1 Date: 11 August 2004 To: James Covington, EPA From: Maureen F. Kaplan, ERG Subject: Drinking Water Facilities Profile 1. Introduction The drinking water supply and treatment industry was identified as an industry sector currently not regulated by effluent guidelines through stakeholder's suggestions for the 2003/ 2004 effluent guidelines program plan. EPA examined discharges for this industry in the Toxics Release Inventory ( TRI) and Permit Compliance System ( PCS) databases ( USEPA, 2003) This memorandum provides an initial industry profile.

Section 2 describes the primary data sources, industry subsets of interest, and the data limitations for an in depth analysis at this time. Section 3 summarizes the estimated number of direct and indirect dischargers ( i. e., potential BAT and PSES facilities, respectively). Section 4 presents the ownership profiles and small business estimates. Section 5 lists the type of contaminants found in the raw water concentration ( i. e., before treatment). Section 6 discusses typical treatment practices that might result in effluents. Section 7 discusses the financial characteristics of drinking water facilities.

2. Data Sources U. S. EPA, Community Water System Survey 2000, Volumes 1 and 2, EPA 815 R 02 005A and EPA 815 R 02 005B, December 2002 ( hereafter called " Survey 2000") is the primary data source for this industry profile. Survey 2000 is based on a sample count of about 1,250 questionnaires returned to EPA from facilities in 50 states and the District of Columbia. In contrast, the data sources for the draft effluent guidelines plan are TRI and PCS. TRI had only two observations. The PCS database contained wastewater flows for 13 facilities in SIC 4191 ( water supply), however, only 7 observations are from the 50 States and the District of Columbia. ( The remainder are from Puerto Rico.) The data sets, then, have little overlap. Sections 5 and 6 of this memorandum are based on Survey 2000 to provide a general idea of the initial contaminants and treatment practices that might be found in an effluent limitations guideline analysis of drinking water systems.

ERG does not have access to the individual observations in the Survey 2000 data base, only what is published in the report. Therefore all estimates are very general. For example, we cannot, at this time, correlate facilities that discharge to surface waters with particular treatment practices that might generate sludges of interest. The remaining discussion in this section must be read with this caveat in mind. 2 3. Number of Direct and Indirect Dischargers Survey 2000 indicates that there are approximately 52,186 drinking water facilities nationwide. For the purpose of estimating the subset of facilities that might be within scope of an effluent guideline, we need to identify the number of facilities that discharge to surface waters ( direct dischargers or BAT facilities) and which discharge to a sanitary sewer ( indirect dischargers or PSES facilities). Survey 2000, volume 2, Table 29 lists the percentages of plants that discharge ( 1) directly to surface waters and ( 2) to a sanitary sewer. Based on this information, we estimate there are about:

# 8,830 drinking water systems that might be within scope of an effluent guideline # 5,694 of the 8,830 systems discharge to surface waters ( BAT)

# 3,136 of the 8,830 systems discharge to a sanitary sewer ( PSES).

See ERG, 2004 for details on the calculations. In other words, an effluent guideline might apply to about 17 percent of the drinking water treatment facilities ( that is, 8,830 of 52,186 facilities).

4. Ownership and Small Entities 4.1 Types of Ownership Survey 2000 notes that community water systems are evenly split between public and private ownership. Public facilities are owned by counties, cities, towns, or other forms of local government. Private facilities are owned by one of three types of entity:

# Most ( 39%) systems are ancillary systems. That is, water treatment is not the primary business of the owner. The owner supplies water as an integral part of their business.

# About one third ( 34%) of the private community water systems are rum as not for profit entities.

# For profit entities constitute the smallest proportion of private community water systems ( 27%).

In general, public and private systems have different rate structures, sources of funding, and the size of the population served. These are discussed in more detail in Section 7.

4.2 Counts by Ownership Survey 2000 crosstabulates the public and private ownership of drinking water facilities by primary source of water and the population served ( volume 2, Table 3). Combining this information with that presented in volume 2, Table 29 ( residual management by primary source of water and the population served) to estimate the number of public and private BAT and PSES facilities. The estimates are: 3 # 4,592 public facilities S 2,515 BAT S 2,077 PSES # 4,239 private facilities S 3,179 BAT S 1,060 PSES 4.3 Small Entity Definitions The Regulatory Flexibility Act as amended by the Small Business Regulatory Enforcement Flexibility Act ( RFA/ SBREFA) defines a " small governmental jurisdiction" as the government of a city, town, county, school district, or special district with a population of less than 50,000 ( USEPA, 1999) For the purpose of this memorandum, we assume that a public drinking water facility that serves 50,000 or fewer persons belongs to a small entity.

Drinking water facilities are part of NAICS code 221310 Water Supply and Irrigation Systems. The Small Business Administration size standard for NAICS 221310 is $ 6.0 million dollars in revenue ( SBA, 2002). However, as noted in Section 4.1, nearly four out of every ten private drinking water systems are ancillary systems. This means that the primary business would be a NAICS code other than 221310. For the purpose of estimating the number of small entities, however, we assume all private drinking water systems with less than $ 6.0 million in annual revenues belongs to a small entity. ERG, 2004 provides more information on how small commercial business were identified by the revenue ranges by population served reported in Survey 2000, volume 2, Table 47.

Table 1 summarizes the results.

5. Initial Contaminants Survey 2000 asked systems that served more than 500,000 people about nine contaminants in the raw water prior to treatment ( volume 2, Table 27). ( That is, about 64 systems.) If a system did not test for a contaminant, the response was " N/ A." If a system tested for the contaminant and did not detect it, the response was " ND." EPA calculated the mean, median, and 90th percentile concentrations for the systems that reported positive concentrations.

Table 2 presents the findings for very large systems that use groundwater. The relevance of this information to effluent guidelines is as follows. Suppose a drinking water system uses groundwater as a source and the water has a contaminant. Suppose the drinking water system removes the contaminant during treatment. The residuals then contain the contaminant. If the drinking water system discharges to surface water, it could contribute the contaminant to the surface water. 4 Table 1 Estimated Number of Drinking Water Systems Belonging to Small Entities Number of Drinking Water Systems 52,186 Estimated ELG Drinking Water Systems 8,830 Drinking Water Systems belonging to Small Entities 8,582 Estimated BAT Drinking Water Systems ( Total) 5,694 Public Ownership 2,515 Private Ownership 3,179 Public Ownership  Small 2,378 Private Ownership  Small 3,163 Estimated PSES Drinking Water Systems ( Total) 3,136 Public Ownership 2,077 Private Ownership 1,060 Public Ownership  Small 1,991 Private Ownership  Small 1,050 Numbers do not sum due to rounding.

Table 2 Concentration of Various Contaminants in Very Large Groundwater Systems % Reporting Concentration ( ppm unless Radon)

Contaminant NA ND Median Mean 90th Percentile Arsenic 19.2% 11.5% 0.010 0.007 0.025 Radon ( pCI/ L) 80.8% 2.6% 371.1 417.5 554.5 MTBE 33.3% 48.7% 0.175 0.004 0.050 Atrazine 33.3% 57.7% 0.043 0.001 0.210 Metolachlor 47.4% 44.9% 0.053 0.001 0.210 Boron 51.3% 2.6% 0.173 0.120 0.273 2,4 D 34.6% 57.7% 0.001 0.001 0.001 Simazine 32.1% 59.0% 0.043 0.001 0.210 Glyphosate 34.6% 56.4% 0.002 0.001 0.006 5 Source: Survey 2000, volume 2, Table 27. 6. Treatment Practices Survey 2000, volume 2, Tables 23 and 24 indicate the percentage of facilities that use certain treatment practices such as chlorination only, disinfection prior to sedimentation or filtration, coagulation/ flocculation, polymers, settling/ sedimentation, softening, or various types of filtration. Facilities that use coagulation/ flocculation might contain a subset of interest   those that use alum, ferric chloride, or ferric sulfate in the process. ( Aluminum and iron are two of the contaminants reported in the PCS data for this industry group.) Although 60.8 percent of facilities treating surface water and 2.1 percent of the facilities treating groundwater use coagulants and/ or flocculating agents, we cannot tell at this time how many of these facilities also discharge to surface waters or sanitary sewers. Access to the Survey 2000 database, however, would presumably allow EPA to estimate the population with both of these characteristics and target the smaller set of facilities for more detailed investigation.

7. Financial Characteristics 7.1 Industry Revenues and Expenses In 2000, water system revenue was about $ 38.8 billion and expenses were about $ 32.2 billion ( see Table 3). While the overall relationship between revenues and expenses is positive, there are systems that show losses. Although the number of drinking water systems is nearly evenly split between public and private ownership, nearly 90 percent of the revenues are associated with public systems. This is consistent with water production, that is, about 91 percent of the water produced is produced by public systems ( Survey 2000, volume 1, p. 10).

Table 3 2000 Annual Revenues and Expenses ( Billions)

Ownership 2002 Revenues 2002 Expenses Public $ 34.5 $ 29.1 Private $ 4.3 $ 3.1 Total $ 38.8 $ 32.2 Source: Survey, 2000, volume 1, p. 15 Table 4 summarizes the average annual revenues per facility by ownership and by the population served. Ancillary systems are excluded from the calculations because they frequently do not charge for water. Water is provided as part of a larger service. The range is spans three orders of magnitude. For systems serving fewer than 500 individuals, privately owned systems earn about one fourth of the revenues for a publicly owned system in the same population category. 6 Table 4 2000 Average Annual Revenues by Population Served 2000 Average Annual Revenues ( Dollars)

Population Served Publicly Owned Privately Owned Fewer than 500 $ 53,176 $ 12,795 501 to 3,300 $ 185,867 $ 178,375 3,301 to 10,000 $ 756,035 $ 792,240 10,001 to 100,000 $ 3,654,402 $ 3,601,541 More than 100,000 $ 40,797,408 $ 45,853,541 Source: Survey, 2000, volume 1, p. 26.

7.2 Sales Distribution Survey 2000 reports the percentage of water sales revenue by customer class. The dataset excludes ancillary systems because they frequently do not charge separately for water. This information is summarized in Table 5. For the smallest systems, residential sales make up nearly 90 percent of the water sales revenue. This percentage decreases as the system size increases. For systems serving more than 100,000 persons, residential sales make up about half the revenues. Commercial/ industrial water use grows from 7 percent to 21 percent of the revenues from the smallest to the largest systems. Wholesale sales make up less than 5 percent of revenues for systems serving fewer than 10,000 persons but form nearly a quarter of the revenue for systems serving more than 100,000 persons.

Table 5 Distribution of 2000 Revenues by Customer Type Population Served Customer Type Below 500 501 to 3,300 3,301 to 10,000 10,001 to 100,000 Over 100,000 Residential 89.3% 83.5% 73.6% 67.1% 49.8%

Commercial/ Industrial 6.8% 11.3% 18.6% 21.1% 20.7%

Wholesale 1.1% 2.0% 4.3% 7.4% 24.7%

Other 2.8% 3.3% 3.5% 4.4% 4.9%

Total 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Survey, 2000, volume 1, p. 16. Note: Excludes ancillary systems. 7 7.3 Profitability Survey, 2000 provides ratios of total revenues to total expenses by ownership ( public/ private) and population served, see Table 6. Total expenses is defines as total operating expenses including debt service but excluding capital and other non operating expenses. If the ratio is less than 1.0, costs exceed revenues and the facility is losing money or relying on non operating revenue to finance operations. Shaded boxes in Table 6 indicate subgroups with ratios less than 1.0. A ratio of 1.0 means that the facility operates at the break even point, i. e., revenues equal costs. A ratio greater than 1.0 means that the facility has more funds available to pay down debt. Survey 2000 notes that a ratio above 1.2 is considered strong.

Table 6 Ratio of Total Revenues to Total Expenses By Ownership System Service Population Category Ownership Type 100 or Less 101 to 500 501 to 3,300 3,301 to 10,000 10,001 to 50,000 50,001 to 100,000 100,001 to 500,000 Over 500,000 All Sizes Public Systems Average Ratio 2.1 1.1 1.3 1.2 1.1 1.3 1.2 1.2 1.2 10th Percentile 0.8 0.6 0.8 0.9 0.8 0.9 0.9 0.9 0.8 25th Percentile 1.2 0.9 0.9 1.0 1.0 1.0 1.0 1.0 0.9 50th Percentile 1.7 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 75th Percentile 3.4 1.4 1.4 1.3 1.2 1.2 1.3 1.2 1.4 90th Percentile 3.4 1.6 2.3 1.7 1.4 1.6 1.5 1.6 1.9 Private Systems Average Ratio 1.5 1.5 1.1 1.3 1.2 1.3 1.2 1.2 1.4 10th Percentile 0.5 0.8 0.9 0.8 1.0 1.0 1.0 1.1 0.7 25th Percentile 1.0 0.8 1.0 1.1 1.0 1.1 1.0 1.1 0.9 50th Percentile 1.2 1.1 1.1 1.2 1.2 1.2 1.1 1.2 1.1 75th Percentile 1.8 1.8 1.2 1.3 1.3 1.4 1.2 1.4 1.6 90th Percentile 2.8 2.5 1.3 2.2 1.6 2.1 1.8 1.4 2.5 Source: Survey 2000, volume 2, Table 65. 8 A comparison of Table 3 and Table 6 indicates how the overall ratios can mask the variability in financial status within the drinking water industry. For public facilities, the overall average ratio is 1.2, i. e., healthy. The 10th percentile, however, consistently shows expenses exceeding revenues for all size categories. For facilities serving 101 to 500 and 501 to 3,300 persons, the lower quartile still shows expenses exceeding revenues. For publicly owned drinking water facilities, one out of every four facilities shows expenses exceeding revenues. Two factors need to be considered before drawing conclusions about the financial state of public drinking water facilities. First, depreciation is included as an expense. Depreciation, however, is a non cash expense reflecting wear and tear on the equipment. So it is possible for a facility to show a total revenues to total expenses ratio that is less than 1.0 but still have positive cash flow for the year. Second, the survey provides a 1 year " snapshot" of financial data. Some systems with ratios less than 1.0 might be waiting for rate increases to take effect. Some combined systems ( e. g., water and sewer or water and power) had difficulty separating expenses but, presumably, the costs associated with drinking water treatment have an equal probability of being over or under estimated.

The data for private systems are more difficult to interpret. Like public systems, the overall ratio is 1.4 and about one in four systems shows a ratio less than 1.0. But the private ownership category has three subcategories: ancillary systems, not for profit, and for profit organizations. Each could appear differently in the data.

As mentioned in Section 4.1, nearly 40 percent of the privately owned drinking water treatment facilities are ancillary systems where the water is supplied as part of a larger business operation. Ancillary systems might appear in any one of three ways in the ratio data: ( 1) as a cost center [ costs but no revenues, ratio = 0.0 or undefined], ( 2) a break even operation [ i. e., revenues from the larger operation are allocated to drinking water treatment to cover costs, ratio = 1.0], or ( 3) customers are billed separately for water use [ ratio reflects actual cost recovery ratio].

About one third of the private systems are run as " not for profit" organizations. Survey 2000 provides an example where a small homeowners association might show costs exceeding revenues. The technical insolvency could be resolved quickly by levying a small assessment on all customers to become solvent. So a ratio less than 1.0 in the 2000 " snapshot" might not indicate long term insolvency.

The remaining systems are for profit organizations with the more typical interpretation of financial ratios. As with the public systems, a ratio less than 1.0 might correspond to a positive cash flow due to the inclusion of depreciation as an expense.

This information has several implications for an economic analysis of the drinking water industry. In particular, the methodology will need to address four different types of financial communities:

# Public systems. The economic analysis might investigate the cost increase passed to residential customers and/ or the ratio of the cost increase to the median household income for the region.

# Ancillary systems. These might be covered under effluent guidelines for the larger business operation, such as happened in the transportation equipment cleaning industry where in house operations ( as opposed to commercial operations) were considered regulated under a different industry. The size standards for this group of facilities would be set by the NAICS code for the larger business. For this group, it might be less 9 expensive to shut down their treatment operations and becoming a customer to another drinking water treatment system.

# Not for profit organizations. The economic analysis for this group might resemble that for publicly owned systems rather than other privately owned systems.

# For profit organizations. A more traditional financial analysis ( e. g., discounted cash flow, closure, company financial health) is possible for this group.

7.5 Sources of Capital Funds Table 7 summarizes the different sources of funds tapped by publicly and privately owned drinking water systems to finance infrastructure replacement, system expansion, or improvements to water quality. The data are restricted to facilities that made capital expenditures during 1996 2000. The percentages sum to more than 100 percent because facilities typically use a mix of funding sources.

Seventy percent of public systems and 81 percent of private systems used current revenues to fund capital expenditures. About 10 percent of the public systems received Drinking Water State Revolving Fund ( DWSRF) loans. Seven percent of the population had part or all of the DWSRF principal payment forgiven. Most of these were small systems serving fewer than 500 people. Some states do not make DWSRF available to private systems, thus explaining the low use of this source of funds in the private sector.

Publicly owned systems are more likely to use other government loans and grants ( 13 percent and 22 percent, respectively) than privately owned systems ( 3 percent and 5 percent, respectively). Small publicly owned systems are more likely to get grants ( 28 percent) than large systems ( 6 percent).

Twenty percent of the publicly owned systems borrow from the private sector. This is actually a larger percent than the proportion of privately owned systems ( 13 percent).

Table 8 shows how much of each ( average) system's total capital expenditures came from each funding source. The difference between the public and private systems is apparent. Public systems derive, on average, about half their funding for capital expenses from current revenues. In contrast, private systems, on average, derive nearly 80 percent of their funding for capital expenses from current revenues. Both types of ownership derive between 15 percent to 17 percent of their funding from borrowing from the private sector and other sources of revenue. The difference is that publicly owned systems obtain nearly one third ( 32 percent) of the funding from a combination of government loans and grants. This source of funding is barely available to the private sector.

In other words, the economic analysis for an effluent guideline for the drinking water industry will need to address the differences in access to different types of capital by publicly owned and privatelyowned drinking water treatment systems. 10 Table 7 Source of Capital Funds in the Past 5 Years By Ownership System Service Population Category Ownership Type 100 or Less 101

500 501  3,300 3,301

10,000 10,001

50,000 50,001

100,000 100,001 500,000 Over 500,000 All Sizes Public Systems Current Revenues 6.3 63.8 70.1 73.9 79.9 81.7 90.4 95.9 69.5 DWSRF Loans 24.4 9.4 12.6 3.4 7.7 8.8 9.3 25.7 9.8 DWSRF Principal Repayment Forgiveness 16.3 14.0 6.9 1.5 4.3 3.5 2.9 2.1 7.1 Other Government Loans 0.0 13.1 12.6 14.2 16.4 8.3 7.4 2.1 12.9 Other Government Grants 6.5 28.3 17.9 28.0 21.6 13.8 6.0 6.2 21.8 Borrowing from Private Sector 3.2 10.0 12.6 27.3 36.0 50.5 40.8 75.1 19.5 Other 46.9 0.0 3.0 3.5 1.1 2.7 3.6 2.0 3.6 Private Systems Current Revenues 79.2 86.5 71.6 67.5 85.9 73.6 92.9 64.0 81.2 DWSRF Loans 0.0 0.0 0.0 0.0 3.2 0.0 14.1 36.0 0.1 DWSRF Principal Repayment Forgiveness 0.1 0.0 0.0 11.6 0.0 0.0 0.0 0.0 0.5 Other Government Loans 3.3 0.3 8.6 2.4 22.6 17.6 15.3 0.0 3.3 Other Government Grants 0.0 4.9 14.8 11.6 18.3 8.8 0.0 0.0 4.8 Borrowing from Private Sector 12.4 6.1 24.1 51.1 36.6 55.8 70.6 68.0 13.4 Other 7.5 3.9 6.9 9.3 10.4 0.0 0.0 0.0 6.0 Source: Survey 2000, volume 2, Table 79. 11 Table 8 Percentage of Funds by Source for a Average System Ownership Type Funding Source Public Private Current Revenues 51% 78%

DWSRF Loans 7% 0%

DWSRF Principal Repayment Forgiveness 4% 0%

Other Government Loans 8% 2%

Other Government Grants 13% 4%

Borrowing from Private Sector 14% 10%

Other 3% 5%

Sum 100% 100%

Source: Survey, 2000, volume 2, Table 80. Numbers do not sum due to rounding.

8. References ERG. 2004. Eastern Research Group, Inc. " Estimated Number of Small Entities Owning Drinking Water Facilities." Memorandum to James Covington, III, EPA dated 4 August.

SBA. 2002. Small Business Administration. Small Business Size Standards: Size Standards by 2002 North American Industry Classification System. Federal Register 67: 56944. 6 September.

USEPA. 2003. U. S. Environmental Protection Agency. Preliminary Effluent Guidelines Program Plan for 2004/ 2005. Federal Register 68: 75515 75531. 31 December.

USEPA. 2002. U. S. Environmental Protection Agency. Community Water System Survey 2000. Volumes 1 and 2, EPA 815 R 02 005A and EPA 815 R 02 005B. December.

USEPA. 1999. U. S. Environmental Protection Agency. Revised Interim Guidance for EPA Rulewriters: Regulatory Flexibility Act as amended by the Small Business Regulatory Enforcement Flexibility Act. March 29.