Summary: Haig Farmer's Response to WIC Suggestions for Public-Private Transactions
To:	WIC Board Members
From:	Larry Chertoff
Drafted:	April 15, 1999

Background:

On April 2, 1999 the WIC submitted to Haig Farmer, Privatization Coordinator, U.S. EPA, a memorandum of comments and suggestions for developing "procedures for expeditious review under E.O. 12803." The complete document, drafted by WIC counsel, Roger Feldman can be downloaded and printed from the Members Only section of our web site*. E-mail recipients of this memo will have the WIC memo attached as an MS Word 7.0 attachment.

This memorandum summarizes Mr. Farmer's informal response to the WIC suggestions as given to me in a telephone conversation on April 13, 1999. I expect Haig to send a written response, which may include draft language for the privatization guidelines. It will likely have several sections that will need more specific guidance language, additions, deletions or amendments. In anticipation of that interchange of ideas, Haig has agreed to convene an informal ad hoc committee composed of WIC members, himself and EPA staff. Please let me know if you would like to join Roger Feldman, Ken Maltese and Hank Mayer to serve on our new "Industry-Agency Committee." The committee will meet with EPA to further develop the public-private transaction guidelines.

EPA Wants Some Flexibility: Haig's overriding concern with our suggestions was the degree and frequency in which we requested specificity. Haig expressed concern that we were trying to anticipate every contingency. He would like to address the transactions most often encountered and allow his staff flexibility to deal with unusual cases. Having said that, Haig did agree that there should be clear definitions of review requirements so that municipalities are able to anticipate EPA Construction Grant and E.O. 12803 requirements and prepare their submission for rapid review and approval.

EPA Will Review for "Grant Deviation" Only Disposition of Facilities: With respect to all wastewater facilities and systems which have received Federal construction grants, unless repaid dollar-for-dollar (not depreciated), EPA continues to assert that review and approval is needed for all "disposition" transactions. These include sale, lease and "lease-like" transactions. A concession fee, paid up-front or in periodic payments, is deemed "lease-like" and considered by EPA a disposition. EPA must review the transaction and agree it meets EPA criteria (as now being developed with WIC input). A positive review of the transaction will result in an EPA Grant Deviation. The deviation releases the facility/system from the Federal interest, so long as the terms of the agreement which allowed the "disposition" remains in effect. The facility would then be completely at the disposal of the municipality. In sum, if the facility was not wholly, or partially, Federally funded, or if the facility grant was repaid on a dollar-for-dollar basis, a transaction for the disposition of the facility is not subject to EPA review.

Traditional Con-Ops Not Subject to Review: Haig asserted that EPA does not have the right to review/approve transactions of assets that are not disposed of. Therefore, non-concession fee con-ops transactions would not require EPA construction grant or EO 12803 review. However, the Federal interest in that facility, under the Construction Grant program, would remain.

State Law Not Considered: In reviewing facility transactions EPA will not consider state or local laws. A facility must receive approval of the Federal government even if the transaction is not considered a sale or lease under state law. Similarly, Federal approval does not supercede state or local laws, rules, regulations or requirements. In case of conflict the municipality must seek change of law or a variance from such regulations at the appropriate level of government.

"…Definition of Parameters of the Concession Fee Concept": Refer to Page 3, paragraph (b) of WIC's submission dated April 2^nd. EPA contends that a management fee can equal 1% (one percent) of the transaction cost; any payment greater than 1% would be considered a concession-fee and subject to review even if paid over time. EPA has not yet determined what discount rate to use to measure the computed present value of a concession fee which is paid over a period of time. Haig would favorably consider using the communities current bond rating, a recent bond issue or other reasonable criteria to determine a fair discount rate.

Scope of EPA's Construction Grants Federal Interest Jurisdiction: Refer to Page 4, section B.

Review would be for transactions in which there would be a facility disposition. Upon approval of such transactions a Grant Deviation will be issued to the applicant. The facility is then freed of E.O. 12803 responsibilities unless the underlying transaction agreement (contract) is violated or changed. Any change from the transaction, EPA reviewed and approved would require a new review and approval.

Documentation of Application Compliance: Refer to Page 6, section II. EPA contends that state law is not a Federal consideration in determining if a competitive bid is required. Therefore, if there are no competitive bids OMB reserves the right to review and approve the transfer price, regardless of the legality of the disposition without competition under state law. EPA recognizes no relationship between proposed concession fee and proposed asset valuation. The method of valuation where no competition has occurred, is open to debate in our proposed Industry-Agency Committee.

Criteria for Future Use of the Asset: EPA will want to assure the asset continues to be used for its intended purpose; it remains in compliance with permits and enforcement programs; arrangements are made for permit transfer and preservation; it complies with consent decrees and all other Federal regulatory requirements and programs.

Verification of Completed Application: EPA plans to accept the statement of the elected or appointed official: mayor, town manager, executive director of a utility authority with respect to all factual matters required for review.

Processing Time: EPA is currently required to make a determination on a transaction application within 120 days of submission of a complete application. If the application is incomplete the clock stops until the corrected application is returned. EPA resists time limitations for individual tasks leading to a determination. We are not clear if EPA has another 120 days from resubmission of the application, or only the time which had been remaining.

Financial Requirements: EPA believes that the intended use of all financial proceeds from the transaction should be made available to the public. How "public knowledge" is defined or achieved is an open question for the Industry-Agency Committee. The degree to which the public must evidence its support for the use of funds is an open question. But EPA agrees that it cannot go beyond that which is specified in E.O 12803 in determining the proper the use of funds generated by the transaction.

Rate Impact: In general, EPA will accept any rate impact that the affected community accepts so long as the applicable public disclosure requirements have been met. The Industry-Agency Committee can work with EPA to define how to measure that acceptance.

Expediting Application Processing: EPA agrees with WIC's suggestions that our I-A Committee should clarify issues as much as possible to ease the municipal application preparation and EPA review. Haig is preparing a draft with specific language responding to our concerns. We will respond to Haig's draft in the inaugural Industry-Agency Committee meeting with EPA.

Delegation of Authority: At this time EPA resists delegating application review authority to the states. They site some anticipated state resistance and possible demand for Federal funds to perform the work. Haig would prefer waiting to see the work load and his ability to get the applications processed quickly and to the satisfaction of the industry and the agency.

Haig reiterates that it is his policy to make the process rapid, transparent and fair. He has told me that he believes that very few deals will require detailed study and review for approval. Further, he has said that EPA does not expect to reject a deal. It may require additional public notice if there appears to be an egregious disregard for the public welfare in terms of notice of proposed disposition price. However, any deal supported by the affected community and otherwise in compliance with Federal law will be approved.

We, at the WIC, must help EPA define public notice and acceptance so it does not become a stumbling block.

Larry Chertoff