September 15, 2006 BY ELECTRONIC MAIL The Honorable Stephen L. Johnson, Administrator The Honorable Benjamin H. Grumbles, Assistant Administrator for Water Programs The Honorable Brian Mannix, Associate Administrator for Policy and Economic Innovation U.S. Environmental Protection Agency c/o Water Docket, Mail Code 410T 1200 Pennsylvania Avenue, NW Washington, DC 20460-0001 Electronic Address: http://www.regulations.gov/ (Docket ID No. OW-2005-0034) Re: Comments on EPA's National Primary Drinking Water Regulations for Lead and Copper: Short-term Regulatory Revisions and Clarifications; Proposed Rule Dear Sirs: The U.S. Small Business Administration's (SBA) Office of Advocacy (Advocacy) is pleased to submit the following comments on the U.S. Environmental Protection Agency's (EPA) Proposed National Primary Drinking Water Regulations for Lead and Copper: Short-term Regulatory Revisions and Clarifications Rule.(1) The proposed rule is intended to strengthen the implementation of the Lead and Copper Rule (LCR) in the following areas: monitoring, treatment processes, customer awareness, and lead service line replacement. The proposed changes are designed to provide more effective protection of public health by reducing exposure to lead in drinking water.(2) Advocacy recommends that EPA subcategorize regulated small entities in order to understand better the impact of the proposed rule on small water systems of varying sizes. Advocacy also believes that subcategorization should be adopted as a general principle of regulatory flexibility analysis. Office of Advocacy Advocacy was established pursuant to Pub. L. 94-305 to represent the views of small entities before Federal agencies and Congress. Advocacy is an independent office within SBA, so the views expressed by Advocacy do not necessarily reflect the views of the SBA or the Administration. The Regulatory Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA),(3) gives small entities a voice in the rulemaking process. For all rules which will have a significant economic impact on a substantial number of small entities, EPA is required by the RFA to assess the impact of the proposed rule on small business and to consider less burdensome alternatives. Moreover, on August 13, 2002, President Bush signed Executive Order 13272,(4) which requires Federal agencies to give every appropriate consideration to any comments on a proposed or final rule submitted by Advocacy. The agency must include, in any explanation or discussion accompanying publication in the Federal Register of a final rule, the agency's response to any written comments submitted by Advocacy on the proposed rule. Background EPA's proposed rule is intended to strengthen the implementation of the Lead and Copper Rule (LCR) to provide more effective protection of public health by reducing exposure to lead in drinking water. However, the proposed changes do not affect the basic requirements of the LCR, the lead or copper maximum contaminant level goals, or action levels. EPA has certified under the RFA that the proposed rule will not have a significant economic impact on a substantial number of small entities. While Advocacy does not dispute the ultimate determination of the certification, Advocacy believes that EPA should subcategorize the regulated small entities in order to understand better the impact of the rule on small water systems of varying sizes. Specifically, EPA's use of a single size category for small water systems serving 10,000 users or fewer without subcategorizing small water systems into subcategories dilutes the size of the impact by using a single revenue figure instead of revenues reflecting four different size systems. This is contrary to Advocacy guidance and inconsistent with past EPA practices. Advocacy hired a contractor (Pechan) to assess EPA's RFA analysis and recommends that EPA adopt the methodology recommended by the contractor. A copy of the Pechan report(5) is attached and incorporated as part of Advocacy's comments. However, as stated earlier, a revision of the methodology in this particular rulemaking does not change the certification decision because this particular rule does not impose significant costs on any size facilities.(6) EPA Should Subcategorize as a General Principle of RFA Analysis As directed by Executive Order 13272, Advocacy prepared guidance for federal agencies on how to comply with the RFA.(7) That guidance (excerpted below) clearly supports the concept that federal agencies should subcategorize industry sectors as necessary when performing regulatory flexibility analyses: Thus, to meet the basic [RFA] goal, analysts will routinely want to economically segment industrial sectors into several appropriate size categories smaller than the . [SBA size standard]. Only by doing so will the analyst accurately identify and analyze those entities covered by the RFA. Consider the following example of how the SBA definition of a small business may not adequately address the nuances that exist within the universe of affected small entities: SBA established a size standard for the drinking water supply industry at $5 million in revenues, equating approximately to a city serving 30,000 people. EPA has proposed an alternative definition-a small water supply would serve no more than 10,000 people. Such a system generates somewhat less than a million dollars in annual revenue. However, EPA does not stop by looking only at the supply serving 10,000 people. It also examines sub- populations of the water supply industry serving fewer than 100 people, 101-500 people, 501-3,300 and 3,300- 10,000. Water supplies in the smallest size category generate revenues less than one-tenth that of those in the 10,000-25,000 size category. More significantly, 90 percent of regulated water supplies serve fewer than 500 people, and on average, water supplies in those two size categories have net losses, costs being spread to other municipal revenue streams. EPA typically examines each of these small water supply size categories and, in keeping with the Regulatory Flexibility Act, has proposed different "available treatment technologies" for each water supply size, reflecting the wide range in economic viability within the industry. Each of the size categories below the "small water supply" size cut-off stands as its own universe of economically similar regulated entities. EPA recognized the regulatory significance of this and incorporated it into its analysis. Agencies should identify and examine various economically similar small regulated entities so that they will have a baseline from which to determine whether a significant regulatory cost will have an impact on a substantial number of small entities. An understanding of the differences in economic impacts across the various regulated communities often generates different regulatory alternatives. When the agency is ready to prepare its [Initial Regulatory Flexibility Analysis], sound analysis implies that agencies look at the various subsectors of the regulated community, the differences among them, and additional sound regulatory alternatives that can achieve the statutory mission while mitigating unnecessary economic impacts on small entities.(8) Since there is a wide disparity among small water systems revenues, a single size standard for the purposes of regulatory flexibility analysis is inappropriate. Accordingly, Advocacy recommends that EPA subcategorize small water systems into the four subgroups recommended in the attached Pechan report.(9) The Pechan report adopts the same four subcategories as EPA uses in the analysis cited above. Below is a copy of Table 4 from the Pechan report: Table 4. 2000 CWSS Revenue Estimates for All Small Water Systems Population Number of Mean Median Served Water ($000 ($000s Systems s) ) Less than 100 12,658 10 2 101 to 500 16,461 36 20 501 to 3,000 14,017 191 144 3,001 to 5,052 786 648 10,000 10,000 or 48,188 153 117 less* *weighted by proportion of number of systems in each size category In the table, using a single size category results in median revenues of $117,000, whereas using four subcategories results in a range of revenues from $2,000 to $648,000.(10) In other words, use of a single size standard of $117,000 underestimates the regulatory impact on a small system of less than 100 users by a factor of more than fifty (i.e., $117,000 ö 2). Therefore, the failure to use subcategories dilutes the measure of impact, and EPA would potentially miss significant impacts for more expensive rules. Accordingly, Advocacy recommends that EPA employ the subcategorization method in this rulemaking and in all EPA rules. EPA Does Not Have a Consistent RFA Certification Methodology In the RFA certification analysis of the pesticide container rule promulgated only last month, EPA properly disaggregated the 3,000 affected small pesticide commercial applicators into three sizes: small-small, medium-small, and large- small.(11) Therefore, EPA found that it was appropriate in the certification analysis to divide these differently affected firms in this situation for a proper analysis. EPA has not offered any explanation as to why the approach would be different for drinking water rules. This is particularly surprising, when for other purposes, such as the affordability waiver, the EPA office already employs four subcategories within the small water system category to examine whether regulatory variances are appropriate. Conclusion Advocacy appreciates the opportunity to comment on EPA's Proposed National Primary Drinking Water Regulations for Lead and Copper: Short-term Regulatory Revisions and Clarifications Rule. Advocacy recommends that EPA employ an appropriate subcategorization method in the final LCR and future Safe Drinking Water Act rules. Please feel free to contact me or Kevin Bromberg of my staff at (202) 205-6964 (or kevin.bromberg@sba.gov) if you have any questions or require additional information. Sincerely, //signed// Thomas M. Sullivan Chief Counsel for Advocacy //signed// Kevin Bromberg Assistant Chief Counsel for Advocacy cc:Steven D. Aitken Acting Administrator, Office of Information and Regulatory Affairs Office of Management and Budget Attachment: September 15, 2006 Pechan Technical Memorandum ENDNOTES 1. 71 Fed. Reg. 40828-40863 (July 18, 2006). 2. Id. at 40828. 3. Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C. 601 et seq.). 4. 67 Fed. Reg. 53461 (August 16, 2002). 5. Revenue Estimates for Small Entity Potentially Affected By National Primary Drinking Water Regulations for Lead and Copper, Technical Memorandum, E.H. Pechan & Associates, Inc., September 15, 2006. 6. The average cost/small facility revenue is estimated at 0.002 percent. 71 Fed. Reg. 40828, 40856. This ratio would not increase this figure to above one percent for even the smallest subcategory (100 or fewer users. 7. A Guide for Government Agencies, How to Comply with the Regulatory Flexibility Act, Implementing the President's Small Business Agenda and Executive Order 13272, May 2003. 8. A Guide for Government Agencies, How to Comply with the Regulatory Flexibility Act, Implementing the President's Small Business Agenda and Executive Order 13272, May 2003, pages 15-16. 9. Advocacy recognizes that the example from the Advocacy guidance is from EPA's affordability analysis for small water systems and not its RFA certification analysis. Affordability analyses are used by EPA to determine if small systems within a given subcategory warrant a variance from a specific drinking water standard. However, it is also appropriate to use this methodology for certifications since both measure regulatory impacts. 10. Pechan's single category revenue estimate for small water systems is $117,000, whereas EPA uses a figure of nearly $3.0 million. See further discussion in the Pechan report at pages 1-7. The Pechan report explains in more detail why EPA should be using only the municipality water- related revenues, and not total municipal revenues, in the cost/revenue comparison that is part of EPA's certification analysis. 11. EPA Final Rule, Standards for Pesticide Containers and Containment, 71 Fed. Reg. 47329-47437 (August 16, 2006).