5262                     *                                800R80907
                        ANALYSIS OF THE EXPECTED ECONOMIC IMPACTS OF
                                THE PROPOSED UIC REGULATIONS
          Introduction
               In May and June of 1980 EPA promulgated Underground Injection
          Control (UIC)  regulations under the authority of Part C of the Safe
          Drinking Water Act.  Several major corporations Individually and collectively
          through their  trade associations and the State of Texas petitioned the
          D.C.  Circuit Court of Appeals for review of the regulations.  In all  the
          plaintiffs filed petitions covering 93 issues.  The Agency has discussed
          these issues with the petitioners and has reviewed studies on which 1t
          relied to draft the regulations.  It has also reassessed comments received
                                                       /
          during rule making and has reevaluated the cost and production Impacts
          of the regulations in the light of these discussions.  As a result of
          this  revaluation the Agency Issued additional guidance to the states,
          promulgated technical amendments and Is proposing amendments to the
          regulations.   This document assesses the economic effects of the proposed
          amendments largely on the basis of Information previously generated by
          the Agency.

               Section I of the analysis first determines that these proposed
          changes do not constitute a major rule under Executive Order 12291.
          Section II discusses broad regulatory alternatives as well as detailing
          some  of the many technical alternatives considered when EPA promulgated
          the regulations In 1980.  Section III describes the expected results  of
          the proposed regulation including the reduction in paperwork burden,  the
          Increased flexibility of State directors and the attendant reductions in

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Promotion A

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the cost of the regulation.  Section IV assesses the Impacts of the
proposed regulations upon production and small businesses; the proposed
regulations are not expected to have a significant Impact on a substantial
number of small entities.

     When the UIC regulations were originally promulgated EPA included a
provision for the State Directors to provide data to EPA so that EPA
could evaluate the operation of the regulations.  As shown in Section  V
this requirement remains.

I.   Determination As a Non-Major Regulation

     The proposed regulations would modify certain monitoring and reporting
requirements, provide greater flexibility to owners or operators and to
State enforcement agencies, and remove certain wells from coverage under
Class III of the regulation.  The changes are expected to result in a
savings of approximately $70 million over five years.  As such they do
not constitute a major rule under Executive Order 12291.  However, in
the spirit of the Order EPA has prepared this analysis of the proposed
changes which includes many of the kinds of information which would be
called for were the proposed regulation a major rule.

II.  Alternative Regulatory Approaches

A.   Broad Alternative Regulatory Approaches

     The intent of the Executive Order is for regulatory agencies to

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 consider carefully the market failure which their action would correct
 and to  investigate non-regulatory alternatives which could correct the
 problem.   Ir, light of these questions EPA examined (1) what would happen
 without regulation (i.e., 1s a regulation necessary) and; (2) could a
 restitution approach better deal with the problem then a regulatory
approach?

 1.   No regulations.  Part C of the Safe Drinking Water Act requires
 the Administrator to promulgate Underground Injection Control Regulations
 and Includes some specific requirements for them.  As part of Its approach
 EPA posed  the fundamental question, can existing market forces be relied
 upon as an alternative to national regulations?  The Agency concluded
 that such  forces cannot consistently provide the appropriate controls
 because there are Insufficient Incentives for the well owners or operators
 to nrpvpnt endangerment of drinking water sources.  Since the well owner
 or operator will not realize the benefits from expenditures for the
 protection of underground sources of drinking water, he cannot be expected
 to Incur the costs of proper Injection practices voluntarily.  The
 purpose of Part C of the Act, and of the UIC program, 1s to establish a
 Federal-State system of controls which will ensure that underground
 injection  practices do not endanger drinking water sources.

 2.   Restitution approach.  This alternative entails the creation of a
 fund, either through Insurance premiums or other sources such as general
 tax revenues, which would be used to rectify any damage to an aquifer.

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It should be noted that It Is very expensive to restore an aquifer to  an
uncontamlnated state.  Therefore restitution would probably Involve compensation
rather than restoration.  Compensation may Involve a liability scheme  or  a
"no fault" basis.  Under a compensation plan Insurance premiums for owners
or operators would reflect the degree of risk for well  failure.  Rates would
be Inversely related to the care exercised by an owner or operator so  that
more careful owners or operators would pay less than those using less  stringent
measures.  In order to qualify for coverage an operator would  probably have
to meet specific minimum requirements.  It Is likely that these requirements
would not be substantially less than those required by the regulations.   In
addition since the Insurer would be risk-averse and expect a profit from  his
endeavors, the rates would Include these costs of doing business.   The cost
for well owners or operators could therefore be larger under a restitution
scheme than under regulations.  Moreover, under an Insurance approach, Intractable
problems could arise over determining the party responsible for the contamination.
To Illustrate, In areas where large amounts of water are withdrawn and salt water
Intrudes It nay not be possible to ascertain If It was the withdrawal  or  the
Injection associated with secondary recovery of oil  which caused the contamination.
Finally, the restitution approach was rejected because It Is Inconsistent with
the preventive nature of the Safe Drinking Water Act, which requires EPA
to promulgate regulations which contain minimum requirements for effective
State programs to protect underground sources of drinking water.

B.   Alternative Regulatory Provisions.

     In the June 1980 preamble to the promulgation of the UIC  regulations,
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                                                               I/
the Agency discussed several alternative regulatory provisions.    For example,
wells disposing of nuclear wastes below underground sources of drinking
water were Included under Class I at one ttme, rather than Class  V.   For
Class II wells EPA examined: requiring casings to be cemented  to  the surface,
differentiating regulatory requirements for existing wells on  the basis of age,
alternative area of review requirements, assessments for or postponements  of
national requirements, alternative monitoring schemes, and coverage  of natural
gas storage facilities.  For Class III the agency considered various requirements
for mechanical integrity testing as well as aquifer restoration and  containment
of fluids for solution mining of uranium.  EPA also evaluated  alternatives for
Class IV wells.  The discussion of why the Agency selected or  rejected these
alternatives will not be reiterated here.  As noted tn the Preamble, the
proposed regulations would change several technical requirements.  However,
except for these proposed changes, the Agency has not changed  its  views on
the various alternatives considered.
                                                                        i
IV.  Expected Results of the Proposed Regulation, Technical  Amendments
and Program Guidance.

     As part of tts reeyaluation of the regulations the Agency has Issued
technical amendments and program guidance which deals with EPA policy
concerning interpretation of the regulations.  The regulations being proposed
today and the technical amendments and guidance wtll  result tn numerous
    45 FR 42490

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improvements over the May and June, 1980 regulations  In  the  following
categories:

     o    Clarification of the original  Intent of the 1980 regulations;

     o    Reduction in paperwork burden  to industry and  the  States;

     o    Increased flexibility to State Directors; and

     o    Attendant reductions in costs  to industry and  the  States.

     This discussion of the main Improvements  will  highlight examples of the
major changes but is not Intended to analyze the effect  of every  proposed
change.

A.   Clarification of original Intent.   Through the public hearing process
and reliance upon materials officially submitted for  the record EPA
ascertained the concerns of affected parties related  to  the  meaning of
various parts of the regulations, and revised  them accordingly.   Despite
diligent efforts to remove uncertainties, some remained. EPA  has sought
to eliminate any remaining uncertainties in two ways:  first, it has revised
the regulatory language on the basis of  extensive discussions  with litigants
and a review of the record and second, 1t has  prepared "Program Guidance"
to be used by agencies in Interpreting various sections  of the regulations.
To illustrate, the wording of S146.22(h) states that  "All Class II wells
shall be cased and cemented to prevent movement of fluids Into or between
underground sources of drinking water."   In certain local situations, e.g.,
where the existence of competent bedrock or plastic shales have made it

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possible to construct wells without a long string casing or  cement  recirculated
to the surface, tt may not be necessary that a well  be cased and  cemented
In order to prevent significant movement of fluids between aquifers through
the well bore.  Newly prepared guidance to be provided to enforcement
authorities states that existing casing and cemented practices  which are
not "typical" may be considered adequate under S146.22(e) If 1t can be
demonstrated that they have not resulted In contamination of USDW's and will
not do so In the future.  Although this was EPA's original Intention, the
guidance explicitly states that a variety of practices are allowed  as long
as they do not contaminate USDW's.  Since EPA's original  assessment of
the effects of the regulations was en the basis of our original Intention,
this analysis of the Impacts Includes no estimates of savings resulting
from the guidance.

B.   Reduction In paperwork, burden.  These reductions take two  forms.
First, where Information Is to be collected and/or submitted, EPA would
simply require less of 1t.  To Illustrate, the 1980 regulations required, for
Class II wells, monitoring of the Injection pressure, flow rate and cumulative
volume of Injected fluid at frequencies of once per day,  once per week, or
once per month, depending upon the type of Injection operation.   The proposed
regulations simply requlre~observatton of these parameters at the above
frequencies, with actual recording of the data ",..at reasonable  Intervals
no greater than 30 days."  Another example Is the descriptive Information
to be submitted with an application for an area permit.   In  1980, the
regulations required that each Injection well  covered by an  area  permit
be described and Identified by location.  In the currently proposed regulations

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                                Table 1
                Savings Over Five Years in Hourly Burden for
                         Monitoring and Reporting
                       Class II and Class III Wells
                          (thousands of hours)
                         1980           Current

                         Regulations    Proposal
                         Savings
1.   Savings to Operators.!/

Class II                      241

Class III                      24
Total
265
                                          48

                                           4
                                          52
                           193

                            20
213
">   savings to States.!/
s II
s III
126
20
26
18
100
2
Total
146
                                          44
102
!_/   There are no proposed changes in the monitoring and reporting
     requirements for owners or operators of Class I wells.

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"...the Director may accept a stngle description of wells  wtth  substantially
the same characteristics..." a clear reducatlon In  paperwork  burden  for
both the operator and the Director.
                                    «
As Indicated In Table 1 below, EPA estimates  the reduction 1n the  number of
hours required by operators to monitor and report on Class II and  Class III
wells over a five year period to be on the order of 213  thousand hours, a
reduction of 80% from tts earlter estimate of the requirement associated
with the 1980 regulations.  Hourly savings to the States In processing
monitoring reports also appear tn Table 1  and are approximately 102  thousand
hours over five years.

C.   Increased flexibility to State  Directors.   In  some  cases a proposed
change to the regulations way result In reduced cost of  compliance as well
as Increased flexibility.  Therefore the decision to classify a given change
as an example of Increased flexibility rather than  an example of cost savings
Is judgemental.  Increased flexibility Is  often synonymous with reduced
costs to States and/or owners and operators,  but these savings  are not
estimated.1n this section.

     The 1980 regulations contained  a host of provtstons whtch  gave  the
Director flexibility in making various determinations.   Among others
tbe Director had the latitude to determine: whtch method to use 1n ascertaining
the zone of endangering Influence (S 146.06); the adequacy of corrective
action (S 146.07); the need for aqutfer cleanup and monitoring  to  ensure
that contaminants do not migrate Into an underground source of  drinking

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water IS 146.01 (d)}; and the geological  data to be provtded  in  authorizing
a Class II well (5 146.24(a)C5)).

     The currently proposed regulations  would enhance the Director's
flexibility In numerous ways, such as:

o    S122.39(a) - in issuing area permits the Director may accept
     a single description of wells with  substantially the same
     characteristics, rather than requiring a separate description
     of each one;

o    S146.10(a) - the Director may now allow Class III wells  to be
     plugged with various materials, rather than only wtth cement,
     as currently required;

o    S146.22(b)(4-9l - many items of information the Director is
     required to consider tn determining and specifying  casing
     and cementing requirements would be optional;

o    S146.24Ca)(10-14) - certain information which the Director i?
     now required to consider before issuing a permit for en  existing
     Class II well or the construction of a new Class II well would
     become optional;

o    $146.040:1 - the Director my determine thflt en aquifer  which
     meets the criteria for an underground source of drinking water is an
     exempted aquifer if the total dissolved solids content of  the ground
     water is more than 3,000 and less than 10,000 mg/1  and is  not
     reasonably expected to supply a public water system,
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EPA anticipates that the added flexibility will  reduce the regulatory burden
to both owners or operators and the States by reducing the amount  of
Information which must be sumttted and reviewed, by allowing  wider latitude
in adopting construction techniques to site-specific characteristics and  by
removing from coverage aquifers which have high  mtneral  content  and are not
reasonably expected to be used as a source of drinking water.

D.   Reduced Costs to Owners or Operators and States

     The savings to owners or operators and States  are a major benefit flowing
from the regulations being proposed today.  These figures  are based upon  EPA's
analysis of the cost of the promulgated regulations.  Other assessments of
the cost of those regulations could produce different estimates  of the savings.
EPA estimates the savings to owners or operators over the  1980 regulations
to be approximately seventy million dollars in 1981  prices, the  bulk of which
results from the relaxation of mechanical integrity testing requirements  for
certain Class II wells.  Other significant cost  reductions occur 1n the
areas of Class II and Class III monitoring, reporting and  permit application,
and from the transfer of certain types of wells  from coverage under Class
III to Class V.  Except as noted 1n this section dollar figures  are In
1977 terms.  They are approximately 60% higher In 1981  dollar terms because
of cost Increases for the affected Industries.

1.   Class II.

a.   Mechanical integrity testing (.-$37 million}.   For existing  wells  without
a packer the owner or operator may now evaluate, under proposed  S146.08(b)C3),
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the absence of slgntftcant leafcs by means of monttortng  records  showing
the absence of significant changes tn the relationship between injection
pressure and tnjectton flow rate.  Currently such an evaluation  has to be made
by monitoring of the annulus pressure or by a pressure test  with liquid or
gas.  Based on the assumption that adequate records  exist  for all  such wells,
EPA estimates that the savtngs in testing of $1500 per well, offset by reporting
costs of $25 per well, will result tn a net savings  of $37 millton over five
years to owners and operators.

b.   Monttortng and reporting (.-$3.2 million}..   Currently  an owner or
operator is required to monitor tnjectton pressure,  flow rate and  cumulative
volume daily, weekly or monthly depending upon  the type  of injection
operation.  Proposed section 146.23(b) would require the owner or  operator
merely to observe these parameters at the above frequencies, and to record
one observation at reasonable intervals, but not more often  than every
thirty days.  Such a change would bring the monitoring requirement closer
to industry practices.  EPA estimates an 80% reduction In  the costs of
monitoring and reporting, resulting in a savings of  some three million
dollars over a five year period.

c.   Application costs for new enhanced recovery wells.  (-$2.6 mill ton).
costs to operators.  Under proposed S122.39UKD. the Director  may accept
a single description of wells with substantially the same  characteristics,
rather than requiring a separate description of each and every one.  In -
addition, the requirement under current S122.39ta)(3}, that  the  injection
wells be of similar construction, would be deleted.   Under proposed
5122.39(c), the area permit may authorize the permittee  to plug  and abandon
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wells, as well as construct and operate them.  EPA estimates that these
changes will reduce permit application costs by 40%,  resulting in a  savings
of approximately $2.6 million over five years.

2.   Class in Wells.

a.   Proposed reclasstficatton of geotherroal and tn-sttu gasification  wells
from coverage under Class III to Class V.   (.-$40 thousand).   Total compliance
costs to owners or operators for these wells were estimated  to be $40
thousand for the current regulations.  Their reclassiftcation to  Class V
results in a reduction of industry costs over the next five  years.   (Savings
in permtt processing costs to States are another result of this change.
Such savings are discussed below).

b.   Closing and reclassiflcatio.i of certain copper operations,  (-$260 thousand),
In 1980 there were three operating copper leaching mines which were  expected
to incur $360 thousand over five years in order to comply with the regulations.
In Its discussion with the litigants EPA has learned  that two operations
have been closed, and the third 1s an experimental endeavor.   Hence  it 1s no
longer appropriate to Include these costs  as a  part of total  compliance
costs.

c.   Monitoring for remaining Class III wells.  (.-$410 thousand).   The  current
regulations require, under S146.33(b)(2),  the Installation and use of
continuous recording devices to monitor the injection pressure, flow rate
and volume.  The proposed requirements Is  for monitoring of  Injection  pressure
and either flow rate or volume semi-monthly, or metering and  daily recording
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of Injected and produced flutd volumes, as appropriate.   In addition
the current requirement, that flutd level  and the parameters chosen to
measure water quality 1n the Tnjectlon zone be monitored weekly,  has also
been relaxed.  Under S146.33(b)(4) monitoring of the fluid level  would
*« performed semi-monthly, as appropriate, and monitoring of water quality,
seml-isonthly rather than weekly.  EPA estimates a savings of 20?, or $410
 -
thousand over five years, accruing from these changes.

     Table 2 summarizes the cost savings to owners or operators.   All  of
the savings are In transaction costs except those relating the removal  of
certain wells from coverage under Class III.  Of the total  savings of
$44 million over five years, transaction cost savings account for 98%,
or $43 million In 1977 price levels.  When converted to  1981  price levels
EPA estimates the savings to be on the order of seventy  million dollars,
:f -.:':.*z\i transaction costs represent roughly $69 million.

3.   Reduction In State costs of permit processing.  (-$1.4 million).
     The proposed regulations are expected to reduce the number of Class
II permit applications as well as the amount of Information provided In
them.  EPA estimates that this reduction In workload to  the States will
result In savings of approximately $1.4 million over five years.   The
removal of geothermal, tn-sltu gasification and copper leaching wells  from
Class III also will reduce the permit processing workload.   It 1s estimated  *•
that such savings will total $38 thousand  over five years.   The total  savings
to States 1s $1.4 Billion In 1977 price levels, or roughly $2.3 million
1n 1981 prices.
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                               TABLE 2

             SAVINGS OVER FIVE YEARS IN COSTS TO INDUSTRY
                1977 dollars (1n 1,000) except as noted
CLASS II
     Mechanical Integrity Testing
     Monitoring and Reporting
     Application costs for New
      Enhanced Recovery Wells

CLASS III
     Geothermal
     In S1tu Gasification
     Cooper Leaching
     Monitoring
          Salt
          Potash
          Frasch Sulfur
          Uranium
Estimate 1n 1981 Dollars
                                        Original
                                        Estimate
37,620
 4,024

 6,420
               Revised
                Cost
  627
  804

3,852
              Savings
36,993
 3,220

 2,568
19
21
358
100
345
15
53
48,975
78,400
0
0
0
20
69
3
11
5,386
8,600
19
21
358
80
276
12
42
43,589
69,800
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V.   Impacts.
     A.   Aggregate Production.
     In connection with the 1980 version of the regulations EPA estimated
no losses in oil production due solely to the inability of a well  to
absorb the cost of a mechanical interity test or casing leak test.
Since the effect of the currently proposed regulations is to eliminate
certain testing and other requirements, EPA anticipates that no further
impacts on production will accompany this proposal.

     Similarly, no further impacts on production from Class III wells
are expected to occur.  As stated in connection with the 1980 regulations,
the potential impact on Class III owners and operators is not expected
to be significant because (1) for most industries the production from
the sites subject to the regulations accounts for only a small proportion
of domestic supply; (2) for salt and Frasch sulfur production, compliance
costs are relatively small, and (3) firms engaged in solution mining are
diversified.  The regulations proposed today would reduce the cost of
compliance and regulatory burden even further.

     B.   Small Businesses.

     Under the Regulatory Flexibility Act EPA must prepare an initial
regulatory flexibility analysis whenever it proposes a regulation,
unless the head of the agency certifies that the rule, if promulgated,
will not have a significant economic Impact on a substantial  number of
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small entitles.  If the agency head so certifies, a succinct statement
explaining the reasons is to be provided.

     The proposed regulations have their major effect on Class  II  and
III wells.  Class III wells are generally owned by larger firms and the
operations often represent a small portion of their overall  business.
Both large and small firms own Class II wells.  The proposed changes to
the regulations affect enhanced recovery and salt water disposal wells
for oil and gas extraction (SIC 13).

     The Department of Energy has divided the industry into  large,
intermediate and small firms on the basis of production.  Large firms
are defined as annually producing more than 1.5 million barrels of oil
or over 15 billion cubic feet of gas approximately one hundred  fifty
firms fit this definition.  Intermediate firms, of which there  are about
350 annually, produce between 400,000 and 1.5 million barrels of oil or
between 2 and 15 billion cubic feet of gas.  Approximately 15,500  small
firms produce annually less than 400,000 barrels of oil or less than 2
billion cubic feet of gas.  Unfortunately, DOE does not have data  on the
distribution of wells ownership by size of firm.  Therefore, it is
difficult to analyze the impact of the regulations on small  entities on
the basis of ownership.

     Regardless of the size of the firm, owners and operators of wells
affected by this proposal  usually employ the same general  approach in
reaching an investment decision.  Viewing each well or project  as  a
separate producing entity, the owner or operator considers production
prices, costs, and makes a decision on the basis of the expected
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 return.   If the value of the expected returns does not exceed the contemplated
 costs, the Investment will not be made.

     The  currently proposed regulations will reduce compliance costs by
 almost $70 million over five years to all owners and operators of Class
 II wells.  These savings will result from reduced requirements for
 mechanical integrity testing; monitoring and reporting, and permit
 application costs for new enhanced recovery wells.  The expected cost
 savings to small owners and operators over the regulations promulgated
 in 1980 will improve their economic position.  In addition to the dollar
 savings,  the reduction in requirements dealing with monitoring and
 reporting, and permit application, will also benefit small businesses
 which have a smaller revenue base over which to spread the costs.
 Because 97% of the oil firms fall into the smallest size category it is
 likely that a substantial portion of the dollar savings and the paperwork
 reduction benefit would redound to them.

     EPA  also investigated using a stripper well as an alternative
 definition of a small entity.  Stripper wells produce less than 10
 barrels per day of oil.  They may be obtained by any size firm.  This
 definition was used to allow the output from small wells to be sold at
world prices while oil from more productive wells was under price controls.
 This special treatment of stripper wells was to ensure maximum production
 from them.  Stripper wells account for approximately 70% of all  producing
wells and about 13% of production.  Since the proposed regulations
change the requirements for wells it is likely that the majority of
benefits will  accrue to owners and operators of stripper wells.
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     Since one effect of these proposed regulations 1s to reduce the
admnlnlstratlve burden and cost of compliance for all owners and operators,
the Administrator certifies that this proposed regulation will  not have
a significant economic Impact on a substantial number of small  entitles.
The proposed regulations provide for numerous changes which reduce the
regulatory burden on owners and operators of all sizes.

     VI.  Provisions for Review of the UIC Regulations.

     Sections 122.18(c)(4) and 146.35 require that certain Information
be provided by the Director so that EPA may evaluate the operation of
the UIC regulations.  EPA will review these reports and, in conjunction
with other Information 1t develops under its own evaluation plan, will
ascertain the need for further changes to the UIC regulations.   Among
other matters, EPA will be interested 1n the total number of wells
requiring repairs, the adequacy of the provisions to allow cementing
records to serve as a basis for demonstrating the soundness of  a well,
and the various provisions relating to the area of review.

     VII. Summary.

     The proposed regulations would reduce the regulatory burden and
cost of compliance to both industry and States, reduce paperwork requirements,
and increase flexibility without reducing the level of protection afforded
to underground sources of drinking water.  Industry impacts, which were
generally small  under the 1980 regulations, are expected to be  reduced
under the currently proposed regulations as well.  In addition  changes
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'.: ;  Ajoncy

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in the language and the preparation of guidance have  eliminated  uncertainty
on the part of Industry In the Interpretation  of numerous  provisions.
This should facilitate smooth implementation by the States and EPA.
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