How Will Water Affordability be Defined for the Next 20 Years?

The EPA has a chance to listen and implement water industry leaders’ recommendations on affordability using new data, methods, metrics and digital technologies. Here’s a review of submitted comments to the EPA on its proposed affordability guidance updates. 

By Greg Baird

In the United States, the water affordability paradigm is based on a fundamentally flawed convention that the average water and sewer bill with a combined value over 4.0 percent or 4.5 percent of median household income (%MHI) is considered “unaffordable.” This metric stems from a 2 percent of MHI benchmark intended to measure community-level affordability for wastewater created by the U.S. EPA’s 1997 Combined Sewer Overflows — Guidance for Financial Capability Assessment and Schedule Development (1997 FCA Guidance). This guidance is intended to assess a community’s financial capability to implement project schedules and control measures needed to meet Clean Water Act (CWA) obligations. The EPA’s 1997 FCA has erroneously become the defacto standard to measure household affordability for the last two decades and is widely used as a financial affordability benchmark during utility rate setting discussions.

On Sept. 15, 2020, when EPA released its Proposed 2020 Financial Capability Assessment Guidance (Proposed 2020 FCA) asking for comments due back on Oct. 19, 2020, hundreds of utilities reacted at the anticipation of the EPA signaling a change in how the agency considers the financial burdens when developing implementation schedules for CWA permits and consent decrees applicable to public utilities. Any new change has been long coming as several organizations have been appealing to the EPA to make changes to the 1997 FCA during the past 20 years.

A key input came from a 2016 Congressional direction for the EPA to contract with the National Academy of Public Administration (NAPA) to create a framework for “community affordability.” The NAPA report, “Developing a New Framework for Community Affordability of Clean Water Services” was guided by the feedback and participation from the American Water Works Association (AWWA), the National Association of Clean Water Agencies (NACWA), the National League of Cities (NLC), the Brookings Institute, Center for Progressive Reform (CPR), the Natural Resources Defense Council (NRDC) and the U.S. Conference of Mayors (USCM).

In an effort to further collaborate with local decision makers to help ensure the proper collection and treatment of domestic sewage and wastewater, the EPA requested comments on the proposed 2020 Financial Capability Assessment, which would expand the metrics EPA uses to consider a community’s financial capability to fund its water obligations. While specific and sometimes narrow questions were asked as part of the comments, several organizations also provided overall feedback concerning water infrastructure and affordability. This critical feedback sheds greater light on the water industry’s struggle with defining water affordability and raises concerns over elements of the Proposed 2020 FCA.

What Water Sector Organizations Are Saying

The submitted comments from water/sewer utility trade associations, local government organizations including finance and public works, civil engineering associations, underground infrastructure management experts and manufactures, establish a resounding voice of conscience from the U.S. water sector that state and federal agencies — specifically the EPA ­— should listen to.

AWWA, a 501c3 scientific and educational member association with 50,000 drinking water members, along with WEF’s comprehensive study of wastewater and NACWA with the nation’s top clean water utilities, have provided praise to the EPA leadership and staff in responding to the NAPA report. A 2019 joint funded study from the three organizations encouraged the EPA to finalize the guidance with the caveat that additional adjustments, materials and future steps will still be needed. As for the Proposed 2020 FCA, both alternatives are recommended to be available to all applicants. The new metrics of the lowest quintile residential income indicator and poverty indicator should be included in both alternatives with a special emphasis on cash flow modeling and household-level affordability analysis of a “total” water household burden (including drinking water, wastewater, stormwater, recycling, etc.).

The tone of disappointment and concern in not following all of the NAPA revelations and NACWA analysis was expressed in their collective feedback related to any retention of the 1997 guidance, proposed adjustments for household size and any use of the arbitrary 2 percent as any kind of benchmark. Additionally, clarity was requested for the linkage between the FCA to any flexible project schedule and the use of the term “useful life.” Above all, the EPA needs to clearly state the FCA is only a scheduling tool and does not define water affordability in the broader sense. It also should not be used in a way that utility managers will not misinterpret that once the lowest quintile reaches 2 percent of their income on water costs, that rates have somehow become unaffordable.

The Role of Local Government

Local governments also have a direct interest in any proposed changes to the FCA. The U.S. Conference of Mayors, representing cities with populations greater than 30,000, the National League of Cities (NLC) representing more than 19,000 cities, towns and villages, the National Association of Counties (NACo) with 3,069 counties and 20,000 members of the Government Finance Officers Association (GFOA) point out that even after Clean Water and Drinking Water State Revolving Loan Funds (SRFs) and WIFIA loans, local governments are currently responsible for 98 percent of all water and wastewater expenditures to comply with federal and state unfunded mandates.

Since 2009, collectively, they have promoted the use of green infrastructure, creating an Integrated Planning Framework (IP Framework) and revising the affordability guidance. As such, they support the Proposed 2020 FCA and its flexibility and transparency, but want it finalized with the following revisions: Remove MHI as a benchmark which has masked financial burdens, clarify “useful life”, allow flexibility on the schedule of timeframes for compliance on  project by project basis and clarify how new Water Quality Standards (lead pipes, PFAS, etc.) will fit in. The emphasis is that the EPA needs to allow enough flexibility to allow for the development of a solution that meets that community’s needs and that local officials want to work with the EPA to establish a timeframe for compliance that is synchronized with a local government’s ability to invest and operate. Once again, the imperative is to include all water costs “all in” and not “siloed” and have the communities submit actual utility billing data to improve transparency and accuracy in determining affordability.

The EPA now finds itself at the crossroads of partnering with and supporting the industry’s water affordability recommendations.

While 85 percent of water utilities and 54 percent of sewer utilities are owned and controlled by municipal governments, most fall under the public works department or utilities department. The American Public Works Association (APWA) with 30,000 members recommends that the EPA support legislative and regulatory efforts to encourage water systems with noncompliance issues to voluntarily partner with successful and compliant utilities to limit the liability of the “Good Samaritan” water utility. APWA also recommends rate design that is more accurate and reflective of full cost-of service and that cost-benefit analyses and feasibility studies are needed. APWA points out that affordability varies by community, region and economic conditions and that the use of MHI is arbitrary, does not include average water use and is a grossly inadequate metric for affordability. It also stresses the inclusion of stormwater management with CWA compliance and cost considerations. APWA recommends volumetric sewer prices based on indoor flow and that rate making and design consider low fixed charges for low volume customers which are often low income. APWA explains that even while the new FCA will provide a better picture of what communities can afford, it will not, however, resolve the need for additional federal support and funding. APWA urges that the “EPA should request from Congress and Congress should provide substantial increases in federal funding for investment in water infrastructure.”

While the EPA can provide more flexible and extended schedules, public works professionals are concerned with the impact of delaying compliance of water pollution regulations in order to just keep utility rates low. Clean water agencies have also raised the same fear that schedule delays have real consequences. Many are not willing to simply accept the public health risks and a scenario where the community and low-income populations have to wait for water quality improvements.

This raises what some have described as “the bigger policy challenge” and asking the question that, as a nation, will we provide communities (low-income populations) the assistance and funding to have access to clean and safe water? Will the EPA finally address these bigger policy questions?

The American Society of Civil Engineers (ASCE) with their 150,000 engineers every four years publish the Infrastructure Report Card which gave water infrastructure a “D” grade and wastewater infrastructure a D+ in 2017. A stormwater grade is expected in 2021. ASCE highlighted the issues of the 16,000 wastewater treatments plants that are functioning at about 81 percent of their design capacities while 15 percent have reached or exceeded it and the chronic trend of underinvestment which continues to widen the financial gap. ASCE reminds the EPA that while each water, sewer, storm enterprise fund is separate with their own rates, charges and fees, each requires its own financial assessment of current and future risks and costs to start to understand the water affordability issue of a community. ASCE warns the EPA that any new FCA guidance will once again be incorrectly adopted as a national affordability standard and that each community will still need to struggle with their own definition of affordability and equity.

ASCE suggests the additional federal requirements of the “Drinking Water System Risk Assessments and Emergency Response Plans” required under America’s Water Infrastructure Act (AWIA) also needs to be considered. ASCE supports reducing costs and fostering optimization through the use of life cycle cost analysis and recommends that the EPA develop a unit cost template and common standard of metrics as found in the AWWA Utility Benchmarking publication for performance management. In doing so, they also recommend separating maintenance costs from operational costs. ASCE strongly recommends that rate studies and cost of service models following the AWWA M1 published guidelines be required and “growth pays for growth” policies should be updated so developers “buying into the system” can help offset the cost burden of existing customers. Many times, growth’s share of the costs fall to the financial burden of low-income customers.

ASCE proposes the remaining useful life of an asset be calculated as part of an asset management and condition assessment program and the correct remaining life be reflected in the accounting system to increase the accuracy and valuation of the utility. This more accurate valuation can then update rates and the value of the utility for privatization, consolidation or regionalization reviews to mitigate affordability concerns where a change in the governance or management model maybe needed. Engineers also recognize that grey infrastructure projects are not the only solution in meeting compliance issues but the application of digital technologies, remote monitoring, advanced analytics and digital twins can reduce costs and risks as another means to address affordability issues and emerging water quality and contaminant concerns. ASCE has a utility asset management (UAM) division and water and sewer asset management committee to help promote the use of best practices to reduce risks and the total cost of ownership.

Asset Management

Asset management has been a key solution for consent decrees. In 2003, the Buried Asset Management Institute – International (BAMI-I) was established to help with the largest and most complex federal consent decree at the Atlanta’s Department of Watershed Management. Through an EPA Cooperative Agreement in 2006, the Certificate of Training in Asset Management courses (CTAM) were developed. BAMI-I’s response (now at Purdue University) calls to eliminate the 2 percent metric which does not have any real justification. BAMI-I recommends cost of service rate studies and cash flow models to be conducted for all separate enterprise funds (water, sewer, and storm) to understand the actual costs to maintain current service levels now, in the future and the costs of unfunded mandates. Using the asset management principles of business continuity and cost improvement to evaluate ways to reduce the overall life cycle costs of an asset or treatment process, they call for new technologies, processes and materials including deploying sensors and developing digital twins to increase operational awareness. BAMI-I suggests that between the local, regional, state and federal levels of cooperation the mix of funding and timing of the project should be decided to maximize the life cycle value of the assets and protect the public health.

The underground infrastructure manufacturer’s PVC Pipe Association’s comments explained how sustainable water resources and service levels connect the entire urban water cycle as described by the US Water Alliance‘s One Water concept to support affordability. The PVC Association boldly states that affordability needs to be prioritized with “all water” and the EPA should not presuppose what affordability, or the “value of water” is to a community. “Water, if prioritized, should never be “unaffordable” otherwise it devalues life.” While recommending rate studies and cash flow models, life cycle analysis and life cycle assessments to reduce the carbon footprint, they also would require each project to have a checklist of digital technologies, solutions and strategies applied for each infrastructure group and only base implementation schedules on cost and risk analysis.

Xylem, Inc., a global water equipment, instrumentation and digital solutions company also provided supporting comments. Xylem, as with the other water leaders, recommends analyzing the true economic burden for “all water services” and incorporating the best available technology, such as digital technologies that improve water quality and deliver operational cost savings.

Xylem says it believes that “innovation is key to a community’s affordability in the immediate and long-term.” The deployment of digital technologies, which did not exist in 1997 or when projects “did their research” need to be included. This includes the use of SCADA, GIS, sensors, IoT, wireless and secured connectivity, data collection and cloud storage, advanced analytics, and the use of AI, machine learning and digital twins. It also includes the development of asset monitoring technologies for distribution, collection, treatment, storm and re-use and that they should be included in the requirements, project plans and implementation schedules.

It is anticipated when finalized, the 2020 FCA will support negotiations of schedules for implementing CWA requirements for municipalities and local authorities. The EPA has requested stakeholder comments and the feedback overwhelmingly recommends using new data, new methods and metrics, as well as innovative digital technologies.

The EPA now finds itself at the crossroads of partnering with and supporting the industry’s water affordability recommendations. The questions remain – can the federal agency move away from 1997 framework into the 2020s, applying innovation and changing how projects will be scheduled and how affordability will be discussed for the next 20 years? Will we as a nation decide to support one water equity for disadvantaged communities who need clean and safe water services?

One thing is clear, the water industry leaders stand united as willing partners to deliver sustainable and affordable water services for the nation.

Greg Baird is president of the Water Finance Research Foundation and a frequent contributor to WF&M. As a management consultant, he specializes in long-term utility planning, infrastructure asset management and capital funding strategies for municipal utilities in the United States. He has served as a municipal finance officer in California and as the CFO of Colorado’s third-largest utility.

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