EPA Finalizes Flawed Update to Financial Capability Assessment Guidance

Feb 2, 2023

Over objections from NACWA as well as numerous water sector and municipal organizations, EPA finalized its revised Financial Capability Assessment (FCA) Guidance on February 1. The pre-publication version of the document is available on EPA’s website, and NACWA issued a strong press release in response.  

NACWA submitted detailed comments in April of 2022 on a draft of the document that effectively rewrote the carefully-crafted guidance that had been negotiated over the previous several years. Despite making minor changes in the version released this week, the final FCA Guidance is largely unchanged from the 2022 draft in terms of the major concerns NACWA identified.  

Specifically, the final FCA Guidance:  

  • Does not consider actual impacts on low-income households, opting instead to compare community level measures with national metrics. EPA has abandoned the Lowest Quintile Residential Indicator (LQRI) metric from the 2020 Proposed FCA Guidance that examined the costs of planned compliance measures on economically disadvantaged households.  

  • Maintains the burdensome and costly new requirement for utilities to conduct a Financial Alternatives Analysis (FAA). EPA states that without the FAA it will be unable to “assess possible financial impacts and whether those impacts might outweigh the environmental impacts of extended noncompliance,” so the scheduling recommendations for communities that have not performed the FAA will be shorter than for those who have completed it.  

  • Keeps, with only minor changes, the arbitrary scheduling boundaries from the 2022 draft, effectively locking in the prescribed benchmarks from the 1997 FCA Guidance despite the fact that several noteworthy Consent Decrees that are still straining permittees’ financial capabilities have been extended beyond those timeframes.  

Changes to how the final burden score is determined (removing an ‘adjustment’ step based on whether the utility had conducted an FAA) and the addition of scheduling benchmarks that consider whether the FAA has been completed or not, are the most substantive changes in the final document. There is no meaningful effect of these changes, as the schedule benchmarks provided for communities that do not conduct the FAA are the same as they would have been under the 2022 proposal.  

EPA has merely changed from a punitive approach (where scores are lowered if the FAA isn’t conducted) to an incentive approach (with more time seemingly available to those who do the FAA). But the amount of time a community can receive, across the spectrum of burden findings or completion status of the FAA, has not changed.  

While the revised scheduling guidelines in the 2023 document seem to suggest that the FAA is not required, the entire guidance is structured to include the FAA as a component of any financial capability assessment. This is an additional element that was not part of the previous 1997 guidance and that will likely add significant time and expense for utilities.   

One bright spot of the final guidance is the retention of Alternative 2, which allows for the use of financial and rate model analyses to conduct cash flow forecasting to better understand what revenues will be necessary to cover costs over the life of a program and look at the impacts rate increases will have on individual bills. This type of approach has been used successfully by utilities in negotiations over the last 25 years. Unfortunately, EPA saddles this more thoughtful approach to financial capability assessment with the requirement to conduct a FAA in order to access greater schedule flexibility.  

NACWA will be discussing next steps on the FCA Guidance with its members and Board of Directors during the Winter Conference in Sonoma later this month. Members with questions on the FCA Guidance can contact Chris Hornback, NACWA’s Deputy CEO. 

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