Document ID: EPA-HQ-OW-2020-0426-0070
Agency: epa
Document Type: Notice
Title: Guidance: Proposed 2022 Clean Water Act Financial Capability Assessment
Posted Date: 2022-02-23T05:00Z

[Federal Register Volume 87, Number 36 (Wednesday, February 23, 2022)]
[Notices]
[Pages 10193-10196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03738]

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ENVIRONMENTAL PROTECTION AGENCY

[EPA-HQ-OW-2020-0426; FRL-8421-02-OW]

Proposed 2022 Clean Water Act Financial Capability Assessment 
Guidance

AGENCY: Environmental Protection Agency (EPA).

ACTION: Notice; request for comment.

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SUMMARY: When municipal discharges cause violations of the Clean Water 
Act (CWA), EPA sets a schedule for the municipality to address them as 
soon as possible. When developing schedules to implement the control 
measures, EPA considers factors such as public health, environmental 
protection, and a community's financial capability. The Proposed 2022 
Financial Capability Assessment (FCA) Guidance describes the financial 
information and formulas the Agency intends to use to assess the 
financial resources a community has available to implement control 
measures. The Proposed 2022 FCA directly incorporates relevant portions 
of the 1997 Combined Sewer Overflows--Guidance for Financial Capability 
Assessment and Schedule Development (1997 FCA Guidance) and EPA's 2014 
Financial Capability Assessment Framework for Municipal Clean Water Act 
Requirements (2014 FCA Framework) as Appendices. Once finalized, EPA 
intends for the Proposed 2022 FCA to replace the 1997 FCA Guidance to 
evaluate a community's capability to fund CWA control measures in both 
the permitting and enforcement context. Additionally, EPA intends 
Section IV.g of the 2022 FCA to assist states and authorized tribes in 
the consideration of economic impacts to public entities for supporting 
revisions to designated uses, water quality standard (WQS) variances, 
and antidegradation reviews for high quality waters. The Proposed 2022 
FCA reflects EPA's consideration of public comments received in 
response to its September 18, 2020 Federal Register publication. The 
contents of this guidance document do not have the force and effect of 
law and are not meant to bind the public in any way. This document is 
intended only to provide clarity to the public regarding existing 
requirements under the law or agency policies.

DATES: Comments must be received on or before April 25, 2022.

ADDRESSES: You may send comments, identified by Docket ID No. EPA-HQ-
OW-2020-0426, by the following method:
     Federal eRulemaking portal: https://www.regulations.gov/. 
Follow the online instructions for submitting comments.
    Instructions: All submissions received must include the Docket ID 
No. for this guidance. Comments received may be posted without change 
to https://www.regulations.gov/, including any personal information 
provided. For detailed instructions on sending comments and additional 
information on the guidance process, see the ``Request for Public 
Comments'' heading of the SUPPLEMENTARY INFORMATION section of this 
document. Out of an abundance of caution for members of the public and 
our staff, the EPA Docket Center and Reading Room are open to the 
public by appointment only to reduce the risk of transmitting COVID-19. 
Our Docket Center staff also continues to provide remote customer 
service via email, phone, and webform. Hand deliveries and couriers may 
be received by scheduled appointment only. For further information on 
EPA Docket Center services and the current status, please visit us 
online at https://www.epa.gov/dockets.

FOR FURTHER INFORMATION CONTACT: Sonia Brubaker, Office of Wastewater 
Management, Water Infrastructure Division (MC4204M), Environmental 
Protection Agency, 1200 Pennsylvania Ave. NW, Washington, DC 20460; 
telephone number: (202) 564-0120; email address: 
[email protected].

SUPPLEMENTARY INFORMATION:
I. Purpose of the Proposed 2022 Financial Capability Assessment 
Guidance
II. Changes From the September 2020 Proposed FCA Guidance
III. Overview of the Proposed 2022 FCA Guidance
IV. Request for Public Comments

[[Page 10194]]

EPA'S Proposed 2022 Financial Capability Assessment Guidance

I. Purpose of the Proposed 2022 Financial Capability Assessment 
Guidance

    The Proposed 2022 FCA advances the ability of communities to more 
thoroughly demonstrate the financial impacts they face and increases 
the transparency of EPA's considerations as it endeavors to 
consistently apply FCA methodologies across the country. The Proposed 
2022 FCA allows communities to submit more consistent and comprehensive 
information relevant to the entire community's capability to fund CWA 
control measures and programs. Specifically, the Proposed 2022 FCA 
includes templates and calculations that communities can use to submit 
information regarding lowest quintile income (LQI), drinking water 
costs, financial models or studies, and other relevant information. The 
templates and calculations include references to publicly available 
data sources that can be used in compiling this information.
    The Proposed 2022 FCA sets forth two alternative approaches for 
assessing a community's financial capability to carry out CWA control 
measures. The first alternative is the existing 1997 FCA methodology 
with expanded consideration of lowest quintile income and poverty in 
the service area. The second alternative is the development of a 
dynamic financial and rate model that looks at the impacts of rate 
increases over time on utility customers. Additionally, EPA recommends 
the application of the methodologies from Alternative 1 of the Proposed 
2022 FCA to the consideration of economic impacts to public entities 
when making decisions on WQS variances and antidegradation reviews. In 
appropriate cases, these methodologies also inform decisions about 
revisions to designated uses, subject to additional analyses.
    EPA is proposing to base its FCA metrics on data that is available 
in the American Community Survey (ACS). The ACS is conducted every year 
by the U.S. Census Bureau to provide up-to-date information about the 
social and economic conditions of communities. The annual updates 
include key socio-demographic information at an appropriate geographic 
scale with historic continuity. The ACS can produce data showing the 
quintiles of household income (each quintile defines the household 
income range for 20% of a community's households). The 2022 Proposed 
FCA metrics meet the following criteria recommended by the National 
Academy of Public Administration (NAPA): \1\
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    \1\ NAPA issued a report titled ``Developing a New Framework for 
Community Affordability of Clean Water Services'' in October 2017.
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     Readily available from publicly available data sources;
     Clearly defined and understood;
     Simple, direct, and consistent;
     Valid and reliable measures, according to conventional 
research standards; and
     Applicable for comparative analyses among permittees.
    The 2022 Proposed FCA strengthens both CWA protections and water 
service affordability protections. For the first time, EPA may ask 
municipalities negotiating compliance schedules and certain WQS 
revisions to affirmatively demonstrate actions to reduce or mitigate 
the financial impact of water service costs on the lowest quintile 
households and to achieve compliance as expeditiously as possible.

II. Changes From the September 2020 Proposed FCA Guidance

    On September 18, 2020, EPA published a Proposed 2020 Financial 
Capability Assessment for Clean Water Act Obligations (Proposed 2020 
FCA) in the Federal Register for notice and public comment.\2\ On 
January 12, 2021, EPA posted a pre-publication version of the FCA 
Guidance on the Agency's website. The pre-publication FCA was never 
published in the Federal Register and was withdrawn for review and 
approval in accordance with the January 20, 2021 White House 
Memorandum, Regulatory Freeze Pending Review.\3\ The Proposed 2022 FCA 
reflects EPA's consideration of public comments received in response to 
its September 2020 Federal Register publication, as well as feedback 
received through various stakeholder outreach sessions since then. The 
three major changes from the Proposed 2020 FCA are outlined below.
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    \2\ See 85 FR 58352 (September 18, 2020).
    \3\ See https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/20/regulatory-freeze-pending-review/.
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1. Consideration of Lowest Quintile Households and Poverty Indicators

    EPA originally proposed to add two new FCA metrics, the Lowest 
Quintile Residential Indicator (LQRI) and the Poverty Indicator (PI). 
The LQRI was intended to evaluate the financial impact of CWA costs on 
lowest quintile households in a community by calculating the ratio of 
adjusted costs per lowest quintile household to the service area's 
lowest quintile income.
    While commenters were supportive of the new poverty measures, many 
expressed concerns about the methodology proposed to scale the costs 
for lowest quintile households and the proposed LQRI thresholds. A 
number of community-specific factors--such as age of infrastructure, 
housing type, and efficiency of water appliances--may impact water 
usage and costs to lowest quintile households. In addition, if the 
community charges residential customers on a fixed rate structure, 
i.e., low-volume households receive the same bill as high-volume 
households, a metric that scales down estimates of cost based on 
projected water use would not be appropriate.
    EPA recognizes that considering lowest quintile income is an 
important measure to supplement existing FCA metrics. Median household 
income (MHI) does not account for the variability of income 
distribution from community to community. Even when communities have a 
similar MHI, infrastructure investments could have a greater financial 
impact on low-income households in certain situations, such as when 
there is a wide distribution between the highest and lowest income 
customers. For this reason, EPA is proposing two simplified Proposed 
Options to assess the severity and prevalence of poverty in a 
community's service area. EPA is seeking comment on both Proposed 
Options, but only one of the Proposed Options is to be included in the 
final 2022 FCA Guidance. Both Options consider the community's lowest 
quintile income as benchmarked against the national lowest quintile 
income, as well as five poverty indicators:
     Percentage of Population with Income Below 200% of Federal 
Poverty Level;
     Percentage of Population Receiving Food Stamps/SNAP 
Benefits;
     Percentage of Vacant Households;
     Trend in Household Growth; and
     Percentage of Unemployed Population 16 and Over in 
Civilian Labor Force.
    EPA has determined that the methodology of either Option 1 or 2 
would enable EPA to distinguish between two communities with similar 
MHI but different levels of poverty.
    Proposed Option 1 for Comment: This Option would add a single new 
metric to the assessment, the Lowest Quintile Poverty Indicator (LQPI) 
to be considered with the Residential Indicator and Financial 
Capability Indicator. The LQPI would combine a lowest quintile income 
element with poverty indicator elements. To ensure that both the 
severity and prevalence of

[[Page 10195]]

poverty are reflected in the LQPI metric, EPA would give equal weight 
to the LQI (50%) and the five prevalence of poverty indicators 
(weighted at 10% each for a total of 50%).
    Under Proposed Option 1, Residential Indicator and Financial 
Capability Indicator would be combined in a matrix to determine an FCA 
Score. An Initial LQPI Score would be calculated, and adjusted based on 
a Financial Alternatives Analysis, if appropriate. Finally, the FCA 
Score and Final LQPI Score would be combined in the Expanded FCA Matrix 
to provide the final FCA result.
    Proposed Option 2 for Comment: This Option would add two new 
metrics, the Lowest Quintile Income Indicator (LQII) and the Poverty 
Indicator (PI) to be considered with the Residential Indicator and 
Financial Capability Indicator. The LQII is the lowest quintile income 
metric, and the PI is a separate metric based on the average score of 
the five prevalence of poverty indicators.
    Under Proposed Option 2, the Residential Indicator and Financial 
Capability Indicator would be combined in a matrix to determine an FCA 
Score. Then, LQII and PI would be each calculated separately. The LQII 
and PI would be combined in a matrix to determine an Initial LQPI 
Score. The Initial LQPI Score would be adjusted based on a Financial 
Alternatives Analysis, if appropriate. Finally, the FCA Score and Final 
LQPI Score would be combined in the Expanded FCA Matrix to provide the 
final FCA result.

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   Summary of Section IV.b of the Proposed 2022 FCA: Step 3 Shows Two
Proposed Options for Consideration of Lowest Quintile Income and Poverty
                               Indicators
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Step 1: Calculate Residential Indicator.
Step 2: Calculate Financial Capability Indicator.
Step 3: Calculate Initial Lowest Quintile Poverty Indicator Score--Two
 Proposed Options.
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Step 3 Under Proposed Option 1              Step 3 Under Proposed Option
                                             2
 
Calculate Initial Lowest Quintile Poverty   First, calculate the Lowest
 Indicator Score based on the six elements   Quintile Income Indicator
 below:                                      Score (i.e., community's
 Lowest Quintile Income              Lowest Quintile Income
 benchmarked to National LQI--50% of         benchmarked to the National
 score.                                      LQI).
 Percentage of Unemployed           Then, average the five
 Population 16 and Over in Civilian Labor    poverty elements below to
 Force--10% of score.                        determine the Poverty
 Percentage of Population Living     Indicator Score:
 Under 200% of Poverty Level--10% of         Percentage of
 score.                                      Unemployed Population 16
 Percentage of Population            and Over in Civilian Labor
 Receiving Food Stamps/SNAP Benefits--10%    Force.
 of score.                                   Percentage of
 Percentage of Vacant Households--   Population Living Under
 10% of score.                               200% of Poverty Level.
 Trend in Household Growth--10% of   Percentage of
 score.                                      Population Receiving Food
                                             Stamps/SNAP Benefits.
                                             Percentage of
                                             Vacant Households.
                                             Trend in Household
                                             Growth.
                                            Finally, combine the LQI and
                                             PI in the Initial LQPI
                                             Matrix to determine the
                                             Initial LQPI Score.
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Step 4: Perform Financial Alternatives Analysis if Initial LQPI Score is
 ``medium'' impact or ``high'' impact.
Step 5: Determine Final LQPI Score.
Step 6: First, combine RI and FCI to determine Financial Capability
 Matrix Score. Then, combine Financial Capability Matrix Score and Final
 LQPI Score to determine Expanded Financial Capability Assessment Matrix
 Score.
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2. Addition of Financial Alternatives Analysis

    Where CWA compliance costs may have an impact on a community's 
residents with incomes in the lowest quintile, a longer schedule may 
not always be the best solution to address impacts to those residents. 
In particular, if a community shows strong economic indicators in other 
categories, there may be better options for the community to address 
the potential financial burden faced by its lowest quintile 
residents.\4\ If the intended goal is to help a community's lowest 
income residents, an extended CWA schedule may in fact have the 
opposite effect if it delays addressing pollution in the neighborhoods 
where they live.
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    \4\ The CSO Policy identifies three additional financial 
considerations for negotiating implementation schedules: Grant and 
loan availability; previous and current residential, commercial and 
industrial sewer user fees and rate structures; and other viable 
funding mechanisms and sources of financing. See 59 FR 18688, 18694 
(April 19, 1994).
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    Use of variable rate structures, customer assistance programs, and 
applications for grants or subsidies from the Clean Water State 
Revolving Fund (CWSRF) are all potential tools to enable shorter 
compliance schedules by allowing increased total spending on compliance 
without burdening low-income customers. Federal funding initiatives and 
programs such as the Bipartisan Infrastructure Law (BIL), American 
Rescue Plan Act (ARPA), State Revolving Loan Funds (SRFs), Water 
Infrastructure Finance and Innovation Act (WIFIA) and others provide 
billions of dollars for state, local, territorial, and tribal 
governments. For instance, the Bipartisan Infrastructure Law has 
provided $11.7 billion in additional funds to the CWSRF. The state 
match requirement has been reduced to 10% for the first two years and 
49% of the money will be provided as grants or principal forgiveness 
loans to communities. These resources create a historic opportunity for 
communities to address long-standing challenges. In addition, shorter 
compliance schedules provide water quality and public health 
improvements that deliver important social, environmental, and economic 
benefits to the community. For these reasons, EPA does not intend to 
provide extended CWA compliance schedules or greater consideration for 
WQS decisions unless the community demonstrates that it has taken all 
feasible steps to reduce or mitigate the financial impact of water 
service costs on the lowest quintile households and to achieve 
compliance as expeditiously as possible. In evaluating this 
demonstration, EPA expects to look comprehensively at the community's 
financial strategy, including, but not limited to, an analysis of the 
community's approach to covering costs through rate structure and 
design as well as its other initiatives to assist low-income customers 
while assuring necessary and timely compliance with environmental 
requirements.

[[Page 10196]]

3. Modification of Scheduling Benchmarks

    The Proposed 2020 FCA provided that communities with ``medium'' FCA 
impacts could qualify for compliance schedules of up to 15 years and 
``high'' impact communities could receive compliance schedules up to 25 
years, or as long as the useful life of the CSO controls for unusually 
high impacts. For users of the Proposed 2022 FCA, it is more 
transparent and consistent to define a recommended scheduling boundary 
rather than retain the ``useful life'' language. It is important to 
consider human health and environmental impacts as well as cost when 
considering extended schedules. EPA is also mindful that prolonging 
water quality impairments could exacerbate environmental justice 
concerns. EPA believes that, for unusually high impacts, 25 years is a 
reasonable recommended scheduling benchmark that is more consistent 
with environmental protection and the Agency's past FCA practice.
    EPA proposes to revise the FCA guidance to keep 15 years as the 
outer recommended boundary for ``medium'' impact communities and change 
the benchmark for ``high'' impact communities to 20 years, or up to 25 
years for unusually high impacts, but is seeking comment on whether 
these are appropriate recommended scheduling boundaries.

III. Overview of the Proposed 2022 FCA Guidance

    The 2022 FCA Guidance recommends two alternative approaches for 
assessing a community's financial capability to carry out CWA control 
measures. The first alternative is the existing 1997 FCA methodology 
with expanded consideration of poverty and impacts on the population in 
the service area with incomes in the lowest quintile. EPA is retaining 
the 1997 Residential Indicator (i.e., 2% of MHI) and the Financial 
Capability Indicator because they measure factors required under the 
Clean Water Act by the CSO Policy as part of a financial capability 
assessment.\5\ These indicators also allow for consistent comparative 
analysis among communities. The new critical metric, the Lowest 
Quintile Poverty Indicator (LQPI), allows the Agency to assess severity 
and prevalence of poverty. The second alternative is the development of 
a dynamic financial and rate model that looks at the impacts of rate 
increases over time on utility customers.
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    \5\ The Clean Water Act requires that each permit, order, or 
decree for a discharge from a municipal combined storm and sanitary 
sewer conform to the CSO Policy. 33 U.S.C. 1342(q). The CSO Policy 
lists the following considerations for financial capability: Median 
household income; total annual wastewater and CSO control costs per 
household as a percent of median household income; overall net debt 
as a percent of full market property value; property tax revenues as 
a percent of full market property value; property tax collection 
rate; unemployment; and bond rating. See 59 FR 18688, 18694 (April 
19, 1994).
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    Both alternatives permit consideration of other metrics and may 
support an extended implementation schedule. Nonetheless, EPA does not 
anticipate establishing implementation schedules that would exceed 20 
years, or up to 25 years for communities that demonstrate unusually 
high impacts. The Proposed 2022 FCA can help to ensure that local 
challenges related to low-income households are better reflected in CWA 
implementation schedules. Consistent with previous policy, EPA plans to 
consider any relevant financial or demographic information presented 
that illustrates the unique or atypical circumstances faced by a 
community. The Proposed 2022 FCA is available at: https://www.regulations.gov/, Docket ID No. EPA-HQ-OW-2020-0426.
    Additionally, EPA recommends application of the methodologies from 
the Proposed 2022 FCA to the consideration of economic impacts to 
public entities for supporting revisions to designated uses, WQS 
variances, and antidegradation reviews for WQS. EPA intends that the 
recommended expanded matrix for WQS decisions in the Proposed 2022 FCA, 
once finalized, along with the electronic spreadsheet tools for the 
public sector,\6\ would replace the worksheets and calculations for the 
public sector sections of the 1995 Interim Economic Guidance for Water 
Quality Standards. The Proposed 2022 FCA does not revise the 
recommended methodology in the private sector sections of the 1995 WQS 
Guidance.
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    \6\ These electronic spreadsheet tools for the public sector, 
available at https://www.epa.gov/wqs-tech/spreadsheet-tools-evaluate-economic-impacts-public-sector, encompass the data inputs 
and calculations of the 1995 Interim Economic Guidance for Water 
Quality Standards.
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IV. Request for Public Comments

    EPA requests public comment on the Proposed 2022 FCA. Specifically, 
EPA is requesting comment on the following:

    1. Should the Final 2022 FCA incorporate a single new metric--
LQPI--that considers lowest quintile income and poverty elements 
together? Or should the Final 2022 FCA incorporate two new metrics 
(a lowest quintile income indicator and a poverty indicator) to be 
calculated separately and combined in a matrix?
    2. EPA is seeking additional examples or case studies of funding 
and financing considerations to add to Appendix C.
    3. EPA is seeking feedback on the current proposed scheduling 
benchmarks of 20 years for ``high'' Expanded FCA Matrix impacts, or 
25 years for unusually high impacts. If commentors propose different 
benchmarks, EPA is requesting examples to support the basis for such 
benchmarks.

    Dated: February 10, 2022.
Andrew D. Sawyers,
Director, Office of Wastewater Management, Office of Water.
[FR Doc. 2022-03738 Filed 2-22-22; 8:45 am]
BILLING CODE 6560-50-P