The Virginia Department of Health (VDH) was tasked with conducting a cost analysis of the impact that certain U.S. Environmental Protection Agency (EPA) regulations will have on Virginia waterworks. Specifically, VDH was directed to assess the anticipated costs to be incurred by Virginia waterworks to comply with the new National Primary Drinking Water Regulation (NPDWR) for per- and polyfluoroalkyl substances (PFAS) as well as recent updates to the Lead and Copper Rule (LCR) (e.g., Lead and Copper Rule Improvements (LCRI) and the Lead and Copper Rule Revisions (LCRR)), referred to collectively as “lead regulations." As directed in Budget Amendment HB30 Item 280 #1c, the report shall include the results of the cost analysis, possible funding models, and identification of federal funding that may be available. The report was generated by the VDH Office of Drinking Water, which contracted subject matter professionals to support the analysis and preparation of this report, herein referred to as the “Study Team". The report will be submitted to the Chairs of the House Appropriations and Senate Finance and Appropriations Committees with a due date of December 1, 2024. Throughout the duration of the study, the Study Team deployed surveys to Virginia community and non-transient noncommunity (NTNC) waterworks, held virtual meetings with certain waterworks, and followed up through email and phone calls with specific questions and clarifications as necessary. The findings of the cost analysis are provided below.

FINDINGS

1. PFAS Compliance Costs: Present day estimates of PFAS capital expenditures (CapEx) are between $643M and $904M, which are expected to be incurred by most waterworks between present day and the compliance date of 2029. Present day estimates of PFAS operational expenditures (OpEx) are between $72M and $88M annually and will continue indefinitely. Ongoing PFAS monitoring for compliance purposes will add approximately $0.7M per year in 2024 dollar value. The population served by waterworks with known PFAS contamination that exceed the Maximum Contamination Levels (MCL) set by the EPA is approximately 2.6M people, however, the impacted population is greater than 2.6M people because certain waterworks with known PFAS contamination sell treated water to other waterworks within the Commonwealth. Additionally, the impacted population is expected to be even greater because there are waterworks within the Commonwealth that are yet to sample for PFAS to confirm if they are in compliance. An estimate of additional waterworks and their associated population served that may be impacted by PFAS is provided in the Results section.

2. Lead Compliance Costs: Present day estimates of lead service line (LSL) replacement CapEx are between $290M and $670M. The present day OpEx estimate for additional compliance activities (e.g. public outreach and maintaining an LSL inventory) is $43M. The present day OpEx estimate for monitoring costs is between $1M and $2M.

3. Project Funding: Overall, larger waterworks are better positioned to afford needed CapEx and OpEx using rate increases to cover costs because of larger customer bases (and resulting economies of scale), while smaller waterworks will have more difficulty in affording the needed CapEx and OpEx using rate increases because of their smaller rate bases. To deliver the capital projects and provide the ongoing operations and maintenance required, most waterworks are expected to utilize a funding model comprised of a combination of low interest loans through programs such as the Virginia Drinking Water State Revolving Fund (DWSRF), state and federal grants when available, bonds obtained through the Virginia Resources Authority (VRA), rate increases, and in certain circumstances, funds from litigation claims. At the federal level, there are many ongoing programs from which VDH has received grant funds to award waterworks applicants to apply towards PFAS and/or lead compliance projects. Considering the estimated costs for compliance, in most cases, financing through grants and litigation claims will not provide enough financial support for waterworks to avoid raising customer rates. The strategy for funding drinking water treatment plant upgrades, LSL replacements, OpEx, and additional compliance activities for both PFAS and lead projects will differ depending on the waterworks. Additionally, the financial support that waterworks provide to replace customer-owned LSLs will also differ, as waterworks may be restricted from using rate payer funds on private property and will therefore be reliant on funding streams such as DWSRF in order to subsidize the customers’ replacement cost.