

EPA’s Analysis of Costs of Obtaining Offsets

Does Not Include Potential Delay Costs

• In estimating the cost of offsets, EPA’s cost estimate does

not account for the potential cost of delay that a firm may

incur due to an inability to obtain the needed pollutant

reductions (such as from other firms discharging to the

same impaired water).

• Although EPA’s analysis recognized that delay is possible, it

assumed these firms would be able to purchase an offset by

the time the facility construction or expansion project is

approved (about three years).

• However, the market for nonpoint source offsets is not well

defined and there has been minimal trading to date.

• Thus, there is some uncertainty as to whether firms will be

able to purchase offsets--any delay in time required to

purchase offsets could impose additional costs on the firm.

EPA Cost Estimate Does Not Account for More

Aggressive Application of State Controls

• According to EPA, states will avail themselves of all existing

authorities before using burdensome and costly NPDES

permits.

• If this is true, this would create an added incentive for the

states to implement their existing authorities more

aggressively.

• Accordingly, more aggressive implementation would impose

control costs on silvicultural and animal feeding and aquatic

production facilities that would be a result of the proposed

regulation.

• These costs are not included in EPA’s cost estimate.
Enclosure I

26 GAO/RCED-00-206R TMDL Regulations

There are several questions regarding the quality of the data

EPA used in its analysis.

• The data EPA used to estimate the number of impaired

waters and need for NPDES permits are, in some respects,

incomplete and unreliable.

• GAO recently reported that states’ assessments of water

quality are generally based on a small percentage of

monitored waters, may rely on outdated or unconfirmed

data, and are conducted inconsistently across states.

• EPA’s own TMDL cost analysis acknowledges that

additional monitoring in future years will “undoubtedly”

identify additional impaired waters.

Cost Estimates Are Based on

Incomplete Water Quality Data

Cost Estimates Are Based on

Incomplete Water Quality Data

• These limitations add to the uncertainty surrounding EPA’s

cost estimate because the estimate

• does not account for the potential future listings of

additional impaired waters needing TMDLs,

implementation plans, and NPDES permits.

• is based on data that are in some cases unreliable.

• Given these limitations, a sensitivity analysis to assess the

effect of data uncertainty on the cost estimate would have

been appropriate.
Enclosure I

27 GAO/RCED-00-206R TMDL Regulations

EPA Did Not Assess the Effect of a

Lower Discount Rate

• EPA did not assess the effect of a lower discount rate.

• EPA used a 7-percent (real) discount rate--the rate OMB

recommends--to discount future costs to the present.

• However, OMB’s Circular A-94 (OMB’s guidance on

discount rates) also recommends that agencies conduct

sensitivity analyses to assess the effect of discounting

on the present value of benefits and costs.

• According to OMB officials, EPA analysts usually

conduct sensitivity analyses using a lower rate.

• Because many costs (and benefits) associated with

permitting point sources will occur well into the future, a

sensitivity analysis using a lower rate would be appropriate.

EPA Did Not Estimate Benefits

• Executive Order 12866 states that agencies shall assess

both the benefits and costs for significant regulatory actions,

regardless of whether the regulation is economically

significant or not--EPA’s rule was deemed significant by the

agency because it addressed “novel legal or policy issues”.

• EPA did not quantify (and monetize) the proposed rule’s

benefits and, as a result, its analysis does not indicate

whether the expected benefits of the rule outweigh expected

costs.

• EPA officials stated that because the proposed rule was not

economically significant (i.e., would not have an annual

effect on the economy of $100 million or more) they did not

believe they were required to quantify the benefits of the

proposed rule. Instead, the benefits were briefly mentioned

in the proposal for the rule.
Enclosure I

28 GAO/RCED-00-206R TMDL Regulations

EPA Did Not Estimate Benefits

• OMB officials told us that ideally federal agencies should

assess both benefits and costs of proposed regulations to

compare the net benefits of alternative regulatory actions.

• Although EPA’s proposed regulation may have benefits,

without a monetary estimate of both the benefits and costs,

we cannot confirm that the rule is economically justified (i.e.,

that it would have positive net benefits).

• EPA officials told GAO that under OMB’s Best Practices, the

agency is not required to quantify or monetize benefits.

• Nonetheless, we believe it is good economic practice to

express both benefits and costs in comparable dollar terms

in order to estimate net benefits.

• In any case, EPA’s qualitative discussion of the proposed

regulation’s potential benefits was very limited.

Assessment of EPA’s Compliance With

the Regulatory Flexibility Act

Regulatory Flexibility Act

• EPA’s determination that it was not required to conduct

further analyses under the Regulatory Flexibility Act for

either proposed regulation is adequately supported by case

law. (See enclosure III for detailed legal analysis.)

• While the proposed rules do not themselves directly

regulate small entities and while EPA fully complied with the

Regulatory Flexibility Act, this does not mean that future

actions taken by EPA and the states pursuant to these

regulations will not have economic impacts on small entities.
Enclosure I

29 GAO/RCED-00-206R TMDL Regulations

Unfunded Mandates Reform Act

• Nothing in UMRA’s language, legislative history, or case law

definitively addresses how agencies are to perform

preliminary economic assessments or to select the

appropriate baseline in order to determine whether UMRA’s

$100 million threshold has been met.

• UMRA’s legislative history does indicate that the spirit and

intent of Title II of UMRA are meant to be entirely consistent

with the relevant portions of Executive Order 12866.

• OMB’s Best Practices states that it was designed to help

agencies meet the analytical requirements of the Executive

Order and of UMRA.

Assessment of EPA’s Compliance With

the Unfunded Mandates Reform Act

Unfunded Mandates Reform Act

• EPA officials told us they used OMB’s Best Practices and

EPA’s April 1998 draft guidance for performing the

economic analyses on the TMDL and NPDES proposed

rules.

• GAO therefore used these two documents in assessing

EPA’s compliance with UMRA.

• Limitations concerning EPA’s economic analysis call into

question the agency’s estimates of the potential costs of

both proposed regulations.

• Therefore, we disagree with EPA that the agency

adequately supported its determination that the annual costs

will not exceed $100 million, and that additional analyses

required by Title II of UMRA were not needed.

Assessment of EPA’s Compliance With

the Unfunded Mandates Reform Act
Enclosure II

30 GAO/RCED-00-206R TMDL Regulations
Enclosure II

31 GAO/RCED-00-206R TMDL Regulations
Enclosure II

32 GAO/RCED-00-206R TMDL Regulations
Enclosure II

33 GAO/RCED-00-206R TMDL Regulations
Enclosure II

34 GAO/RCED-00-206R TMDL Regulations

The following are GAO’s comments on the Environmental Protection Agency’s letter

dated June 16, 2000.

GAO’s Comments

1. EPA states that GAO incorrectly assessed the reasonableness of the assumptions

used in estimating the costs of the TMDL and NPDES proposed regulations.

However, as our report indicates, there is substantial uncertainty about several of the

key assumptions and data used by EPA, which could affect the cost estimates

derived. Among the most important of these is EPA’s assumption that all states are

or will be in compliance with existing TMDL regulations. It is clear there is current

noncompliance and we believe there is uncertainty as to when states will be in

compliance. For example, while EPA has told us that existing consent decrees and

future lawsuits will be the primary driver for states to get into compliance, litigation

in some states were dismissed and a few consent decrees address only a subset of

waters in a state. In addition, as our report notes, only about 1,300 of the needed

20,000 to 40,000 TMDLs had been developed through fiscal year 1999; state

commitments made to EPA regarding schedules for TMDL development are nonbinding; and additional efforts will be needed by states to develop TMDLs for newly

identified polluted waters. Furthermore, funding for TMDL activities has just

recently become a funding priority and must compete with other priority activities.

In cases of such uncertainty about compliance, both OMB’s Best Practices and EPA’s

economic guidance suggest the consideration of alternative compliance rates in

assessing the economic effect of proposed regulations. Indeed, in cases such as this

one, where it is known that there is noncompliance with a regulation that is being

tightened, EPA’s guidance states that the analysis should estimate costs associated

with attaining full compliance with the existing regulation and then estimate the costs

of moving to full compliance with the tighter regulation.

2. EPA notes that both the agency and the states are actively developing TMDLs, and

that this justifies its baseline assumption that “the states and EPA are working over

time to comply with the current law and its implementing regulation.” This statement

acknowledges that there is current noncompliance with existing regulations.

However, EPA’s cost estimates do not account for this noncompliance. As discussed

above in response to comment 1, both OMB’s Best Practices and EPA’s economic

guidance suggest that noncompliance with existing regulations be considered when

assessing the costs of proposed regulations.

3. EPA states that OMB has not interpreted UMRA as requiring an assessment of the

costs of existing regulations. While we have not reviewed OMB’s record in this

regard, OMB’s Best Practices and EPA’s economic guidance speak directly to this

point. OMB’s Best Practices document, which was issued to assist agencies in

conducting economic analyses under Executive Order 12866 and UMRA, and EPA’s

economic guidance both state that an agency’s economic analysis should consider the

way the world would look absent the proposed regulation (referred to as the

“baseline”) and that many factors may influence this scenario—including the degree
Enclosure II

35 GAO/RCED-00-206R TMDL Regulations

of compliance with existing regulations. EPA’s own guidance for conducting

economic analyses states that, “If it is well known that there is noncompliance with

an existing regulation that is being tightened (i.e., replaced with a more stringent

regulation), then the analysis should be performed in two stages, if possible.” The

guidance goes on to state that the two stages should include estimates of the costs of

attaining full compliance with the existing regulations and the costs of moving to full

compliance with the tighter regulations. Therefore, we believe it would have been

appropriate for EPA to consider alternative baselines with regard to compliance with

existing regulations. We discussed our interpretation of OMB’s Best Practices with

OMB officials and they agreed that it was correct.

4. EPA agrees with our statement that there is nothing in UMRA’s language, legislative

history, or case law that definitively addresses how agencies are to perform economic

analyses. The agency also appears to agree that OMB’s Best Practices and EPA’s

economic guidance help instruct how these economic analyses are to be performed.

Given EPA’s assertions of certainty with its key assumptions in its economic

analyses, EPA believes that it did follow its own guidance. However, as discussed in

our response to comments 1 and 2 above, we believe there are substantial

uncertainties as to when states will be in full compliance, and as to the number of

waters needing TMDLs in the future. Given these uncertainties, we believe it would

have been appropriate to conduct sensitivity analyses, in accordance with OMB’s

Best Practices and EPA guidance, to assess uncertainty in its assumptions and with

key data used.

5. EPA states that we misunderstood OMB’s Best Practices and EPA’s guidance

concerning estimates of baseline costs under existing regulations. EPA then states,

without page citations, that “where a proposed regulation does not change the

environmental or public health standard of an existing regulation, OMB and EPA

guidance indicate that an assumption of full compliance with the regulation is

appropriate.” There is no such statement in either document. Indeed, as we point

out in comments 1 and 3, EPA’s guidance specifically provides that if it is known that

there is noncompliance with an existing regulation that is being tightened (i.e.,

replaced with a more stringent regulation), both the costs of attaining full compliance

with the existing regulation and the costs of moving to full compliance with the new

regulation should be estimated. In this case, the proposed regulation states that it

“strengthens” the current TMDL regulatory requirements so that TMDLs “can more

effectively contribute to improving the nation’s water quality.” In particular, the

proposed regulation will require states to develop TMDLs within 15 years of listing

impaired waters, and to provide reasonable assurance that controls will be

implemented so that water quality standards will be attained and maintained.

Because the TMDL regulation is clearly being tightened, we believe the provision of

EPA’s guidance recommending estimation of the costs of attaining full compliance

with existing regulations is applicable here.

6. EPA cites OMB’s Best Practices as stating that when faced with uncertainty, agencies

should base “[their] decisions on the best reasonably obtainable” information

concerning the intended regulation. We recognize that available information is often
Enclosure II

36 GAO/RCED-00-206R TMDL Regulations

imperfect, and that it is appropriate under such circumstances to rely on the “best

reasonably obtainable” information. However, there is substantial uncertainty about

EPA’s key assumptions and data, and EPA did not assess the effect of these

uncertainties on its cost estimates. We believe that the appropriate course of action

would have been to use sensitivity analyses to assess the effect of alternative

assumptions on the cost estimates. Such an approach would have presented a more

realistic picture of the range of potential costs.

7. EPA states that GAO “wrongly implies that the uncertainty about water quality data

caused EPA to seriously underestimate the extent of pollution problems.” We

continue to believe that the uncertainty over the completeness and reliability of water

quality data substantially adds to the uncertainty surrounding EPA’s cost estimate

because it directly affects the number of water bodies EPA assumes are impaired and

will therefore require TMDLs. EPA’s TMDL cost analysis in fact acknowledges that

there is considerable uncertainty in future listings of impaired waters. However, it

does not account for potential future additional listings in its cost estimate. EPA also

cites a recent GAO report in which state officials told us that they are confident that

they have identified most of their serious water quality problems. In doing so, the

agency appears to imply that few additional waters will require TMDLs. However, the

same GAO report also states that state officials acknowledged that “more

comprehensive monitoring would reveal additional problems.” In fact, in official

agency comments on a draft of that report, EPA drew the same conclusion, stating

that “...it is likely that some states, perhaps most, do not have enough data to identify

all of the impaired waters because they have not achieved comprehensive assessment

of all state waters.”

8. EPA states that our report incorrectly suggests that the agency did not analyze the

benefits of the proposed regulations. It notes that per OMB’s Best Practices, it was

required in this case only to provide a qualitative assessment of benefits, and

described these benefits in the preamble to the proposed regulation. We have revised

our report to state that EPA did briefly mention the benefits in the proposed

regulations qualitatively. That said, the discussion of benefits in the preamble

alluded to by EPA is so limited that it provides little evidence of a meaningful

“assessment” of benefits, as called for by Executive Order 12866. For example, on

page 46015 of the TMDL proposal, EPA states that it is revising the definition of a

TMDL because “Current regulatory requirements have engendered different

interpretations” and that states need “greater certainty in establishing TMDLs and

submitting them to EPA for approval.” EPA also states that it needs a more precise

definition “to promote consistency in reviewing and approving TMDLs nationally.”

For the NPDES proposal, EPA states that it will “achieve reasonable further progress

toward attaining water quality standards. . . . .” EPA describes one way in which the

proposal will accomplish this is by addressing the lengthy administrative continuance

of permits that authorize discharges into impaired waters. It states that “[b]y not

reissuing these permits, there is a delay in the implementation of needed water

quality-based effluent limitations.”
Enclosure II

37 GAO/RCED-00-206R TMDL Regulations

9. EPA notes that while we may have thought it desirable for the agency to provide

different or supplemental economic analysis of the proposed regulation, and that

“while additional analysis is always possible,” time and cost considerations must also

be weighed against delaying the issuance of a rule with significant benefits. We

believe that in light of the high degree of uncertainty concerning the future costs of

these regulations, the consideration of alternative assumptions was more than

“desirable.” Further, statements in one of the economic analyses for the proposed

regulations and by EPA staff do indeed indicate that time was a constraint in

conducting a more thorough analysis, but it is important to note that these time

constraints were the result of the schedule that EPA, itself, set for the issuance of its

regulations.
Enclosure III

38 GAO/RCED-00-206R TMDL Regulations

Assessment of EPA’s Determinations That No Further Analyses Were

Required Under the Regulatory Flexibility Act for the TMDL or NPDES

Proposed Rules

The Environmental Protection Agency (EPA) certified that its proposed rules,

Proposed Revisions to the Water Quality Planning and Management Regulation

(“the TMDL proposed rule”),3 and Proposed Revisions to the National Pollutant

Discharge Elimination System Program and Federal Antidegradation Policy in

Support of Revisions to the Water Quality Planning and Management Regulation

(“the NPDES proposed rule”)4will not have a significant economic impact on a

substantial number of small entities under section 605(b) of the Regulatory

Flexibility Act (RFA).5

You have asked us to assess these certifications. We

believe EPA properly certified the proposed rules under the RFA.

The Regulatory Flexibility Act requires an agency, when proposing a rule for

notice and comment, to “prepare and make available for public comment an initial

regulatory flexibility analysis...[that] describe[s] the impact of the proposed rule

on small entities,6 including small businesses, small non-profit enterprises, and

small governmental jurisdictions.7In addition, when promulgating a final rule, an

agency must “prepare a final regulatory flexibility analysis” that describes, among

other things, “a summary of significant issues raised by the public comments in

response to the initial regulatory flexibility analysis, a summary of the assessment

of the agency of such issues,” and “the steps the agency has taken to minimize the

significant economic impact on small entities.”8

However, these analyses are not required if the agency “certifies that the rule will

not, if promulgated, have a significant economic impact on a substantial number

of small entities.”9

EPA certified that neither the TMDL proposed rule nor the

NPDES proposed rule will have a significant economic impact on a substantial

number of small entities within the meaning of the Regulatory Flexibility Act.10

Therefore, EPA did not prepare an initial regulatory flexibility analysis for either

proposed rule.

3

64 Fed. Reg. 46012 (1999) (to be codified at 40 C.F.R. pt. 130) (proposed Aug. 23,

1999). “TMDL” refers to “Total Maximum Daily Load.”

4

64 Fed. Reg. 46057 (1999) (to be codified at 40 C.F.R. pt. 122 et al.) (proposed

Aug. 23, 1999). “NPDES” refers to “National Pollutant Discharge Elimination

System.”

5

5 U.S.C. §§ 601-612 (1994 & Supp. IV 1998).

6

Id. § 603(a).

7

Id. § 601.

8

Id. § 604(a).

9 Id. § 605(b).

10 64 Fed. Reg. at 46041, 46082.
Enclosure III

39 GAO/RCED-00-206R TMDL Regulations

THE TMDL PROPOSED RULE

EPA’s Certification

In support of its determination that no further analyses were required under the

Regulatory Flexibility Act for the TMDL proposed rule, EPA states that the RFA

requires analysis of the impacts of a rule on the small entities subject to the rule’s

requirements, citing United States Distribution Cos. v. FERC, 88 F. 3d 1105, 1170

(D.C. Cir. 1996); Mid-Tex Elec. Coop., Inc. v. FERC, 773 F.2d 327 (D.C. Cir. 1985);

and Motor & Equip. Mfrs. Ass’n v. Nichols, 142 F.3d 449 (D.C. Cir. 1998).

According to EPA, the proposed TMDL rule establishes no requirements

applicable to small entities.

EPA explains that under section 303(d) of the Clean Water Act,11 states, territories

and Indian tribes authorized to do so by EPA must list impaired waterbodies and

establish Total Maximum Daily Loads (“TMDLs”), or amounts of various

pollutants that a body of water may receive and still allow the water to attain and

maintain water quality standards. If EPA disapproves the efforts of these entities,

it must prepare the lists and TMDLs itself. According to EPA, what the proposed

rule does is set forth requirements for EPA, states, territories, and authorized

tribes to follow when listing impaired waterbodies and establishing TMDLs.

Listing and TMDL requirements are imposed only on these categories of entities

and not on any small entities.

EPA further states that any economic impact on small entities of any lists or

TMDLs established pursuant to the proposed regulation will be indirect and is

highly speculative. First, EPA states, no impact flows directly from this proposed

regulation. Instead, any impact on small entities that discharge pollution into

waterbodies would result from future action by states, territories, authorized

tribes, or EPA in listing impaired waterbodies, establishing TMDLs, and then

implementing them. This future economic impact on small entities may flow

from the TMDLs because the TMDLs are to allocate to individual pollution

sources or categories of sources (which may be small entities) amounts of

pollution that may not be exceeded, and the TMDLs are to have implementation

plans that assure that such sources do not exceed the amounts of pollution

allocated to them.

However, EPA notes that states, territories, Indian tribes, and EPA have

considerable discretion under the Clean Water Act and the proposed regulation

concerning which waterbodies to list, how to prioritize such waterbodies, how to

schedule the waterbodies for TMDL development, and how to calculate and

apportion TMDLs among pollution sources. Thus, it is impossible to predict the

eventual impact (if any) of this proposed rule on any individual sources. This

uncertainty is compounded, according to EPA, by the fact that EPA itself has no

authority to enforce TMDLs for so-called “nonpoint” sources of pollution like

11 33 U.S.C. § 1313(d) (1994).
Enclosure III

40 GAO/RCED-00-206R TMDL Regulations

agricultural operations, which do not discharge pollution from a discrete pipe or

other point. TMDLs for such nonpoint sources are only enforceable to the extent

that they are made so by state, territorial, or tribal laws and regulations, which

means that EPA cannot reliably predict whether or to what extent pollution

allocations will actually be implemented and therefore eventually impact small

entities.

Legal Analysis

EPA’s position that no further analyses were required for the TMDL proposed rule

under the Regulatory Flexibility Act is supported by the case law interpreting the

RFA. The courts have consistently held that an agency may properly certify that

no regulatory flexibility analysis is necessary when it determines that the rule will

not have a significant economic impact on a substantial number of small entities

that are subject to the requirements of the rule.12 Because the TMDL proposed

rule would not itself subject small entities to any requirements, but instead would

impose requirements on states, no regulatory flexibility analysis is required.

The leading case is Mid-Tex Elec. Coop., Inc. v. FERC, 773 F.2d 327 (D.C. Cir.

1996). In Mid-Tex, the Federal Energy Regulatory Commission (FERC) had

proposed a federal rate standard that would regulate the wholesale rates of large

electric utilities. Petitioners in the case, wholesale customers of the utilities,

argued that the Regulatory Flexibility Act required FERC to consider whether its

proposed rule would have a significant economic impact on wholesale customers

as well as on the regulated utilities. Before the Commission, the Small Business

Administration advocated that FERC should also consider the impact on retail

customers of the utilities and even the impact on ultimate retail electric

consumers, many of which were small businesses.

The court of appeals in Mid-Tex examined the language and legislative history of

the RFA, in particular pointing to section 603 of the statute, which specifies the

contents of the initial regulatory flexibility analysis. These initial analyses are to

include “a description of and, where feasible, an estimate of the number of small

entities to which the proposed rule will apply,”

13 and “a description of the

projected reporting, recordkeeping and other compliance requirements of the

12 Michigan v. EPA, No. 98-1497, 2000 U.S. App. LEXIS 3209 (D.C. Cir. Mar. 3,

2000); American Trucking Ass’ns, Inc. v. EPA, 175 F.3d 1027, 1045 (D.C. Cir.),

reh’g granted in part, denied in part, 195 F.3d 4 (D.C. Cir. 1999), cert. granted, 68

U.S.L.W. 3724 (U.S. May 22, 2000) (No. 99-1257); Motor & Equip. Mfrs. Ass’n v.

Nichols, 142 F.3d 449, 467 (D.C. Cir. 1998); United Distribution Cos. v. FERC, 88

F.3d 1105, 1171 (D.C. Cir. 1996); Mid-Tex Elec. Coop., Inc. v. FERC, 773 F.2d 327,

342 (D.C. Cir. 1985). See also Southwestern Pennsylvania Growth Alliance v.

Browner, 121 F.3d 106, 122 (3rd Cir. 1997); Colorado v. Resolution Trust Corp., 926

F.2d 931 (10th Cir. 1991) (where a rule contains no regulatory compliance

requirements at all, no regulatory flexibility analysis is required under the RFA).

13 5 U.S.C. § 603(b)(3) (emphasis added).
Enclosure III

41 GAO/RCED-00-206R TMDL Regulations

proposed rule, including an estimate of the classes of small entities which will be

subject to the requirement....”14 The court concluded that “Congress did not

intend to require that every agency consider every indirect effect that any

regulation might have on small businesses in any stratum of the national

economy.” Id. at 343. Instead, the court held, the problem Congress attempted to

address with the RFA was the high cost to small entities of compliance with

uniform regulations, and the remedy Congress fashioned—careful consideration

of these costs in regulatory flexibility analyses—is accordingly limited to small

entities subject to the proposed regulation. Id.

The principle articulated in Mid-Tex and its progeny has recently been applied in

the context of environmental rulemaking. Last year, in American Trucking Ass’ns,

Inc. v. EPA, EPA rules revising certain National Ambient Air Quality Standards

(“NAAQS”) were challenged on a number of grounds, including on the basis that

EPA had improperly certified that the revised NAAQS would not have a significant

impact upon a substantial number of small entities under the Regulatory

Flexibility Act. EPA argued that the NAAQS themselves impose no regulations

upon small entities. Instead, under the Clean Air Act, the states regulate small

entities through state implementation plans (SIPs) that provide for the attainment,

maintenance, and enforcement of the NAAQS.15 Because the NAAQS only regulate

small entities indirectly—that is, insofar as they affect the planning decisions of

the states—EPA concluded that small entities were not subject to the proposed

regulation.

The American Trucking court of appeals found EPA’s description of the

relationship between the NAAQS, SIPs, and small entities incontestable. 175 F.3d

at 1044. According to the court, states have broad discretion in determining how

they will achieve compliance with the NAAQS, and EPA has no authority, short of

imposing its own SIP on non-complying states, to impose burdens on small

entities. Id. In view of this discretion, the court held, small entities that are

regulated by SIPs and bear the burdens of revised NAAQS are no more subject to

the EPA’s regulation than the wholesalers in Mid-Tex were subject to regulation

by FERC. Id. at 1045.

Finally, and most recently, the Court of Appeals for the D.C. Circuit rejected

another Regulatory Flexibility Act challenge in another Clean Air Act decision,

Michigan v. EPA, No. 98-1497, 2000 U.S. APP. LEXIS 3209 (D.C. Cir. Mar. 3, 2000).

The case involved an EPA rule mandating that 22 states and the District of

Columbia revise their state implementation plans to mitigate the interstate

transport of ozone. The rule was issued under a provision of the Clean Air Act

requiring SIPs to contain adequate provisions prohibiting sources of air pollution

from emitting air pollutants in amounts that contribute significantly to other

states’ nonattainment of National Ambient Air Quality Standards or interfere with

14 Id. § 603(b)(4) (emphasis added). 15 See Clean Air Act § 110, 42 U.S.C. § 7410 (1994).
Enclosure III

42 GAO/RCED-00-206R TMDL Regulations

other states’ maintenance of those standards.16 Under the rule, states were

required to revise their SIPs to include controls on sources of nitrogen oxide, an

ozone precursor.

The court in Michigan v. EPA stated that under the applicable case law, the issue

in evaluating whether EPA had properly certified that the rule would not have a

significant impact on a substantial number of small entities under the RFA was

whether the rule “regulates” small entities. The court agreed with EPA that the

rule did not directly regulate individual sources of emissions. Instead, the court

stated, the rule would require states to develop, adopt, and submit SIP revisions

that would achieve the necessary nitrogen oxide reductions and leave to the

states the task of determining how to obtain those reductions, including which

entities to regulate. Thus, the court concluded, the case was analogous to

American Trucking, in that the rule at issue regulated small entities only

indirectly.

The principle articulated in Mid-Tex and its progeny applies with equal force to

the TMDL proposed rule. The Clean Water Act, like the Clean Air Act,

contemplates a partnership between EPA and the states,17 in which EPA is often

required to set standards or regulatory requirements which states then implement

by regulating individual pollution sources. Thus, as EPA points out, the TMDL

proposed rule would not itself regulate any small entities. Indeed, as in the

Michigan and American Trucking cases, the TMDL proposed rule would not itself

regulate any individual sources of pollution, small or otherwise.

Instead, as in both those cases, the TMDL proposed rule would establish

requirements for states (and territories, Indian tribes, and the EPA) to follow in

listing impaired waters and establishing TMDLs. Also as in both those cases,

states (and territories, tribes and the EPA) will have discretion over many

variables, including which waterbodies to list, how to prioritize such waterbodies,

how to schedule the waterbodies for TMDL development, and how to calculate

and apportion the TMDLs to individual sources of pollution. Therefore, EPA’s

proposed TMDL rule no more regulates small entities that might eventually be

subject to TMDLs than EPA regulated small entities that might eventually be

subject to state implementation plans in the American Trucking decision. As the

court stated in the Mid-Tex opinion, in enacting the Regulatory Flexibility Act,

“Congress did not intend to require that every agency consider every indirect

effect that any regulation might have on small businesses in any stratum of the

national economy.” 773 F.2d at 343.

16 See id. 17 Arkansas v. Oklahoma, 503 U.S. 91, 101 (1992)(“Clean Water Act anticipates a

partnership between the States and the Federal Government”); Virginia v. EPA,

108 F.3d 1397, 1408 (D.C. Cir.), modified on other grounds, 116 F.3d 499 (D.C. Cir.

1997) (“Clean Air Act creates a partnership between the states and the federal

government” (quoting Bethlehem Steel Corp. v. Gorsuch, 742 F. 2d 1028, 1036-37

(7th Cir. 1984))).
Enclosure III

43 GAO/RCED-00-206R TMDL Regulations

Accordingly, we conclude that the case law interpreting the Regulatory Flexibility

Act adequately supports EPA’s certification that the TMDL proposed rule will not

have a significant economic impact on a substantial number of small entities

under section 605(b) of the RFA and its resulting determination that it was not

required to conduct an initial regulatory flexibility analysis under section 603(a) of

that statute.

THE NPDES PROPOSED RULE

EPA’s Certification

EPA certified under section 605(b) of the RFA that none of the several new

provisions of the NPDES proposed rule would have a significant impact on a

substantial number of small entities. EPA’s certification is based on: (1) its

analyses of the potential costs of the new provisions, and (2) the caselaw it cited

in connection with its certification of the NPDES proposed rule. We address

EPA’s economic analysis in the attached briefing slides.

The Offset Provision

One of the provisions of the NPDES18 proposed rule would require that states

ensure that new and significantly expanding dischargers that are large entities on

impaired waterbodies offset their discharges by obtaining and maintaining

reductions in pollution discharges of more than 1.5:1 from existing dischargers on

the same waterbody (“the offset provision”). Because this provision would

require offsets only of large entities, EPA concluded that it would not impact

small entities under the RFA.

The Permit Reissuance Provision

Another proposed provision would authorize EPA to object to and to reissue

expired state-issued NPDES permits that have not been reissued following the

expiration of their 5-year term, where the permit authorizes discharges into

impaired waters or where the permit does not contain limits consistent with the

applicable TMDL.19 EPA characterizes this provision as a proposal to authorize

future discretionary action by EPA.

18 The Clean Water Act generally prohibits the discharge of pollutants from

discrete pipes or "point” sources except pursuant to a permit issued under the

National Pollutant Discharge Elimination System (NPDES). See Clean Water Act,

§§ 301-302, 502 (12), (14); 33 U.S.C. §§ 1311-1312, 1362 (12), (14) (1994).

19 Under the Clean Water Act, states with EPA-approved programs may issue

NPDES permits to sources of water pollution that discharge pollutants from

discrete pipes or “point” sources. See Clean Water Act §§ 402(b); 33 U.S.C. §§

1342(b)(1994).
Enclosure III

44 GAO/RCED-00-206R TMDL Regulations

The Designation Provisions

A final set of proposed provisions would extend EPA’s current authority under the

National Pollutant Discharge Elimination System to designate and require NPDES

permits for certain presently unpermitted sources. The proposal would authorize

EPA under certain conditions to require permits for animal feeding operations,

aquatic animal production facilities, and silvicultural activities.

With respect to animal feeding operations and aquatic animal production

facilities, the current regulations provide that where EPA is the permitting

authority, EPA may designate such facilities as point sources requiring NPDES

permits if EPA determines they are significant contributors of pollution to waters

of the United States. The proposed rule would extend this discretionary

designation authority to authorize EPA action in states with approved NPDES

programs, but only where the EPA has established the TMDL and designation is

necessary to provide reasonable assurance that the TMDL will be implemented.

EPA states that promulgation of the designation provisions involving animal

feeding and aquatic animal facilities is only one step in a series of actions that

must occur before any costs are imposed on any particular small entity. First, the

proposal would authorize EPA action in only a limited set of circumstances:

(1) where a state has either failed to submit a TMDL or has submitted a deficient

TMDL; (2) where EPA has established a TMDL for the water body; and (3) where

EPA determines that the animal feeding or aquatic animal facility is a significant

contributor of pollution and that designation (and permitting) of the source are

needed to ensure that the TMDL is implemented. Moreover, EPA explains that

when and how often it might exercise the proposed authority is unpredictable.

Because EPA does not know for which water bodies in which states it will need to

establish TMDLs, it cannot predict what animal or aquatic facilities it may need to

consider for designation under the proposed authority.

With respect to silvicultural activities, the proposed rule would eliminate the

current categorical exemption from NPDES regulation that most silvicultural

stormwater sources have. Under the proposal, these sources would continue to

be exempt unless and until EPA or a state with an approved NPDES program

designated them as subject to NPDES regulation. The currently unregulated

silvicultural sources would only be required to obtain NPDES permits (1) on a

case-by-case designation by EPA or a state with authority to issue permits and (2)

for the purposes of EPA designation, only for sources that discharge to waters for

which EPA establishes a TMDL, in order to provide assurance that the TMDL will

be implemented.

Concerning the designation provisions involving silviculture, EPA states that

while the provisions may at some point in the future impose costs on dischargers,

including small entities, promulgation of the provisions giving EPA authority to

subject these sources to NPDES permitting requirements does not impose

additional costs on dischargers now. Moreover, because the proposed authority is
Enclosure III

45 GAO/RCED-00-206R TMDL Regulations

discretionary, it is not possible to identify which nonpoint source dischargers, if

any, would be designated as point sources and required to obtain a permit. No

sources would be automatically so designated. Only in the event EPA or a state

acted to designate a particular discharger would there be any costs to the

discharger.

Legal Analysis

EPA’s position that no further analyses were required for the NPDES proposed

rule under the Regulatory Flexibility Act is supported by the case law interpreting

the RFA. As previously discussed, the pertinent inquiry in determining whether a

proposed rule has been properly certified is whether the rule would regulate small

entities. See, e.g., Michigan v. EPA, No. 98-1497, 2000 U.S. APP. LEXIS 3209 (D.C.

Cir. Mar. 3, 2000). None of the provisions in the proposed NPDES rule would

themselves regulate small entities. In fact, except for the offset provision, which

only applies to large entities, none of the provisions would impose requirements

on any entities at all. Instead, both the designation provisions and the permit

reissuance provision would expand EPA’s regulatory authority to allow future

discretionary action by EPA. In such circumstances, the case law holds that

certification is proper.

The designation provision and the permit reissuance provision of the NPDES

proposed rule are analogous to RFA rule certifications upheld in two federal

appellate decisions not cited by EPA. In Colorado v. Resolution Trust Corp., 926

F.2d 931 (10th Cir. 1991), plaintiffs had challenged a Resolution Trust Corporation

(RTC) regulation formalizing the RTC’s interpretation of its authorizing statute as

allowing the RTC to override state branch banking laws preventing banks that

acquired failed or failing thrifts in emergency acquisitions from retaining and

operating the thrifts’ offices as bank branches.

In certifying that the rule would not have a significant impact on a substantial

number of small entities under the RFA, the RTC stated that “the rule will not

impose compliance requirements on depository institutions of any size.”

Moreover, the certification stated, the rule “imposes no performance standards,

no fees, no reporting or recordkeeping criteria, nor any other type of restriction or

requirement with which depository institutions must comply. Thus, it does not

have the type of economic impact addressed by the RFA.” Id. at 948.

The court agreed. Id. Quoting Mid-Tex. Elec. Co-op., Inc. v. FERC, 773 F.2d 327,

342 (D.C. Cir. 1985), the court pointed out that the RFA is meant to address “the

high cost to small entities of compliance with uniform regulations,” and “the

relevant ‘economic impact’ is the impact of compliance.” The RTC rule imposed

no regulatory compliance requirements at all. Therefore, according to the court,

the certification was proper. Id. at 948.

Recently, the Court of Appeals for the Third Circuit determined that the RTC

holding was directly applicable to a rule promulgated by EPA denying
Enclosure III

46 GAO/RCED-00-206R TMDL Regulations

Pennsylvania’s request that the EPA redesignate a certain “nonattainment” area in

the state as an “attainment” area under the Clean Air Act. Southwestern

Pennsylvania Growth Alliance v. Browner, 121 F.3d 106 (3rd Cir. 1997). Like the

RTC rule, the particular rulemaking at issue in Southwestern Pennsylvania

Growth Alliance did not “affect any existing requirements applicable to small

entities” nor did it “impose new requirements.” Id. at 123.

The court rejected an intervenor’s contention that the EPA’s denial of

redesignation would impact small entities. The intervenor had argued that EPA’s

disapproval of Pennsylvania’s redesignation request would soon result in a “bump

up” of the area’s nonattainment classification from “moderate” to “severe.” This

would happen, according to the intervenor, because under the Clean Air Act,

areas that failed to attain air quality standards by the applicable date, as this one

would, were classified by operation of law to the next higher classification, and

that classification would mean stricter pollution control requirements for small

entities in the area. Id. at 123-24.

The court disagreed. According to the court, the more stringent controls

impacting small entities would result from the rulemaking process that would

accompany the reclassification to the higher nonattainment status, not from the

rulemaking process before the court in which the EPA denied Pennsylvania’s

redesignation request. Id. at 124. Therefore, the court concluded, the EPA

properly certified that the particular rulemaking at issue in this case would not

affect small entities under the RFA.

The RTC and the Southwestern Pennsylvania Growth Alliance cases stand for the

proposition that where a rule contains no regulatory compliance requirements at

all, no regulatory flexibility analysis is required under the RFA. That proposition

applies here. As in both those cases, the designation provisions and the permit

reissuance provisions in the NPDES proposed rule impose no requirements on

any entities. Instead, as with the rule in the RTC case, which, as noted previously,

formalized the RTC’s interpretation of its statutory authorization, the proposed

designation provisions and the permit reissuance provisions expand EPA’s

regulatory authority. Moreover, as in the Southwestern Pennsylvania Growth

Alliance case, the permit reissuance provisions and the designation provisions can

be fairly characterized as proposals to authorize future discretionary action by

EPA, and not the current imposition of new requirements.

Accordingly, we conclude that the case law interpreting the Regulatory Flexibility

Act adequately supports EPA’s certification that the NPDES proposed rule will

not have a significant impact on a substantial number of small entities under

section 605 (b) of the RFA and its resulting determination that it was not required

to conduct an initial regulatory flexibility analysis under section 603(a) of that

statute.

(160520)
Orders by Internet

For information on how to access GAO reports on the Internet, send an e-mail message

with “info” in the body to

info@www.gao.gov

or visit GAO’s World Wide Web home page at

http://www.gao.gov

To Report Fraud, Waste, and Abuse

in Federal Programs

Web site: http://www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: 1-800-424-5454