Economic Analysis and Statutory Requirements
This page provides information on EPA’s approach to economic analysis when developing standards for drinking water contaminants. EPA uses cost-benefit analysis as an important source of information to evaluate the impacts of alternative policy choices. The Safe Drinking Water Act (SDWA) and other regulatory process laws require EPA to conduct economic analysis during the development of new drinking water contaminant regulations.
Cost analysis involves estimating the expenses needed to comply with new drinking water regulations. Costs may include:
- Expenditures to install and operate contaminant removal technologies
- Costs of water monitoring and analyzing water samples
- Management and oversight costs
The estimated cost is also used to assess the financial impact of reducing the contaminant on the consumers of water (such as an increased household water bill).
Benefits represent the avoided damages or losses in well-being that humans would have experienced without regulatory action. Benefits analysis focuses on the qualitative, quantitative and monetary assessment of these positive changes.
Water treatment technology cost models
To estimate treatment costs, EPA developed several engineering models using a bottom-up approach known as work breakdown structure (WBS). The WBS models:
- Produce water system-level costs
- Provide EPA with comprehensive, flexible and transparent tools to help estimate these treatment costs
Data for economic analysis
A number of data sources are commonly used in the analysis of potential new drinking water contaminant regulations. The primary data used for analyses include:
- Health effects and risk assessment
- Contaminant occurrence in drinking water
- Regulated community statistics
SDWA statutory requirements
The SDWA requires the conduct of various economic analyses whenever EPA proposes a national primary drinking water regulation. SDWA requires EPA to prepare a health risk reduction and cost analysis (HRRCA) in support of any NPDWR. Components of the analyses include:
- Treatment design
- Treatment costs and national costs
- Model systems development
- Baseline estimates
- Benefits analysis
The SDWA places a significant responsibility upon 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. The SDWA:
- 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)(3)(C)]
- 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 [Section 1412(b)(6)]
- Requires 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 [Sections 1415 and 1416]
The SDWA was amended in 1996 to specifically require cost-benefit analysis as part of the regulatory process. EPA's choice of regulatory levels is guided by statutory language requiring the Agency to set maximum contaminant levels (MCLs) as close to the maximum contaminant level goal as is "feasible" [Section 1412(b)(4)(B)]. ”Feasible” is defined as the use of the best technology and treatment approaches examined for effectiveness under field conditions, taking cost into consideration [Section 1412(b)(4)(D)].
When there is no reliable method that is economically or technically feasible to indicate there is not a public health concern, a treatment technique is set rather than an MCL. EPA must determine the feasible MCL or treatment technique.
EPA, at the discretion of the Administrator, may establish less stringent MCLs if any of these apply:
- The costs of achieving the lowest feasible level are not justified by its benefits
- Achieving the MCL could result in an increase in health risks from other contaminants
- Meeting the MCL may interfere with the treatment processes used to comply with other SDWA regulations
For Cryptosporidium, the SDWA does not allow EPA to use cost and benefits to establish a treatment technique requirement or MCL [Section 1412(b)(6)(C)].
Other statutory requirements
Regulatory Flexibility Act / Small Business Regulatory Enforcement Fairness Act (RFA/SBREFA)
The Regulatory Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement Fairness Act (SBREFA), requires EPA to convene a Small Business Advocacy Review (SBAR) panel for most proposed rules.
However, if the Agency can certify, through an economic impact analysis, that a rule will not have a significant economic impact on a substantial number of small entities, then a SBAR panel may not be necessary.
When convened, the panel process offers an opportunity for small businesses, small governments, and small organizations (collectively referred to as small entities) to provide advice and recommendations to ensure that EPA carefully considers small entity concerns.
Unfunded Mandates Reform Act
The development of new regulations must take into account the requirements of the Unfunded Mandates Reform Act, which was designed to avoid imposing unfunded federal mandates on state, local, and tribal governments, or the private sector.
The Paperwork Reduction Act
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.