Summary of Haig Farmer's Statement of
US EPA Position
Following is a brief summary of EPA’s proposed treatment of concession fees under E.O. 12803, as presented by Haig Farmer in a teleconference call on December 24, 1998.
1. As in any conventional disposition, or asset encumbrance, e.g. lease, EPA proposes to deem a project transaction to be E.O. 12803-jurisdictional if a community receives a "concession fee" in connection with the outsourcing of the operation of a partially Federally grant-funded facility in which the community retains title. That being the case, assuming EPA approves a transaction under E.O. 12803, the local government receiving the concession fee would have to apply the proceeds as follows:
- First, to local funds invested in initial project capital (for continued water treatment project related use by the local government)
- Second, to the Federal Government to repay the undepreciated portion of the Federal grant still extant in the project (applying the accelerated depreciation accounting principles of E.O. 12803.)
- Third, to the local government for infrastructure development and/or tax reduction purposes.
To better determine the impact of its position EPA has agreed to try to quantify the number of potential facilities in which there still are undepreciated Federal funds. Haig Farmer estimates that the number of such projects is low and diminishing rapidly. The details of continued Federal economic entitlement with respect to the grant in the case of asset refinancing or sale subsequent to the concession fee/operations contract have not yet been worked out.
2. A regulation-driven streamlining of the EPA review of concession fee/operations contract arrangements under E.O. 12803 was discussed by Mr. Farmer as a further means of mitigating the impact of its position but that, too, has not been worked out. However, one key area to which consideration has specifically been given is EPA evaluation of the rate impact of an E.O. 12803 jurisdictional transaction. EPA's basic proposal is that in an E.O. 12803 review any rate change from a concession fee would be acceptable to EPA if the impact of the concession fee:
- has been disclosed through a satisfactory public participation process (EPA definition which includes well publicized public hearings), or
- if the concession fee meets a "rate reasonableness" test which EPA has formulated.
The proposed "rate reasonableness" test relates the impact on rates of the payment of a concession fee to the average income of consumers in a district. Currently, EPA and OMB suggest that concession payment induced rate shifts not greater than 1%-2% of the average income of local residents would qualify under this test, i.e., would not be deemed to have a rate impact which EPA would have to review further.
3. Further, in support of its objective of creating an expedited review process, EPA is also considering convening an EPA/industry association-working group which would develop specific guidelines for local governments. The guidelines would allow the transaction parties to know, prior to a transaction, (i) how to structure the transaction in a way which would avoid lengthy EPA review, and (ii) exactly the information required by EPA, and (iii) the proper format for a rapid E.O. 12803-review approval. Perhaps WIC's "checklist" effort can be brought to bear in this context.
Summary/Actions Needed:
In short, while EPA/OMB still proposes to require an E.O. 12803 review for concession fee-operating contracts it is seeking ways to mitigate the delay imposed by such reviews. EPA asserts that it will not oppose a concession fee if the potentially impacted ratepayer has received advance notice and disclosure of the rate impact (using EPA notification guidelines) or the rate has less than a 1%-2% impact on the average family income of the ratepayer. The WIC, with the other industry organizations must (i) assess the practical impact of EPA's proposals and (ii) work with EPA to insure the creation of an Industry-Agency Committee with direct input to formulation of the local government guidelines.