[Federal Register Volume 63, Number 24 (Thursday, February 5, 1998)]
[Notices]
[Pages 6018-6029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2874]



[[Page 6017]]

_______________________________________________________________________

Part V





Environmental Protection Agency





_______________________________________________________________________



Guidance and Information for States on Implementing the Capacity 
Development Provisions of the Safe Drinking Water Act; Notice

  Federal Register / Vol. 63, No. 24 / Thursday, February 5, 1998 / 
Notices  

[[Page 6018]]



ENVIRONMENTAL PROTECTION AGENCY

[FRL-5958-8]


Guidance and Information for States on Implementing the Capacity 
Development Provisions of the Safe Drinking Water Act

AGENCY: Environmental Protection Agency.

ACTION: Public review draft.

-----------------------------------------------------------------------

SUMMARY: The Environmental Protection Agency is publishing, for public 
comment, draft ``Guidance for States on Implementing the Capacity 
Development Provisions of the 1996 Amendments to the Safe Drinking 
Water Act.'' The Agency is also announcing the availability of the 
following related draft documents for public review and comment: 
Information for States on Implementing the Capacity Development 
Provisions of the Safe Drinking Water Act, and Information for the 
Public on Participating with States in Preparing Capacity Development 
Strategies.

DATES: Comments must be received by April 6, 1998.

ADDRESSES: Send comments to Peter E. Shanaghan, Small Systems 
Coordinator, Mail Code 4606, Environmental Protection Agency, 401 M 
Street S.W., Washington, D.C. 20460 or E-mail 
[email protected].

FOR FURTHER INFORMATION CONTACT: Peter E. Shanaghan, 202-260-5813 or 
[email protected].

SUPPLEMENTARY INFORMATION: The 1996 Safe Drinking Water Act (SDWA) 
Amendments bring significant improvements to the national drinking 
water program. Capacity development is an important component of the 
Act's focus on preventing problems in drinking water. The capacity 
development provisions offer a framework within which States and water 
systems can work together to ensure that systems acquire and maintain 
the technical, financial, and managerial capacity needed to achieve the 
public health protection objectives of the SDWA.
    The 1996 Amendments emphasize the technical, managerial, and 
financial capacity of water systems. By enhancing and ensuring the 
technical, financial, and managerial capacity of water systems, States 
will promote compliance with national primary drinking water 
regulations (NPDWRs) for the long term. To avoid a withholding in its 
Drinking Water State Revolving Fund (DWSRF) allotment, each State is 
required to obtain the legal authority or other means to ensure that 
new community water systems and new nontransient noncommunity water 
systems demonstrate adequate capacity, and to develop and implement a 
strategy to assist existing systems in acquiring and maintaining 
capacity.
    The draft guidance published and the draft information documents 
being made available today are the result of a thorough stakeholder 
consultation process initiated by the U.S. Environmental Protection 
Agency (EPA) and its National Drinking Water Advisory Council (NDWAC). 
The NDWAC was established by the original Safe Drinking Water Act as a 
diverse group of stakeholders to advise the Agency on drinking water 
issues. In order to most effectively advise EPA regarding 
implementation of the capacity development provisions of the SDWA 
Amendments of 1996, NDWAC established a Small Systems Working Group. 
The Small Systems Working Group met on four occasions between February 
and July, 1997, each two days in length, with the purpose of developing 
consensus recommendations on how EPA should implement the capacity 
development provisions of the SDWA Amendments of 1996. The Small 
Systems Working Group consisted of 22 members representing small public 
water systems, environmental and public health advocacy groups, State 
drinking water programs, public utility commissions, and other interest 
groups. The Small Systems Working Group recommended to NDWAC, which in 
turn recommended to EPA, that the Agency publish a combination of 
guidance and information to facilitate the implementation of the 
capacity development provisions of the 1996 SDWA Amendments. The 
working group, through the NDWAC, made specific substantive 
recommendations regarding the content of the draft guidance being 
published today and information documents being made available today.

Guidance and Information Documents

    The guidance document being published today is in large part based 
on recommendations by the Small Systems Working Group and NDWAC. The 
document is entitled Guidance for States on Implementing the Capacity 
Development Provisions of the 1996 Amendments to the Safe Drinking 
Water Act, and includes the following major sections:
     Guidance for States on Ensuring that All New Community 
Water Systems and New Nontransient Noncommunity Water Systems 
Demonstrate Technical, Managerial, and Financial Capacity
     Guidance for States on Minimum Requirements for State 
Capacity Development Strategies (to Avoid DWSRF Withholding)
     Guidance for States on Assessment of Capacity for the 
Purposes of Awarding Drinking Water State Revolving Fund (DWSRF) 
Assistance
    The draft information documents being made available today are also 
based in large part on specific recommendations by the Small Systems 
Working Group and NDWAC. The first document, entitled Information for 
States on Implementing the Capacity Development Provisions of the Safe 
Drinking Water Act, includes the following chapters:
     Information for States on Ensuring that All New Community 
Water Systems and New Nontransient Noncommunity Water Systems 
Demonstrate Technical, Managerial, and Financial Capacity
     Information for States on Preparing State Capacity 
Development Strategies
     Information for States on Assessment of Capacity (For 
Purposes of Awarding DWSRF assistance)
    A second draft document recommended by the Small Systems Working 
Group and NDWAC, entitled Information for the Public on Participating 
with States in Preparing Capacity Development Strategies, is also being 
made available today.

Specific Issues for Commentors to Consider

    There are two issues on which the Agency wishes to specifically 
solicit public comment. The first pertains to the proposed guidance 
being published today. Does the proposed guidance strike an appropriate 
balance between respecting State flexibility and discretion in 
implementation of the capacity development provisions, while ensuring 
adequate national level program accountability for SDWA implementation?
    The second issue pertains to the draft information document for 
which a notice of availability is being published today. Does the 
document contain sufficient substantive information, and is the 
information appropriately organized, to facilitate State implementation 
of the capacity development provisions?

Statutory Basis for the Guidance and Information Documents

    The following provisions of the Safe Drinking Water Act as amended 
comprise the statutory requirements for capacity development and 
provide the basis for the subsequent guidance and accompanying 
information documents:

[[Page 6019]]

     Section 1420(a): State Authority for New Systems-A State 
shall receive only 80 percent of the allotment that the State is 
otherwise entitled to receive under section 1452 (relating to State 
loan funds) unless the State has obtained the legal authority or other 
means to ensure that all new community water systems and new 
nontransient, noncommunity water systems commencing operation after 
October 1, 1999, demonstrate technical, managerial, and financial 
capacity with respect to each national primary drinking water 
regulation in effect, or likely to be in effect, on the date of 
commencement of operations.
     Section 1420(c): Capacity Development Strategy--(1) In 
General-Beginning 4 years after the date of enactment of this section, 
a State shall receive only--(A) 90 percent in fiscal year 2001; (B) 85 
percent in fiscal year 2002; and (C) 80 percent in each subsequent 
fiscal year, of the allotment that the State is otherwise entitled to 
receive under section 1452 (relating to State loan funds), unless the 
State is developing and implementing a strategy to assist public water 
systems in acquiring and maintaining technical, managerial, and 
financial capacity.
     Section 1452(a)(1)(G)(i): New System Capacity--Beginning 
in fiscal year 1999, the Administrator shall withhold 20 percent of 
each capitalization grant made pursuant to this section to a State 
unless the State has met the requirements of section 1420(a) (relating 
to capacity development) and shall withhold 10 percent for fiscal year 
2001, 15 percent for fiscal year 2002, and 20 percent for fiscal year 
2003 if the State has not complied with the provisions of section 
1420(c) (relating to capacity development strategies). Not more than a 
total of 20 percent of the capitalization grants made to a State in any 
fiscal year may be withheld under the preceding provisions of this 
clause. All funds withheld by the Administrator pursuant to this clause 
shall be reallotted by the Administrator on the basis of the same ratio 
as is applicable to funds allotted under subparagraph (D). None of the 
funds reallotted by the Administrator pursuant to this paragraph shall 
be allotted to a State unless the State has met the requirements of 
section 1420 (relating to capacity development).
     Section 1452(g)(3): Guidance and Regulations--The 
Administrator shall publish guidance and promulgate regulations as may 
be necessary to carry out the provisions of this section, including--
(A) provisions to ensure that each State commits and expends funds 
allotted to the State under this section as efficiently as possible in 
accordance with this title and applicable State laws; (B) guidance to 
prevent waste, fraud, and abuse; and (C) guidance to avoid the use of 
funds made available under this section to finance the expansion of any 
public water system in anticipation of future population growth. The 
guidance and regulations shall also ensure that the State and public 
water systems receiving assistance under this section, use accounting, 
audit, and fiscal procedures that conform to generally accepted 
accounting standards.
    The Act also provides that the Environmental Protection Agency 
(EPA) will assist State capacity development efforts by providing 
information and guidance:
     Section 1420(d): Federal Assistance--(1) In General--The 
Administrator shall support the States in developing capacity 
development strategies. * * * (4) Guidance for New Systems--Not later 
than 2 years after the date of enactment of this section, the 
Administrator shall publish guidance developed in consultation with the 
States describing legal authorities and other means to ensure that all 
new community water systems and new nontransient, noncommunity water 
systems demonstrate technical, managerial, and financial capacity with 
respect to national primary drinking water regulations.

                                Acronyms                                
------------------------------------------------------------------------
                  Acronym                            Definition         
------------------------------------------------------------------------
CFR.......................................  Code of Federal Regulations.
CWS.......................................  Community Water System.     
DWRSF.....................................  Drinking Water State        
                                             Revolving Fund.            
EPA.......................................  Environmental Protection    
                                             Agency.                    
IUP.......................................  Intended Use Plan.          
NDWAC.....................................  National Drinking Water     
                                             Advisory Council.          
NPDWR.....................................  National Primary Drinking   
                                             Water Regulations.         
NTNCWS or NTNC............................  Nontransient, Noncommunity  
                                             Water System.              
PWS.......................................  Public Water System.        
SDWA......................................  Safe Drinking Water Act.    
SDWIS.....................................  Safe Drinking Water         
                                             Information System.        
TNC or TNCWS..............................  Transient, Noncommunity     
                                             Water System.              
------------------------------------------------------------------------

Contents

 I. Introduction to Technical, Managerial, and Financial 
Capacity of Water Systems
 II. Guidance for States on Ensuring that All New CWSs and 
New NTNCWSs Demonstrate Technical, Managerial, and Financial 
Capacity
 III. Guidance for States on Minimum Requirements for State 
Capacity Development Strategies (To Avoid DWSRF Withholding)
 IV. Guidance for States on Assessment of Capacity for 
Purposes of Awarding DWSRF Assistance

I. Introduction to Technical, Managerial, and Financial Capacity of 
Water Systems

    The 1996 Safe Drinking Water Act (SDWA) Amendments bring 
significant improvements to the national drinking water program. 
Capacity development is an important component of the Act's focus on 
preventing problems in drinking water. The capacity development 
provisions offer a framework within which States and water systems can 
work together to ensure that systems acquire and maintain the 
technical, financial, and managerial capacity needed to achieve the 
public health protection objectives of the SDWA.
    The 1996 Amendments emphasize the technical, managerial, and 
financial capacity of water systems. By enhancing and ensuring the 
technical, financial, and managerial capacity of water systems, States 
will promote compliance with national primary drinking water 
regulations (NPDWRs) for the long term. To avoid a withholding in its 
Drinking Water State Revolving Fund (DWSRF) allotment, each State is 
required to obtain the legal authority or other means to ensure that 
new community water systems and new nontransient noncommunity water 
systems demonstrate adequate capacity, and to develop and implement a 
strategy to assist existing systems in acquiring and maintaining 
capacity.
    The capacity development provisions in the Act offer a simple, 
flexible framework within which States can organize their efforts to 
address the challenges facing small systems. Each state has 
extraordinary flexibility to implement a capacity development program 
that is uniquely tailored to its circumstances. The statute specifies 
that new systems must demonstrate technical, managerial, and financial 
capacity prior to commencing operation, and States must develop and 
implement strategies to assist public water systems in acquiring and 
maintaining technical, managerial, and financial capacity. The statute 
lists several specific issues which a State must consider, solicit 
public comment on, and include as appropriate in its capacity 
development strategy. The statute does not dictate which substantive 
components a State strategy must contain. Enhancing the technical, 
managerial, and financial

[[Page 6020]]

capacity of water systems offers great potential for correcting 
existing non-compliance and, more importantly, preventing future non-
compliance with NPDWR's.
    This section presents the background information necessary to 
understand the guidance documents that are provided in Sections II 
through IV. These draft guidance documents are designed to assist 
States in implementing the capacity development provisions of the Act.
    Included in this introductory section are a discussion of the 
demographics of systems affected by the provisions, and working 
definitions of technical, managerial, and financial capacity that are 
used throughout the draft guidance and information documents.

1. System Demographics 1

    The capacity development provisions of the SDWA apply to several 
types of public water systems. Some provisions apply to all public 
water systems (PWSs), which include: (1) Community water systems 
(CWSs); (2) nontransient, noncommunity water systems (NTNCWSs); and (3) 
transient, noncommunity water systems (TNCWSs). Other provisions apply 
only to community water systems and nontransient, noncommunity water 
systems. It is important to note that the statute does not limit or 
focus the capacity development provisions based on system size. 
However, as the following discussion makes clear, the overwhelming 
majority of water systems are small. Thus, as a practical matter, small 
systems will be a significant focus of capacity development efforts due 
to the sheer number of such systems.
---------------------------------------------------------------------------

    \1\ Data Source: Safe Drinking Water Information System (SDWIS).
---------------------------------------------------------------------------

    A public water system is a ``system for the provision to the public 
of water for human consumption through pipes or other constructed 
conveyances, if such system has at least fifteen service connections or 
regularly serves an average of at least twenty-five individuals'' 
(Section 1401(4)(A) SDWA as amended). This category includes community 
water systems; nontransient, noncommunity water systems; and transient, 
noncommunity water systems. There are approximately 172,000 public 
water systems nationwide.
    A community water system is ``a public water system which serves at 
least 15 service connections used by year-round residents or regularly 
serves at least 25 year-round residents.'' (40 CFR 141.2) There are 
approximately 55,000 community water systems serving over 246 million 
people. About 87 percent of CWSs are classified as ``very small'' 
(serving fewer than 500 persons) or ``small'' (serving from 501 to 
3,300 persons). Although the small and very small systems comprise a 
significant majority of CWSs, they serve just over 10 percent of the 
population served by CWSs. Community water systems can be classified 
into two major ownership types--privately owned and publicly owned. 
Within the privately owned category, a substantial number of systems 
are ``ancillary systems,'' i.e., they provide water as an ancillary 
function of their principal business or enterprise. An example is 
mobile home parks (Figure 1). Like NTNCWSs, they provide water to their 
customers, but provision of water is not their principal business. The 
incidence of ancillary systems varies significantly by system size. In 
small CWSs serving between 25 and 100 persons, over half (53 percent) 
are ancillary systems. In larger CWSs serving more than 10,000 persons, 
only 0.1 percent are ancillary systems.
    A nontransient, noncommunity water system is defined as ``a public 
water system that is not a community water system and that regularly 
serves at least 25 of the same persons over 6 months per year.'' (40 
CFR 141.2) Examples of establishments which are nontransient, 
noncommunity water systems include schools, factories, office/
industrial parks, and major shopping centers. Most are privately owned. 
The approximately 20,000 NTNCWSs across the nation serve approximately 
6 million people. Over 96 percent of NTNCWSs use ground water as their 
primary source. They typically are small systems; 99 percent of NTNCWSs 
are classified as ``very small'' or ``small.''

BILLING CODE 6560-50-P

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BILLING CODE 6560-50-C

[[Page 6022]]

2. Defining Capacity

    In the context of the 1996 Amendments to the Safe Drinking Water 
Act, water system capacity refers to the overall capability or 
wherewithal of a water system to consistently produce and deliver water 
meeting all NPDWRs. Capacity encompasses the technical, managerial, and 
financial capabilities of the water system to plan for, achieve, and 
maintain compliance with applicable drinking water standards given 
available water resources and the characteristics of the service 
population.
    Technical, managerial, and financial capacity are three general, 
highly interrelated areas of overall water system capability:
     Technical capacity refers to the physical infrastructure 
of the water system, including but not limited to the adequacy of the 
source water, infrastructure (source, treatment, storage, and 
distribution), and the ability of system personnel to adequately 
operate and maintain the system and to otherwise implement technical 
knowledge.
     Managerial capacity refers to the management structure of 
the water system, including but not limited to ownership 
accountability, staffing and organization, and effective linkages to 
customers and regulatory agencies.
     Financial capacity refers to the financial resources of 
the water system, including but not limited to revenue sufficiency, 
credit worthiness, and fiscal controls.

3. Key Questions

    Technical, managerial, and financial capacity are individual yet 
highly interrelated areas of a system's overall capability, as 
illustrated in Figure 2. A system cannot sustain acceptable performance 
without maintaining adequate capability in all three areas. Indicators 
of capacity within each area can be framed by key sets of issues and 
questions, including but not limited to the following:
Technical Capacity
     Source water adequacy. Does the system have access to a 
reliable and sufficient source of water? Is the source water of 
adequate quality? Is the source adequately protected?
     Infrastructure adequacy. Can the system provide water that 
meets SDWA standards? What is the condition of the system's 
infrastructure, including well(s) and/or source water intakes, 
treatment, storage, and distribution? What is the life expectancy of 
the system's infrastructure? Does the system have a capital improvement 
plan?

BILLING CODE 6560-50-P

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[GRAPHIC] [TIFF OMITTED] TN05FE98.007



BILLING CODE 6560-50-C

[[Page 6024]]

     Technical knowledge and implementation. Does the system 
have a certified operator? Is the system operated with technical 
knowledge of applicable standards? Are personnel able to implement this 
technical knowledge effectively? Do the operators understand the 
technical and operational characteristics of the system? Does the 
system have an effective operation and maintenance program?
Managerial Capacity
     Ownership accountability. Are the system owner(s) clearly 
identified? Can they be held accountable for the system?
     Staffing and organization. Are the system operator(s) and 
manager(s) clearly identified? Is the system properly staffed and 
organized? Do personnel understand the management aspects of regulatory 
requirements and system operations? Do personnel have adequate 
expertise to manage water system operations? Do personnel have the 
necessary licenses and certifications?
     Effective external linkages. Does the system interact well 
with customers, regulators, and other entities? Is the system aware of 
available external resources, such as technical and financial 
assistance?
Financial Capacity
     Revenue sufficiency. Do revenues cover costs? Are rates 
and charges for water service adequate to cover the cost of service?
     Credit worthiness. Is the system financially healthy? Does 
it have access to financial capital through public or private sources?
     Fiscal management and controls. Are adequate books and 
records maintained? Are appropriate budgeting, accounting, and 
financial planning methods used? Does the system manage its revenues 
effectively?
    Many aspects of water system operations involve more than one kind 
of capacity. A program of infrastructure replacement and improvement, 
for example, requires technical knowledge, management planning and 
oversight, and financial resources. In other words, a water system with 
adequate capacity draws on strengths in all three capacity areas--
technical, managerial, and financial.

II. Guidance for States on Ensuring That All New CWSs and New NTNCWSs 
Demonstrate Technical, Managerial, and Financial Capacity

    The Safe Drinking Water Act (SDWA) Amendments of 1996 (Pub.L. 104-
182) authorize a Drinking Water State Revolving Fund (DWSRF) to help 
public water systems finance the infrastructure needed to achieve or 
maintain compliance with SDWA requirements and to achieve the public 
health protection objectives of the Act. Section 1452 authorizes the 
Administrator of the U.S. Environmental Protection Agency (EPA) to 
award capitalization grants to the States. Under section 1420(a) of the 
Act, the Administrator is directed to withhold a portion of a State's 
allotment under section 1452 unless the State ``has obtained the legal 
authority or other means to ensure that all new community water systems 
and new nontransient, noncommunity water systems commencing operation 
after October 1, 1999, demonstrate technical, managerial, and financial 
capacity with respect to each national primary drinking water 
regulation in effect, or likely to be in effect, on the date of 
commencement of operations.'' Section 1452(a)(1)(G)(i) discusses the 
process of withholding funds under the Act's provisions related to new 
system capacity.
    Section 1420(d)(4) instructs the EPA Administrator to publish 
``guidance developed in consultation with the States describing legal 
authorities and other means to ensure that all new community water 
systems and nontransient, noncommunity water systems demonstrate 
technical, managerial, and financial capacity with respect to national 
primary drinking water regulations.'' This guidance document fulfills 
this requirement.
    This guidance document--developed in consultation with States and 
other stakeholders--provides the criteria that EPA will use in 
evaluating State implementation of the requirements of section 1420(a) 
of the Act. The criteria are (1) demonstration of statutory or 
regulatory basis of authority, (2) demonstration of control points in 
the new system development process at which the authority will be 
exercised, and (3) initially, a plan for evaluating the program on an 
ongoing basis; then in subsequent years an annual description of actual 
program implementation and effectiveness. To supplement this guidance, 
EPA is making available for public review an informational document 
entitled Information for States on Implementing the Capacity 
Development Provisions of the Safe Drinking Water Act. Chapter One of 
this document contains options States can consider in developing a 
program that ensures that all new community and new nontransient, 
noncommunity water systems demonstrate technical, managerial, and 
financial capacity. This document is available through the Safe 
Drinking Water Hotline, and can be obtained by calling 1-800-426-4791.

2. The Statutory Background

General Issues
    The SDWA Amendments establish an integrated environmental law. 
Links among different parts of the law create a tapestry of provisions; 
prevention programs are integrated with, and essential to the success 
of, new regulatory flexibilities. One of these prevention programs is 
capacity development. The Amendments require States to ensure that all 
new community and nontransient, noncommunity systems commencing 
operation after October 1, 1999 demonstrate technical, managerial, and 
financial capacity. Ensuring capacity, which prevents costly 
noncompliance, facilitates the regulatory flexibility of the 
Amendments.
    Read in the context of the Amendments, the statutory basis for the 
criteria that are presented below is clear. First, when the statute 
says a State must have the ``legal authority or other means'' to ensure 
the capacity of new systems, it means that the State must have the 
authority to intervene in the process of new system development to 
obtain the necessary demonstration of technical, managerial, and 
financial capacity. The conference committee report makes clear that 
the phrase ``legal authority or other means'' means that States must 
have the ``actual authority'' to ensure the capacity of new systems.
    In other words, as described more fully in the criteria, the States 
must be able to demonstrate that they have, and can exercise, authority 
to prevent the creation of new community or nontransient, noncommunity 
systems that do not have technical, managerial, and financial capacity. 
This implies, and to make functionally effective may require, that 
there must be some ``control point'' at which a State can say ``no'' to 
the development of a new system that does not have adequate capacity.
    Second, the guidance recognizes a central theme found throughout 
the Amendments--an approach to State programs that is flexible and 
recognizes the diversity of State strategies to achieve the objectives 
of the Amendments. In programs dealing with new system creation, a 
State may involve a variety of State and local governmental agencies. 
This guidance accepts the diversity of approaches. It requires only 
that there be a clear, unambiguous demonstration of State authority to 
ensure that no new

[[Page 6025]]

community or nontransient, noncommunity system will be created if it 
lacks adequate capacity. Section 1420(a) of the statute emphasizes that 
the requirement is effectively a performance standard when it says that 
the Administrator shall withhold a portion of a State's allotment 
unless the State has obtained the legal authority or other means ``to 
ensure'' the intended result.
    How this statutory mandate is achieved is up to the State. The 
statute does not require that a particular State agency (e.g., the 
primacy agency) be responsible; it simply requires that some State 
agency be responsible. It does not preclude delegation of authority to 
make the decision to other agencies or to local governments. The 
statute does, however, require that there be clear State authority to 
ensure that new systems have adequate technical, managerial, and 
financial capacity.
    Third, the statutory emphasis on all three aspects of capacity--
technical, managerial, and financial--requires a comprehensive view of 
capacity. To comply with this requirement, it is not enough for a State 
to focus on only one aspect, e.g., technical capacity. Section I of 
this document provides some suggested parameters for each of the three 
areas of capacity.
    Finally, section 1420 makes explicit that the definition of system 
capacity be forward looking. Under section 1420(c), for example, States 
are required to develop a strategy to assist systems in ``acquiring and 
maintaining'' all three areas of capacity. Thus, to demonstrate 
capacity, the system must have technical, managerial, and financial 
capacity on the first day of operation and over time. When States 
evaluate the capacity of new systems, they must assess both current and 
future capacity. The criteria shown below are to help States develop an 
effective program that ensures its new community and nontransient, 
noncommunity water systems conform with the requirements of the Safe 
Drinking Water Act.
    EPA expects that States will provide, either as part of their DWSRF 
capitalization grant applications, or as a separate submittal, a full 
description, explanation, and documentation of their programs for 
ensuring a demonstration of new system capacity. The Agency will use 
the criteria discussed in this guidance to evaluate whether the State's 
program meets the requirements of the SDWA, as amended. EPA is required 
to begin DWSRF withholding related to new system capacity in fiscal 
year 1999. Any capitalization grant award made in fiscal year 1999 is 
subject to the capacity development withholding (including fiscal year 
1998 funds awarded in fiscal year 1999). Thus State capitalization 
grant applications submitted for award in fiscal year 1999, for fiscal 
year 1999 funds or fiscal year 1998 unawarded funds, must contain a 
full description, explanation, and documentation of the States program 
for ensuring a demonstration of new system capacity. Once a State has 
successfully demonstrated a basis of authority and control points at 
which the authority will be exercised, the State should include these 
demonstrations in the operating agreement of its capitalization grant 
application, but need not include it in each subsequent capitalization 
grant application (or as a separate submission) unless the basis of 
authority or control points have changed. However, documentation of 
ongoing program implementation must be provided in all subsequent 
capitalization grant applications or as part of the DWSRF annual 
review.

3. Criteria

    For the first year of implementation, EPA will base its withholding 
decision on whether a State can demonstrate a statutory or regulatory 
basis of authority to prevent the creation of new community water 
systems and new nontransient, noncommunity water systems which lack 
capacity, demonstrate control points for the exercise of that 
authority, and provide a plan for program implementation and evaluation 
on an ongoing basis. For subsequent years, if the authority and control 
points remain unchanged, the withholding decisions will be based on 
whether the State is consistently implementing its program.
A Basis of Authority
    Under section 1420(a), EPA shall withhold 20% of a State's 
capitalization grant under section 1452 unless the State has obtained 
the ``legal authority or other means'' to ensure the demonstration of 
capacity by new community water systems and new nontransient, 
noncommunity water systems commencing operation after October 1, 1999. 
This authority must provide the State with the capability to intervene 
in the process of new system development in order to obtain necessary 
assurances of technical, managerial, and financial capacity. As 
explained in the introduction, the phrase ``legal authority or other 
means'' means that States must have the ``actual authority'' to ensure 
that new systems have adequate capacity. To meet the requirements of 
this provision, States must identify and demonstrate this authority. 
Examples of ``legal authority or other means'' are provided in Chapter 
Two of the EPA document Information for States on Implementing the 
Capacity Development Provisions of the Safe Drinking Water Act. 
Implicit in the requirements of section 1420(a) are the following:
     The State must specify which agency of State government is 
responsible for ensuring that new systems demonstrate capacity. This 
agency could be the State SDWA primacy agency. The State, at its sole 
discretion, may decide which agency is responsible, but there must be a 
responsible agency.
     The State agency responsible for making determinations of 
technical, managerial and financial capacity need not always be the 
SDWA primacy agency. Certification authority for new investor-owned 
systems, for example, may rest with the State public utility 
commission. Collaborative arrangements among agencies for controlling 
new system development must be documented through statutory or other 
means (such as memoranda of understanding).
     The responsible State agency (or combination of agencies) 
must possess and demonstrate the ``actual authority'' to prevent the 
creation of a new system if the system cannot demonstrate adequate 
technical, managerial, and financial capacity. ``Actual authority'' may 
take the form of statutory authority, regulations, or other effective 
and demonstrable means of preventing the creation of a new system due 
to inadequate capacity.
     Active involvement of local and county entities is one 
means of addressing new system capacity concerns. The authority for 
obtaining the necessary assurances of technical, managerial, and 
financial capacity may be granted initially at the local level, but the 
State is ultimately accountable for meeting the capacity requirements 
of the Act, and must have the final authority to ensure new system 
capacity.
Demonstration of Control Points in the New System Development Process
    A control point is a point at which a State (or other unit of 
government) can make an authoritative decision as to the adequacy of a 
new system, in terms of its technical, managerial, and financial 
capacity. Control points allow a State to exercise its legal authority 
or other means to ensure the capacity of new systems. They provide 
opportunities to prevent the creation of systems that lack technical, 
managerial, and financial capacity. Each State must demonstrate to EPA 
that it has one or more clear

[[Page 6026]]

control points. Many control points are possible at both the State and 
local levels of government. While actions by local governments can be 
an important part of the process, the State must have at least one 
control point that allows it to exercise its authority directly. The 
existence of this authority does not preclude the State from providing 
advice or technical assistance that could help to ensure that a system 
has adequate capacity.
    Examples of generic control points in the new system development 
process are described in Chapter Two of the EPA document, Information 
for States on Implementing the Capacity Development Provisions of the 
Safe Drinking Water Act.
Plan for Implementation and Evaluation of the New System Capacity 
Assurance Program
    States must develop plans for implementing and evaluating their 
capacity-assurance program for new systems. The EPA Administrator must 
make continuing year-by-year determinations with regard to withholding 
under section 1452(a)(1)(G)(i). Initially, State programs will be 
assessed prospectively; but evaluations of program implementation and 
effectiveness will become more important in succeeding years. States 
must therefore present a plan for program implementation and evaluation 
as part of their initial demonstration of authority for new systems 
under section 1420(a). The plan must outline a means of verifying 
program implementation and evaluating the program. In subsequent years, 
the State must describe ongoing program implementation and evaluation 
during the preceding year and plans for program implementation and 
evaluation during the current year.

III. Guidance for States on Minimum Requirements for State Capacity 
Development Strategies (to Avoid DWSRF Withholding)

    The Safe Drinking Water Act (SDWA) Amendments of 1996 (Pub.L. 104-
182) authorize a Drinking Water State Revolving Fund (DWSRF) to help 
public water systems finance the infrastructure needed to achieve or 
maintain compliance with SDWA requirements and in achieving the public 
health objectives of the Act. Section 1452 authorizes the Administrator 
of the U.S. Environmental Protection Agency (EPA) to award 
capitalization grants to the States. Section 1420(c) of the Act directs 
the Administrator to withhold a portion of a State's allotment under 
section 1452 unless the State is ``developing and implementing a 
strategy to assist public water systems in acquiring and maintaining 
technical, managerial, and financial capacity.''
    This document provides the criteria that EPA will use in evaluating 
State capacity development strategies to implement the withholding 
requirements in section 1420(c) of the Act. Each State will have 
considerable flexibility in preparing its capacity development 
strategy. Only minimum criteria will be reviewed to ensure that the 
State meets the provisions of section 1420(c). The five criteria are 
(1) solicitation and consideration of public comments, (2) 
consideration of section 1420(c)(2)(A-E), (3) description of the 
capacity development strategy, (4) description of strategy 
implementation, and (5) required actions regarding systems in 
significant noncompliance. Chapter Three of Information for States on 
Implementing the Capacity Development Provisions of the Safe Drinking 
Water Act contains options on how States might meet these requirements. 
The basis for this guidance is the Administrator's authority to issue 
guidance and regulations relative to the State Revolving Loan Fund 
under section 1452(g)(3) the SDWA and the specific provisions of 
section 1420 of the Act.
    EPA views the purpose of this guidance as helping to ensure that 
the wide and creative flexibility intended under the law for States in 
framing their capacity development strategies will be available in 
fact. Section 1452(a)(1)(G)(i) of SDWA states that EPA ``shall 
withhold'' up to 20% of a State's DWSRF allocation ``if the State has 
not complied with the provisions of Section 1420(c).'' Thus, some 
States might be unduly, but understandably, cautious in drafting their 
strategies if they were largely uncertain about how EPA was going to 
assess such compliance, and would not want to risk proceeding on a 
mistaken assumption that might place their DWSRF allocations in 
jeopardy. EPA believes that fidelity to Congress' intention in this 
regard and fairness to the States demands that EPA clarify in advance 
how the directives of Section 1452(a)(1)(G)(i) will be applied, and 
this guidance seeks to do so.
    EPA expects that States will include in their DWSRF capitalization 
grant applications, or separately and in advance of its application, a 
full description and documentation of their capacity development 
strategy. The Agency will use the criteria discussed in this guidance 
to evaluate whether the State's strategy meets the requirements of the 
SDWA, as amended. EPA is required to begin DWSRF withholding related to 
capacity development strategies in fiscal year 2001. Thus, State 
capitalization grant applications submitted for award in fiscal year 
2001 must contain a full description and documentation of the State 
capacity development strategy or such description and documentation 
must be submitted separately and in advance of the capitalization grant 
application. Once a State has successfully demonstrated development of 
a capacity development strategy, the State should include this 
demonstration in the operating agreement of its capitalization grant 
application, but need not include this demonstration in each subsequent 
capitalization grant application or separate submittal, unless the 
strategy has changed. However, a full documentation of ongoing strategy 
implementation must be provided in both the initial and all subsequent 
capitalization grant applications, or as part of the DWSRF annual 
review, subject to these provisions.

2. Benefits of a State Capacity Development Strategy

    The SDWA Amendments strongly emphasize prevention of drinking water 
contamination. They seek to avoid new problems through a number of 
interrelated provisions, such as capacity development, operator 
certification, and source water protection. Achieving increased 
technical, financial, and managerial capacity can allow systems to take 
advantage of operator certification and source water protection and 
will help prevent compliance problems in the future. The Amendments' 
new prevention approach has two key elements:
     A clear State lead, with flexibility and resources to 
achieve results.
     A strong effort to provide information to the public and 
involve stakeholders in decision-making processes.
    The Amendments seek to improve the ability of water systems to 
reliably provide safe water by requiring States to ensure adequate 
capacity in new systems and to assist existing systems in acquiring and 
maintaining capacity through a State capacity development strategy. 
This strategy is intended to be a plan for the State program to assist 
water systems in acquiring and maintaining the technical, managerial, 
and financial capacity to reliably deliver safe drinking water. The 
tools and approaches that States develop as part of their capacity 
development strategies will make the Act's implementation more 
workable, consistent, and effective. Some possible tools and approaches 
available to States are

[[Page 6027]]

described in Chapter Three of EPA's Information for States on 
Implementing the Capacity Development Provisions of the Safe Drinking 
Water Act.

3. Criteria

    EPA will use the following criteria to evaluate whether or not a 
State has complied with the capacity development strategy requirements 
of the SDWA, as amended. States not complying with the statutory 
requirements face withholding of a portion of their DWSRF allotment, as 
discussed previously.
Solicitation and Consideration of Public Comment
    The Act provides that the States, in preparing their capacity 
development strategies, ``shall consider, solicit public comment on, 
and include as appropriate'' the elements listed in section 
1420(c)(2)(A-E). To meet its statutory obligations with regard to 
public comment, a State must:
     Certify that it pro-actively solicited public comments on 
the listed elements, and that the process of soliciting public comment 
occurred as part of the preparation of its capacity development 
strategy.
     Describe all significant public comments and the State's 
response to those comments.
Definitions
    For the purposes of this requirement, several terms must be 
defined.
    A ``proactive process'' is a process that has the following 
characteristics:
     The State notified the general public--through 
appropriately visible channels--of the opportunity to provide comment 
on elements A-E as part of the State's preparation of its capacity 
development strategy.
     The State identified, before soliciting public comments, 
the groups that might be interested in the preparation of a capacity 
development strategy. These groups are likely to be of the same type as 
those identified in section 1420(c)(2)(E).
     The State ensured that each of the identified groups 
received a request for public comment on the listed elements.
     The State provided an accessible mechanism for receiving 
public comment.
    `Significant public comment' is any public comment that contributes 
to or addresses in a substantive manner the development of a 
comprehensive State strategy. Significant public comment includes 
comments that suggest changes to, or express support for, any State 
position. `Response' to significant public comment is the State's 
description of the manner in which it used or did not use all 
significant public comments in preparing its capacity development 
program. The response must clearly outline how and why the State 
decided to use or not to use such comments.
States With Existing Strategies
    Some States have implemented or are implementing capacity 
development strategies. Having a strategy does not exempt a State from 
its responsibility to solicit and consider public comments on that 
strategy. Each State that has a strategy must solicit and consider 
public comment on the State's treatment of the listed elements (i.e., 
elements listed in section 1420(c)(2)(A-E)) in its strategy. One means 
of doing this is by including the existing strategy in the Intended Use 
Plan (IUP) and taking effective steps to highlight the opportunity for 
comments on the substantive elements of the strategy. Each State with 
an existing strategy must certify that it used a proactive process to 
solicit public comment, and the State must describe all significant 
public comments and its response to each of them.
Consideration of Section 1420(c)(2)(A-E)
    Under section 1420(c)(2) the State ``shall consider, solicit public 
comment on, and include as appropriate'' each of the listed elements A 
through E. These five elements require the State to consider:
    i. Methods or criteria that the State will use to identify and 
prioritize systems most in need of improving technical, managerial, and 
financial capacity (section 1420(c)(2)(A)).
    ii. A description of the institutional, regulatory, and financial, 
tax, or legal factors at the Federal, State, or local level that 
encourage or impair capacity development (section 1420(c)(2)(B)).
    iii. How the State will use the authority and resources of the SDWA 
or other means to assist public water systems in complying with 
drinking water regulations, encourage the development of partnerships 
between public water systems to enhance technical, managerial, and 
financial capacity of systems, and assist in the training and 
certification of operators (section 1420(c)(2)(C)).
    iv. A description of how the State will establish the baseline and 
measure improvements in capacity with respect to drinking water 
regulations (section 1420(c)(2)(D)).
    v. Procedures to identify persons interested and/or involved in the 
development and implementation of the capacity development strategy 
(section 1420(c)(2)(E)).
    To comply with this requirement, the State must describe the issues 
it considered relative to each of the listed elements and explain why 
it included or excluded each element from its capacity development 
strategy.
Description of the Capacity Development Strategy
    EPA must review two aspects of a State's capacity development 
strategy. First, a State must develop a strategy. This means that there 
must be a rational basis for concluding that the elements chosen by the 
State--when taken together and considered as a whole--constitute a 
strategy that is likely ``to assist public water systems in acquiring 
and maintaining technical, managerial, and financial capacity'' 
(section 1420(c)(1)). A State must describe the manner in which the 
selected elements fit together and achieve the statutory objective. EPA 
will not evaluate the desirability or potential effectiveness of each 
element. The Agency will, however, evaluate whether there is a rational 
basis for concluding that the State has a strategy, as required by 
section 1420(c)(1).
    Second, to complete the report as specified in section 1420(c)(3), 
a State must describe its plan and means for assessing and measuring 
its progress toward improving the technical, managerial, and financial 
capacity of the public water systems in the State. Further, this 
section requires the State agency responsible for executing the 
capacity development strategy to prepare a triennial report to the 
Governor on ``the efficacy of the strategy and progress made towards 
improving the technical, managerial, and financial capacity of public 
water systems in the State.'' The State will not meet this requirement 
if its strategy does not include some means of assessment.
Description of Strategy Implementation
    EPA will defer to each State's determination of how the State will 
implement its plan. Initially, each State only must describe its 
current strategy implementation efforts, as well as its plans for 
future strategy implementation. In subsequent years, the State must 
describe the actual strategy implementation during the preceding year 
and plans for strategy implementation during the current year.
Required Actions Regarding Systems in Significant Noncompliance
    As required by section 1420(b), each State must prepare, 
periodically update, and submit to the EPA Administrator a

[[Page 6028]]

list of community water systems and nontransient, noncommunity water 
systems that have a history of significant noncompliance. States must 
also indicate, to the extent practicable, the reasons for this 
noncompliance.
    Each State must also submit, by August 6, 2001, a report to the 
Administrator on the success of enforcement mechanisms and initial 
capacity development efforts in helping community water systems and 
nontransient noncommunity water systems with a history of significant 
noncompliance to improve technical, managerial, and financial capacity. 
Both requirements must be met as part of the implementation of a 
State's capacity development strategy.
Definitions
    For the purposes of this requirement, several terms must be 
defined.
    ``Periodically update'' is defined as once every 3 years. The first 
list was due to the Administrator by August 6, 1998. Subsequent lists 
will be due to the Administrator every three years.
    A ``history of significant noncompliance'' means being in 
significant noncompliance during (at least) any 3 quarters of the 
previous 3 years.

IV. Guidance for States on Assessment of Capacity for Purposes of 
Awarding DWSRF Assistance

    The Safe Drinking Water Act (SDWA) Amendments of 1996 (Pub.L. 104-
182) authorize a Drinking Water State Revolving Fund (DWSRF) to help 
public water systems finance the infrastructure needed to achieve or 
maintain compliance with SDWA requirements and to achieve the public 
health objectives of the Act. Section 1452 authorizes the Administrator 
of the U.S. Environmental Protection Agency (EPA) to award 
capitalization grants to the States. The States, in turn, provide 
assistance to eligible water systems. Under section 1452(a)(3)(A), a 
State may not provide assistance to a system that lacks the technical, 
managerial, or financial capability 2 to maintain SDWA 
compliance, or is in significant noncompliance with any requirement of 
a National Primary Drinking Water Regulation (NPDWR) or variance. Two 
exceptions to this requirement are provided in section 1452(a)(3)(B). 
This provision allows States to provide assistance to a system that is 
in significant noncompliance if the use of the financial assistance 
from the DWSRF will ensure compliance. If the system lacks adequate 
capacity the state may provide DWSRF assistance if the owner or 
operator of the system agrees to undertake feasible and appropriate 
changes in operation to ensure technical, managerial, and financial 
capacity to comply with the SDWA over the long term.
---------------------------------------------------------------------------

    \2\ The term capability is synonymous with ``capacity'' for the 
purposes of this provision of the Act.
---------------------------------------------------------------------------

    As part of its Capitalization Grant Application, each State must 
explain how it will review the technical, managerial, and financial 
capability of all systems that receive assistance. This requirement is 
separate from the capacity development strategy required under section 
1420(c) of the Act. The basis for this guidance is the Administrator's 
authority to issue guidance under section 1452(g)(3) of the Act.
    This guidance document--developed in consultation with States and 
other stakeholders--provides the minimum requirements for State 
assessment of a system's technical, managerial, and financial capacity 
for the purposes of distributing DWSRF funds. To ensure the 
implementation of section 1452(a)(3)(A), a State must describe its 
procedures for assessing technical, managerial, and financial capacity 
at present and for the foreseeable future; whether DWSRF assistance 
will help to ensure compliance (if a system is not in compliance); and 
whether the system has a long-term plan to develop adequate capacity 
(if a system lacks capacity).
    EPA recognizes that assessing system capacity is an iterative 
process, which may change as a State annually prepares its capacity 
development strategy and evaluates the strategy's success. This 
guidance provides a phased approach for States to develop and describe 
their assessment procedures. Initially, States must describe the 
procedures they will use to assess system capacity. In subsequent 
years, States must summarize the results of the previous year's 
assessment and describe any changes to the procedures for assessing 
technical, managerial, and financial capacity. This allows States to 
change their assessment procedures to meet the needs of their capacity 
development strategies. Tools and approaches that States can use to 
assess system capacity are described in Chapter Four of EPA's 
Information for States on Implementing the Capacity Development 
Provisions of the Safe Drinking Water Act.
    In developing procedures to assess system capacity, States should 
recognize that these assessments are to be part of a systematic process 
that will better enable the State to carry out other tasks required by, 
or vital to, the law and the drinking water program. By examining the 
broad goals of the program and of its strategy, a State can select the 
assessment tools and approaches that will most benefit its overall 
program. Viewing each component of the capacity development process--
including the method for assessing systems--as one part of an 
integrated whole will enable a State to develop a comprehensive, 
integrated strategy for capacity development that will make the law's 
implementation more workable, consistent, and effective. EPA will use 
the criteria presented below to evaluate State DWSRF capitalization 
grant applications. Chapter Four of EPA's Information for States on 
Implementing the Capacity Development Provisions of the Safe Drinking 
Water Act contains options States can consider in preparing the 
substance of their assessment procedures.

2. Criteria

Procedure To Assess Technical, Managerial, and Financial Capacity
    Section 1452(a)(3)(A) of the Amendments specify that a State may 
not provide assistance to a system that lacks the technical, 
managerial, and financial capability to ensure SDWA compliance. To 
comply with this provision, a State must have a procedure to assess the 
technical, managerial, and financial capacity of water systems at 
present and for the foreseeable future.
    EPA, based upon specific recommendation by the NDWAC, is proposing 
that a State's procedures to assess technical, financial, and 
managerial capacity for the purpose of determining whether to award 
DWSRF assistance be placed in the Intended Use Plan (IUP) of the 
State's capitalization grant application. This is to ensure adequate 
opportunity for public review and comment on these procedures prior to 
implementation.
    To meet its statutory obligations under this provision initially, a 
State must provide in its IUP:
     An assurance that it will assess the technical, 
managerial, and financial capacity of water systems, and
     A brief description of the procedures that will be used to 
conduct the assessment of capacity at present and for the foreseeable 
future.
    To meet its statutory obligations under this provision in 
subsequent years, a State must summarize as part of its capitalization 
grant application, or as part of the DWSRF annual review, the results 
of its assessment from the previous year and describe any changes

[[Page 6029]]

to its procedures for assessing capacity at present and for the 
foreseeable future.
Procedure for Assessing Whether DWSRF Assistance Will Help to Ensure 
Compliance (If a System Is Not Presently in Compliance)
    Section 1452(a)(3)(A) prohibits provision of DWSRF assistance to 
any system in significant noncompliance with a national primary 
drinking water regulation or variance unless the use of the financial 
assistance from the DWSRF will ensure compliance.
    To determine which systems are eligible for assistance under 
section 1452(a)(3)(A), a State must develop a procedure to assess 
whether such assistance will help to ensure compliance in a system that 
is presently in significant non-compliance.
    To meet its statutory obligations under this provision initially, a 
State must provide as part of its IUP:
     An assurance that it will assess whether such assistance 
will help systems in noncompliance ensure that they come into 
compliance.
     A brief description of the procedures that will be used to 
conduct the assessment.
    To meet its statutory obligations under this provision in 
subsequent years, a State must summarize, as part of its capitalization 
grant application, the results of its assessment from the previous year 
and describe any changes to its procedure for assessment.
Procedure for Assessing Whether the System Has a Long-Term Plan to 
Undertake Feasible and Appropriate Changes in Operations Necessary to 
Develop Adequate Capacity (If a System Lacks Capacity)
    Section 1452(a)(3)(B) prohibits provision of DWSRF assistance to 
any system which does not have the technical, managerial, and financial 
capability to ensure compliance with SDWA, as amended, unless the owner 
or operator of the system agrees to undertake feasible and appropriate 
changes in operation to ensure technical, managerial, and financial 
capacity to comply with the SDWA over the long term.
    To determine which systems are eligible for assistance under 
section 1452(a)(3)(B), a State must develop a procedure to assess 
whether the system has a long-term plan to undertake feasible and 
appropriate changes in operations necessary to develop adequate 
capacity (if a system lacks capacity).
    To meet its statutory obligations under this provision initially, a 
State must provide as part of its IUP
     An assurance that it will assess, for systems presently 
lacking capacity, whether the system has a long-term plan to undertake 
feasible and appropriate changes in operations necessary to develop 
adequate capacity.
     A brief description of the procedures that will be used to 
conduct the assessment.
    To meet its statutory obligations under this provision in 
subsequent years, a State must summarize as part of its capitalization 
grant application the results of its assessment from the previous year 
and describe any changes to its procedure for assessment.

    Dated: January 27, 1998.
Cynthia C. Dougherty,
Director, Office of Ground Water and Drinking Water.
[FR Doc. 98-2874 Filed 2-4-98; 8:45 am]
BILLING CODE 6560-50-P