Full Text of Letter Sent by US EPA to Mayors of Municipalities considering Public-Private Partering
Dear Mayor:

The purpose of this letter is to provide you with information on the privatization of your federally funded wastewater treatment system. We understand that your community is considering a privatization agreement for the operation of your wastewater treatment system. When a privatization arrangement involves the receipt of funds from the private entity or encumbers of the facility's title, there are requirements for federal review, approval and possible repayment of federal grant funds. We would like to inform you of the requirements and provide any assistance we can to help you comply with them.

There are three basic types of privatization a community can undertake with a private entity to operate its wastewater treatment system. The first type of privatization is a form of contract operations in which the private entity provides only normal wastewater operation and maintenance services to the community. Contract operation does not involve any encumbrance of the title to the facility, capital investment in the facility by the private entity, or transfer of funds from the private entity to the public entity.

The second type of privatization is a lease type of arrangement where the private entity may provide capital investment in the facilities and/or transfer private funds to the community. This transfer of funds usually is in the form of a lump sum or periodic lease concession fee. A privatization agreement that involves an up-front or periodic payment to the community may be considered to be a contract operation agreement by a community but this type of agreement is viewed as a lease arrangement by the EPA. The lease type of privatization involves an encumbrance of the title to the wastewater facilities when the private entity invests its funds in the wastewater facilities. A lease type of agreement requires Executive Order E.O. 12803 approval from the EPA and may also require the EPA to approve a deviation from construction grant regulations if the agreement encumbers the title to the facilities.

The third type of privatization is a sale of the wastewater treatment facilities to a private entity. This type of privatization arrangement transfers title of the facilities to the private entity for a specific transfer price. A sale arrangement also requires construction grant deviations and E.O. 12803 approval from the Agency. The Office of Management and Budget must also approve a lease or sale agreement that involves noncompetitive procurement procedures.

If your community enters into a privatization arrangement with a private entity, the Agency must evaluate the privatization agreement's effect on your original EPA grant conditions and whether any repayment of grant funds is required under E.O. 12803. As a first step in this process, please provide this office with an executive summary of the privatization agreement and a complete set of the implementing agreements with supporting documents. The executive summary should include all salient facts of the privatization agreement such as: a general description of the privatization agreement, the permit arrangements, operational guarantees, public participation, changes in the debt structure for the wastewater facilities, the amount and intended use of funds received from the private entity, the EPA construction grant project costs contributed by the city, State and Federal authorities, deprecations calculations for the Federal grant funds using the Internal Revenue Service Modified Accelerated Cost Recovery System depreciation schedules based on the dates the grant contracts were placed in service, the city's oversight responsibilities, employee status under the privatization agreement, authority for establishing future user rates, and the impact of the privatization agreement on user fees with supporting data. After the Agency has reviewed this material, we will be in a position to define any additional informational requirements that may be needed to complete the Agency' s evaluation of your privatization agreement.

In addition to the above issues related to E.O. 12803, when a private entity operates or leases a publicly owned wastewater treatment facility, the NPDES permit conditions must be modified to include the private entity as a co-permittee. In the case where the facilities are sold, the private owner must obtain either a new NPDES or RCRA permit. Since a privately owned wastewater treatment facility does not qualify under the Domestic Sewage Exclusion for the discharge of hazardous wastes, the private owner will have to obtain a RCRA permit if hazardous wastes are discharged to the treatment facilities.

I trust the above information will be helpful to you in assembling the appropriate information. I am enclosing a copy of E.O. 12803 for your information. Please feel free to contact me or Haig Farmer on my staff at (202)260-7279 with any questions you may have about required information, EPA's review and approval of your privatization agreement, or any possible repayment of federal grant funds under E.O. 12803.


Michael B. Cook

Director, Office of Wastewater Management