Clean Water Current

EPA Releases Revised Draft of Financial Capability Guidance; NACWA and Water Sector To Comment

Feb 16, 2022

EPA released a new draft of its revised Financial Capability Assessment (FCA) Guidance February 16, ahead of a Federal Register notice that will be published in the coming days formally announcing a 60-day public comment period.

NACWA has been tracking EPA’s efforts to revise a January 2021 version of the FCA guidance released by the outgoing Trump Administration, which had been drafted in close coordination with the water sector and already subjected to extensive public comment.

Based on additional comments received from within EPA and from external stakeholders, Biden Administration officials have made significant changes to the January 2021 draft, including to a key metric that underlies the entire assessment methodology.

The revised draft retains consideration of impacts on the lowest wage earners and prevalence of poverty in a community – key elements that all stakeholders and Congress believe must be part of any new methodology – but has moved away entirely from looking at cost impacts on individual households. Rather than look at costs as a percentage of income (whether that is lowest quintile income, as proposed in January 2021 or median household income, as used in the 1997 guidance), the new approach will instead assess a community’s lowest quintile income and how it compares to a national average.

For example, if a community’s lowest quintile income is more than 25% below the national lowest quintile income, the metric would be scored as ‘weak’. The Agency is seeking comment on two options for including this new lowest quintile income element – combining it with poverty indicators to produce a single metric, the Lowest Quintile Poverty Indicator (LQPI) or considering it as a separate metric, the Lowest Quintile Income Indicator (LQII), together with a Poverty Indicator (PI). Only one option will be used in the final document.

In either case, the new metric(s) will be combined with the exiting Residential Indicator and Financial Capability Indicator in an expanded matrix to provide the final FCA score.  

The final score or finding of the FCA methodology in this new draft, however, is also influenced by an entirely new requirement, the Financial Alternatives Analysis. If the community’s initial LQPI score, for example, equals a medium or high impact, the utility will be required to perform a Financial Alternatives Analysis before any FCA determination is made.

The new Guidance notes that the analysis should “document whether the community has considered all feasible steps to address impacts to the lowest quintile” as identified in a new Appendix to the Guidance, including the “use of variable rate structures, CAPs [community assistance programs], and applications for grants or subsidies from the CWSRF.” This is a new requirement being imposed on utilities with no information on how the Agency will review the analysis or determine whether the utility has done enough to warrant additional schedule relief.  

EPA is also proposing major changes to the scheduling benchmarks, effectively capping all schedules at 20 years with a provision to extend that to 25 years based on undefined ‘additional considerations.’

As in the January 2021 draft FCA Guidance, EPA is providing an alternative to the matrix calculations described above. This alternative allows utilities to use financial and rate model analysis and conduct cash flow forecasting to determine the revenue necessary to cover costs associated with the program or new requirements and what impacts those revenue requirements will have on individual households throughout the entire project schedule.

Inclusion of this type of analysis was a top recommendation of the water sector groups and is what many utilities have used over the last several years to successfully counter EPA’s basic matrix, median household income-based calculation. The formal inclusion of this alternative in the FCA Guidance is significant. However, EPA is adding a requirement for utilities using this approach to also calculate their LQPI and to conduct the Financial Alternatives Analysis if a medium or high impact is indicated.

NACWA and its water sector partners will be doing a comprehensive review of the entire document, including the new metric and additional policy changes, and submitting comments to the Agency. Members with questions can contact Chris Hornback, NACWA’s Deputy CEO.

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