February 09, 2017

Obama EPA Rules for Water Infrastructure Subsidies Survive Freeze as Deadline for Application Looms

In the waning days of the Obama administration, the Environmental Protection Agency (EPA) issued a set of rules and notices to establish long-term, low-cost credit assistance to creditworthy water and wastewater projects. This program is one of the few at the EPA that remained after the initial set of directives by the Trump administration and regulatory review by Congress, which has halted movement at EPA. The resiliency of this program stems, in part, from the urgent need for more than $600 billion in water infrastructure improvements over the next 20 years and the dual congressional actions that support this funding. However, the window is quickly closing for interested borrowers, such as public and private utilities, to take advantage of this program.

In 2014, Congress passed the Water Infrastructure Finance and Innovation Act (WIFIA) as a five-year pilot program for direct loans and loan guarantees to cover a portion of the cost of construction for water, wastewater, stormwater and water reuse projects. The loan program was tucked into the nearly perennial Water Resources Reform and Development Act (WRRDA), and Congress approved funding in December 2016. On December 19, 2016, EPA issued an interim final rule that established the guidelines and process for the new credit assistance program. On January 10, 2017, the EPA issued a Notice of Funding Availability (NOFA) that $1 billion in credit assistance will be available and that EPA will begin accepting Letters of Interest (LOI) from potential applicants through April 10, 2017. EPA will issue a second NOFA later this summer if credit is still available.

Eligible Projects under WIFIA

The WIFIA program is likely to be of particular interest to utilities that are planning large, capital infrastructure projects, such as those dealing with lead, aging infrastructure or sewer overflows. Both publicly- and privately-owned water and wastewater utilities are eligible for credit assistance under WIFIA. Eligible projects include:

  • Clean water and drinking water projects eligible for assistance under state revolving fund (SRF) programs, notwithstanding public ownership requirements.
  • Projects for enhanced energy efficiency in the operation of public water systems or publicly owned treatment works.
  • Repair, rehabilitation or replacement of treatment works, community water systems, or aging water distribution or waste collection facilities.
  • Drought prevention, reduction or mitigation projects.
  • Brackish or sea water desalination, managed aquifer recharge or water recycling projects.

As written, EPA will prioritize projects that involve adaptation to extreme weather, climate change resiliency, sustainability, green infrastructure, and those that serve economically stressed communities. Costs covered by the program include development phase activities, construction, rehabilitation and replacement activities, acquisition of real property, environmental mitigation (e.g., wetlands), contingencies, equipment, and capitalized interest necessary to meet market requirements, reserve funds, and capital issuance expenses (e.g., fees) and other carrying costs.

Minimum Requirements and Funding Limits

The WIFIA program will be valuable for utilities that are ineligible for — or with project costs in excess allowed by — SRFs. Consequently, credit is primarily geared toward larger capital projects, such as those required by Long-Term Control Plans (LTCPs), above a minimum cost threshold so that it does not compete with state programs. For large communities (population more than 25,000), minimum total project costs are $20 million. EPA will also set aside at least 15 percent of its budget for projects that serve smaller communities of 25,000 or fewer individuals, where the minimum project size is only $5 million. Applicants can jointly apply with a common security pledge.

In most cases credit assistance through the WIFIA program will supplement other types of financing. Loans through this program will only cover a maximum of 49 percent of eligible project costs and total federal assistance cannot exceed 80 percent. Although SRFs receive the right of first refusal to fund eligible projects, applicants can use both SRF and WIFIA financing, but SRF loans from federal grants are considered federal funding subject to the 80 percent cap.

Benefits of WIFIA Credit Assistance

WIFIA loans may be an attractive and flexible alternative for, or supplement to, other forms of financing. Most importantly, however, is that private entities (including partnerships and joint ventures, corporations and trusts, and nonprofits) are eligible under WIFIA. Creditworthy projects will have the lesser of 35 years or the useful life of the project after substantial completion to pay back the loan. Generally, EPA expects projects to be completed within five years of closing, but there is no specific maximum project length. Loan repayment can be deferred up to five years, which can be negotiated prior to closing of the loan.

In short, the WIFIA program could offer much-needed assistance to private and public utilities that expect significant upcoming water or wastewater capital projects. For those projects that are eligible, these subsidized loans could also substantially mitigate the burden of increased rates to consumers over the short term. Most of all, because these loans are available to private entities, this financing could incentivize privately-owned utilities to purchase municipal sewer or water systems that face high capital costs liabilities.

Interested borrowers have until midnight on April 10, 2017, to submit LOIs to EPA. EPA will then select projects that it intends to fund and invite them to continue the application process.

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