Key Takeaways
What Happened: The U.S. Environmental Protection Agency (EPA) is soliciting public comments on its Financial Capability Assessment (FCA) guidance document, a key methodological tool used to negotiate compliance timetables for stormwater and wastewater managers facing Clean Water Act (CWA) enforcement actions.
Who’s Impacted: Wastewater and stormwater managers such as municipalities, utilities, and federally recognized tribes—particularly those serving low-income or high-cost communities.
Next Steps: Interested parties should consider whether and how to engage in public comments by the May 26, 2026 deadline. For example, impacted entities may want to submit comments highlighting additional factors (such as cost-of-living differences, poverty distribution, and legal constraints on rate -setting) that could better clarify local ratepayers’ economic conditions. Entities with unique regional challenges, such as special state laws or non-riparian water rights systems, may want to highlight those factors as considerations the agency is overlooking.
Background
The FCA primarily serves as a tool to tailor negotiated CWA compliance timelines or as a threshold trigger for consent decree modification clauses. It creates a procedural opportunity to present evidence that the service area’s rates would rise based on the municipality or utility’s existing wastewater and stormwater management obligations. The FCA allows regulators to consider location-specific socioeconomic idiosyncrasies which, although non-dispositive, can improve settlement outcomes.
EPA substantively updated the original 1997 FCA guidance in 2023 by adding additional socioeconomic factors to increase the framework’s flexibility. EPA now seeks input on whether the FCA’s current affordability metrics accurately reflect economic hardship in a utility’s service area—particularly for small, rural, and low-income communities—and whether it should use additional or different metrics instead.
EPA is accepting public comments on any aspect of the FCA. EPA is focused on the following issues:
- Measuring poverty more accurately.
- EPA’s notice suggests that existing indicators may understate affordability challenges in rural and low-income communities.
- Regional cost-of-living differences.
- EPA is considering whether its income metrics should also account for high housing, utility, and other costs.
- Appropriate compliance timelines.
- EPA is considering how to balance affordability constraints with the need for timely environmental compliance. The agency is seeking input on how to establish realistic yet protective compliance schedules.
- Costs in water quality standards (WQS) decisions.
- Separate from compliance negotiations, the FCA also factors into WQS designations, variances, antidegradation reviews, and designated-use revisions. To that end, EPA is seeking feedback on how to handle costs to address stakeholder concerns about the current approach’s inconsistent and unclear application.
California Case Study
Common California dynamics highlight some of the FCA framework’s current shortcomings:
The FCA could better account for state-specific environmental conditions materially affecting affordability. Californian ratepayers often bear the costs associated with groundwater decline and land subsidence, including impacts on major conveyance infrastructure, Delta levee issues, and salinity-related risks. In addition, Californians generally face broad cost pressures, such as labor, materials, and regulatory delays. Arguably, EPA could better clarify in the FCA that such geographically specific costs related to hydrologic stressors may be treated as legitimate community-specific cost drivers.
The FCA could better explain how appropriated state funding should be incorporated into forward-looking affordability analyses. The FCA guidance directs communities to evaluate grants, subsidies, and other financing mechanisms, but it could provide more explicit guidance. For example, the sustained funding for Delta levee improvements that could be provided by the proposed California Senate Bill 872 could be incorporated into Alternative 2 financial models, provided EPA clarifies the scope of state funding eligible for inclusion in affordability assessments.
The FCA does not clearly address how state affordability backstops should be accounted for when evaluating the economic impact of potential WQS decisions. While the FCA recognizes that drinking water costs may be considered in WQS economic analysis, the current FCA does not explain how to account for drinking water affordability supports, like California’s Safe and Affordable Funding for Equity and Resilience (SAFER) program, which are intended to help offset these costs. Clarifying how state programs like SAFER fit into WQS economic analyses would help ensure that the analysis accurately reflects a community’s financial capability and the economic impact associated with a potential WQS decision.
Furthermore, the FCA does not expressly address the financial implications of state-law-imposed procedural rules that affect rate setting. For example, California’s Proposition 218’s procedural requirements may delay implementation of revenue measures needed to support compliance schedules. EPA could revise the FCA to clarify when and how to expressly consider state constitutional constraints when evaluating feasible timelines.
The FCA could better reflect costs unique to low-income communities. FCA guidance that includes broader state-specific matrix factors would give regulators a more complete view of the costs of bringing low-income communities’ stormwater or wastewater systems into CWA compliance, particularly where rural water utilities lack the financial, political, or technological resources to deliver critical services.
Next Steps
Public comments can help ensure that EPA considers local realities in its final framework. Utilities and municipalities should consider highlighting in comments the need for revisions, such as:
- Whether current FCA metrics reflect local economic conditions,
- Region-specific cost drivers and legal constraints, and
- Alternative metrics that could affect affordability determinations.
EPA announced plans to host two virtual meetings to solicit public feedback, but it has not yet announced the dates . Those interested should monitor the FCA page, the EPA Live page, and docket EPA-HQ-OW-2026-1090 for an update or notice.
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