ENVIRONMENTAL FINANCIAL ADVISORY BOARD
    Mem bets

A. James Barnes, Chair

    Terry Agriss

    John Boland

  George Butcher

   Donald Correll

   Michael Curley

   Rachel Deming

   Kelly Downard

  Mary Francoeur

  James Gebhardt

   Scott Haskins

 Jennifer Hernandez

    Keith Hinds

  Langdon Marsh

  Mathilde McLean

    Greg Mason

   Karen Massey

   Lindene Fatten

 Sharon Dixon Peay

    Cherie Rice

  Andrew Sawyers

    Doug Scott

    Greg Swartz

   Leanne Tobias

  Steve Thompson

     Jim Tozzi

  Chiara Trabucchi

   Justin Wilson

    Stan Meiburg
    Designated
   Federal Official
                                 March 31,2010
Honorable Peter Silva
Assistant Administrator
Office of Water
U.S. Environmental Protection Agency
Washington, DC 20460

Dear Mr. Silva:

       The Environmental Financial Advisory Board (EFAB) was asked by the
Office of Water to evaluate alternatives for financial assurance for a new class of
underground injection wells, designated in the Agency's proposed rule under the
Safe Drinking Water Act (SDWA) as Class VI wells, for geologic sequestration
of carbon dioxide gas streams. Specifically, we were asked to provide
recommendations on guidance for use by State and Regional implementers of
Class VI programs. In connection with that charge, the Board was asked to
review existing State and federal underground injection control financial
assurance regulations and guidance under SDWA, and to evaluate existing
SDWA and Resource Conservation and Recovery Act (RCRA) financial
assurance programs for potential application to this new class of wells. EFAB is
pleased to transmit to you this Report on Financial Assurance for Underground
Carbon Sequestration Facilities.

       After an extensive review of the existing regulations for SDWA wells, in
particular Class I and Class II wells, and RCRA facilities, the Board concluded
that the RCRA and the SDWA financial assurance requirements for Class I wells
rather than SDWA Class II wells provide the best model for establishing
financial assurance requirements for new Class VI wells. The financial
assurance requirements for Class I wells closely resemble the RCRA regulations.
 A key  consideration for the Board's recommendation is that the Class VI wells
will be operated as part of a facility rather than as individual wells, which is
more typical for the operation of Class II wells. The Board also recommends
that because carbon sequestration technology remains developmental and pilot
projects and other facility-level testing is ongoing, the periodic review of
operational conditions  in the proposed regulations include a review of the scope
of obligations covered  by financial assurance as wells as the continued viability
of the financial assurance instruments being used.
                     Providing Advice on "How to Pay" for Environmental Protection

-------
                                                                       2
       We hope that you will find Board's report constructive and useful. The
members of EFAB appreciate the opportunity to advise and assist the Agency on
important environmental finance issues, and wish to particularly express our
gratitude to Ann Codrington, Joseph Tiago and Brace Kobelski of the Office of
Water for their assistance and cooperation.

       If you would like to discuss the report in more detail, we would be happy
to meet with you and/or members of your staff at your convenience.
Sincerely,
A. James Barnes                                A. Stanley Meiburg
Chair                                          Designated Federal Official

Enclosure

cc:     Bob Perciasepe, Deputy Administrator
       Peter S. Silva, Assistant Administrator, Office of Water
       Barbara J. Bennett, Chief Financial Officer

-------
 Environmental Financial Advisory Board
EFAB

A. Stanley Meiburg
Designated Federal
Officer
Members
A. James Barnes, Chair
Terry Agriss
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
James Gebhardt
Scott Haskins
Jennifer Hernandez
Keith Hinds
Langdon Marsh
Greg Mason
Karen Massey
Mathilde McLean
Linden Patton
Sharon Dixon-Peay
Cherie Rice
Andrew Sawyers
Doug Scott
Greg Swartz
Steve Thompson
Leanne Tobias
Jim Tozzi
Chiara Trabucchi
Justin Wilson
Financial Assurance for Underground
    Carbon Sequestration Facilities
This report has not been reviewed for approval by the U.S. Environmental
 Protection Agency; and hence, the views and opinions expressed in the
  report do not necessarily represent those of the Agency or any other
            agencies in the Federal Government.
                  March 2010

               Printed on Recycled Paper

-------
                FINANCIAL ASSURANCE FOR UNDERGROUND
                    CARBON SEQUESTRATION FACILITIES
I. CHARGE

At the request of the U. S. Environmental Protection Agency (Agency), the
Environmental Financial Advisory Board (Board) is examining questions concerning the
financial assurance requirements and long-term financial stewardship related to the
sequestration of carbon dioxide gas streams1 through underground injection. In a
subsequent directive, the Agency requested that the Board address only financial
assurance requirements and defer consideration of long-term financial stewardship. In
connection with this request, the Agency asked EFAB to review existing regulations and
guidance governing the Underground Injection Control Program issued pursuant to the
Safe Drinking Water Act (SDWA), which in large part use the financial assurance
instruments and framework in the Resource Conservation and Recovery Act (RCRA)
regulations.

EFAB has already spent a considerable amount of time and effort evaluating some of the
financial assurance mechanisms under RCRA. The RCRA requirements address closure,
post-closure, corrective action and other aspects of the Subtitle C (hazardous waste),
Subtitle D (solid waste) and Subtitle I (underground storage tank) programs, with the goal
of ensuring that an obligated party has  the financial capacity to meet its obligations.
Under RCRA, a range of mechanisms are available to regulated entities to meet these
requirements including: (1) trust funds; (2) satisfying the corporate financial test;  (3)
corporate guarantees provided by a corporate parent, sibling corporation, or other firm
with a substantial business relationships that does meet the financial test; (4) insurance;
(5) letters of credit; and (6) third-party sureties (payment or performance bonds).

A workgroup of the Board classified these instruments into three categories. The first
encompasses the financial test and corporate guarantee, both of which rely on the
financial viability of the regulated entity or an affiliate. The second category contains
three of the four remaining mechanisms, insurance, letters of credit and sureties, which
are provided by third parties, resulting  in an additional cost to the regulated entity.  The
final category is a trust fund, usually created by the responsible party.

II. BACKGROUND & CONTEXT
D
1 In its proposed rule for geologic sequestration wells, the Agency defined a carbon dioxide stream as
"carbon dioxide that has been captured from an emission source (e.g. a power plant), plus incidental
associated substances derived from the source materials and the capture process, and any substances added
to the stream to enable or improve the injection process. This subpart does not apply to any carbon dioxide
stream that meets the definition of a hazardous waste under 40 CFR part 261." See Federal Requirements
Under the Underground Injection Control (UIC) Program for Carbon Dioxide (CO2) Geologic
Sequestration (GS) Wells, 73 Fed. Reg. 43,491 (2008), proposed 40 CFR § 146.81(d), 73 Fed. Reg. at
43,535.

-------
In a letter dated January 11, 2006, EFAB provided its initial analysis and response
concerning the use of the first category, the financial test and corporate guarantee. The
Board found that many regulated parties rely on their credit ratings to use the financial
test for meeting their financial assurance requirements.  Its primary recommendation was
that the use of independent credit analysis, i.e. credit ratings, is a cost-effective
mechanism for demonstrating financial assurance and should continue to be an
alternative for those companies that have investment-grade ratings on their debt.  Many
of the large public companies that are obligated to provide financial assurance are
participants in the debt markets and carry ratings on their bonds.

In a second letter dated March 20, 2007, the Board addressed the question of whether
captive insurance companies should be allowed to issue financial assurance policies.
Captive insurers are often distinguished by the initial  funding and restriction of their
coverage to one company. Given that the Board's recommendation addressed both the
financial strength of the parent company and the financial strength of the captive insurer,
our recommendations are a hybrid between the first and second categories of financial
assurance instruments.  Consistent with the findings with regard to use of the financial
test for financial assurance purposes, the Board found that the use of independent credit
analysis (i.e., credit ratings) to be a cost-effective mechanism for demonstrating the
financial strength of a captive insurer.  It also recommended certain additional measures,
such as transparent and rigorous oversight by the licensing agency.

On February 25, 2010, the Board transmitted a letter outlining its findings and
recommendations with respect to the use of the first of the third-party instruments,
commercial insurance for financial assurance. The Board concluded that in many cases
insurance is a viable and valuable mechanism for providing financial assurance.  It
determined that there should be minimum requirements to evidence the financial strength
of an insurer underwriting insurance for environmental financial assurance, but deferred
recommending a specific minimum credit rating for third-party providers until  it
completes its review of other third-party instruments. The Board recognized that the use
of insurance for financial assurance purposes is a highly complex area and that the
regulators have divergent views on its use. The Board did not recommend the use of
standardized policy language, but did suggest that the Agency adopt procedures under
which the regulatory authority can  specifically agree to limitations contained in the
insurance policy or, in the alternative, specifically reject such limitations prior to the time
the carrier becomes legally obligated to issue the policy.

In light of the significant change in the financial markets since the first two letters were
issued, the question of whether the financial test and captive insurance remain viable
alternatives has resurfaced. In addition, the market conditions have raised two additional
questions: (1) should regulators evaluate the creditworthiness of the third-party issuers of
financial assurance; and (2) should regulators rely on credit-rating agencies to assess
financial viability of any entity offering financial assurance?

Despite current market conditions,  the Board continues to recommend making the
financial test and third-party financial assurance mechanisms available to responsible

-------
parties.  There are other governmental bodies charged with regulating these markets and
it does not make sense for federal or state environmental entities to establish parallel
alternative economic criteria for evaluating the financial viability of those entities. Nor
does the Board believe that the regulations should be rewritten to presume that the
economy is in a perpetual crisis, thus requiring the establishment of costly measures like
trust funds.  Since financial assurance is a hedge against financial distress of the
owner/operator, duplicative or excessive upfront funding of financial responsibilities
would not be an appropriate use of economic resources.

While the board continues its work on financial assurance with respect to RCRA, we
have begun to examine financial assurance for a proposed new class of wells for the
injection of carbon dioxide gas streams in proposed carbon capture and sequestration
(CCS) facilities.  Toward this end, we have examined the SDWA requirements associated
with Class I waste injection wells and Class II oil and gas injections wells in connection
with the Agency's proposed rule to regulate carbon dioxide gas  stream injection with the
creation of Class VI wells under SDWA.2

A. DISCUSSION OF CHARGE

We believe that the RCRA and the SDWA financial assurance requirements for Class I
wells rather than Class II wells provide the best model for establishing the requirements
for Class VI wells.  The Class II requirements relate to individual wells, while the Class I
requirements apply at a facility-level with multiple wells. The operating paradigm of a
CCS facility is a multiple well injection facility, hence the Class I overall approach to
financial assurance at a facility level is more appropriate as a working model.  However,
we do note that there are differences among the programs as outlined below.

The SDWA financial assurance regulations for Class I wells closely resemble the
financial assurance requirements under RCRA.  Owners/operators are required to
establish financial assurance  for plugging and abandonment of each existing and new
Class I hazardous waste injection wells.  The SDWA regulations allow owner/operators
to use same six instruments prescribed under RCRA regulations at 40 C.F.R.
§264.143(a)-(f) as well additional provisions stipulated at 40 C.F.R. § 144.63(g)-(i).

Notable exceptions between RCRA Subtitle C and the SDWA Class I regulations
include:

   •   Section 144.63(f) of the SDWA regulations limits guarantors that can underwrite
       a corporate guarantee to parent corporations of the owner/operator. In  contrast,
       under RCRA Subtitle C, corporate guarantees can also be underwritten by a firm
       with the same parent corporation as the owner/operator or a firm with a
       'substantial business relationship' with the owner/operator. We recommend that
       the Agency extend the acceptance of a party with a "substantial business

D
2 Id.

-------
       relationship" to the guarantee provisions for SDWA.

   •   SDWA Class I regulations also require owner/operators to notify the EPA
       Regional Administrator by certified mail of the commencement of a voluntary or
       involuntary proceeding under Title 11 (Bankruptcy), U.S. Code, within 10
       business days after the commencement of the proceeding. We recommend that
       his provision be applied to the Class VI wells.

   •   SDWA Class I regulations also stipulate owner/operators using letter of credits,
       surety bonds,  or insurance policies will be deemed without the required financial
       assurance in the event of bankruptcy, insolvency, or a suspension or revocation of
       the license or charter of the issuing institution. The owner/operator is required to
       obtain alternate financial assurance within 60 days after such an event. However,
       it is important to note that unlike the RCRA Subtitle C regulations, the SDWA
       Class I regulations do not extend this provision to include bankruptcy of the
       trustee or a loss of the issuing institution's authority to act as a trustee. We
       recommendation that the SDWA Class VI regulations extend the provision to
       include bankruptcy or loss of authority of the trustee.

The primary difference between the available financial assurance mechanisms under
SDWA for purposes of plugging Class I and Class II wells is that commercial insurance
is not an allowable instrument for Class II wells. There are also some structural
differences between the instruments for Class II wells as compared to Class I wells. In
particular, while language is prescribed for letters of credit and sureties for Class I wells,
it is not for Class II wells.

Another material distinction between the Class I and Class II well requirements is the
significant difference between the requirements of the financial test.  The Class I wells
requirements closely  mirror those of the RCRA. For Class II wells, however, there is no
requirement that the financial capacity of the owner/operator be linked to the estimated
cost of the plugging and abandonment and the owner/operator only need demonstrate a
net worth of $1 million.

B. RECOMMENDATIONS

We are of the opinion that these differences result in weaknesses in the Class II wells
requirements if applied at a facility scale, as would be the case for a CCS facility.
Therefore, we believe that the Class I instruments be used, which include the use of
insurance as well as specific language for the other instruments.

Additionally, because the RCRA financial mechanisms that are largely used in the
SDWA Class I program were developed based on hazardous  waste facility owner and
operator considerations, there may be differences in the owner/operator profiles for
proposed carbon sequestration facilities that warrant additional financial assurance
mechanisms. For example, it may be appropriate to consider the use of rate-based
financing, such as sinking funds, to meet financial  assurance  requirements. The Board

-------
does not have sufficient information about the profile of CCS facility owners and
operators to make specific recommendations on this issue, but we encourage the Agency
to consider adding a new category of financial assurance to the Class VI program that
provides the Agency with the flexibility to approve the "functional equivalent" to the
established RCRA financial assurance tests.

The Board notes that the timing and amount of financial assurance must be determined by
the Agency  based in its evaluation of the risks. During our discussions, a key component
of geological sequestration identified to protect drinking water sources is a
comprehensive system of monitoring wells during the operation of the facility.  The
Board was informed that, under current SWDA regulations, decisions on the scope of
financial assurance requirements are in large part left to state regulators under delegated
programs. Some states require financial assurance for monitoring during operations for
certain classes of wells while other states do not. We also note that RCRA does not
require financial assurance for monitoring  during the operation of the facility. Because
the Agency  identified two objectives in its summary of the proposed rule for geological
sequestration of carbon dioxide, consistency in permitting geological sequestration
operations across the United States and prevention of the endangerment of underground
sources of drinking water,3 the Board recommends that the Agency consider the extent
to which it has the authority to require financial assurance for monitoring wells before
closure of the sequestration facility, in addition to the costs for plugging wells and
closing the facility.

As a further consideration,  because carbon sequestration technology remains
developmental and pilot projects and other facility-level testing is ongoing, the
performance levels of such technology and projects cannot be known with a high level of
predictability. Additionally, field testing and ongoing operations by their very nature
often result in deviations from predicted or modeled studies created during the permitting
process. The Board believes that these issues are best addressed in the context of the
permitting process, rather than establishing financial assurance requirements that are so
costly as to create barriers to the development and deployment of effective carbon
sequestration technologies. The proposed Class VI well regulations require periodic
review of operational conditions, and the Board believes that these periodic reviews
provide an opportunity to revisit, as necessary, the amount of financial assurance required
for CCS facilities.  This would include financial assurance for corrective action for a
prospective  remedial scenario (e.g., the cost of installing extraction well(s) at the point of
drinking water incursion to extract and treat affected groundwater)4 during the
operational phase of the facility if adverse impacts to drinking water sources are
threatened or occur.

A possible answer to the issue of updating financial assurance requirements for a facility
is to link the amount of financial assurance required to cost estimates that are updated on
a regular basis (e.g., every five years).  In order to periodically update estimates for a
D
3 Id. at 43492.
4 We recognize that pumping and treating groundwater can be expensive, including treatment for non-
hazardous constituents.

-------
large sequestration project, it would be desirable to collect various types of data on a
rolling basis.  EPA's proposed rule for Class VI wells would require operators to update
as necessary various plans relating, among other things, to monitoring, corrective action,
well plugging and site closure.  If coupled with robust annual reporting requirements that
document why updated plans have or have not been necessary, EPA's proposed rules
would  establish the basis for making adjustments to the required amount of financial
assurance.  The financial instruments being used could be reviewed at that same time.

III. CONCLUSION

The Board's recommended use of Class I financial assurance mechanisms relates only to
our familiarity with, and belief in, the effectiveness of these mechanisms. This
recommendation is not intended, and should not be construed, as making any judgment
that carbon sequestration facilities are or should be regulated  as hazardous waste
treatment, storage or disposal facilities under RCRA.

-------
                                WAS! !il\!(T f O,M, (^ C, "U
                                         JUN 0 4
                                                                              OF'fH'.E OF
                                                                               WATER
Professor A, James Barnes
Chair, Environmental Finance Advisory Board
U.S. Environmental Protection Agency
1200 Pennsylvania Avenue N.W.
Washington, D.C. 20460

Dear Professor Barnes:

       Thank you for your letter of March 31, 2010, providing the Environmental Finance
Advisory Board (EFAB) recommendations on Financial Assurance for Geologic Sequestration of
carbon dioxide. I appreciate the significant time and effort that the Carbon Capture and Storage
Workgroup and the EFAB full board spent in conducting their review and preparing their
recommendations over the past two years.

       We value your suggestions. Your recommendations are informing the Environmental
Protection Agency's development of a guidance document entitled "Financial Responsibility for
Underground Injection Control Program Class VI Geologic Sequestration Wells."

       Again, thank you for your assistance with this important effort.  If you have any
questions, please contact Cynthia Dougherty, Director of the Office of Ground Water and
Drinking Water at (202) 564-3750.

                                               Sincerely,
                                                            V
                                                 ter S. Silva
                                                 sistant Administrator
                                 I •   ,-\ ^'jit> SURD-  iiup'1 i\i' BI-IM v
                i-»Tyclftt>if * F >fHnf v Uli V-jiU  -Oil > ••n'lnl i»oi) 1U"  ' v! jiiSUf  r I-a  "C

-------