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The Congressional Budget Office (CBO) prepared this report at the request of the then Chairman of the Senate Committee on Governmental Affairs. The report uses data provided by the Environmental Protection Agency (EPA), the American Water Works Association, and local communities to examine the cost of treating drinking water according to the standards set under the Safe Drinking Water Act (SDWA). It also discusses available data on the benefits that result from treating drinking water and examines the actual use of legislative provisions that are meant to provide the EPA and the states with flexibility in enforcing the requirements of the SDWA.

Terry Dinan of CBO's Natural Resources and Commerce Division wrote the study under the supervision of Jan Paul Acton and Roger Hitchner. CBO analysts Kim Cawley, Teri Gullo, and Matthew Eyles made valuable comments, and Aaron Zeisler and Kim Wegbreit provided assistance with data analysis. Outside CBO, James McFarland, John Cromwell, Robert Raucher, and Robert Stavins provided valuable assistance and reviews. In addition, several staff members of the EPA's Office of Drinking Water and the Bureau of the Census provided useful information.

Paul L. Houts edited the report, and Leah Mazade provided editorial assistance. Angela McCollough typed the drafts. Kathryn Quattrone, Christian Spoor, and John McCarty prepared the study for publication.
 

June E. O'Neill
Director
September 1995
 
 

SUMMARY

ONE - INTRODUCTION

• Study Objectives
• Measuring the Incremental Cost of Unfunded Federal Mandates
• Data on the Costs and Benefits of the Safe Drinking Water Act
• Background on Drinking Water Regulations and Trends in Cost

TWO - TOTAL NATIONAL ESTIMATES OF SDWA COSTS

• Limitations on Data
• Total Cost Estimates for Existing and Proposed Rules

THREE - HOUSEHOLD COSTS OF DRINKING WATER TREATMENT

• EPA Data on Costs at the Household Level
• Survey Data on Local Costs
• Comparison of National and Local Estimates of SDWA Costs

FOUR - PLACING SDWA COST ESTIMATES IN CONTEXT

• Costs Relative to Benefits
• Treatment Costs Relative to Other Cost Factors
• Local Cost Estimates of the Safe Drinking Water Act Compared with Fiscal Capacity

FIVE - FLEXIBILITY UNDER THE SAFE DRINKING WATER ACT

• Provisions in the Law
• Actual Use of Provisions for Flexibility
• Restructuring as Another Option to Reduce Costs

SIX - IMPLICATIONS FOR PROVIDING COST ESTIMATES UNDER THE UNFUNDED MANDATES REFORM ACT OF 1995

• Measuring the Incremental Cost of a Federal Mandate
• Uncertainty About the Regulations That Will Result from Legislation
• Limited Data Sources
• Limited Time

APPENDIX - Method Used to Construct Estimates of Per Capita Local Expenditures on Drinking Water
 

TABLES
1.	Annual Cost of Treatment According to Standards Specified by the Safe Drinking Water Act
2.	Average Household Cost for Monitoring and Compliance, by Size of System and Number of Treatments
3.	Average Household Cost Under the Proposed Rules by Size of System
4.	Cost per Health Effect Avoided for Selected Rules and Contaminants
FIGURES
1.	Annual Local Expenditures for Water Supply Measured on a Per Capita Basis, 1957-1991
2.	EPA's Estimate of the Annual Costs of Complying with Final and Proposed Rules Under the Safe Drinking Water Act
3.	Distribution of Households by EPA Estimates of the Cost of Monitoring and Treating Drinking Water According to Existing SDWA Standards
4.	Mandates Covered by Surveys of U.S. Cities and Counties
5.	Distribution of Households by Average Per-Household Cost of Treating Drinking Water According to Existing SDWA Standards: 1993 Versus 1997 Municipal Expenditure Survey Data
6.	Distribution of Households by Average Per-Household Cost of Treating Drinking Water According to Existing SDWA Standards: 1997 Municipal Expenditure Survey Data Versus EPA Data
7.	Distribution of Municipalities by Average Per-Household Cost of Treating Drinking Water According to Existing SDWA Standards as a Share of Median Household Income
8.	Distribution of Municipalities by Average Per-Household Cost of Treating Drinking Water According to Existing SDWA Standards as a Share of Average Residential Property Value
BOXES
1.	Existing and Proposed Rules Under the Safe Drinking Water Act as of September 1994
2.	Quality Control Steps and Remaining Limitations of the Municipal Expenditure Survey Data
3.	Definitions and Requirements Regarding Intergovernmental Mandates Under the Unfunded Mandates Reform Act of 1995

 

State and local officials have voiced strong opposition in recent years to the growing number of federal requirements. At the local level, environmental requirements are perceived to be particularly onerous. Critics of those so-called "unfunded mandates" argue that they place a large burden on local governments, the federal government frequently underestimates local costs, the costs of such mandates sometimes outweigh their benefits, and often the mandates lack the flexibility to accommodate important differences in local conditions. The Congressional Budget Office (CBO) examined available data to determine the validity of those criticisms with respect to the Safe Drinking Water Act (SDWA). The SDWA was enacted in 1974 and requires all public water systems to meet drinking water standards and monitoring requirements that the Environmental Protection Agency (EPA) has developed.

CBO chose to use the SDWA as a case study of the unfunded mandates issue because the SDWA has been identified as one of the more burdensome federal mandates. In addition, examining its local cost impact is relatively easy because only a limited amount of federal aid is provided to drinking water systems. Consequently, one does not need to try and separate federally funded costs from locally funded costs for most systems. Even with that simplifying feature, this case study highlights many of the difficulties in measuring the costs and benefits of federal mandates. Data on costs and benefits are limited. In addition, no reliable method exists to estimate the incremental cost of the SDWA--that is, the additional expenditures that federal standards require water systems to make above and beyond the expenditures that they would have made to ensure safe drinking water without such standards. Despite those difficulties, this study reaches several conclusions.
 

To Date, the SDWA Has Resulted in Fairly Modest Costs for Most Households

Although the SDWA has been cited as a particularly burdensome mandate, available data do not indicate that it has imposed high costs on most households. Cost estimates from the EPA and available data on actual experiences with costs at the local level both indicate that most households--approximately 80 percent--are expected to incur costs of less than $20 per year to treat their drinking water to meet the standards specified by the existing rules of the SDWA. Moreover, comparing EPA data with available local estimates does not reveal that the EPA has underestimated local compliance costs.

The limited available data indicate that the Safe Drinking Water Act currently places a small fiscal burden on most municipalities, accounting for less than 0.1 percent of median household income or average residential property values. Although those results are important, this study did not examine the cumulative effect that multiple federal mandates have on municipalities.

Average household costs are modest for most communities, but some could face very high household costs--in excess of $100 per year--under existing drinking water standards. Households served by small water systems are particularly likely to face high costs. Furthermore, compliance costs could increase significantly over time. In fact, four rules that are currently proposed under the SDWA could more than triple compliance costs.
 

Benefit-to-Cost Ratios Vary Widely by Categories for Contaminants and System Sizes

For both existing and proposed regulations for carcinogens in drinking water, CBO examined available data on the cost per cancer case avoided--that is, the cost to prevent a single case of cancer. Those data indicate that the cost per cancer case avoided varies greatly among contaminants. For example, the average cost per cancer case avoided (averaged for all system sizes) is estimated at $500,000 for regulating the pesticide ethylene dibromide and its co-contaminants compared with more than $4 billion for regulating the pesticides atrazine and alachlor. In addition, the cost per cancer case avoided tends to increase sharply as the size of the system decreases. For example, in the category for the largest-sized systems, the expected cost per cancer case avoided because of the proposed regulation of adjusted gross alpha emitters (which primarily reduces exposure to the radio-nuclide polonium) is $600,000 compared with more than $1 billion for the category for the smallest-sized systems.

Conclusions about the merits of drinking water standards are limited by a great deal of uncertainty underlying estimates of both costs and benefits. However, in some cases the cost per cancer case avoided would need to be decreased by a factor of 10 or more to fall within the range that is generally considered reasonable.

The most costly rule currently proposed is the Disinfectants/Disinfection By-Product (D/DBP) Rule. The degree to which that rule would reduce the risk of cancer is extremely uncertain. The EPA estimates that the average cost per cancer case avoided ranges between $867,000 and $8.7 billion in the initial stage of the rule and between $840,000 and $19 billion in the extended stage.

The second most costly rule currently proposed is the Enhanced Surface Water Treatment (ESWT) Rule, which is designed to prevent the outbreak of waterborne gastrointestinal diseases. Using an estimate of medical costs and lost wages as a measure of benefit, the benefits are expected to exceed the average cost per case of waterborne disease avoided as a result of complying with the proposed initial phase of the ESWT rule (averaged for all systems). That assessment, however, is based on limited data on the potential risk of waterborne diseases.
 

The EPA's and States' Use of Legislative Tools to Provide Flexibility to Water Systems Has Been Limited

One benefit of federal drinking water standards is the assurance that all water systems meet minimum health standards. A potential disadvantage of federal requirements, however, is that uniform requirements may cause some localities to take actions that do not make sense for their specific community--such as testing for chemicals that are not used in their area or undertaking treatment measures for which the costs far outweigh the benefits. An important question, therefore, is whether the SDWA provides sufficient flexibility to adjust requirements in those cases.

The SDWA provides the EPA and the states with several tools that are designed to allow them to provide flexibility to water systems. Those measures of flexibility, however, have not been widely used. Furthermore, numerous barriers prevent more widespread use of those measures. Such barriers include constraints on resources, concerns about public perception, and the effect that those measures might have on protecting public health.
 

The SDWA Case Study Highlights Challenges That CBO Faces in Providing State and Local Cost Estimates

The Unfunded Mandates Reform Act of 1995 requires CBO to estimate the costs that proposed legislation will impose on state and local governments as well as the private sector. The SDWA case study highlights some of the challenges involved in fulfilling that responsibility. Because mandates are often designed to achieve goals that state and local governments share, a particularly difficult issue is how to estimate the additional, or incremental, costs that a mandate imposes--above and beyond the expenditures that state and local governments would have made in its absence.

Estimating state and local costs at the legislative stage is more difficult than estimating the cost of current and proposed standards under the SDWA for at least three reasons. First, legislation is often broad and lacks the specifics, which are developed through the regulatory process, to project costs. Second, many of the sources of data used in this study are not available at the legislative stage. Third, often only a very limited amount of time is available to collect information on projected state and local costs. As a result of those complicating factors, cost estimates constructed at the legislative stage will be much less precise than examinations conducted after the law or regulation has taken effect.

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