Regulatory Alert - RA 07-01

To:	Members & Affiliates
From:	National Office
Date:	January 5, 2007
Subject:	EPA PROPOSES PERMIT FEE INCENTIVE RULE, NACWA SEEKS MEMBER INPUT
Reference:	RA 07-01

The Environmental Protection Agency (EPA) announced on December 22, 2006 that it would soon be releasing a proposal to provide financial incentives to States to utilize an adequate fee program when implementing an authorized National Pollutant Discharge Elimination System (NPDES) permit program. The proposed rule was officially published in the Federal Register on January 4, 2007 (72 Fed. Reg. 293) and has a 60-day public comment period that ends on March 5, 2007. The rule, if finalized, would not be effective until fiscal year 2008. NACWA intends to comment on the proposal but requires member input on several key questions (see below) and is asking that members provide responses to these questions and forward the information to NACWA’s Counsel, Nathan Gardner-Andrews, at ngardner-andrews@nacwa.org by February 16, 2007. A copy of the proposal is available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2007_register&docid=fr04ja07-19.

Background on NPDES Fees
State water quality programs are currently funded with a mixture of State and federal money. The primary source of federal funding to States comes from grants awarded under Section 106 of the Clean Water Act (CWA). These grants are distributed to States through the EPA, and the current formula used by EPA for Section 106 grants establishes an allotment ratio for each State based on six components selected to reflect the extent of the water pollution problems in a given State. The six components are: surface water area, ground water use, water quality impairment, potential point sources, nonpoint sources, and the population of urbanized areas. However, even with Section 106 grant money available, many States have begun to implement NPDES permit fee programs to help cover the growing cost of increasingly complex water quality issues.

Currently, an estimated 41 of the 45 States authorized by EPA to administer all or part of the NPDES program have permit fee programs in place, with the fees paying for all or a portion of the cost of the State’s permit program. However, a handful of states operate their permit programs with no reliance on permit fees, and many of the ones that do operate fee programs cover only a small portion of their costs. In an effort to encourage States to fund more of their programs through permit fees, the President’s proposed Fiscal Year (FY) 2006 budget for EPA included language that required the Agency to finalize by December 31, 2006 a rule for “section 106 (Water Pollution Control) grants that incorporates financial incentives for States that implement adequate National Pollutant Discharge Elimination System fee programs." Although this language was never adopted in an enacted Congressional appropriations bill – and likely never will be – EPA nevertheless proposed this permit fee incentive approach to address the language in the President’s budget proposal.

EPA’s Proposed Rule and NACWA’s Request for Comments
In summary, the proposed rule states that if there is an increase in total funding allotted to States under the Section 106 program, then a percentage of the increased funds may be allotted to states with eligible permit fee programs. The total amount of this "incentive pool" of funds can be no greater than 3% of the total Section 106 allotment in fiscal year (FY) 2006. This means that if the Section 106 program is funded in future years at FY 2006 levels or below, no incentive money would be made available. Funds may only be placed in the “incentive pool” if the total funding for the Section 106 program is more than the FY 2006 level of $169.3 million. If, however, Section 106 funding does increase, the proposed rule gives EPA the discretion to place up to $5.1 million of the additional funds in the “incentive pool” (which is equal to 3% of $169.3 million). This $5.1 million would then be divided up between all of the eligible states, with each individual state getting a rather small portion of the additional monies. Only states that fund 75-100% of their Section106 programs through permit fees would be eligible to obtain incentive pool funds based on a sliding scale.

Clearly, the amount of money contemplated by this proposal does not appear to be a significant monetary incentive for states to alter their permit fee structure. A lot of buzz, however, was made about this proposal in advance of its release, potentially because it was unclear what the percentage of incentivized funding would be. In advance of the proposal, state groups such as the Association of State and Interstate Water Pollution Control Administrators (ASIWPCA) and the Environmental Council of States (ECOS) came out adamantly opposed to it. Their arguments focused on how the incentive program may signal a desire to have the permitting program fully funded by permit fees in order to allow the federal government the necessary cover to ultimately cease funding the 106 program. NACWA will speak to these groups about whether the proposal as written alters any of their expressed views.

Federal officials at EPA have told NACWA that it is not their intent that the increased permit fees would replace 106 funding but, instead, municipalities would benefit by having some of the 106 funds freed up for priority state programs such as monitoring and total maximum daily loads (TMDLs), etc.

While NACWA has heard concern about the possible consequences of this proposal from a small handful of members, the Association would like to hear from more members regarding their views of this proposed rule. NACWA is interested in hearing from members about:

Please send your responses to the above questions and/or your utility’s comments on the proposal to NACWA’s Counsel, Nathan Gardner-Andrews, at ngardner-andrews@nacwa.org by February 16, 2007.

NACWA’s Efforts to Date and Next Steps
NACWA first became aware early last fall of EPA’s plans to release the proposed rule and raised concerns about the proposal which were briefly discussed at NACWA’s September 2006 Leadership Retreat in Washington, D.C. As a result of these concerns, NACWA has been working with a variety of organizations to address the issues raised by the proposed rule, including ASIWPCA, the Federal Water Quality Coalition (FWQC), and a coalition organized by Washington, D.C. consulting firm Crowell and Moring. Through these coalitions, NACWA has been reaching out to EPA, the Office of Management and Budget (OMB), and Capitol Hill to gather information but also to express potential concern with the direction of the proposal.

The advocacy of the coalition efforts also led to a letter on December 20, 2006 from Sen. James Inhofe (R-OK), then chair of the Senate Environment & Public Works (EPW) Committee, and Sen. Hillary Rodham Clinton (D-NY), then ranking member of the Senate EPW Subcommittee on Fisheries, Wildlife and Water, to the Office of Management & Budget (OMB), opposing the fee-based approach (http://www.nacwa.org/getfile.cfm?fn=2006-12-20obm.pdf). Their opposition was in part based on the language in the President’s budget proposal seeking such a program was not enacted and never became law.

Again, please send your responses to the above questions and/or your utility’s comments on the proposal to NACWA’s Counsel, Nathan Gardner-Andrews, at ngardner-andrews@nacwa.org by February 16, 2007.