Small Drinking Water Systems Variances-Revision of Existing National-Level Affordability Methodology and Methodology To Identify Variance Technologies That Are Protective of Public Health, 10671-10685 [06-1917]

Agencies

• ENVIRONMENTAL PROTECTION AGENCY

[Federal Register Volume 71, Number 41 (Thursday, March 2, 2006)]
[Notices]
[Pages 10671-10685]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-1917]



[[Page 10671]]

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ENVIRONMENTAL PROTECTION AGENCY

[EPA-HQ-OW-2005-0005; FRL-8035-7]


Small Drinking Water Systems Variances--Revision of Existing 
National-Level Affordability Methodology and Methodology To Identify 
Variance Technologies That Are Protective of Public Health

AGENCY: Environmental Protection Agency (EPA).

ACTION: Notice.

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SUMMARY: The 1996 amendments of the Safe Drinking Water Act (SDWA) 
provide States the authority to grant variances to small public water 
systems that cannot afford to comply with a primary drinking water 
standard. These variances allow a system to install and maintain 
technology that can remove a contaminant to the maximum extent that is 
affordable and protective of public health in lieu of technology that 
can achieve compliance with the regulation. One of the conditions for 
States to grant variances on a case-by-case basis is that the EPA must 
have found for systems of a similar size and with similar source water 
that there are no affordable technologies available that achieve 
compliance with the standard, but that there are affordable variance 
technologies that are protective of public health.
    The EPA currently determines if there are affordable compliance 
technologies available to small systems by comparing (for a 
representative system) the current household cost of water plus the 
estimated additional cost to comply with a new rule to an affordability 
``threshold'' of 2.5 percent of the median household income (MHI). 
Today=s Federal Register notice requests comment on revisions to this 
existing national-level affordability methodology for small drinking 
water systems and an approach for determining if an affordable variance 
technology is protective of public health. The Agency is committed to 
working with State and local officials and stakeholders to update and 
improve affordability analyses under the Safe Drinking Water Act.

DATES: Comments must be received on or before May 1, 2006.

ADDRESSES: Submit your comments, identified by Docket ID No. EPA-HQ-OW-
2005-0005, by one of the following methods:
     https://www.regulations.gov. Follow the on-line 
instructions for submitting comments.
     E-mail: OW-Docket@epa.gov, Attention Docket ID No. OW-
2005-0005.
     Fax: (202) 566-1749.
     Mail: Water Docket, Environmental Protection Agency, 
Mailcode: 4101T, 1200 Pennsylvania Ave., NW., Washington, DC, 20460.
     Hand Delivery: Water Docket, Environmental Protection 
Agency, EPA West Building, Room B102, 1301 Constitution Avenue, NW., 
Washington, DC. Such deliveries are only accepted during the Docket's 
normal hours of operation, and special arrangements should be made for 
deliveries of boxed information.
    Instructions: Direct your comments to Docket ID No. EPA-HQ-OW-2005-
0005. EPA's policy is that all comments received will be included in 
the public docket without change and may be made available online at 
https://www.epa.gov/edocket, including any personal information 
provided, unless the comment includes information claimed to be 
Confidential Business Information (CBI) or other information whose 
disclosure is restricted by statute. Do not submit information that you 
consider to be CBI or otherwise protected through https://
www.regulations.gov, or e-mail. The https://www.regulations.gov Web site 
is an ``anonymous access'' system, which means EPA will not know your 
identity or contact information unless you provide it in the body of 
your comment. If you send an e-mail comment directly to EPA without 
going through https://www.regulations.gov, your e-mail address will be 
automatically captured and included as part of the comment that is 
placed in the public docket and made available on the Internet. If you 
submit an electronic comment, EPA recommends that you include your name 
and other contact information in the body of your comment and with any 
disk or CD-ROM you submit. If EPA cannot read your comment due to 
technical difficulties and cannot contact you for clarification, EPA 
may not be able to consider your comment. Electronic files should avoid 
the use of special characters, any form of encryption, and be free of 
any defects or viruses.
    Docket: All documents in the docket are listed in the https://
www.regulations.gov index. Although listed in the index, some 
information is not publicly available, e.g., CBI or other information 
whose disclosure is restricted by statute. Certain other material, such 
as copyrighted material, will be publicly available only in hard copy. 
Publicly available docket materials are available either electronically 
in https://www.regulations.gov or in hard copy at the Water Docket, EPA/
DC, EPA West, Room B102, 1301 Constitution Avenue, NW., Washington, DC. 
The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday 
through Friday, excluding legal holidays. The telephone number for the 
Public Reading Room is (202) 566-1744, and the telephone number for the 
Water Docket is (202) 566-1749.

FOR FURTHER INFORMATION CONTACT: Dan Olson, Standards and Risk 
Management Division, Office of Ground Water and Drinking Water, 
(4607M), Environmental Protection Agency, 1200 Pennsylvania Ave., NW., 
Washington, DC, 20460; telephone number: (202) 564-5239; fax number: 
(202) 564-3758; e-mail address: olson.daniel@epa.gov.

SUPPLEMENTARY INFORMATION: 

I. General Information

A. What Should I Consider as I Prepare My Comments for EPA?

    1. Submitting CBI. Do not submit this information to EPA through 
https://www.regulations.gov or e-mail. Clearly mark the part or all of 
the information that you claim to be CBI. For CBI information in a disk 
or CD ROM that you mail to EPA, mark the outside of the disk or CD ROM 
as CBI and then identify electronically within the disk or CD ROM the 
specific information that is claimed as CBI. In addition to one 
complete version of the comment that includes information claimed as 
CBI, a copy of the comment that does not contain the information 
claimed as CBI must be submitted for inclusion in the public docket. 
Information so marked will not be disclosed except in accordance with 
procedures set forth in 40 CFR part 2.
    2. Tips for Preparing Your Comments. When submitting comments, 
remember to:
     Identify the rulemaking by docket number and other 
identifying information (subject heading, Federal Register date and 
page number).
     Follow directions--The agency may ask you to respond to 
specific questions or organize comments by referencing a Code of 
Federal Regulations (CFR) part or section number.
     Explain why you agree or disagree; suggest alternatives 
and substitute language for your requested changes.
     Describe any assumptions and provide any technical 
information and/or data that you used.
     If you estimate potential costs or burdens, explain how 
you arrived at your estimate in sufficient detail to allow for it to be 
reproduced.

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     Provide specific examples to illustrate your concerns, and 
suggest alternatives.
     Explain your views as clearly as possible.
     Make sure to submit your comments by the comment period 
deadline identified.

Table of Contents

I. General Information
    A. What Should I Consider as I Prepare My Comments for EPA?
II. Background
    A. What Is the Purpose of Today's Action?
    B. Statutory Background
    C. How Does EPA Currently Determine if Affordable Compliance 
Technologies Are Available to Small Drinking Water Systems?
III. Affordability Methodology
    A. The EPA's Science Advisory Board Recommendations on 
Affordability
    1. EPA's Approach to Determining Affordability for Small Systems
    2. Components of the Affordability Determination Method
    3. Source Water and Regional Disparities
    4. Financial Assistance
    B. The National Drinking Water Advisory Council's 
Recommendations on Affordability Criteria
    1. Should MHI or Another Income Measure (Such as Per Capita 
Income) Be Used for the Income Level?
    2. Should 2.5 Percent or Another Percentage Be Used as the 
Income Percentage for Determining the Maximum Affordable Water Bill, 
and What Is the Basis for an Alternative Selection?
    3. How Should the Expenditure Baseline Be Adjusted To Account 
for New Rules?
    4. Should Separate Affordability Criteria Be Developed for 
Surface and Ground Water Systems?
    5. Should Financial Assistance Be Incorporated in the 
Calculations of the Expenditure Baseline?
    6. Should Regional Affordability Criteria Be Developed, Given 
Current Data Limitations?
    7. NDWAC Perspective
    8. NDWAC Work Group--Minority View
    C. Key Factors Considered in Developing Affordability 
Methodology Options
    1. Variability in Household Costs of Water Treatment
    2. Variability in the Ability of Small Systems To Pay for 
Treatment
    3. Need for Improved Implementation at the Federal Level of the 
Small System Variance Provisions of the SDWA
    D. Affordability Methodology Options
    1. Calculating Household Costs
    2. Affordability Determination Options
    3. Identification of Affordable Variance Technologies
IV. Protection of Public Health Methodology
    A. How Does EPA Consider Public Health in Establishing Drinking 
Water Standards?
    1. Setting the Maximum Contaminent Level Goal
    2. Setting the MCL or Treatment Technique
    3. Determining That Variance Technologies Are Protective of 
Public Health
    B. Methodology To Identify Affordable Variance Technologies That 
Are Protective of Public Health
V. State Consultation
VI. Request for Comment
VII. References

II. Background

    This section provides the purpose of today's action, a brief 
statutory background on affordability-based small drinking water system 
variances, and how EPA currently determines if affordability-based 
variances can be made available to small drinking water systems.

A. What Is the Purpose of Today's Action?

    Today's notice seeks comment on revisions to EPA's national 
affordability methodology for small drinking water systems and a 
methodology for determining if an affordable variance technology is 
protective of public health. EPA believes such revisions are needed to 
address variability in both incomes and costs across small systems, and 
to maintain transparency and consistency in determinations regarding 
affordability and protectiveness of public health. Neither the national 
affordability methodology nor the methodology for determining if an 
affordable variance technology is protective of public health imposes 
any requirement on any person or entity. Rather, these methodologies 
will be applied by EPA in evaluating small system affordability of 
future National Primary Drinking Water Regulations (NPDWRs), except 
regulations for microbial contaminants (including bacteria, viruses, or 
other organisms) or indicators for microbial contaminants. SDWA section 
1415(e)(6)(B) states that small system variances are not available for 
microbial contaminants.

B. Statutory Background

    Today's Federal Register requests comment on a revised approach for 
implementing the small systems variance provision of the 1996 SDWA 
amendments. The SDWA, as amended in 1996, includes a provision intended 
to help reduce the economic impact that certain new regulations will 
have on some small systems. For small systems with a service population 
of less than 10,000, SDWA section 1415(e) authorizes a primacy agency 
to grant a variance from compliance with a Maximum Contaminant Level 
(MCL) or treatment technique under certain conditions. (An MCL is the 
maximum permissible level of a contaminant in drinking water that is 
delivered to any user of a public water system. A treatment technique 
is an enforceable procedure or level of technological performance, 
which public water systems must follow to ensure control of a 
contaminant.) A primacy (primacy enforcement) agency may grant such a 
variance on a case-by-case basis for an NPDWR only if EPA has 
determined that there are no nationally affordable compliance 
technologies for small systems in the corresponding size category and 
with comparable source water quality and EPA has identified one or more 
affordable variance technologies that are protective of public health. 
In granting this variance, a primacy agency must provide public notice 
and an opportunity for a public hearing. The primacy agency must also 
make two system-specific determinations: (1) That the system cannot 
otherwise afford to comply (using the State's affordability criteria) 
through treatment, using an alternative source of water supply or 
restructuring or consolidation; and (2) that the terms of the variance 
ensure adequate protection of public health. In accordance with the 
SDWA, EPA evaluates the affordability of new drinking water rules for 
these categories of small systems: (1) A service population of 10,000 
or fewer but more than 3,300; (2) a service population of 3,300 or 
fewer but more than 500; and (3) a service population of 500 or fewer 
but more than, or equal to, 25.
    The legislative history of section 1415(e) does not provide 
guidance on how EPA is to interpret the term ``affordable.'' However, 
the Senate Report for S 1316, the Senate version of the SDWA amendments 
of 1996 which contained similar small system variance provisions, 
includes the following discussion.

    ``Of the approximately 57,000 community water systems regulated 
under the Safe Drinking Water Act, nearly 54,000 serve populations 
of 10,000 or less. While EPA has taken steps to recognize the 
difficulties of small systems by establishing the Small System 
Technology Initiative, by forming the National Training Coalition, 
and by developing handbooks and computer software, the current Safe 
Drinking Water Act does not successfully address the problems of 
small systems.
    The fundamental problem is one of economics. Maximum contaminant 
levels in national primary drinking water regulations have been 
based on the best available treatment techniques that are affordable 
for large systems. Because small systems do not enjoy the economies 
of scale that are available to large systems (infrastructure costs 
cannot be spread over a large number of households) drinking water 
regulations can have a much greater economic impact on small 
systems. EPA and the Congressional

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Budget Office have published estimates indicating that systems 
serving more than 10,000 persons experience costs averaging less 
than $20 per household per year to comply with the current 
requirements of the Safe Drinking Water Act. By way of comparison, 
the average annual incremental household cost to comply with the 
requirements of the Safe Drinking Water Act for systems serving 25 
to 100 persons is $145.'' (Senate Report No. 104-169, Nov 7, 1995, 
pp 54-55) \1\
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    \1\ The average annual household increases cited in the report 
is for the cumulative impact imposed by the drinking water 
regulations at the time of the report. These are average costs 
across all systems in the size category including those with no 
impact. Treatment costs would not be derived in that manner for the 
options in this notice.

    This language underscores the Senates concern for the burden 
imposed on very small systems by NPDWRs, and provides an indication of 
the treatment cost data considered by the Senate at the time they 
developed these small system variance provisions. The House and 
Conference Reports do not provide any additional guidance on 
interpreting section 1415(e).

C. How Does EPA Currently Determine if Affordable Compliance 
Technologies Are Available to Small Drinking Water Systems?

    As explained in the August 6, 1998 Federal Register notice (63 FR 
42032), EPA currently determines if there are any affordable compliance 
technologies for a given NPDWR by comparing the estimated household 
costs to national-level affordability criteria based on household 
income. If EPA cannot identify affordable compliance technologies, then 
EPA must identify affordable variance technologies, pursuant to section 
1412(b)(15) of the SDWA. A variance technology is one that provides the 
maximum contaminant removal, or inactivation, that is affordable, 
considering the quality of the source water to be treated and the 
expected useful life of the technology, and that the Agency determines 
is protective of public health. To date, EPA has found no NPDWRs 
``unaffordable'' for small systems.
    The focus of the current national-level affordability analysis is 
the household. Treatment technology costs are presumed affordable to 
the typical household if they do not cause median water bills to exceed 
an affordability threshold of 2.5 percent of MHI. This approach assumes 
that affordability to the median household in a system size category 
can serve as an adequate measure for the affordability of technologies 
to the size category as a whole.
    The current national-level affordability criteria consider current 
annual water bills, or baseline cost, the incremental cost of the new 
regulation, and the affordability threshold (i.e., 2.5 percent of MHI). 
For each NPDWR, EPA estimates the baseline cost using annual sales 
revenue per residential connection from the most recent Community Water 
System Survey (CWSS). The CWSS is a national survey that the Agency 
conducts and is designed to compile operating and financial information 
from a statistically representative sample of community water systems. 
EPA subtracts this baseline from the affordability threshold to yield 
an ``expenditure margin.'' The Agency then compares this expenditure 
margin with the projected per household treatment costs for a new rule 
to make affordable technology determinations. As previously stated, 
this national affordability threshold currently sets the maximum 
affordable water bill at 2.5 percent of the MHI for the median system 
in a given size category (e.g., public water systems serving (1) a 
population of 10,000 or fewer but more than 3,300; (2) a population of 
3,300 or fewer but more than 500; and (3) a population of 500 or fewer 
but more than, or equal to, 25).
    Some stakeholders have argued that the current criteria are too 
stringent and fail to recognize situations in which a significant 
minority of systems within a size category may find a regulation 
unaffordable. After seven years of experience with the current 
criteria, EPA agrees it is time to consider refinements to address the 
situations of communities with below average incomes or above average 
drinking water and treatment costs.
    In today's notice EPA has changed the term it uses to refer to the 
procedures for evaluating the affordability of compliance technologies. 
Today's notice refers to an ``affordability methodology'' rather than 
``affordability criteria.'' EPA believes the term ``methodology'' 
better describes its procedures for determining small system 
affordability of NPDWRs. EPA again reiterates that this methodology 
imposes no regulatory requirements on the public. Its only purpose is 
to guide EPA in making small system affordability determinations under 
the SDWA. EPA may continue to update and refine this methodology as 
appropriate in the future.

III. Affordability Methodology

    As part of the 2002 appropriations process, Congress directed EPA 
to review and update the national-level affordability methodology. In 
response, EPA sought the advice of its Science Advisory Board (SAB) and 
the National Drinking Water Advisory Committee (NDWAC). This section 
summarizes the SAB and NDWAC recommendations to EPA for revising the 
national-level affordability methodology, presents the key issues EPA 
considered in evaluating its affordability methodology, and discusses a 
range of options for revising the existing national-level affordability 
methodology.

A. The EPA's Science Advisory Board Recommendations on Affordability

    The EPA SAB is a public advisory group that provides extramural 
scientific information and advice to the Administrator and other EPA 
officials. The Board is structured to provide balanced and expert 
assessment of scientific matters related to problems facing the Agency.
    In March 2002, the EPA asked the SAB to consider the economic 
issues associated with the current national-level affordability 
methodology, as well as the factors that were used to establish the 
methodology. The SAB's Environmental Economics Advisory Committee met 
twice to prepare recommendations regarding four key topics:
    1. EPA's approach to determining affordability for small systems.
    2. Components of the affordability determination method.
    3. Source water and regional disparities.
    4. Whether financial assistance should be considered in EPA's 
national-level affordability methodology.
    The SAB's findings and recommendations on these topics were 
published in the report Affordability Criteria for Small Drinking Water 
Systems: An EPA Science Advisory Board Report (EPA-SAB-EEAC-03-004) 
which can be found in the EPA Docket. The discussion in today's notice 
summarizes the key findings with respect to the four general areas 
noted above.
1. EPA's Approach To Determining Affordability for Small Systems
    The SAB found that EPA's approach to determining affordability for 
small systems addressed equity, efficiency, and administrative 
practicality considerations. However, the SAB recommended that the 
Agency consider some modifications to address long-term efficiency 
issues (i.e., allowing variances potentially inhibit movement toward 
small system consolidation) and to more effectively deal with the 
diversity among small systems.

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2. Components of the Affordability Determination Method
    a. Measures other than median. The SAB highlighted some concerns 
with relying on median household income as the basis for the 
affordability threshold for small systems. One concern is that it does 
not reflect income inequality within water systems. That is, even if 
the median household can afford to pay the increased water bill, poorer 
households within a water system may find it unaffordable. Another 
concern about using median household income arises from income 
inequality across water systems within a size class. That is, even if 
the median system in a size category can afford to pay for a treatment 
technology, poorer systems may find it unaffordable.
    The SAB identified three approaches to account for these income 
inequalities. To address within-system income inequality, SAB suggested 
that EPA could keep the current affordability formula, but specify a 
lower household income percentile within water systems (instead of the 
current MHI) such as the 10th or 25th percentile. To address between-
system income inequality, SAB suggested that EPA could consider whether 
a significant percentage of systems (e.g., 10 percent or 25 percent) 
fall below the threshold, even when the median system does not. A third 
approach that may address both issues involves basing the threshold on 
some statistical measure of dispersion, such as variance or standard 
deviation, in addition to the mean (i.e., basing it on 1.5 standard 
deviations below the mean household income within a system size 
category).
    b. Alternatives to 2.5 percent as the income percentage. The SAB 
highlighted the fact that the national affordability threshold has 
never been exceeded and that there was evidence suggesting that some 
small water systems have genuinely struggled with compliance costs. 
They believe that this suggests that the 2.5 percent threshold is too 
high, and that a lower cutoff should be used resulting in a greater 
likelihood that small systems variances would be authorized.
    c. Alternatives to the expenditure baseline calculation. The use of 
an expenditure baseline (e.g., current water bills) potentially has the 
effect of causing early regulations to be considered affordable, 
whereas later, if the affordability threshold is exceeded, even 
regulations with trivial costs could be found unaffordable to small 
systems. The SAB recommended eliminating the expenditure baseline from 
the formula and evaluating the affordability of each set of regulations 
incrementally (i.e., where the cost of each new rule is compared to a 
percentage of household income). EPA notes that in practice, this has 
not been an issue, as the expenditure margin calculated using 2.5 
percent of MHI has widened, not narrowed, over time.
3. Source Water and Regional Disparities
    a. Ground water versus surface water. The SAB noted that a 
significant number of (typically) small rural communities have 
historically relied on ground water as their source of supply with 
little or no treatment. For these communities to comply with new 
drinking water regulations, they may incur costs of establishing a 
Awhole treatment system@ rather than simply adding onto an existing 
system. While this may be more likely for groundwater systems, the SAB 
noted that some surface water supplies also require little treatment. 
The SAB also noted that there is great variation in treatment costs for 
both surface water and ground water systems. Therefore, the SAB 
recommended that the affordability methodology not differentiate 
between ground water and surface water systems.
    b. Regional versus national basis. The SAB discussed making 
determinations on a regional or even local basis as well as adding an 
urban/rural distinction. The SAB stated that ``regional income measures 
and expenditure baselines would capture affordability relative to the 
resources available in a community more accurately than the national 
values; however, a national affordability threshold is necessary to 
implement the fairness goal.''
4. Financial Assistance
    Funding is available to assist small systems through the Drinking 
Water State Revolving Loan Fund and the Rural Utilities Service of the 
U.S. Department of Agriculture. However, it is not available to all 
systems because affordability is only one criterion used in awarding 
this type of assistance. The SAB stated that since this funding is only 
available to some systems, it should not affect the national-level 
affordability determination.

B. The National Drinking Water Advisory Council's Recommendations on 
Affordability Criteria

    One of the formal means by which EPA works with its stakeholders is 
the National Drinking Water Advisory Council. The NDWAC, comprised of 
members of the general public, State and local agencies, and private 
groups concerned with safe drinking water, advises the EPA on 
everything that the Agency does relating to drinking water. To assist 
in this process, the NDWAC forms work groups of experts to perform 
assessments of specific drinking water issues. The work groups prepare 
reports and recommendations that the NDWAC considers when making its 
recommendations to EPA.
    The NDWAC Affordability Work Group met five times between September 
2002 and January 2003. The NDWAC Work Group was comprised of 18 
individuals representing an array of backgrounds and perspectives. 
Collectively, these individuals brought into the discussion the 
perspectives of State, local, and tribal governments, environmental and 
consumer groups, drinking water utilities, small system advocates, 
technical assistance providers, and academia.
    The NDWAC Work Group was specifically asked--based on six charge 
questions posed by EPA--to provide advice on EPA's national-level 
affordability methodology, the process used to derive the methodology, 
and EPA's approach to applying this methodology to NPDWRs. The six 
questions were as follows:
    1. Should MHI or another income measure (such as per capita income) 
be used for the income level?
    2. Should 2.5 percent or another percentage be used as the income 
percentage for determining the maximum affordable water bill, and what 
is the basis for an alternative selection?
    3. How should the expenditure baseline be adjusted to account for 
new rules?
    4. Should separate affordability criteria be developed for surface 
and ground water systems?
    5. Should financial assistance be incorporated in the calculations 
of the expenditure baseline?
    6. Should regional affordability criteria be developed, given 
current data limitations?
    The NDWAC's findings and recommendations on these topics were 
published in the report Recommendations of the National Drinking Water 
Advisory Council to U.S. EPA on Its National Small Systems 
Affordability Criteria (NDWAC, 2003) and can be found in the EPA 
Docket. The discussion in today's notice summarizes the key findings 
with respect to the six general areas noted earlier.

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1. Should MHI or Another Income Measure (Such as Per Capita Income) Be 
Used for the Income Level?
    The NDWAC found that since the MHI is clearly defined and available 
for all regions of the nation, it was the most appropriate income 
metric to use for this purpose at the time of the report. The NDWAC 
members noted that a better metric may be found in the future.
2. Should 2.5 Percent or Another Percentage Be Used as the Income 
Percentage for Determining the Maximum Affordable Water Bill, and What 
Is the Basis for an Alternative Selection?
    The NDWAC recommended that EPA replace its current approach with an 
incremental approach where the cost of each new rule is compared to a 
percentage of household income (e.g., one percent) because it ``is 
theoretically sounder, is simpler to administer, and has greater 
transparency than the current EPA method.'' The NDWAC observed that the 
incremental approach permits EPA to assess each new rule independently 
of the cumulative costs of preceding regulations. While this 
recommendation does not involve calculating a maximum water bill, the 
NDWAC did recommend that the incremental affordability threshold be set 
at a fixed percent of MHI.
    The NDWAC stated that the incremental percentage of MHI could be 
based on an analysis of willingness to pay measures (comparable 
expenditures as a percent of MHI), defensive expenditures (i.e., 
bottled water or point-of-use/filter devices), or other considerations 
related to household affordability such as a ``doubling of current 
water bills.'' The NDWAC did not believe that an affordability 
threshold should be greater than twice the amount of current household 
water bills. The NDWAC stated that national data indicated the average 
water bill for households amounted to 0.5-0.6 percent of MHI. In 
addition, NDWAC stated that one percent of MHI was approximately equal 
to 1.5 times the cost of point-of-use technologies used to treat water. 
Based on these observations, the NDWAC recommended that EPA use one 
percent of MHI as the incremental affordability threshold.
3. How Should the Expenditure Baseline Be Adjusted To Account for New 
Rules?
    The NDWAC recommended an incremental approach that eliminates the 
need for establishing or updating an expenditure baseline.
4. Should Separate Affordability Criteria Be Developed for Surface and 
Ground Water Systems?
    The NDWAC recommended that EPA use the same criteria for surface 
water and ground water systems. The NDWAC Work Group observed not only 
minimal cost differences between surface and ground water systems, but 
also that treatment costs vary widely for both types of systems.
5. Should Financial Assistance Be Incorporated in the Calculations of 
the Expenditure Baseline?
    The NDWAC recommended an incremental approach that eliminates the 
need for establishing or updating an expenditure baseline. However, if 
EPA retains its present approach to making the national affordability 
determination, the NDWAC recommended incorporating financial assistance 
into the calculations if the financial support is generally available 
to all systems nationwide. The NDWAC further recommended that States 
consider the availability of financial assistance in their analysis and 
calculations when determining whether a variance should be granted to a 
particular system, regardless of EPA's approach to making the national 
affordability determination.
6. Should Regional Affordability Criteria Be Developed, Given Current 
Data Limitations?
    The NDWAC recommended that EPA establish differential regional 
affordability criteria when sufficient supporting data are available. 
In particular, the NDWAC recommended that EPA separate the MHI into 
rural and urban categories to more accurately reflect actual ability 
and willingness to pay.
7. NDWAC Perspective
    The NDWAC adopted the Work Group report with minor modifications to 
some of the Work Group's recommendations, and provided additional 
recommendations and perspective on affordability issues associated with 
small public water systems. These are summarized below. The 
recommendations of the NDWAC Work Group were made in the context of the 
SDWA requirement to make affordability-based variances available to 
small systems when the statutory criteria are satisfied. However, the 
NDWAC did not believe that this is generally the best approach for 
addressing affordability issues at small systems. The NDWAC stated 
specifically that ``significant practical, logistical, and ethical 
issues mitigate against the use of variances.''
    The NDWAC noted that the regulatory burden associated with the 
procedures for obtaining a variance (40 CFR part 142, subpart K) may be 
substantial to both small drinking water systems and primacy (primacy 
enforcement) agencies. Furthermore, the NDWAC found that ``the 
potential acceptance of lower water quality for disadvantaged 
communities is ethically troublesome.''
    The NDWAC believes that alternatives to the variance process, 
including cooperative strategies (e.g., State leadership to promote 
consolidation or other types of cooperation among small systems), and 
targeted use of funding to disadvantaged water systems (e.g., 
supporting individual households with a Low-Income Water Assistance 
Program funded through Congressional appropriation) are more 
appropriate means to address affordability issues associated with small 
public water systems that cannot afford to comply with a NPDWR.
8. NDWAC Work Group--Minority View
    Through its representative on the Work Group, the National Rural 
Water Association (NRWA) filed a minority report indicating 
disagreement with the recommendations of the majority of the Work Group 
members. The minority report is entitled Small and Rural Community 
Affordability Consensus Report and is included as an appendix to the 
NDWAC Report. The NRWA Report identifies three issues on which it 
dissents from the NDWAC recommendations.
    First, the NRWA Report states that the NDWAC Work Group recommended 
affordability level is ``clearly unaffordable for millions of low-
income families and many communities by any reasonable definition of 
affordable.'' The NRWA Report also identifies a problem with the use of 
median household income (MHI) as a metric for determining 
affordability, noting that, ``The fact that a certain level of 
expenditure is affordable to the median income household in a community 
tells us very little about the ability of the low-income households in 
the community to afford the same levels of expenditure.'' To address 
these concerns, the NRWA suggested an alternative ``Safe and Affordable 
Variance Approach'' under which EPA would list variance technologies 
for each applicable rule, and States would decide on a case by case 
basis if a variance technology is appropriate. Under this approach, all 
NPDWRs would be found potentially ``unaffordable'' at the national 
level, and it would be up to States to determine

[[Page 10676]]

which small systems actually could not afford to comply and thus were 
eligible for a variance.
    Second, NRWA found that the NDWAC Work Group recommendations do not 
``provide a reasonable and workable small systems variance technology 
program as mandated in the SDWA.'' NRWA expressed concern that the 
NDWAC Work Group's recommended affordability level was designed to 
avoid requiring EPA ``to determine a variance technology policy, which 
incidentally is the Congressionally prescribed solution to unaffordable 
EPA rules.''
    Finally, the NRWA identified concerns with the NDWAC 
recommendations regarding consolidation, USDA Program Initiatives, low-
income water assistance programs (LIWAP) and other potential federal 
initiatives. NRWA found these to be ``steps in the wrong direction for 
assisting small and low-income communities to comply with rules because 
each recommendation shares a common theme of eroding local government 
authority, control and protection.''
    In developing the proposed revisions to its national affordability 
methodology, EPA has carefully considered the recommendations of both 
the NDWAC majority report, and the NRWA minority report.

C. Key Factors Considered in Developing Affordability Methodology 
Options

    Based on the recommendations of the SAB, the NDWAC and the NRWA, 
the Agency identified three key factors that it considered in 
developing revisions to its affordability methodology: Variability in 
household costs of water treatment, variability in small system ability 
to pay, and the need for improved implementation at the Federal level 
of the small system variance provisions of the SDWA. This section 
discusses these issues.
1. Variability in Household Costs of Water Treatment
    Within and among the approximate 50,000 small systems in the U.S., 
there are a number of factors that affect the household cost of a given 
technology. Among these, the SDWA requires the Agency to consider two: 
population served and source water quality.
    a. Population served. EPA currently selects the median sized system 
as representative of the costs within a system size category and 
estimates the household costs for each of the technologies that can 
achieve compliance with the primary drinking water standard. In 
general, total costs for installation, operation, and maintenance of 
treatment units are greater for systems that serve large populations 
than for systems that serve small populations. However, on a per 
household basis, the opposite is true. Because of fixed costs and 
substantial economies of scale, the per household costs of treatment 
are higher for small water systems (especially very small systems 
serving less than 500 people) than for large regional systems. It was 
this concern that led Congress to include the affordability-based small 
system variance provisions in the 1996 SDWA amendments.
    Table III-1 demonstrates the increasing per household cost for 
compliance as system size decreases by presenting the average household 
costs for compliance among system size categories for recently 
promulgated or proposed drinking water standards. In addition to 
economies of scale, average household costs presented in Table III-1 
are also affected by larger systems being more likely to have multiple 
sources of water, not all of which will have source water 
concentrations of a contaminant that require treatment.

     Table III-1.--Comparison of Average Costs \1\ Per Household by System Size for Three Recent Rulemakings
----------------------------------------------------------------------------------------------------------------
                                                                                                   Stage 1 DBPR
                           System size                              Arsenic \2\      Radon \3\          \4\
----------------------------------------------------------------------------------------------------------------
25-100..........................................................            $327            $270            $177
101-500.........................................................             163              99             123
501-1,000.......................................................              71              27              84
1,001-3,300.....................................................              58              27              55
3,301-10,000....................................................              38              17              27
10,001-50,000...................................................              32              12              14
50,001-100,000..................................................              25              12               8
100,001-1 million...............................................              21              10               7
> 1 million.....................................................               1              10               6
----------------------------------------------------------------------------------------------------------------
\1\ Costs are an average of the treatment costs for all systems installing treatment in the size category. The
  majority of these systems do not need significant removal of the contaminant, since they are just above the
  MCL.
\2\ Costs are based on Exhibit 6-17 in the Arsenic in Drinking Water Rule Economic Analysis (EPA 815-R-00-026)
  and can be found in the Docket.
\3\ Costs are presented for compliance with the proposed Radon MCL of 300 pCi/L and are taken from Table XIII.11
  of the Proposed Radon Rule preamble (64 FR 59246-59378) and can be found in the Docket. The costs presented do
  not reflect the proposed AMCL in combination with a multi-media mitigation plan.
\4\ The Stage 1 DBPR economic analyses does not present an average of household costs across influent and
  treatment conditions as was done in arsenic and radon. The values listed are a weighted average from tables F-
  1 through F-4 in Appendix F of the November 1998 Regulatory Impact Analysis of Final Disinfectant/Disinfection
  By-Products Regulations (EPA 815-B-98-002) and can be found in the Docket.

    As the table shows, there is significant variability in per 
household costs, even within the statutory system size categories, 
particularly within the smallest size category. For example, for the 
arsenic rule, the average per household cost for systems serving <101 
persons was roughly double that for systems serving 101-500 persons, 
while for the proposed radon rule, it was roughly triple. For the Stage 
1 DBP rule, the average per household cost for systems serving <101 
persons was roughly 50 percent higher than that for systems serving 
101-500 persons. These figures suggest that the per household costs for 
the median sized system within a statutory size category may not be the 
best proxy for per household costs within the category generally, 
particularly for the smallest size category.
    b. Source water quality. The type of treatment a system must 
install and the treatment costs are also affected by the quality of the 
source water, including the concentration of the contaminant to be 
removed, the pH of the source water, and the presence of other 
dissolved or suspended solids. The concentration of the contaminants 
may affect the size of the treatment units, the amount of treatment 
chemicals that must be used,

[[Page 10677]]

or the amount of residual to be disposed of--all of which affect the 
cost to install, operate, and maintain the treatment units. Source 
water quality parameters such as pH or the presence of dissolved solids 
can make some treatment technologies ineffective, requiring a system to 
select a different technology or to install and operate a pretreatment 
system that removes or adjusts these parameters so that the treatment 
to remove the contaminant will be effective. Source water varies 
significantly among public water systems. It is affected by the source 
water type (ground water or surface water) and the conditions in the 
watershed or aquifer from which it is drawn.
    Population served and source water quality are perhaps the most 
significant factors that affect the household cost of technologies. 
Therefore, it is appropriate that the SDWA requires the Agency to 
consider these factors in its evaluation of the affordability of new 
drinking water rules. The national affordability methodology should 
address the variability in these factors, such that a reasonable range 
of potential household costs are considered by the Agency in its 
national affordability determination.
2. Variability in the Ability of Small Systems To Pay for Treatment
    Under the approaches EPA is currently considering for revising the 
national affordability methodology, EPA would continue to use an income 
threshold (i.e., a fixed percentage of household income) as a screen to 
make general findings of unaffordability. The affordability threshold 
has two components: the income percentile and the income percentage. 
The income percentile is the value selected from the distribution of 
household incomes. It can be based either on the distribution of 
individual incomes, or on the distribution of system-level median 
incomes. The income percentage is the percentage by which the selected 
income level is multiplied to determine the affordable level of per 
household treatment costs. For example, EPA's current threshold is 2.5 
percent of the MHI for the median system in a given size category 
(currently $44,544 for the smallest size category). In this example, 
the income percentile is 50 percent and it is based on the distribution 
of system-level median incomes. The income percentage is 2.5 percent 
($1,114, or $44,544 times 2.5 percent).
    EPA views the affordability determination to be made under SDWA 
Section 1412(b)(4)(E) as a general screen to determine the likelihood 
that a significant number of systems may find a regulation 
unaffordable. Congress left to the primacy (primacy enforcement) 
agencies (usually the States) the task of determining which particular 
small systems cannot afford compliance technologies once EPA determines 
that affordability may be an issue for a particular regulation. The 
Agency established household income as the basic measure to determine 
affordability for the current methodology. If the households served by 
a system do not have income available to pay for increased water bills, 
then the modifications to the system are unaffordable. Because systems 
ultimately pass additional water treatment costs on to customers, EPA 
believes that household income remains the appropriate basis for 
determining affordability.
    EPA believes that system-level MHI is the most appropriate income 
metric for determining water system affordability because it meets 
several reasonable criteria for a national-level affordability 
methodology. First, MHI data are available nation-wide. Second, the 
calculation of system-level MHI is simple (it is based on readily 
available Census data on household income), and finally, the metric can 
be easily understood. Consequently, it provides a consistent income-
based metric for determining affordability or ``ability to pay'' for 
new drinking water regulations. Additionally, the NDWAC supported the 
use of system-level MHI as the metric for determining small water 
system affordability.
    EPA used system-level MHI as the basis for its original 
affordability threshold for several reasons. EPA stated that the 
approach was based on the assumption that affordability to the median 
household served by a system can serve as an adequate measure of the 
affordability of technologies to the system as a whole. EPA does not 
believe that the economic circumstances of the poorest households 
within a system should drive its national level affordability 
methodology. Communities have other mechanisms (e.g., financial 
assistance, rate structures) for addressing inequalities within a 
community.
    EPA chose the median system-level MHI for its original 
affordability methodology, based on income data from the 1995 CWSS. EPA 
reasoned that the median is a measure of central tendency and would 
thus be appropriate for a national level affordability screen because 
it reflects the characteristics of ``typical'' systems rather than 
those at the low end of the income distribution. However, one 
limitation of basing the national level affordability determination on 
the median system is that there may be a significant number of systems 
below the median that might find a regulation unaffordable even when it 
is affordable to the median system. As a practical matter, this concern 
can be addressed in two equivalent ways, basing the threshold on a 
lower MHI percentile (e.g., 25th or 10th percentile, as was suggested 
by the SAB), or basing it on a lower percentage of the median MHI. The 
revised approaches that EPA is considering would retain the median MHI 
and consider lower percentages (rather than using a lower percentile of 
MHI) because EPA believes this method is more transparent and better 
supported by existing data. However, EPA wishes to emphasize that 
looking at lower percentages is to some extent a proxy for looking at 
lower percentiles. In other words, if EPA were to ultimately select a 
threshold of, say, 0.5 percent of MHI (one of the options presented 
below), this is partially in recognition of the fact that that 
particular income level ($220 for the 25-500 system size category) 
represents a significantly higher percentage of income for systems at 
the low end of the income distribution, and it is exactly these systems 
that are most likely to find a new regulation unaffordable and may thus 
need a small system variance.
    In examining the distribution of system-level income across a size 
category, another argument in favor of applying a lower income 
percentage to the median system, as opposed to applying a higher 
percentage to a significantly below-median system (as ranked by its 
MHI) is the shape of the distribution of system-level MHIs. Toward the 
lower end of the range, especially at around the 10th percentile 
system, the income figures tend to drop off sharply. This implies that 
relatively slight data inaccuracies could have relatively large impacts 
on estimated income levels. Given the inherent difficulties of 
measuring income, EPA believes the median system provides a more 
reliable basis for its national affordability methodology than a system 
at the low end of the income distribution (e.g., 10th percentile). This 
is not to suggest that EPA is not concerned about affordability for 
these systems. On the contrary, it is exactly these systems that are 
most likely to have affordability issues. But EPA believes that these 
can be better addressed by choosing a lower income percentage and 
applying it to the median system MHI.
    As previously stated, EPA established the current threshold at 2.5 
percent of median system MHI. However, that

[[Page 10678]]

income percentage was applied to a cumulative approach. As recommended 
by both the SAB and NDWAC, EPA is considering revisions that would drop 
the expenditure baseline and move to an incremental approach. This 
means that the total cost of water (including current costs) could be 
significantly higher than whatever affordability threshold EPA selects, 
because the threshold is compared only to the incremental cost of 
complying with the regulation. In addition, as water systems are 
subject to future regulations, they could potentially be required to 
undergo expenditures up to the affordability threshold multiple times. 
The current methodology has also never triggered a finding that a 
regulation was unaffordable, while the evidence suggests that there may 
in fact be significant numbers of systems that have struggled with 
compliance costs for some recent regulations. For all of these reasons, 
the options EPA is considering for revising its affordability 
methodology are based on a range of income percentages significantly 
below the current 2.5% threshold.
3. Need for Improved Implementation at the Federal Level of the Small 
System Variance Provisions of the SDWA
    As previously stated, SDWA section 1415(e) authorizes a primacy 
(primacy enforcement) agency to grant small systems a variance from 
compliance with an MCL or treatment technique for a NPDWR only if EPA 
has determined that there are no affordable compliance technologies for 
small systems and EPA has identified affordable variance technologies 
that are protective of public health. To date, EPA has found no NPDWRs 
(either existing or new) unaffordable using the current methodology. 
However, the SAB and various stakeholders have suggested, and EPA 
recognizes, that some small systems have legitimate affordability 
concerns regarding compliance with some of these regulations.
    EPA recognizes that its current approach has not allowed small 
system variances to be included among the options that States and 
systems consider as they struggle to address small system affordability 
issues. EPA is therefore considering revisions that would make a 
national level determination of unaffordability significantly more 
likely, thus triggering the listing of affordable variance technologies 
that are protective of public health. This will in turn give primacy 
states which choose to include small system variance provisions in 
their drinking water programs the option to evaluate small system 
variance applicants on a case-by-case basis and to authorize adoption 
of affordable alternatives to compliance technologies that provide some 
measure of regulatory relief while still protecting public health.

D. Affordability Methodology Options

    Based on the SAB and NDWAC recommendations, the Agency is 
considering several options under which the incremental increase in 
household water costs that is expected to occur as a result of the 
system installing, operating, and maintaining a treatment technology 
required to comply with a NPDWR would be compared to an affordability 
threshold based on a percentage of household income. In evaluating 
different household cost and affordability threshold options, EPA 
considered the three key factors discussed in section III.C (i.e., 
variability in the household costs of water treatment, variability in 
the ability of small systems to pay for treatment, and the need for 
improved implementation at the Federal level of the small system 
variance provisions of the SDWA). This section discusses the household 
cost and affordability threshold options EPA is seeking comment on as a 
result of this process, and discusses EPA's interpretation of 
affordability for both compliance and variance technologies.
1. Calculating Household Costs
    There are two issues concerning the calculation of household costs 
on which EPA is requesting comment: (1) Should only incremental costs 
(i.e., those of complying with the new regulation) be considered, or 
the total (i.e., cumulative) cost of water to consumers after the new 
treatment technology is installed, and (2) should costs be evaluated 
for the 10th percentile or the 50th percentile sized system within a 
given small system size category. The following discusses each of these 
issues in turn.
    EPA is considering using incremental costs of compliance with the 
new regulation only, rather than the cumulative costs of providing 
water, as the basis for its affordability determination. This is a 
change from the Agency's current approach which adds incremental costs 
to an expenditure baseline to determine affordability. An incremental 
approach would not calculate or consider current household water bills, 
nor would it provide a ceiling on the total increase in household costs 
due to the cumulative effects of different NPDWRs.
    The Agency believes the incremental approach is a better approach 
than the current cumulative approach for several reasons. First, the 
incremental approach focuses directly on the regulation for which 
affordability is being evaluated. The cumulative approach, in contrast, 
considers not just the cost of treatment to comply with the new 
standard but also takes into account costs for existing water system 
improvements, which may involve treatment for odor control, taste, or 
other items not regulated under NPDWRs, as well as costs for 
distributing and storing water. These costs may not be relevant for 
determining whether a system can afford to comply with NPDWRs. In 
addition, the cumulative approach could have the effect of making new 
rules with similar system costs affordable in the near-term, but not in 
the future, as cumulative costs increase. Additionally, an incremental 
approach is consistent with SAB and NDWAC recommendations. An 
incremental approach may also be more transparent than the cumulative 
approach because it deals with fewer variables and calculations in that 
it only considers the costs of the regulation in question. EPA requests 
comment on moving to an incremental approach for calculating household 
costs.
    Under its current national affordability methodology, EPA estimates 
household costs for small systems by estimating each technology's per 
household cost for the 50th percentile (median) system size in each 
size category. This approach assumes that affordability to the median 
sized system within a small system size category can serve as an 
adequate measure for the affordability of technologies to systems 
within the size category as a whole. However, household costs for 
systems at the low end of a system size category are likely to be 
significantly higher than costs for the median-sized system. This is 
particularly true for the smallest system size category (serving 25 to 
500 people). Thus, even if a NPDWR is affordable to the median sized 
system within this size category, there may be a significant number of 
systems at the low end of this category (i.e., serving less than 100 
people) for which compliance with the standard would not be affordable.
    To address this concern, EPA is considering basing its 
affordability determination on the incremental per household costs for 
the 10th percentile system size in each system size category rather 
than the median. This approach recognizes that smaller systems do not 
enjoy the same economies of scale and have a smaller customer base over 
which to spread fixed costs of providing water. In general, household 
costs would most likely be significantly greater for the 10th 
percentile than for

[[Page 10679]]

the 50th percentile sized system in a system size category due to this 
lack of economies of scale.
    For the current methodology, the Agency determined the 50th 
percentile system size by compiling the population sizes for all 
systems in a given size category and finding the system where half of 
the systems serve fewer individuals. For today's notice, EPA used the 
same method to determine the 10th percentile system size (i.e., finding 
the system where 10 percent of the systems serve fewer individuals).
    Table III-2 provides an example of household costs for the 10th and 
the 50th percentile size systems within each of the small system size 
categories. This example demonstrates that the greatest difference in 
household costs are typically found in the 25-500 size category, as the 
estimated household cost for the 10th percentile size system is more 
than double that for the 50th percentile (median) size system. It is 
this smallest system size category where there is most likely to be an 
affordability concern.

                Table III.-2--Comparison of Annual Per Household Costs of Ion Exchange Treatment
----------------------------------------------------------------------------------------------------------------
                                                   10th Percentile sized system    50th Percentile sized system
                                                 ---------------------------------------------------------------
                   System size                      Population       Treatment      Population       Treatment
                                                       size            costs           size            costs
----------------------------------------------------------------------------------------------------------------
25-500..........................................              40            $540             120            $200
501-3,300.......................................             600              72           1,195              54
3,301-10,000....................................           3,609              40           5,325              35
----------------------------------------------------------------------------------------------------------------
Note: Costs are based on cost curve equations in the document Technologies and Costs for Removal of Arsenic from
  Drinking Water (EPA-815-R-00-028). System sizes are determined from SDWISFED January 2004.

    EPA requests comment on whether it should continue to base 
affordability determinations on the median system within a size 
category, or should move to an approach based on costs to the 10th 
percentile size system.
    Section 1412(b)(15)(A) of SDWA requires the Administrator to list 
affordable variance technologies ``considering the size of the system 
and the quality of the source water.'' Under the current methodology, 
EPA estimates household costs for small systems within a size category 
under a range of scenarios that represent the range of expected source 
water conditions that these systems are likely to encounter. Thus, the 
Agency might find a new regulation affordable for systems with a 
particular source water quality, but not for systems in the same size 
category with a different source water quality. The Agency plans to 
continue to evaluate household costs in the same manner. This involves 
estimating the range of expected levels of a contaminant that may be 
present in the source water based on available data, as well as 
considering other source water parameters likely to affect the 
efficiency of identified treatment technologies, and estimating 
incremental per household costs separately for each relevant source 
water quality. If a new regulation is found unaffordable only for some 
subset of systems within a size category, based on poor source water 
quality, only those systems with comparably poor source water quality, 
and for which the regulation may thus be unaffordable, would be 
eligible to apply for small system variances. EPA requests comment on 
continuing to evaluate source water quality in this manner.
2. Affordability Determination Options
    EPA is requesting comment on two distinct approaches for 
determining affordability. Both approaches would start by determining 
whether the incremental household cost of treatment to meet a new 
regulation exceeds an increment based threshold. Under the first 
approach, this would be the sole criterion for determining 
affordability. Under the second approach, if EPA were to find the 
compliance technology affordable at the national level, we would then 
take the additional step of identifying counties that are economically 
at-risk, and list affordable variance technologies for small systems in 
these counties. These systems could then apply to their primacy agency 
for a variance. In other words, EPA would determine that any regulation 
is potentially unaffordable for small systems in these economically at-
risk counties, and leave it to the primacy agency to evaluate 
affordability individually for systems applying for a variance, as they 
are required to do under the SDWA for all small system variance 
requests if the State includes such variances in its drinking water 
program. EPA requests comment on which of these two approaches to 
adopt.
    EPA further requests comment as to what the most appropriate 
national affordability threshold is and what system size should be used 
to calculate costs (i.e., 10th or 50th percentile) for each of the 
three population size categories defined in SDWA (i.e., 25-500, 501-
3,300, and 3,301-10,000).
    Specifically, EPA requests comment on three affordability 
thresholds: 0.25 percent, 0.50 percent, and 0.75 perce