This memorandum summarizes an extended discussion with Haig Farmer on February 16 and the substantive and policy questions which the updated EPA position on E.O. 12803, as articulated by him creates for WIC and WIC members.

A. Summary of EPA Position

1. All transactions in which concession fees are paid by private service suppliers to public bodies in connection with any facility which at any time received a Federal grant is subject to EPA’s "Federal Interest" per its Construction Grants authority, so that an appropriate Deviation from Grant authority must be obtained.

2. As a part of that review, there will be an EPA review under E.O 12803, to assure that the proceeds of concession fees will be applied as specified therein. EPA has been suggested that once such concession payments have been duly applied to state and Federal obligations per E.O. 12803, all future Federal entitlement to 12803 distributions will be extinguished. (Note: This position has not been finalized in EPA Regulations.) Extinguishing of the Federal right to payment does not extinguish the Federal Interest regarding, e.g. reasonable rates on facilities which have received grant assistance.

3. With respect to any transaction for an asset for which there has been Federal financing (whether or not fully amortized and/or discharged), EPA understands the Grant Regulations (as specifically supplemented by E.O. 12803) to mean that the applicant meet EPA’s procedures for public notice and participation and (under certain circumstances) review for compliance with legal standards of the rate impacts associated with transactions. These are outlined in points # 4-6 below.

4. In any concession fee circumstances covered by point #3, EPA expects all ratepayers to receive notice. (Our understanding is that this requirement would be filled by an appropriate bill insert.)

5. In addition, under the basic Construction Grants regulation there is a public notice and participation requirement which EPA considers applicable (in some form) to all circumstances covered by point #3. While EPA has stated that it does not want to replicate those public participation and notice requirements in the point #3 context, it is considering establishing, in effect, a hierarchy of degrees of EPA involvement in review of the procedure; followed by an applicant municipality keyed to (i) a rate impact test, i.e. the percent increase in proposed rates relative to median household income in the service territory in question ("Rate Impact Test"); and (ii) a comparison of transaction Rate Impact with and without the concession fee payment ("Rate Comparison Test"). This hierarchy is described immediately below, followed by a description in point #7 of the interpretive principles EPA is considering applying to this hierarchy.

(a) Rate Impact less than 1% - Assuming competitive proposal of the contract in question, EPA will require only a specified (in regulations or in practice) minimum public notification, e.g. one public notice/one hearing. EPA will regard the rates as "reasonable" for purposes of the Grant Regulations and E.O. 12803 if this requirement is met.

(b) If Rate Impact Test result is 1-2% - Gray area in which EPA may suggest (thorough formal regulations or in the course of processing the Application), that a higher standard of public participation be met to assure that the rate impact is acceptable to the affected district.

(c) If Rate Impact Test result is greater than 2% as a consequence rate increased caused by the transaction, EPA may view a potentially unreasonable rate burden as having been imposed on the public, and will require evidence of a high enough level of public participation in the transaction notice and approval process as to satisfy itself that there has been sufficient public participation in the evaluation of the transaction. (The exact nature of its review in this case was not specified.)

6. The complementary Rate Comparison Test, with respect to a proposed transaction, compares the extent of rate reduction or of rate increase with and without the payment of a concession fee. For purposes of making this comparison, it is assumed that all proceeds of the concession fee transfer from a private to a public person that are not applied to repayment of the State or Federal Government (per 12803) shall be treated as available for rate reduction purposes. (E.O. 12803 by its terms would allow a Government to apply the proceeds to any infrastructure purpose or tax reduction. It appears EPA is not comfortable with the literal application of this provision. Even if this is done, it is still concerned that, in effect, there has been a private loan to the municipality via the concession for payment.)

7. EPA has stated that it does not have the authority to disapprove a transaction, unless "reasonable rates" clearly are not being assessed. It will, presumably, only make this finding, where both (a) the rates are considered burdensome either under the defacto Rate Impact or Rate Comparison Test and (b) the public participation process is deemed insufficient. EPA has expressed the view that this will only be the case in a minimal member of instances.

EPA was not receptive to the idea of municipal self certification of compliance with the public participation requirements. It is insisting on its right of review. It expressed willingness to receive suggestions as to how to streamline the procedures under points # 4-7 above.

B. Points for Discussion at WIC Board Meeting

1. In EPA’s view, its Construction Grants regulation extends to all POTWs that now have – or in the past have received – EPA grants. Is EPA’s policy likely to result in significant chilling effect on the number of municipalities undertaking public-private projects taking into account the EPA formulation in point #5 above?

3. How significant a timing impact will the EPA approach have on project development for those municipalities which determine to proceed?

4. How significant is the legal precedent of the type of rate and public participation review which EPA proposes to play?

5. How far is political and/or legal pressure likely to move EPA from its basic framework?

6. If EPA is provided with guidance for the standardization and simplification of its approach, can such issues as are presented be mitigated?

Bottom Line: What should WIC’s next move be with respect to EPA 12803 regulation?