Document ID: EPA-HQ-OW-2016-0568-0010
Agency: epa
Document Type: Supporting & Related Material
Title: 
Posted Date: 2017-07-25T04:00Z

U.S. Environmental Protection Agency
Fees for Water Infrastructure Project Applications under WIFIA
Response to Public Comments
April 2017

EPA received comments from eight commenters on the proposed rule, "Fees for Water Infrastructure Project Applications under WIFIA." The comments, including the Agency's responses, are below. Responses to the most significant comments are included in the preamble to the final rule. 

Regarding EPA's proposed three alternative methods by which the Agency could allocate additional administrative funds to reduce fees, commenters made three suggestions. One commenter suggested that a combination of the three methods should be used. EPA should first reduce or eliminate credit processing fees charged to applicants for projects that primarily serve a population with a median household income of 80 percent or less of the state median household income. The commenter's rationale is that this approach will target fee relief toward communities that are likely facing some of the most significant water affordability challenges and whose residents could most benefit from both low-cost financing and fee relief. The commenter suggested that any remaining funding available after eliminating credit processing fees in these low-income communities should be used to reduce the credit processing fees for all of that year's remaining applicants by a pro-rata percentage of the total credit processing fees paid by the applicant and any forgiveness of credit processing fees should be calculated on the balance of these fees after the credit for payment of an application fee has been applied. Another commenter suggested that EPA should first reduce the credit processing fee for communities for whom the fees would impose the greatest financial hardship. The commenter stated that EPA should reduce the credit processing fees by an equal amount per loan for those projects that serve a population with a median household income that is 80 percent or less of the state median household income. Once fees have been reduced for hardship communities, any remaining funds should be used to reduce credit processing fees by an equal amount per loan for projects serving communities with populations of under 25,000. Another commenter suggested that EPA reduce fees on a pro-rata share based on loan size.
EPA appreciates the comments received on this important issue and agrees that a combination of methods should be used to reduce the credit processing fees of applicants to the extent that Congress appropriates funds beyond those sufficient to cover internal administrative costs. EPA also agrees that the most important use of these additional funds is to reduce the impact of the fees on the neediest applicants.  In order to reduce the impact of fees on those applicants most in need, EPA will reduce the credit processing fee, to the extent possible, by an equal amount per loan for those projects that serve a population with a median household income that is 80 percent or less of the state median household income.  If funds remain, EPA will then reduce fees by an equal amount per loan for those projects serving a population of not more than 25,000.  If funds still remain, EPA will reduce fees by an equal amount per loan for all remaining loans.  EPA cannot reduce fees as a percentage of the credit processing fee paid by an applicant, because the total credit processing fee for each loan will not be known until loan closing, making the determination of funds available to reduce fees across all applicants, or a class of applicants, impossible.
EPA appreciates the commenters suggestion to reduce fees on a pro-rata share based on loan size because the credit processing fee is not determined by loan amount; however, EPA will not adopt this suggestion.  The estimated range of the credit processing fee is based on the complexity of the underlying transaction and the difficulty or length of time of negotiations.  Therefore, between two applicants, one with a greater loan size may have a smaller fee. Providing greater relief to applicants charged a smaller fee, irrespective of need, does not align with the Agency's desire to provide relief to the neediest applicants. 
With respect to the establishment of the application fee and the lower fee level set for projects serving small communities of under 25,000, one commenter suggested that EPA establish more than two levels for the application fee.  The commenter stated that as proposed, the application fee for a community of 50,000 would be the same as for a large metropolitan area.  The commenter also suggested an alternative to setting fee levels by population by basing the fee levels on project size.
EPA appreciates the commenters suggestions but will not adopt this suggestion. The application fee was established at $100,000 in order to allow the Agency to begin the financial and legal analysis of the project while providing assurance that the applicant intends to proceed to closing, and therefore costs incurred by the Agency may be recovered.  The reduced fee was established based on the statutory allowance for projects serving communities of under 25,000 to apply for loans where total eligible costs are at least $5 million, as opposed to the minimum of $20 million required of all other applicants.  The reduced application fee allows small communities with fewer resources to begin the application process. Creating a reduced application fee for such communities logically follows the statutory allowance for reduced project size for such communities.  Setting application fee levels by project size does not correlate to the ability of an applicant to pay the application fee.  Small communities with large projects would struggle to pay a much higher application fee, while large metropolitan areas that can easily pay the application fee might see a reduced fee.
Another commenter stated that the WIFIA application fees should be waivable or greatly reduced for those projects that serve a population with a median household income that is at least 80 percent or less of the state median household income in order to not discourage applications for projects serving low-income communities The commenter proposed that economically stressed communities regardless of size be eligible for application fee waivers or substantial application fee reduction.
EPA appreciates the commenter's proposal but will not adopt the proposal. As previously stated, the application fee was established at $100,000 in order to allow the Agency to begin the financial and legal analysis of the project while providing assurance that the applicant intends to proceed to closing, and therefore costs incurred by the Agency may be recovered. A reduction or waiver of the application fee would remove the incentive for communities to proceed to closing by eliminating the risk of losing the application fee. EPA expects a greater amount of applicants will be able to show economic stress than will be small communities.  If a significant number of applicants receive an application fee waiver or reduction, EPA will be unable to begin the financial and legal analysis required for each project applicant due to limited resources.  As previously stated, if sufficient resources exist for EPA to reduce fees, such resources will be used to reduce the credit processing fees of applicants that serve a population with a median household income that is at least 80 percent or less of the state median household income.  Additionally, the recent WIFIA amendments in section 5008 of P.L. 114-322 allows borrowers to finance fees with the WIFIA loan.
Regarding § 35.10080(b) Adjustment of application fee, a commenter asks: "What is the `application cycle'? Clarifying this helps better understand the frequency with which EPA may adjust the application fees. If this translates to a fiscal year, then this should be clearly stated as such. If it is a timeframe within the fiscal cycle, then clarifying this could make the program more readily understood.
The "application cycle" referred to in this section is the process by which EPA requests and receives Letters of Interest.  Each "application cycle" begins with the issuance of a Notice of Funding Availability (NOFA).  The NOFA may announce multiple rounds of funding within a year. EPA may change the application fee by publishing this change in the NOFA at the beginning of the "application cycle."
One commenter stated that It is not clear under what circumstances EPA might reasonably expect to waive the Credit Processing Fee.
EPA may reduce or waive the credit processing fee if Congress appropriates funds beyond those sufficient to cover internal administrative costs.
One commenter had questions about the servicing fee.  In particular, the commenter asked whether the servicing fee paid for any form of evaluation, for service such as compliance monitoring, for outside consultants, or for internal staff.
The servicing fee covers the costs of servicing the credit instrument, such as collecting and processing loan principal and interest payments.
Another commenter asked whether the optional supplemental fee is an opportunity for the subsidy cost of a project to be paid for by, or on behalf of, an applicant, at a time when EPA does not have sufficient budgetary authority to execute a loan.
The optional supplemental fee allows the subsidy cost to the WIFIA program to be reduced by an applicant through payment of the fee.  This fee will only be charged if the applicant agrees.
One commenter suggests that reducing fees if Congress appropriates funds in any given year beyond those sufficient to cover internal administrative costs is at odds with the purpose of the program and that these funds should be used to increase the amount of subsidy available. 
While it is true that any increase in the allowance for administration may be used for subsidy, unless specifically targeted by Congress for administration only, EPA has determined that the best use of such additional funds, if they are available, is to reduce the fee burden of WIFIA borrowers. 
Regarding the fee for extraordinary expenses, one commenter states, "In the event that "extraordinary expenses" might be incurred by the EPA in the processing of an application for credit assistance, it may be prudent to identify this possibility, to the extent practical, upon initial review of a proposed application. This would presumably be based on some anticipated circumstance(s), or uncertainty as to the complexity (technical, legal or financial) of the proposed project, and therefore, foreseeable. If this is not the case, then the "extraordinary expenses" allowance seems overly broad, or ill-defined, such that there is no certainty or clarity as to what an applicant might expect the EPA to impose under this provision. It is recommended that a clause be included which either: notes the anticipation, and the timing associated with that notice (i.e., upon proceeding to the application phase, beyond the initial letter of interest); or anticipates certain circumstances associated with the application which allows the applicant to address such known risks in the context of its proposal or application.
EPA appreciates the comment, and notes that the commenter mistakenly asserts that the extraordinary expenses fee may be charged to applicants.  This fee may only be charged to borrowers experiencing difficulty relating to technical, financial, or legal matters or other events (e.g., engineering failure or financial workouts) that require EPA to incur time or expenses beyond standard monitoring, after loan closing.  
Regarding the application fee, one commenter states that the fee is in conflict with an amendment to WIFIA in section 5008 of P.L. 114-322 that allows fees to be financed as part of the loan. The commenter believes the final rule must clearly recognize that an applicant may elect to finance its application fees, and should also detail how an applicant would make this request to the agency.
EPA agrees that section 5008 of P.L. 114-322 amends WIFIA to allow fees to be financed as part of a WIFIA loan.  As this is now law, EPA has fully implemented this new feature as part of the WIFIA program.  However, this amendment does not need to be reflected in this rule.  The purpose of this rule is to establish the fee schedule for the WIFIA program and does not in any way intend to regulate or define the financing options or terms for the program.  EPA will issue further information and guidance as necessary related to financing fees.
One commenter suggests that the final rule should describe how an applicant that ultimately does not obtain a WIFIA loan would finance any application fee that it may still be required to pay. 
EPA appreciates this suggestion. However, an applicant that ultimately does not obtain a WIFIA loan may not finance any fees paid with a WIFIA loan.  The language amending WIFIA in section 5008 of P.L. 114-322 states, "On request of an eligible entity, the Secretary or the Administrator, as applicable, shall allow the fees under subparagraph (A) to be financed as part of the loan." The language states that fees may be financed by the WIFIA loan.  This clearly references the WIFIA loan obtained to finance a project. There is no circumstance in which an entity that fails to obtain a WIFIA loan for a project may then receive a WIFIA loan to finance fees.
Regarding the application fee, one commenter suggests that any changes to the application fee, as allowed under subsection (b) of the rule, should be published in the Notice of Funding Availability for the fiscal year in which the change will apply.
EPA agrees and plans to issue such changes, if necessary, in the Notice of Funding Availability for the fiscal year in which the change will apply.
One commenter notes that application fees of $25,000 for projects serving communities of 25,000 people and below and $100,000 for projects serving all other communities are significant, but the fact that applicants will have the option to finance these fees rather than paying them in full at the time of application makes them somewhat less daunting than they would be otherwise. The commenter urges EPA to minimize these fees as much as practicable to promote widespread participation in the WIFIA program.
EPA agrees that the ability to finance fees provides relief to applicants but notes that the application fee must still be paid at the time of application.  The cost of the application fee will be reimbursable at the time of loan closing as part of the financing.  Additionally, as part of sound contracts management, EPA will ensure that fees are kept to a minimum necessitated by the review and negotiation of each individual loan. 
Two commenters requested assurance and documentation that the fees charged by expert firms are competitive and fall within a reasonable market range and that EPA should select these firms through a competitive process and consider cost as a major selection criterion.
Federal Acquisitions Regulations require EPA to ensure that contract costs are fair and reasonable.  For the WIFIA contracts, awards will be made to the most technically proficient contractor at the lowest cost. The financial advisory and legal services will be procured as commercial services. This method of procurement puts less risk on the government as the contract pricing is set by the market. The engineering support services will be procured through a blanket purchase agreement (BPA). This procurement method utilizes GSA schedule rates that have been negotiated and pre-determined to be reasonable. When selecting the contract vehicle types, EPA worked to select contract mechanisms that ensure all costs fall within a reasonable market range.
Two commenters had questions and recommendations regarding servicing fees.  One commenter would like to know if the servicing fee will increase over the life of the loan due to inflation and would like the option to finance servicing fees. The second commenter recommends that the servicing fee be determined at closing with an inflation factor included and if the servicing fee should rise above the estimate at closing the borrower should receive at least 6 months' notice.
The servicing fee will be set at the time of closing and will be adjusted annually in proportion to the percentage change in the Consumer Price Index.
One commenter recommends that EPA seek to change the WIFIA program to allow the program to keep interest earnings on loan in order to pay for the cost of expert services, thereby reducing fees.
This type of change can only be made by Congress.
One commenter notes that the preamble discusses the use of other sources of financing for a project to pay for fees and recommends that EPA clearly state that since EPA is a federal agency, borrowers would only be able to pay for fees with cash on hand or taxable debt proceeds.
EPA understands that there may be limits on the uses of other sources of financing. However, the recent WIFIA amendments in section 5008 of P.L. 114-322 allowing the financing of fees should alleviate the need to finance fees from other sources.
One commenter notes that the extraordinary expenses fee may not be paid in the event of bankruptcy and recommends that EPA establish a reserve fund to cover these expenses in such circumstance, potentially funded by interest earnings on WIFIA loans.
EPA does not have authority to create a reserve fund to cover future extraordinary expenses.  However, EPA expects that in almost all circumstances it will be able to recover such costs.  
One commenter recommends that EPA provide more detail on how the optional supplemental fee is calculated and request public comment on its affordability.  The commenter also asks whether a higher rated credit would be charged a lower fee.
The purpose of the optional supplemental fee is to allow applicants to buy down the subsidy rate in order to proceed to closing in the event there is insufficient appropriated funds to cover the subsidy cost.  This fee will only be charged with the consent of the applicant.  The cost of the fee is based on the availability of appropriated funds and the creditworthiness of the applicant.
One commenter recommends that EPA change the fee structure so that potential fees are more certain.  The commenter notes that EPA will not know if it will be able to reduce fees at the time of application.
EPA understands that costs related to fees may be uncertain at the time of application.  EPA estimates that total fee costs will be on average $350,000 to $700,000 per project.  The fee for each project will be set based on the costs incurred by EPA for that specific project and the amount is expected to vary among applicants.  This variation is a reflection of the amount of time taken to underwrite and negotiate a loan, which may not directly correlate with the size of the project. More complicated transactions with lengthy negotiations will have higher costs.  Despite the loan specific nature of the fee amount, EPA will strive to provide prospective borrowers with a more precise range based on the specific characteristics of the project prior to application.  In addition, it is important to note that the prospective borrower can have a major influence on the fee amount and can keep costs low by accepting standard EPA terms and conditions and reducing time in negotiations.
One commenter suggested that the high fees associated with WIFIA financing appear to be the result of the detailed review of the projects by EPA (often through hired contractors). The commenter suggests that EPA should consider alternative ways of ensuring credit worthiness and meeting the requirements of the statute and that EPA should evaluate the real value of performing independent reviews compared to the alternatives.
EPA has determined that the process by which it will evaluate and underwrite applications for financing is the preferred method.  It ensures that EPA is able to assess and mitigate risks and that the appropriate amount of subsidy is allocated for a loan loss reserve.   EPA will tailor the review process to the specific characteristics, needs, and riskiness of each individual loan.  Not all credits will require extensive review and negotiations, and in those instances, EPA expects fees will be comparatively low.  
One commenter notes that an upfront, nonrefundable fee places significant financial burden on applicants who are likely using consultants to develop the documents required for the application and that fees will dissuade most public agencies from applying. The commenter suggests that a better solution would be to set aside a portion of the budgeted funds to cover EPA administrative costs, similar to what state run programs do. 
Currently, Congress does not appropriate funding beyond what is needed for the WIFIA program's administrative expenses to reduce or eliminate fees.  To the extent Congress does provide additional appropriations EPA will use the remaining available administrative allowance (less any amount needed for future years' administration) to reduce fees.