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Water: Regulation Development

Economic Analysis

Econonic Analysis: Overview

This page provides information on EPA’s approach to economic analysis when developing standards for drinking water contaminants. By way of context and background, the first section presents a brief overview of the regulatory development process before and after the most recent (1996) amendments to the Safe Drinking Water Act (SDWA). The second section, Economic Analysis: Current Practices and Policies, describes how EPA has been implementing the parts of these requirements that require economic analyses, including discussions of data collection, benefit and cost calculations and economic model development.

History:

The Safe Drinking Water Act (SDWA) was originally passed by Congress in 1974 to protect public health by regulating the nation's public drinking water supply. Amended in 1986 and 1996, the law requires a variety of actions to protect drinking water and its sources: rivers, lakes, reservoirs, springs, and ground water wells. SDWA defines public water systems as having either 15 service connections or regularly serving at least 25 individuals in (SDWA 1401(4)). Community water systems are public water systems that serve at least 15 service connections used by year-round residents or regularly serves at least 25 year-round residents. Non-community water systems are public water systems that are not community water systems.

The 1996 amendments greatly enhanced the original statute by adding components that addressed source water protection, operator training, funding for water system improvements and public information requirements. Since enactment of the original statute, EPA has set standards for more than 90 chemical, microbiological, radiological and physical contaminants in drinking water.

SDWA Statutory Requirements:

The 1996 SDWA amendments require that a variety of economic analyses be conducted whenever EPA proposes a national primary drinking water regulation. Components of the analyses include treatment design, unit treatment costs and national costs, model systems development, baseline estimates, and benefits analysis.

The 1996 amendments place a significant responsibility upon the Environmental Protection Agency (EPA) to realistically assess the capabilities of and resources available to those who could be affected as a result of any future drinking water rulemaking. Section 1412 (b) (3) (C) establishes requirements for health risk reduction and cost analysis under which quantifiable and non-quantifiable benefits of a proposed rule must be measured against its cost. Section 1412 (b) (6) addresses additional health risk reduction and cost considerations by allowing the Administrator in certain circumstances to set a contaminant level that maximizes health risk reduction benefits at a cost justified by the benefits. Sections 1415 and 1416 require EPA to look at costs and economic factors when considering whether or not to allow a variance or an exemption to a treatment requirement for a particular water system.
The 1996 amendments explicitly include cost-benefit analysis as part of the regulatory process, a change from earlier requirements The Agency's choice of regulatory levels was guided by statutory language requiring EPA to set Maximum Contaminant Levels (MCL) as close to the Maximum Contaminant Level Goal as is "feasible" [SDWA, Section 1412(b)(4)(B)], and defined feasible as the use of the best technology and treatment techniques examined for efficacy under field conditions, taking cost into consideration [SDWA, Section 1412(b)(4)(D)]. Under the Amendments, EPA, at the discretion of the Administrator, may now establish less stringent MCLs if the costs of achieving the lowest feasible level are not justified by its benefits. Additional information on the Safe Drinking Water Act may be found on EPA’s Safe Drinking Water site.

To make better estimates of regulatory costs (and benefits) EPA must take into consideration the diversity of water systems that make up the regulated drinking water community: from the smallest non-community water system (NCWS), such as a restaurant, to the largest urban surface water system. Clearly the multiple types of water systems will have highly divergent needs and methods of installing treatment, in addition to varying distributions of regulatory costs and benefits.

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Other Statutory Requirements:

In addition to requirements for economic analysis imposed by the 1996 amendments to the Safe Drinking Water Act, other statutes contain additional requirements for such analysis. Preparation of an Economic Impact Assessment is required by the Regulatory Flexibility Act (RFA) and the Small Business Regulatory Enforcement Reform Act (SBREFA. In 1996, SBREFA amended the RFA to require EPA to convene a small business advocacy review panel prior to proposing any rule that will have a significant economic impact on a substantial number of small entities. Analysis to determine what constitutes “significant economic impact” must be based on a clear picture of the baseline characteristics of the water supply industry and its customers as they currently exist before the effects of new regulations can be calculated.

Similarly, the development of new regulations must take into account the requirements of the Unfunded Mandates Reform Act (UMRA), which was designed to avoid imposing unfunded federal mandates on state, local, and tribal governments, or the private sector. The analyses required by this law can only be conducted once the availability and size of existing state and local government resources are known.

The Paperwork Reduction act requires an assessment of the financial burden of any new regulation on both state and local entities. The time spent complying with a new regulation must be monetized to the extent possible, and must be factored into the total cost of a rule.

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Economic Analysis: Current Practices and Policies

General

EPA has used benefit-cost analysis for many years as one of several sources of information on the impacts of alternative policy choices. Traditionally, the cost side of the analysis includes estimating the expenditures needed to comply with new regulations (e.g., to install contaminant removal technologies) and determining the market effects of these expenditures (e.g., the cost increase to the household water bill). The benefits side of the analysis generally focuses on the effects of reducing exposure to contaminants, including effects on human health and the environment. In order to develop quantifiable estimates for these benefits and costs, many non-economic analyses need to be developed, such as methods for evaluating dose-response relationships for critical and noncritical effects. Also required are additional analyses of subgroups of the population that may be more sensitive than the general population to exposure to contaminants in drinking water.

The following sections describe, in more detail, some of the main components that EPA’s Office of Ground Water and Drinking Water uses in benefit-cost analyses for drinking water contaminants.

Data for Economic Analysis of Drinking Water Standards

Health Effects:

EPA’s framework for risk assessment provides detailed guidance on risk assessment and health effects evaluation. Health effects data, provided by health scientists and risk assessors, are used in identifying and quantifying health effects for a specific drinking water contaminant (e.g., estimating the number of avoided gastrointestinal illnesses from a cryptosporidium outbreak). Using the most current health effects data available is essential to accurately assessing the benefits of a proposed rule and is crucial to developing regulations that will protect human health.

Finished Water Occurrence:

Occurrence data for finished water are used in the quantification of benefits for drinking water standards by allowing the analyst to calculate a baseline of contaminant occurrence together with exposure data. EPA gathers data from States and individual water systems across the country for contaminant occurrence information.

Regulated Community (Water Systems) Baseline:

The Community Water System Survey (CWSS), conducted periodically by EPA, contains information on community supplies, such as the types of treatment in place, water production and design flow, the number and types of water sources, and water distribution and storage configurations. This information, along with the water system financial data collected, serves as a baseline against which the effects of newly proposed regulations can be measured. Non-community water systems are not included in this survey.

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Benefits

The benefits of regulatory action are reflected in improvements in human welfare. Equivalently, they represent the avoided damages or losses in welfare that humans would have experienced in the absence of regulatory action. For environmental regulations, EPA generally defines benefits as the impacts of reducing the emissions of pollutants into the environment. In the case of regulations that establish MCLs (or, when necessary, treatment technique requirements) for public drinking water systems, these benefits result largely from reducing the adverse effects of contamination on users of this water, both in community and non-community water systems. The most significant effects of these regulations are improvements in human health, but other types of benefits may also accrue (such as improved taste, reduced pipe corrosion; and a reduction of the need to boil water, buy bottled water, or purchase a filter)). However, these other benefits are not included in the benefit/cost comparison.
The benefits of regulatory action are reflected in improvements in human welfare. Equivalently, they represent the avoided damages or losses in welfare that humans would have experienced in the absence of regulatory action. These important categories of benefits often considered in the analysis qualitatively, due to the difficulty of quantification and data availability.

Human Health Improvements:

Foremost among the damages avoided by public water treatment are the human health problems associated with contaminants in drinking water. The illnesses caused by these contaminants can either be characterized according to general health effects and diseases, or they can be described by more specific health outcomes, including morbidity and mortality.
In performing economic analysis for potential drinking water standards, these health effects data are a crucial part of the benefits assessment process. Health effects data should include those for which there is the greatest amount of evidence linking contaminant exposure to the health effect. Data on dose-response relationships (the amount of a contaminant that may cause an adverse health effect), relative source contributions (the amount of a contaminant coming from sources other than water, such as food and air), mortality rates, duration and severity of illness data, distribution of risk (in the population and over time), and effects on sensitive sub-populations, such as children and older persons, all play a role in assessing the potential benefits of regulation.

For a more detailed discussion of benefits calculations in drinking water regulations consult:

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Costs

To make better estimates of regulatory costs, EPA must take into consideration the diversity of the regulated drinking water community: from the very smallest of non-community water systems (NCWS), to the largest urban water systems.
EPA has defined the "cost" side of the analysis as including estimates of the expenditures needed to comply with new regulations (e.g., of installing contaminant removal technologies) and of the market effects of these expenditures (e.g., annual household water bill increase). The economic analysis document for the Arsenic Rule provides a detailed example of how costs are calculated and used in the development of National Primary Drinking Water Rules (NPWDR). This example also utilizes some elements of the work breakdown structure unit cost modeling procedures that will be used in future drinking water rules. Other examples may be found under the “Helpful Links” title at the bottom of this page.

Role of Economic Models

In recent decades, economic considerations have played an increasing role in government decision making and policy setting. Since the 1996 amendments to the SDWA, the Office of Ground Water and Drinking Water has worked to further integrate the use of economic benefit and cost modeling into the regulatory process. Models can serve to provide decision makers with the best available information for use in setting contaminant standards that protect human health and the environment while minimizing the burden on the public.

Helpful links for Economic Analysis at EPA:

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