REPORT TO THE SENATE COMMITTEE ON APPROPRIATIONS
REGARDING UNDERGROUND STORAGE TANK FINANCIAL
RESPONSIBILITY AND RELATED ISSUES
Prepared by:
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF UNDERGROUND STORAGE TANKS
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APRIL 1992
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j'ViROuMENTAL PROTECTION AGENCY
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REPORT TO THE SENATE COMMITTEE ON APPROPRIATIONS
REGARDING UNDERGROUND STORAGE TANK FINANCIAL
RESPONSIBILITY AND RELATED ISSUES
Prepared by:
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF UNDERGROUND STORAGE TANKS
APRIL 1992
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TABLE OF CONTENTS
Chapter Page
Executive Summary
I Purpose of This Report
II Context of UST-Related Issues
Ill Progress Toward Compliance With Financial Responsibility lli-1
IV The Cost of Regulatory Compliance IV-1
V Easing Financial Problems Faced by UST Owners V-1
VI Summary of Findings and Recommendations VI-1
M^ Appendices
A Status of State Financial Assistance Programs
B Summary of State Financial Assurance Fund Programs
3 Methodology for Estimating Financial Impacts of UST Requirements on the
Regulated Community
D Impact of Compliance Costs on Rural Motor Fuel Facilities
E Preventing Leaking Underground Storage Tanks: Using Government
Assistance Programs to Finance Tank System Improvements
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LIST OF EXHIBITS
Exhibit
Page
11-1 Characteristics of UST-Owing Firms
II-2 Status of State Financial Assurance Fund Programs
II-3 States with Financial Assistance Programs for Tank Owners
1V-1
IV-2
IV-3
IV-4
V-1
V-2
Financial Responsibility Costs are a Small Portion of
Total Compliance Costs
Many Small UST Owners Face Financial Problems Over the
Next Ten Years
State Funds with $10,000 Deductibles Reduce Business
Failures Over the Next Ten years
State Funds with $10,000 Deductibles Reduce Failures
More Than They Reduce Financial Distress
State Financial Assistance Programs
Characteristics of Financial Assistance Mechanisms
II-5
II-7
II-8
IV-2
IV-4
IV-6
IV-7
V-3
V-4
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EXECUTIVE SUMMARY
o
In response to a request from the Senate Committee on Appropriations, this
report provides information to Congress concerning Federal regulations for
underground storage tank systems (USTs). As directed by the Senate Appropriations
Committee, EPA has specifically addressed three issues: (1) compliance with the
financial responsibility requirements, (2) impact on various industry sectors of meeting
compliance costs resulting from the Federal UST technical standards and financial
responsibility requirements, and (3) methods being used to reduce the impacts
imposed by the UST program on tank owners and operators. Based on the analyses
contained in this report, EPA has developed legislative and regulatory
recommendations for minimizing the burden imposed on the regulated community in
complying with Subtitle I.
Financial Responsibility Compliance
Industry surveys have found that more than 95 percent of UST owners
and operators currently required to be in compliance with the financial
responsibility requirements are estimated to be in compliance.
• Prospects for compliance with the financial responsibility requirements
are improving, primarily because of State assurance funds and State
financial assistance programs.
Costs and Impacts of UST Program
• Compliance with the EPA technical standards and meeting State
corrective action requirements makes far greater demands on the
financial resources of UST owners than does compliance with financial
responsibility.
• Financial responsibility requirements accelerate compliance with the
technical standards so that these costs are imposed sooner.
• Although available data suggest that rural service stations are not
currently closing at a disproportionately higher rate than urban stations,
the eventual impact of closures on consumers may be higher in rural
areas because of the sparse distribution of service stations and the lack
of competition
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Alternatives for Reducing Impacts
• State financial assurance funds can help keep owners and operators in
business by providing money for cleanup activities. Forty-three States
have developed State assurance funds.
* State financial assistance programs (e.g., direct loan programs, loan
guarantee programs, grants) are alleviating some of the economic
burden imposed by the technical standards on small UST owners.
Legislative and Regulatory Recommendations
The Senate Appropriations Committee asked for specific recommendations
regarding legislative and regulatory actions that could be taken to reduce the financial
and economic impacts of the UST regulations. After considering the intent of the UST
program, the way it is being implemented by the States, and the progress that owners
and operators have had to date in meeting the requirements, EPA does not believe
further changes to Federal legislation are necessary, other than the exemption of UST-
contaminated soils and debris from the hazardous waste management requirements.
The current impediments to compliance do not result from overly stringent Federal
statutes, but rather from the costs to recover from bad environmental practices
adopted in the past 40 years.
Although EPA does not believe that significant statutory changes are necessary,
EPA recognizes that regulatory and programmatic initiatives, possible within the
existing authority, are necessary to minimize the impacts of the UST program. As
discussed in this report, EPA believes that most of the financial hardships resulting
from the UST program arise from three sources: simple inability of some owners and
operators to meet the UST regulatory requirements within the current regulatory time
frame, excessively stringent interpretation of the Federal standards by some States,
and unnecessary caution on the part of potential lenders. To address the problems
facing UST owners and operators, EPA recommends the following actions:
Statutory Changes
• Congress should amend the Resource Conservation and Recovery Act
to provide a permanent exemption from hazardous waste management
requirements for UST-contamtnated media and debris.
Regulatory and Programmatic Changes
• EPA should continue regulatory efforts to provide relief for the most
severely affected members of the regulated community.
• EPA should continue to support State efforts to develop programs to
heip the regulated community.
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• EPA should emphasize the flexibility existing in its current regulations with
respect to controlling corrective action costs.
* EPA should clarify the liability of lenders to improve the availability of
funds for financing LIST facilities.
The recommended approach will promote State efforts to provide financial
assistance and financial assurance to the most deserving members of the regulated
community, reduce barriers to more efficient, less costly cleanups, and increase the
availability of capital for LIST owners and operators to upgrade their facilities. The
recommended statutory change will ensure that costs of cleaning up UST
contamination are not unnecessarily high. Finally, EPA is developing Federal criteria
to identify specific groups of UST owners and operators potentially needing additional
time to be able to demonstrate financial responsibility. These criteria will provide
States with the time to grant relief to the members of the regulated community that are
most in need of financial assistance, such as small local governments using USTs to
provide emergency services and small retail marketers serving isolated communities.
Overall, the UST regulations are being implemented successfully and with
sensitivity to their impact on the regulated community. EPA will continue to make
every effort to identify and encourage approaches, especially State financial assurance
funds and assistance programs, that can ease the burden of compliance costs on
small businesses. EPA does not believe that legislative changes at the Federal level to
provide either financial relief or reductions in the stringency of the UST standards is
warranted at this time. Each State is ideally positioned to target its most vulnerable
UST owners and operators and to develop appropriate financial assistance programs.
Seventeen States have developed financial assistance programs to provide monies to
tank owners and operators to upgrade and replace tanks, perform leak detection, and
conduct corrective action.
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CHAPTER I
PURPOSE OF THIS REPORT
In September 1990, the Senate Committee on Appropriations directed the U.S.
Environmental Protection Agency (EPA) to conduct a study of the progress being
made by owners and operators of petroleum underground storage tanks (USTs) in
meeting EPA's financial responsibility requirements. The Committee requested that
EPA summarize its findings and also discuss the actions that EPA and other Federal
and State agencies can take to assist petroleum LIST owners and operators to
upgrade or replace their USTs, to detect releases, and to clean up releases from their
tanks in accordance with EPA requirements. In addition, the Committee asked that
EPA discuss the actions that Federal and State agencies, including EPA, can take to
assist tank owners and operators to obtain affordable tank insurance to meet the
financial responsibility requirements.
This report represents EPA's response to the Committee's request. Chapter II
establishes a context for understanding the UST-related issues raised in the
Committee's request by providing background on the regulated community and the
development and implementation of EPA's regulatory program for USTs. Chapter III
addresses one of the Committee's basic requests for information on the progress UST
owners and operators are making toward compliance with the financial responsibility
requirements. Chapter IV discusses the impact on the regulated community of
meeting compliance costs. Chapter V explores approaches and financial mechanisms
that could enable UST owners and operators to minimize compliance costs and avoid
the economic hardship that can result from meeting compliance costs. Chapter VI
Dresents a summary of the findings of this report, and provides EPA's
•ecommendations about necessary legislative and regulatory efforts to minimize the
financial and economic impacts of the UST Program. Several appendices provide
economic analyses and other supporting material used in the preparation of this
report.
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CHAPTER II
CONTEXT OF UST-RELATED ISSUES
This chapter establishes a background for understanding the development of
Federal regulations for underground storage tanks (USTs), the characteristics of the
regulated community, and the various State programs helping LIST owners and
operators reach compliance. This chapter highlights three points:
• The regulatory challenge is formidable, considering the size of the
regulated community (nearly 1.7 million USTs) and the thousands of UST
releases that will require billions of dollars in cleanup costs.
• Many State financial assistance programs and assurance funds are either
in place or being developed to reduce the impact of compliance costs
for many UST owners and operators.
• Federal regulations are phased in over several years, and some
compliance deadlines have been extended in order to minimize the
economic impacts.
The UST Problem
About 1.7 million USTs in the United States contain petroleum. More than one
hundred thousand releases from the tanks, pipes, or fittings in these systems have
been reported, and many more releases are expected to be found in the future.
Although generally regarded as posing low risk to human health, leaking USTs can
cause fires or explosions that threaten human safety. In addition, leaking USTs can
contaminate ground water, which is used as a source for drinking water by nearly half
of America's citizens. The cost of cleaning up soil and ground water contaminated by
leaking USTs has ranged from several thousand dollars for small releases to more
M:han one million dollars for large releases. EPA's review of the available data suggests
i:hat the average cleanup cost is about $100,000 per site. Because there are a large
number of UST sites, the total cost of cleaning up releases from USTs could easily
reach into the tens of billions of dollars.
Congressional Mandates
Concerned by the environmental and health implications of these releases,
Congress added Subtitle I to the Resource Conservation and Recovery Act (RCRA) in
"I984, requiring EPA to develop regulations to protect human health and the
environment from leaking USTs storing petroleum or hazardous substances. Under §
9003 of RCRA, Congress directed EPA to establish requirements for leak detection,
leak prevention, and corrective action for releases from USTs. Congress further
provided that the UST program, although initially established at the Federal level,
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could become a State program if a State develops programs that are no less stringent
than the Federal program and provides for adequate enforcement.
Subtitle I was amended by the 1986 Superfund Amendments and
Reauthorization Act (SARA). Through these amendments, Congress directed EPA to
establish financial responsibility requirements to ensure that owners and operators of
USTs could demonstrate that financial resources would be available to pay for costs
associated with cleaning up releases or compensating third parties for the effects of
LIST releases. Recognizing the need to ensure that cleanup funds were available,
Congress also created a Federal Leaking Underground Storage Tank (LUST) Trust
Fund.
Regulatory Response
To respond to the statutory mandates under Subtitle I, EPA adopted a
decentralized, "franchise" approach in which States - the "franchisees" - implement
UST programs. EPA's role is primarily to establish national baseline regulations and to
build State implementation capabilities through funding, training, and other support
activities. This approach acknowledged that the enormous number of USTs and UST
releases required active State participation and resources to solve the problem. Using
this approach, EPA developed a flexible program that builds on State capabilities and
provides States the opportunity to tailor their regulations to meet their needs and the
characteristics of their UST-owning populations.
In addition, to make the program practical and less burdensome, EPA based its
regulations on performance standards, rather than on specific technologies. The
minimum standards for new tank construction and installation, for example, adopt
performance standards incorporated in industry consensus codes. Similarly, the
corrective action standards prescribe a streamlined cleanup process rather than
specific cleanup levels. However, as the program is designed to be run by the States,
some States have chosen to prescribe specific technologies and cleanup levels.
The Federal regulations were published in two parts. In September 1988, EPA
promulgated both the UST Technical Standards Rule and the State Program Approval
Rule. These were followed by the Financial Responsibility Rule, promulgated in
October 1988. A brief description of these regulations is presented below.
UST Technical Standards
The Federal UST technical standards require owners or operators of new UST
systems (those installed after December 1988) to comply with requirements in the
following regulatory areas: tank system design, construction, and installation; spill and
overfill prevention systems; corrosion protection; and leak detection. Owners or
operators of existing UST systems (those installed before December 1988) must
upgrade their tanks to meet the requirements for corrosion protection, spill and overfill
prevention, and leak detection. For existing USTs, leak detection requirements are
phased in over several years (depending on the age of the tank) and the
11-2
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requirements for corrosion protection and spill/overfill prevention have a deadline of
December 1998. Owners and operators of all LIST systems must also meet
requirements for recordkeeping, reporting, corrective action, and temporary or
permanent closure.
State Program Approval
As discussed above, EPA has sought to encourage participation and control at
the State level to the greatest possible degree. The State program approval process
provides a mechanism for turning over full authority and implementation of UST
regulatory programs to States while ensuring that the goals of the national program
are met. Under the State program approval regulations, States are permitted to
develop and run their own UST programs as long as the programs impose
requirements that are at least as stringent as the Federal regulations and provide for
adequate enforcement. Because EPA recognizes that different States may have
differing concerns about their USTs, State programs do not have to be identical to the
Federal program in order to be approved. Rather, EPA has established a review
process that compares the level of stringency of the State program in each of the
program areas to the level of stringency of the Federal program. As long as the State
program is no less stringent, the program will be approved. In accord with the
franchise approach, EPA attempts to promote development of State programs by
providing assistance to the States through a variety of outreach, development, and
improvement programs.
At present, almost all States and Territories have enabling UST legislation, and
about half have UST regulations. Most of the statutes incorporate Subtitle I, and some
States have codified the Federal UST regulations as part of their codes. In some
States, additional authority to manage USTs is provided to local authorities or to State
(agencies other than those directly responsible for USTs. It should be noted that
several State programs set standards that exceed the Federal requirements.
As yet, few State programs have been submitted for forma! review under the
State Program Approval process. Six States - Georgia, Mississippi, New Mexico, New
Hampshire, North Dakota, and Vermont - have received approval to administer the
F:ederal program. Maryland has received tentative approval with final approval
expected shortly. Instead, State regulators have been working with EPA Regional and
Headquarters personnel on an informal basis to ensure that the State programs, when
submitted, will meet with EPA approval. More than half of the States have developed
technical standards regulations that could be approved, and these States should soon
be submitting their applications for State Program Approval. In addition, 29 States
and Territories are believed to have financial responsibility regulations at least as
stringent as the Federal standards.
UST Financial Responsibility
The UST financial responsibility regulations require that either the owner or
operator of an UST containing petroleum demonstrate adequate financial resources to
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undertake corrective action and compensate third parties for liabilities arising out of an
UST release. Under § 9003(d)(5) of the statute, Congress directed EPA to set the
required amount of coverage at no less than $1,000,000 per occurrence for petroleum
marketers. Using the discretion permitted under the statute for setting the coverage
limits for non-marketers with low throughput, EPA established the required amount of
coverage for non-marketers to be at least $500,000 per occurrence. Owners and
operators of USTs must also have coverage for an annual aggregate amount that is
determined by the number of tanks under their control: a $1 million annual aggregate
for up to 100 tanks and a $2 million annual aggregate for more than 100 tanks.
Description of Regulated Community
The regulated community consists of approximately 1.7 million petroleum USTs:
1.5 million contain motor fuel and 0.2 million contain used oil. (This report focuses
only on motor fuel USTs.) Exhibit 11-1 provides information about three major groups
of UST owners and operators: retail motor fuel, general industry, and local
government. As the exhibit shows, about 90,000 retail motor fuel firms own about
800,000 USTs; about 137,000 general industry firms own about 630,000 USTs; and
about 29,000 local government entities own 62,000 USTs.
To assess the impact of UST compliance costs, this report groups petroleum
UST owners into three major categories based on financial strength, which can be
synonymous with total assets: large (those with more than $20 million in assets),
medium (those with $1 to $20 million in assets), and small (those with less than $1
million in assets). In addition, the report especially considers another category of
small firms - single service stations - those firms owning or operating only one UST
facility. Single service station owners are particularly important because they control
about 20 percent of all USTs and, among UST owners, they have the smallest assets
with which to meet compliance costs.
State Programs Are Reducing the Impact of Regulatory Costs
Since 1988, States have been active in developing programs related to
underground storage tanks. These programs include (1) State financial assistance
programs that help UST owners and operators meet compliance costs resulting from
the technical standards requirements, and (2) State financial assurance programs that
fund cleanups and allow UST owners and operators to demonstrate compliance with
the financial responsibility regulations. These State programs are briefly described
below.
State Financial Assistance Programs
Seventeen States have established some form of financial assistance program
to increase the ability of UST owners and operators to meet the costs of complying
with the technical standards. These State programs provide grants or loans to be
used by owners and operators to pay for site assessments, tank upgrades, tank
replacements, and/or corrective actions. In many cases, UST owners and operators
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EXHIBIT 11-1
CHARACTERISTICS OF LIST-OWNING FIRMS
Category
Assets
($ thousands)
Typical
Number of
USTs Per
UST-owning
Entity
Estimated
Number of
USTs
Estimated
Number of
Facttities
Estimated
Number of
Entities
Retail Motor Fuel1
Single Station2
Small2
Medium
Large
0-1,000
0-1,000
1,000-20,000
20,000 or more
1
2-4
4-200
200 or more
329,200
33,600
211,600
216,900
80,300
8,200
51,600
52,900
80,300
3,700
5,700
60
General Industry1
Small
Medium
Large
0-1,000
1,000-20,000
20,000 or more
1
1
5-10
207,900
217,800
207,900
63,000
66,000
63,000
63,000
66.000
8,400
Local Government
Small
Medium
Large
200
5,500
270,000
1
1-5
20-50
3,800
47,800
10,400
N/A
N/A
N/A
3,600
25,000
400
1 Estimates of USTs, facilities, and firms were made before the rule was promulgated in 1988; actual numbers in
each category may now be slightly higher.
2 Further breakdown of the financial characteristics within this category is provided in Appendix D.
3 In addition, the State and Federal governments own approximately 85,000 USTs, and there are approximately
45,000 regulated USTs on farms.
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are not eligible for either private insurance or State cleanup funds until they have
demonstrated either compliance with the technical standards or the absence of
existing releases. Because compliance with the technical standards can impose
substantial costs on smaller owners and operators, these financial assistance
programs can help to mitigate the overall economic impacts of the UST regulatory
program, including the financial responsibility standards. (Chapter V presents a full
discussion of options for State financial assistance programs and Appendix A
provides a summary of existing State financial assistance programs.)
State Financial Assurance Programs
Most States have been actively developing State financial assurance fund
programs. These programs provide funds to pay for corrective action and help
owners and operators comply with financial responsibility requirements by
supplementing, or in some cases substituting for, private insurance coverage.
As of March 1992, forty-three States have legislation authorizing the
development of assurance fund programs to assist owners and operators to
demonstrate financial responsibility. Exhibit II-2 displays the status of State assurance
funds. Twenty-seven States have assurance fund programs approved by EPA and
nine States have submitted programs for EPA review. USTs in States whose
proposed programs are under EPA review have the same compliance status as those
in States with approved programs.- In some cases, the remaining States have not
submitted their funds for review because they are still developing their UST programs
and are focused on basic tasks, such as writing regulations.
State assurance funds vary in the amount and type of coverage they provide,
as displayed in Exhibit H-3. (See Appendix B for a summary of existing State financial
assurance fund programs.) Some State funds, for example, provide full coverage of
the liability of owners and operators, from the first dollar to the minimum limit of
coverage required by the statute of $1 million. Others provide only partial coverage.
Partial coverage can include requiring owners and operators to meet a deductible
amount, limiting the maximum amount paid by the State fund to an amount less than
the minimum requirements of the Federal standards, or limiting the coverage to only
corrective action costs but not third-party liability costs. Where only partial coverage is
provided, UST owners and operators must still demonstrate financial responsibility for
any amounts not covered by the State fund by using an additional financial
responsibility mechanism. The mechanisms most frequently used to demonstrate
financial responsibility for the amounts not covered by State funds include private
insurance and a financial test of self-insurance.
State assurance funds typically incorporate eligibility requirements, such as (1)
demonstration that facilities are in compliance with applicable technical requirements,
(2) evidence of satisfactory inventory control and recordkeeping practices, (3)
satisfaction of a financial test of self-insurance for the deductible amount, or (4)
completion of a site assessment or a tank tightness test. State assurance programs
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also generally require the payment of fees assessed on a per-tank basis or on the
basis of capacity or sales volume.
Federal Regulations Minimize the Impact of Regulatory Costs
To reduce the impacts of the financial responsibility regulations, EPA has used
all statutory options. The Federal regulations permit the use of all mechanisms
identified in the statute: insurance, guarantees, letters of credit, surety bonds, and
self-insurance. In addition, the regulations allow States to develop financial assurance
programs to be used to demonstrate compliance with the financial responsibility
requirements, as long as the level of assurance provided by the State programs is
comparable to the level of assurance of the mechanisms allowed by the Federal
regulations.
Also, EPA recognized that most LIST owners would not have the financial
capability either to demonstrate self-insurance or to obtain a letter of credit or surety
bond, but would instead depend on private insurance or State funds. Consequently,
EPA's regulations provide a compliance schedule that phases in deadlines for
demonstrating compliance with the financial responsibility regulations based on the
relative financial resources of four groups of UST owners and operators. Group I
comprises the financially strongest owners and operators (those owning 1,000 or
more USTs and non-marketers with more than $20 million tangible net worth).
Members of Group I were expected to be able to demonstrate compliance through
self-insurance and were required to demonstrate compliance by January 1989.
Members of Group II, petroleum marketers owning or operating 100 to 999 USTs,
were required to comply by October 1989. Members of this group were expected,
based on their relative financial strength, to be able to obtain insurance or to
demonstrate self-insurance.
Members of Group III, petroleum marketers owning 13 to 99 USTs, were
originally required to demonstrate compliance by April 1990. Recognizing that the
availability of State fund coverage and affordable insurance had not increased as
expected, EPA extended the deadline for Group III to April 1991. Similarly, members
of Group IV - petroleum marketers owning 12 or fewer USTs (or fewer than 100 USTs
at a single facility); non-marketers with less than $20 million tangible net worth; and
local governments - were originally required to demonstrate compliance by October
1990. EPA has since extended the deadline to December 1993 for members of this
group except for local governments.
The compliance deadline for local governments has been extended to one year
after EPA promulgates specific financial assurance mechanisms keyed to the legal and
financial characteristics of local governments. In June 1990, EPA proposed
amendments to the financial responsibility requirements that would allow local
governments to use additional mechanisms to demonstrate financial responsibility.
i:PA expects that most local governments will be able to demonstrate financial
responsibility using these additional mechanisms. In its analysis of the 1990 proposal,
EPA estimated that the new alternatives would allow about 20,000 additional
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governments (of 29,000 total) to demonstrate financial responsibility, permit an
additional 40,000 USTs to remain in operation (of 62,000 total), and save local
governments almost $300 million in costs of demonstrating financial responsibility.1
EPA, "Economic Impact Analysis of the Proposal for a Self-Insurance Test for Government
Entities to Demonstrate Financial Responsibility for Underground Storage Tanks," EPA Office of
Underground Storage Tanks, June 1990.
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CHAPTER III
PROGRESS TOWARD COMPLIANCE WITH FINANCIAL RESPONSIBILITY
Congress has directed EPA to examine the progress being made by owners
and operators of underground petroleum tanks in meeting the financial responsibility
requirements. This chapter highlights three main points:
• A trade association representing petroleum marketers estimate that more
than 95 percent of owners and operators currently required to be in
compliance (those in Groups I, II, and III) are in compliance.
• Those currently in compliance are using a variety of assurance
mechanisms to demonstrate financial responsibility: 90 percent use
State Funds for full or partial coverage; 17 percent use private
insurance; and 18 percent use other mechanisms, including letters of
credit, surety bonds, guarantees, and self-insurance.
Prospects for compliance with the financial responsibility requirements
are improving, primarily because of State assurance funds and State
financial assistance programs.
Compliance Rates for Groups I, II and III
As discussed in Chapter II, EPA divided the regulated community into four
groups for the purpose of phasing in the financial responsibility regulations.1 As of
March 1992 only the first three groups of USTs are required to be in compliance with
tne financial responsibility regulations. EPA believes that almost all of the firms in
Group I are in compliance, because they generally have sufficient net worth to self-
insure. Compliance by firms in Groups II and III is less assured, because many do not
qualify for self-insurance and so must rely on private insurance, a State assurance
fund, or other mechanisms. However, a recent survey of gasoline marketers
conducted by one trade association found that virtually all marketers in Groups li and
III indicated that they are in compliance. Those currently in compliance are using a
variety of assurance mechanisms to demonstrate financial responsibility. Of those
able to demonstrate FR, about 90 percent have coverage under state funding, 17
percent have private pollution liability insurance, and 18 percent have other
mechanisms, such as letters of credit, surety bonds, guarantees, and self-insurance.
1 It should be noted that the phase-in schedule affects only the date on which owners and
operators must be able to demonstrate the financial resources to bear the costs of corrective actions
ard third-party liabilities resulting from UST releases. Under Subtitle I, all owners and operators are
responsible for meeting the costs of corrective action and third-party liability, whether or not they have
previously demonstrated the ability.
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(The total percentage is more than 100 percent because many owners use
combinations of mechanisms to fully satisfy the financial responsibility requirements.)2
Compliance Prospects for Group IV
Owners and operators in Group IV have not yet faced the compliance deadline.
Most of Group IV has an December 1993 deadline. The remainder of Group IV, local
governments, will not have a compliance deadline until one year after EPA
promulgates additional assurance mechanisms for their use. Several developments
have increased the likelihood that LIST owners and operators in Group IV will be able
to comply with the financial responsibility requirements and remain in operation. First,
many States have developed State funds for use in demonstrating full or partial
compliance with financial responsibility regulations. Second, several States have
developed financial assistance programs to assist owners and operators of USTs to
upgrade their tanks and thus become eligible for private and State assurance. Finally,
EPA has begun development of additional mechanisms specifically for use by local
governments.
Remaining Compliance Problems
At this time, compliance problems are not directly related to the existence of
financial assurance mechanisms. Most States have at least some form of financial
assurance program; thirty-six State funds can be used by UST owners and operators
to comply with the financial responsibility requirements. Also, about a dozen private
insurers provide coverage that may enable UST owners and operators to comply with
the financial responsibility requirements. Instead, the compliance problems are
primarily related to the cost of private insurance premiums for those marketers not
eligible for State funds and to the cost of meeting insurance underwriting or State fund
coverage requirements (as discussed below).
High Cost of Private Insurance
Depending on the insurance provider, insurance premiums for private insurance
cost between $2,500 and $5,000 annually for a three-tank facility having upgraded
USTs and a clean site. (Recent industry survey data show that average insurance
premiums are about $1,300 per tank, or $3,900 for an average, three-tank facility.)3
At sites with particularly old tanks, insurance costs (when insurance is available at all)
can be considerably higher. Many petroleum marketers claim that they are unable to
raise retail prices enough to compensate for insurance costs when their major
competitors, who are able to self-insure, do not incur the same insurance costs.
Other marketers claim that local economic conditions limit their ability to raise prices.
2 Petroleum Marketers Association of America, "1992 Underground Storage Tank Status Survey,"
March 3, 1992.
Ibid.
I-2
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High Cost of Meeting Underwriting and Coverage Requirements
Insurers, and some State funds, do not cover pre-existing releases. At a
minimum, facilities must demonstrate that existing tanks are not leaking by conducting
tank tightness tests; some insurers and State programs require more extensive site
assessments to determine whether the site has been subject to earlier releases. Tank
tightness testing costs about $1,500 for an average petroleum marketer with a three-
tank facility. Site assessments, which can include drilling for soil samples and
laboratory tests, can cost several thousand to tens of thousands of dollars. If a
release is found, the owner is required by the insurer to perform corrective action
before obtaining insurance. Nationally, the average corrective action cost is currently
about $100,000, more if ground-water contamination requires treatment. However, the
average corrective action cost varies significantly from State to State depending on
each State's specific corrective action requirements.
In addition, some insurers require that insured tanks be fully upgraded to meet
the technical standards. EPA estimates that upgrading or replacing tank systems can
cost from about $30,000 to $100,000 for a three-tank facility, depending on whether
the tank can simply be upgraded or requires replacement with a new UST system.
Compliance costs of this magnitude, resulting from meeting the requirements of the
technical standards, pose a significant burden to many small UST owners and
operators (as discussed in Chapter IV).
II-3
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CHAPTER IV
THE COST OF REGULATORY COMPLIANCE
This chapter focuses on the impact of compliance costs on the regulated
community. This chapter highlights five points:
• Compliance with the technical standards makes greater demands on the
financial resources of UST owners than does compliance with the
financial responsibility requirements.
• The impact of compliance costs is greatest for smaller UST firms.
• State funds can reduce the economic hardship of complying with the
financial responsibility requirements.
State financial assistance programs can reduce the economic hardship
of complying with the technical standards.
• Rural service stations are not currently closing at a disproportionately
higher rate than urban stations; however, the eventual impact of closures
on consumers may be higher in rural areas due to the sparse distribution
of service stations and the lack of competition.
Sources of Impacts
As discussed earlier, the impact of compliance costs for small UST owners and
operators comes from several sources. As Exhibit IV-1 reveals, the largest impact
comes from meeting costs associated with the technical standards: leak detection,
corrective action, and UST upgrades and replacements. In comparison, the
aggregated costs directly caused by the financial responsibility regulations are much
smaller in magnitude. Although some individual owners and operators may spend a
larger portion of direct costs meeting financial responsibility requirements in one year,
the aggregate of all UST owners and operators over an extended time will pay a
relatively small part for financial responsibility.
The indirect effect of the financial responsibility regulations, however, is to
require some UST owners and operators to incur regulatory costs earlier, rather than
delaying them until 1998 when all technical standards must be met. Nevertheless,
tnere may be economic benefits for UST owners who comply with the technical
standards sooner as an indirect effect of complying with financial responsibility: (1) by
having financial responsibility in place sooner, they can avoid being faced with cleanup
or liability costs if they have a release; and (2) by upgrading sooner, UST owners may
avoid having a release (and its associated cleanup and liability costs) that could
otherwise have occurred.
IV-1
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EXHIBIT IV-1
FINANCIAL RESPONSIBILITY COSTS ARE A
SMALL PORTION OF TOTAL COMPLIANCE COSTS
Upgrade & Replacement
24.0%
Leak Detection
4.0% Financial
Responsibility
Corrective Action
63.0%
Breakdown of Compliance Costs
Financial Responsibility
Breakdown of total nationwide costs.
Breakdown for any individual owner/operator
could vary widely from that shown here.
::j Technical Requirements
IV-2
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Regulatory Cost Impacts Are Greatest for Smaller UST Owners
The 1987 and 1988 Regulatory Impact Analyses predicted that many smaller
UST owners would have difficulty complying with the proposed financial responsibility
and technical standards rules. These Regulatory Impact Analyses noted that smaller
establishments would suffer the most, and that the potential for many of them to close
existed. Large and medium size firms would be, it was projected, generally much less
affected. Recent analyses confirm these predictions, although the presence of State
assurance and assistance programs has reduced the severity of the problem.
Summary information from recent analyses is discussed in the following pages. See
Appendix C for the complete analyses.
It should be noted, however, that the regulated community has been in a
process of restructuring in recent years. The number of retail petroleum marketers
has shown a continuing decline that predates the UST regulations. For example, the
American Petroleum Institute noted in late 1989 that half of all traditional gas stations
had closed (or been converted to convenience stores) in the preceding ten years.1
Because the analyses that form this report have not accounted for industry trends,
such as this one, this report may somewhat exaggerate the impact of UST compliance
costs as a factor in creating financial distress for UST owners.
Many Small UST Owners Face Serious Financial Difficulties
Even though the State funds allow many UST owners to comply with the
financial responsibility regulations, they do not provide complete relief from all potential
impacts of the technical and financial responsibility regulations. Exhibit IV-2 shows the
percentage of each category of UST owner that is expected to experience severe
financial distress2 or business failure3 over the next ten years, assuming that all
State funds that either have been approved by EPA or are being reviewed by EPA are
in place and operational. Under this assumption, about 64 percent of small retail
motor fuet firms, 40 percent of single station owners, and 66 percent of small
government entities will experience at least temporary financial hardship (i.e., severe
financial distress). Furthermore, about 30 percent of single service stations and 25
percent of small retail motor fuel firms are expected to close or file for bankruptcy.
The results shown represent impacts from several causes: inability of owners and
operators in States without funds to demonstrate financial responsibility, financial
difficulties faced by owners and operators in meeting the co-payment and deductible
1 American Petroleum Institute, Service Station Management. August 1989, p. 11.
2 Basically, severe financial distress is a situation in which, after imposition of regulatory costs, the
affected business is losing money. See Appendix C for a discussion of this term and its use in
various analyses.
3 Business failure is a situation in which a business is forced to close or enter bankruptcy
Because it is unable to meet its debts (including debts associated with regulatory expenditures).
IV-3
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requirements of State funds, and economic hardship associated with paying technical
compliance costs not covered by State funds. The submission of additional State
assurance funds would reduce the number of firms experiencing either severe financial
distress or business failure.
State Assurance Funds Can Reduce Business Failures
Currently, State assurance funds have either no deductible amount (they pay
from the first dollar) or deductibles that range from $5,000 to $150,000. Exhibit IV-3
shows the percentage of each category of UST owner that would experience severe
financial distress or business failure if ajl States had funds to pay for corrective actions
above a $10,000 deductible. As the exhibit reveals, potential business failures are
greatly reduced when such State funds are readily available. Potential business
failures drop from 31 percent to 14 percent of single service stations and from 24
percent to 8 percent for small service stations.
State Financial Assistance Programs Can Reduce Severe Financial Distress
The potential for owners and operators of single and small service stations to
experience severe financial distress due to the requirements of the UST program
"emains great, despite the development of State funds. As Exhibit IV-4 reveals, severe
"inancial distress caused by the cost of meeting the technical standards requirements
will affect most small retail motor fuel firms at about the same level even if all States
had assurance funds with $10,000 deductibles. The small change in number of firms
with severe financial distress is due to the large total program cost relative to the
iinancial condition of these sectors of the regulated community. Thus, even if a State
fund pays for a corrective action, the costs that these firms will incur to pay for other
technical standards requirements (such as leak detection and tank replacement or
upgrades) still are substantial relative to their sales, profits, and assets. While State
assurance funds achieve the environmental objective of fostering cleanups and the
economic objective of avoiding more business failures, they do not significantly reduce
the economic strains imposed by compliance with the technical standards.
Thus, other mechanisms are necessary to provide financial assistance to UST
cwners and operators to install leak detection, to upgrade or replace their tanks, and
to remove existing contamination from their sites. Several States have developed
State financial assistance programs that help UST owners and operators meet
compliance costs associated with the technical standards requirements. Chapter V
presents a full discussion of State financial assistance programs.
Business Failures in Rural Areas Pose Special Concerns
Concern has been expressed in a number of quarters that the UST regulations
will create more serious problems in rural areas than in urban areas. As a result, EPA
has studied the impact on rural UST facilities and a summary analysis appears below
(see also Appendix D).
IV-5
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A somewhat disproportionate share of USTs are located in rural areas. Rural
areas contain 29 percent of service stations but only 24 percent of U.S. households.
As a result, sales and profits for rural stations may be less than for urban stations.
Also, fewer rural stations are associated with large corporations; thus, they could lack
access to the capital needed to upgrade or replace USTs, and most will be unable to
self-insure. Because the UST regulations impose costs that are more or less fixed on
a per-UST basis, compliance costs could be more burdensome for the smaller rural
facilities.
Disproportionate impacts of the regulations on rural gas stations might grow
more common as the regulations take effect. EPA's analysis of the impacts of
regulatory costs showed that 40 percent of single service stations will experience
severe financial distress, and 25 percent will fail over the next ten years, assuming that
all State funds that either have been approved by EPA or are being reviewed by EPA
are in place and operational. Among service stations that are smaller than average,
as most rural stations are, the impacts are expected to be more than twice as great:
86 percent could experience severe financial distress, and 53 percent could fail. As
with other sectors of the UST population, the spread of State assurance funds with
low deductibles would significantly cut business failures, but would not relieve severe
financial distress.
EPA has reviewed data on UST closures and installations in five western States
with comparatively large rural populations: Colorado, Montana, North Dakota, South
Dakota, and Wyoming. Evidence from these western States does not at this time
show significant differences in net closure rates between rural and urban areas.
As one would expect, the density of gas stations is much lower in rural areas
(about one station for every 86 square miles in rural areas, as opposed to one for
every 3 square miles in urban areas). The low density of gas stations could present
two types of problems for rural consumers. First, even the nearest station may often
be miles away. Second, the lack of nearby competition could allow some isolated
stations to raise fuel prices. Both of these problems for consumers - limited
availability of service stations and lack of competition - would worsen if significant
numbers of rural stations disappeared. Thus, the impact of closures in rural areas
may be greater than the impact of urban closures even if the rate at which USTs close
is similar in urban and rural areas. In rural areas of Wyoming, for example, almost a
quarter of the towns with only one or two service stations have already lost a third or
more of their service station USTs. These closures threaten the availability of fuel and
the competition of marketers in small communities much more than would the closure
of a few stations in a large city.
IV-8
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CHAPTER V
EASING FINANCIAL PROBLEMS FACED BY LIST OWNERS
This chapter focuses on options for helping UST owners and operators meet
compliance costs. This chapter highlights five main points:
• Statutory and regulatory changes that could provide economic relief
have significant limitations.
• The Federal LUST Trust Fund, as currently constituted, cannot be used
to address the overall compliance cost problems of individual UST
owners and operators.
• Current State assistance programs use a variety of financial mechanisms
tailored to their States' needs and the characteristics of their UST
populations.
No single financial assistance mechanism can prove appropriate for
application in all States. States need to consider options and choose the
most appropriate mechanism suitable to their unique State-specific
characteristics.
• Each State is ideally positioned to target its most vulnerable UST owners
and operators and to develop appropriate financial assistance programs.
The options for easing the financial strains caused by the UST regulations fall
into several categories: statutory relief, regulatory relief, potential use of the LUST
Trust Fund, and developing State financial assistance programs. These options are
discussed below.
Limits of Statutory and Regulatory Relief
Statutory relief would include options such as reducing the scope and coverage
Df the technical and financial responsibility requirements or eliminating financial
;-esponsibility requirements for existing tanks. Regulatory relief would include options
:5uch as extending compliance deadlines, issuing interpretive rulings, deferring financial
responsibility requirements, or changing the scope of the regulations to exempt firms
with the smallest assets from some or all requirements. Providing statutory and
regulatory relief may have the advantage of finding long-term solutions to the problem,
although this course of action also has some major drawbacks.
One change that has been suggested in public comments on the financial
responsibility regulations is to reduce the minimum amount of the financial
responsibility requirements for small petroleum marketers from the current statutory
V-1
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minimum of $1 million to a lesser amount. Although this suggestion appears to have
some appeal, EPA believes that the effect of such a change on the cost or availability
of insurance would be minimal. EPA has learned from the insurance industry that
insurers will set premiums based on the average or expected claim. With current
claims averaging $100,000 per claim, therefore, an insurance company will set its
premium with the expectation of paying $100,000 per claim. The price differential for
premiums between a $100,000 LIST pollution liability policy and a $1 million policy is
small (less than 10 percent).
Promulgating major new requirements could take two to three years, which may
be too late to help the smallest businesses. Minor changes, such as extending
compliance deadlines, can be made more quickly, and will temporarily delay the
impact of meeting compliance costs on UST owners and operators.
Most States have developed UST programs that are broader in scope and
more stringent than the Federal requirements. UST owners and operators in those
States are expected to comply with all applicable State and Federal regulations. It
should be noted that modifying Federal standards would not assist UST owners in
those States, unless States can be persuaded to lower their requirements.
LUST Trust Fund
Through a 0.1 cent per gallon gasoline tax, $500 million has been collected to
fund the Federal Leaking Underground Storage Tank (LUST) Trust Fund. In 1990, the
fund was reauthorized for another 5 years at the same rate. States use the LUST
Trust Fund primarily to oversee responsible-party cleanups and to cover the costs of
cleanup when the party responsible for a release is either bankrupt or cannot be
located (as in cases of abandoned USTs). The implementing agency must make
efforts to recover these costs, though no more than a moderate degree of success is
anticipated for these efforts. EPA currently estimates that about 2 percent of the
450,000 potential releases will be abandoned or will otherwise require Federal and
State funds to clean up. The balance of the LUST Trust Fund will be required to fund
the oversight of cleanups. The Fund does not provide financial assistance for leak
detection, tank upgrades, site assessments, or any expense other than cleanups.
Therefore, the Fund cannot be used to address the compliance cost problems of
individual UST owners and operators.
Five Financial Mechanisms for State Assistance Programs
Because regulatory and statutory relief is limited, many States have explored
the option of providing financial assistance to UST owners and operators. Many have
already established several types of loan, grant, and other financial assistance
programs to help UST owners and operators conduct corrective actions, upgrade
their tanks, or pay for other regulatory compliance costs, such as closure costs.
Exhibit V-1 provides a brief summary of existing State assistance programs. Although
programs in different States are structured differently, they all aim at reducing the
costs of leak detection, UST upgrading or replacement, closure, or corrective action to
V-2
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owners and operators, making owners and operators more likely to undertake the
desired activities.
The following pages discuss five financial mechanisms that States can use to
provide financial assistance to UST owners and operators: direct loans, loan
guarantees, interest subsidies, grants, and tax incentives. A brief description of each
financial mechanism is provided along with its advantages and disadvantages,
incentive effects, the parties that are most likely to participate, and estimates of the
cost for using the mechanism.1 Exhibit V-2 summarizes the characteristics of the
different mechanisms discussed in this section.
EXHIBIT V-2
CHARACTERISTICS OF FINANCIAL ASSISTANCE MECHANISMS
Currently used by
State UST programs
Provides direct
access to capital
Level of
administrative
difficulty
Level of private
sector involvement
Relative start-up
costs
Ability to aid
weakest firms
Direct
Loans
•
HIGH
LOW
HIGH
HIGH
Loan
Guarantees
•
LOW
HIGH
LOW
LOW
Interest
Subsidies
•
LOW
HIGH
LOW
LOW
Grants
*
LOW
LOW
HIGH
HIGH
Tax
Incentives
•
LOW
LOW
LOW
LOW
Direct Loans
With direct loans, States issue loans to eligible tank owners or operators. The
funds come from a revolving loan fund. States generally review the credit risk of the
tank owner or operator before providing the loan. Alternatively, some States contract
with a private lender or other institution to conduct credit analyses and otherwise
administer the program. Through a direct loan program, States are able to provide
loans that commercial lenders generally decline (e.g., too small or financially risky
owners or operators, or in small amounts). State loans are provided at the market
1 A study prepared for EPA by the Northeast-Midwest Institute to examine financial assistance
programs for UST owners and operators is contained in Appendix E.
V-4
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interest rate for private borrowers, at the same interest rate at which States can
borrow money (usually below the prevailing market interest rates for private
borrowers), at a lower interest rate, or without interest. In addition, owners and
operators are often allowed to repay the loans over a longer time period than would
normally be by private lenders.
Direct State loans have several advantages and disadvantages:
• This type of program would address owners' and operators' lack of
access to long-term credit due to one of several reasons, including small
loan amount, long repayment period, small size of the firm, or inadequate
credit record.
• Bypassing the participation of private lending institutions leaves lending
decisions solely to the State, allowing for greater administrative flexibility
and increasing the likelihood that targeted owners and operators will
obtain assistance.
Administrative costs for a direct loan program are likely to be high if a
State conducts credit analyses before issuing loans. Although a State
could contract with a private firm, such as a bank, to conduct credit
analyses, banks are presently reluctant to become involved in State loan
programs because the programs are too small or because the banks
fear potential liabilities.
• Because State loan programs provide loans to owners and operators
who are unable to get loans from private lenders, loan programs may
face a high default rate and, therefore, be costly to run.
The capital needed for a loan program will depend on the number of firms to
be given assistance, the average size of the loans, the time frame of the program, and
the repayment terms. For example, a State may decide to help any retail petroleum
facility that would be forced into severe financial distress by the cost of tank upgrading
requirements, which are estimated to average about $10,000 per tank. EPA's analysis
shows that about four percent of all USTs fall into this category. Thus, the State might
consider offering loans of about $10,000 each to about four percent of its total LIST
population. In a State with 30,000 USTs. four percent would equal 1,200; at $10,000
per UST, the total amount loaned would be $12,000,000.
The $12,000,000 total would not necessarily be needed immediately. The
program may be spread over a number of years, lowering the initial capitalization
requirement. For example, if the program is spread over a five year period, only
about $2,400,000 would be needed for the first year. The requirement for new capital
would decline in later years as the recipients of the first loans began to repay them. In
a simple program in which recipients repaid a fifth of any loan annually for five years,
the new capital required for the loan program would decline by a fifth in each
V-5
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successive year. The need for new capital would be greater for longer term loans or if
there were a significant number of defaults.
Loan Guarantees
A loan guarantee is a commitment to a lender by a guarantor that if a borrower
fails to repay a loan, then the guarantor will repay a percentage (up to 100 percent) of
the loan to the lender. A loan guarantee reduces the risk of default faced by a lender.
A loan guarantee program would make commercial lenders more likely to offer loans
to small and other financially risky tank owners or operators. States have to establish
a reserve fund to pay for loans in the event that an owner or operator defaults.
Although the reserve fund size should be only a fraction of the total amount of loans
guaranteed under the program, it should be a conservative percentage of total loans
outstanding, perhaps 10 to 20 percent. The major advantages and disadvantages of
loan guarantees are as follows:
• This type of program could be targeted to firms encountering financing
barriers.
• Because the participating bank risks losing a portion of the total loan
amount, it may carefully assess the probability of the owner or operator
defaulting. States can rely to a large extent on the credit analysis skills
of private lenders, thus reducing administrative costs.
• A loan guarantee program may also lengthen the loan repayment terms
normally provided by commercial lenders. Typically, commercial lenders
do not extend a non-real estate loan beyond five years. With a
guarantee, lenders may be willing to extend the term of loans beyond
five years.
• Unlike a direct loan program, States may limit their financial risk or
exposure by reducing the percentage of the loan that is guaranteed. A
75 percent loan guarantee, for example, reduces potential liabilities by 25
percent.
• Because commercial lenders accept some of the risk, they may be more
conservative in granting loans than in a direct loan program; therefore,
those who need loans most may still be unable to obtain them.
• Although commercial lenders would be likely to extend loans backed by
a 90 percent guarantee, lender participation would decline as the
percentage guaranteed is reduced.
The capita! required for a loan guarantee program will depend not only on the
number and size of the loans but on the fraction of each loan that is guaranteed and
the anticipated default rate. The numerical example of a direct loan program can
serve as a point of departure for an example of a guarantee program. If 240 loans of
V-6
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$10,000 each are to be made in the first year of a guarantee program, the State need
have only a fraction of the full $2,400,000 to be loaned. For example, suppose the
program guarantees 90 percent of the value of the loans, and a 20 percent reserve
fund is considered necessary (that is, the State expects defaults to be as high as 20
percent of the amount lent). Under these assumptions, to cover the first year of the
program the State would have to have available a total of $432,000: 20 percent of 90
percent of $2,400,000. In later years, if defaults turn out to be lower than anticipated,
the reserve fund could be reduced in size.
Interest Subsidies
An interest subsidy entails payments by the States that reduce the cost of
borrowing through either commercial loans or corporate bonds. Interest subsidies
could be structured in several ways, including the foilowing:
• OPTIONAL - The State pays a fixed number of points of the interest rate
being charged to the owner or operator (e.g., the State pays only two
percent interest on the loan, and the owner or operator pays the
remainder, regardless of the terms of the loan).
• OPTION 2 - The State pays any interest payments in excess of a
specified interest rate (e.g., the owner or operator pays five percent and
the State pays the remainder).
• QPTION_3 - The State pays a fixed proportion of the total interest
payments (e.g., 25 percent of ail interest payments) and the owner or
operator pays the remainder.
Each of these options allocates the impact of changes in interest rates differently
between owners and operators and the State. Under Option 1, a State will know in
advance what its costs will be; yet, as market rates change, the actual interest rate
laced by tank owners and operators may fluctuate. Under the second option, a State
will guarantee that the rate charged to owners and operators remains unchanged but
the State runs the risk of significantly increased costs if market rates rise substantially.
Under the third option, both the State and the borrower bear some risk from
fluctuations in the market rate.
The major advantages and disadvantages of an interest subsidy program are
as follows:
• An interest subsidy program would be easier to administer than a loan
program because it could rely on private lenders to conduct credit
analyses and to make loans.
• If a significant problem for UST owners and operators is the cost and not
the availability of loans, compliance with State and Federal regulations
could improve.
V-7
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• Private lending institutions must be willing to provide loans for this
program to be effective. If lenders are unwilling to make loans
regardless of the interest rate, tank owners and operators will not be
assisted through an interest subsidy program.
• If the interest subsidy offered is not high enough, it will not provide an
effective incentive for owners and operators to participate in the
program.
An interest subsidy program that provides a two percentage point subsidy for a
total of $12,000,000 in loans will cost less than $240,000 (i.e., two percent of
$12,000,000} per year, depending on the number of years over which the loans are
made and repaid. For instance, if $2,400,000 in five-year loans are made each year
for five years, the total outstanding loan amount will reach a maximum of $7,200,000 in
the fifth year (assuming for simplicity that the loans are repaid in five equal payments).
In that year, the two percentage point subsidy will cost two percent of $7,200,000 or
$144,000. In subsequent years the cost would decline as more and more of the
outstanding balances of the loans are repaid. Costs for other types of subsidy
programs will depend on their structure and on the behavior of market interest rates.
Grants
Grants would involve direct payments from a State to tank owners and
operators or other tank management professionals. Grants are more appropriate for
low, carefully targeted costs (e.g., tank tightness tests, release detection, cathodic
protection, and spill/overfill prevention) where potential benefits are high. Rather than
fully fund these activities, States may wish to offer partial funding in the form of
matching grants. The administrative ease of a grant program would depend on the
program goals and the length of the application process. If priority sites could be
chosen without extensive information, the administrative burden is likely to be light.
The need for due process protection (e.g., ensuring fairness in grant awards) would
increase the costs of administering a grant program. The major advantages and
disadvantages of a grant program are as follows:
• Owners and operators are selected to receive assistance without regard
to credit worthiness as judged by commercial lenders. A grant program
thus allows broad flexibility in targeting recipients (for example, gasoline
stations in rural, isolated areas).
Because the total cost of a grant program is under the direct control of a
State, the size of the grant can be varied based on evolving program
priorities.
• A grant program would be more costly than either a direct loan or loan
guarantee program because grants are not repaid.
V-8
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• Fewer tank owners or operators could be assisted with a fund of a finite
size.
The costs and capita! needs of a grant program can be determined either by
the need to be addressed or by the funding available. A State choosing to provide
grants for upgrading the USTs of each of the service stations in severe financial
distress could spend (with the same assumptions used in the other examples) a total
of $12,000,000. This expenditure could be spread over as many years as desired or
necessary: over five years, the annual cost would be $2,400,000. This cost would not
decline over the years, as it would in a loan program, due to the nature of grants. The
costs of the program could be cut by requiring matching payments; with a 50 percent
contribution from the recipients, the annual cost of five year program could be
reduced to $1,200,000.
Tax Incentives
Two primary types of State tax incentives - tax credits and tax deductions -
could be used to provide financial incentives for installing leak detection, upgrading or
replacing tanks, or conducting corrective actions. Because regulatory compliance
costs and corrective action costs are ordinary business expenses that are currently
deductible, tax incentives must increase deduction amounts above current limits under
State tax laws.
A tax credit usually takes the form of a direct reduction in the tax liability of the
firm. Tax credits are generally applied to income tax liabilities. A tax deduction
reduces a firm's taxable income by an amount equal to the expense that is being
deducted. The actual benefit to the firm depends on its tax rate and the decrease in
income tax liability associated with the deduction. Because a deduction is subtracted
from income before taxes, while a tax credit is subtracted directly from the tax liability
of a firm, a deduction provides less of an incentive than a tax credit of an equal
amount.
Tax incentives could be structured in several ways. One is to allow accelerated
depreciation of UST improvement expenses. Another is to give tax credits for some
portion of cleanup or closure costs. Providing tax incentives has the following
advantages and disadvantages:
• Because tax incentives reduce the after-tax cost of leak detection, tank
upgrading, replacement, closure, and corrective action, more owners
and operators will choose to comply voluntarily with State and Federal
regulations.
Tax incentive programs are easy to administer because the owner or
operator takes responsibility for conducting the upgrade, closure, or
corrective action, and then reflects the costs along with deductions or
credits on his/her tax forms.
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• Tax deductions might be effective if they allow acceleration of the rate at
which the costs of a new tank can be depreciated and deducted from
taxable income.
• Tax incentives do not assist owners and operators who need money up-
front to begin an upgrade, closure, or corrective action. Thus the
smallest marginal owners may not be assisted.
• It would be difficult to control the costs of a tax incentive program
because it is self-implementing by tank owners and operators with little
government involvement.
• Income tax revenue would decrease.
• It is difficult to target recipients of this incentive because of limited State
involvement beyond the statutory design.
As an example of the costs of a tax abatement program, a jurisdiction might
decide to offer a tax rebate of $2,000 per year for ten years for single gas station firms
in severe distress if they upgrade their USTs. Assuming as in previous examples that
a total of 1,200 firms would enter the program, the total cost of the program would be
$2,400,000 per year for ten years.
Types of Costs Covered
In addition to considering the types of financial assistance programs that are
best suited to their needs, States must also consider the types of costs that the
program will cover based on the goals of the State. A financial assistance program
can emphasize preventive activities by covering tank upgrades and replacements,
closures, or other regulatory compliance costs such as the costs of leak detection
equipment. Alternatively, a financial assistance program could emphasize corrective
activities by assisting tank owners and operators in cleaning up existing releases.
Covering costs of UST upgrade and replacement involves lower costs and risks
than covering the costs of corrective action or closure (required closure activities
include a site assessment aimed at detecting any releases and contamination that may
have been undetected when the tank was in service). Because tank upgrade,
replacement, and closure costs are lower than corrective action costs, a fund of a
given size could assist more owners and operators if it covered only upgrades,
replacements, and closures than if it covered corrective actions.
In addition, the risks associated with a loan program covering corrective action
are different from those covering UST upgrade and replacement. Loans for tank
upgrade and replacement usually involve investment in tangible assets (for example,
installation of a new tank system) that may then serve to provide both collateral for the
loan and the cash flow the borrower needs for loan repayment. Loans for corrective
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action, in contrast, may result in a lender assuming liability for a contaminated site in
the event that an owner or operator defaults.
State Programs Can Effectively Target Vulnerable Groups
The types of businesses that own USTs are diverse, ranging from multi-billion
dollar corporations to rural "Mom & Pop" general stores that sell gasoline. The kinds
of problems that these businesses face as they try to comply with the UST regulations
are varied and complex. Therefore, there may not be one solution that will address
the different needs of these diverse tank owners.
Several States have acknowledged the multi-faceted nature of this problem by
creating State financial assistance programs that have defined State-specific needs
and identified who will benefit from these programs. Each State financial assistance
program is structured differently (for example, direct loan program, loan guarantee
program, interest subsidy program) and covers different types of costs (such as tank
closure, tank replacement, or tank upgrading costs). Therefore, these State-specific
programs indicate that individual States are best suited to looking at their particular
concerns and developing their own solutions.
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CHAPTER VI
SUMMARY OF FINDINGS AND RECOMMENDATIONS
This report summarizes the effects of the Underground Storage Tank program,
with a specific emphasis on the impacts of the financial responsibility requirements
imposed by Subtitle 1. As directed by the Senate Appropriations Committee, EPA has
specifically addressed three issues: (1) compliance with the financial responsibility
requirements, (2) impact on various industry sectors of meeting compliance costs
resulting from the Federal UST technical standards and financial responsibility
requirements, and (3) methods being used to reduce the impacts imposed by the
UST program on tank owners and operators. Based on the analyses contained in this
report, EPA has developed legislative and regulatory recommendations for minimizing
the burden imposed on the regulated community in complying with Subtitle I.
Financial Responsibility Compliance
Industry surveys have found that more than 95 percent of UST
owners and operators currently required to be in compliance with
the financial responsibility requirements are estimated to be in
compliance. This high rate of compliance suggests that, at present, the
financial responsibility regulations are not imposing excessive hardships
on owners and operators.
• Prospects for compliance with the financial responsibility
requirements are improving, primarily because of State assurance
funds and State financial assistance programs. Industry surveys have
found that up to 90 percent of owners and operators able to
demonstrate financial responsibility rely at least in part on State financial
assurance funds. At present, UST owners in 36 States may demonstrate
financial responsibility using State funds, and an additional 7 States are
in the process of developing funds for submission to EPA.
Costs and Impacts of UST Program
Compliance with the EPA technical standards and meeting State
corrective action requirements makes far greater demands on the
financial resources of UST owners than does compliance with
financial responsibility. EPA estimates that upgrading facilities to meet
the new tank standards may cost $30,000 to $100,000, and that cleaning
up an UST release may cost an additional $100,000 or more. Where
available, premiums for commercial UST liability insurance average
around $3,900 per facility per year; State funds may charge tank fees of
$100 to $200 per year.
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Financial responsibility requirements accelerate compliance with the
technical standards so that these costs are imposed sooner. The
financial responsibility regulations often appear to cause economic
hardship because many insurers require that facilities be upgraded and
past contamination cleaned up before they will offer insurance.
Eliminating the financial responsibility requirements would not, ultimately,
offer significant relief to the owners and operators. In the absence of the
financial responsibility requirements, owners and operators would face
the same costs, but on a delayed schedule.
Although available data suggest that rural service stations are not
currently closing at a disproportionately higher rate than urban
stations, the eventual impact of closures on consumers may be
higher in rural areas because of the sparse distribution of service
stations and the lack of competition. Concerns have been expressed
that the UST regulations are leading to a reduced availability of fuel in
rural areas. EPA's analysis of the available data suggest that the UST
regulations have not yet lead to disproportionately high closure rates of
service stations in rural areas. EPA recognizes, however, that the
eventual impact of closures may be higher in rural areas: rural stations
may have less ability to meet the regulatory requirements as they are
phased in, and consumers in rural areas have fewer alternative sources
of supply, so that closure of rural stations imposes a greater potential
burden.
Alternatives for Reducing Impacts
State financial assurance funds can help keep owners and operators
in business by providing money for cleanup activities. Forty-three
States have developed State assurance funds. States have been very
active in developing funds to allow owners and operators to demonstrate
financial responsibility. Most State funds have relatively liberal criteria for
covering releases, and thus provide money for owners and operators to
clean up releases that are not generally covered by commercial UST
insurance and that owners and operators do not have the resources to
pay for. Therefore, State assurance funds allow more small businesses
to remain in business. Also, State assurance funds significantly reduce
the economic hardship of complying with the financial responsibility
requirements.
State financial assistance programs (e.g., direct loan programs, loan
guarantee programs, grants) are alleviating some of the economic
burden imposed by the technical standards on small UST owners.
Many States are adopting programs to improve the ability of UST owners
(and especially smaller UST owner) to meet the costs of complying with
the UST regulations. Financial assistance programs vary substantially
from State to State, reflecting different State priorities about the types of
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owners and operators and types of compliance costs that are of most
concern.
Recommendations
The Senate Appropriations Committee asked for specific recommendations
regarding legislative and regulatory actions that could be taken to reduce the financial
and economic impacts of the UST regulations. After considering the intent of the LIST
program, the way it is being implemented by the States, and the progress that owners
and operators have had to date in meeting the requirements, EPA does not believe
further changes to Federal legislation are necessary, other than the exemption of UST-
contaminated soils and debris from the hazardous waste management requirements.
The current impediments to compliance do not result from overly stringent Federal
statutes, but rather from the costs to recover from bad environmental practices
adopted in the past 40 years.
Although EPA does not believe that significant statutory changes are necessary,
EPA recognizes that regulatory and programmatic initiatives, possible within the
existing authority, are necessary to minimize the impacts of the UST program. As
discussed in this report, EPA believes that most of the financial hardships resulting
from the UST program arise from three sources: simple inability of some owners and
operators to meet the UST regulatory requirements within the current regulatory time
frame, excessively stringent interpretation of the Federal standards by some States,
and unnecessary caution on the part of potential lenders. To address the problems
facing UST owners and operators, EPA recommends the following actions:
Statutory Changes
• Congress should amend the Resource Conservation and Recovery
Act to provide a permanent exemption from hazardous waste
management requirements for UST-contaminated media and debris.
The single largest cost component of the UST program is the cost of
cleaning up releases from USTs. At present, UST-contaminated soils
and debris have a regulatory deferral from the treatment standards under
Subtitle C of the RCRA. The deferral is limited and has been challenged
in court. Consequently, there is a great deal of uncertainty among State
regulators, landfill operators, and the regulated community regarding the
status of soil and debris from UST sites. That uncertainty has fed, in
many cases, to UST-deferred wastes being treated as hazardous waste,
resulting in higher costs for UST corrective actions. If this exemption is
lost, the increased cost to dispose of contaminated soils and media has
the potential to double'the average cost of corrective action at UST sites,
leading to potential increases in the cost of insurance, shortfalls in state
financial assurance funds, and continued reluctance by lenders to
provide money needed to upgrade facilities to meet the technical
standards.
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Regulatory and Programmatic Changes
* EPA should continue regulatory efforts to provide relief for the most
severely affected members of the regulated community. Because of
continuing concern about the ability of the least capable members of the
regulated community to comply, EPA has extended the final compliance
date for demonstrating the financial responsibility requirements to
December 31, 1993. This deadline applies to petroleum marketers
owning multiple facilities (with fewer than 13 USTs) or only a single facility
(with up to 100 USTs), and non-marketers with net worth of less than
$20 million. The extension will allow additional time for States to develop
(1) financial assurance programs so that tank owners and operators can
demonstrate financial responsibility and (2) financial assistance programs
so that tank owners and operators can upgrade their facilities to meet
underwriting requirements imposed by commercial insurance companies.
EPA recognizes, however, that some owners and operators may
continue to be unable to demonstrate financial responsibility.
Consequently EPA has initiated additional regulatory efforts to identify
Federal criteria that States may use to offer additional extensions of the
compliance deadline to specific groups of owners and operators. The
analysis is focusing on USTs located in remote or rural areas and USTs
owned by local governments.
* EPA should continue to support State efforts to develop programs to
help the regulated community. In addition to regulatory relief for some
owners and operators, EPA recommends continuing its support for
States in their efforts to provide relief to owners and operators. States
are in the best position to determine which members of the regulated
community are most in need of assistance, and to balance the
sometimes conflicting public concerns of aggressively protecting the
environment and fostering business development.
EPA should emphasize the flexibility existing in its current
regulations with respect to controlling corrective action costs. The
Federal UST regulations establish a process that allows States to set
cleanup standards on a site-by-site basis and to implement low-cost,
innovative cleanup strategies. Many States, however, have adopted
policies and procedures that are less flexible and more complex than
required by federal law or regulations, significantly increasing the costs
of UST corrective actions at some sites. For example, many States
require costly site assessment plans that can be eliminated, specific
technologies that are outdated or ineffective, or extensive cleanups at
sites that pose minimal threats to human health or the environment. EPA
has initiated the development of a policy directive that will clarify the
flexibility that already exists in the Federal corrective action regulations
and that will promote the use of cost-cutting opportunities.
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In addition, the Agency will continue its use of EPA-funded projects to
help individual States and local programs to "streamline" their cleanup
procedures. These efforts will cut costs and red tape while speeding up
necessary cleanup efforts.
* EPA should clarify the liability of lenders to improve the availability
of funds for financing UST facilities. Concerns about the potential
liabilities associated with lending to UST facilities have been cited as a
major reason that owners and operators of UST facilities have been
unable to obtain funds to upgrade facilities. EPA has initiated regulatory
efforts to provide additional clarification about the circumstances that
would lead to lender liability for UST-related cleanup expenses. EPA
anticipates that the clarification will reduce lender uncertainty and
increase the availability of capital to UST owners and operators.
The recommended approach will promote State efforts to provide financial
assistance and financial assurance to the most deserving members of the regulated
community, reduce barriers to more efficient, less costly cleanups, and increase the
availability of capital for UST owners and operators to upgrade their facilities. The
recommended statutory change will ensure that costs of cleaning up UST
contamination are not unnecessarily high. Finally, EPA is developing Federal criteria
to identify specific groups of UST owners and operators potentially needing additional
time to be able to demonstrate financial responsibility. These criteria will provide
States with the time to grant relief to the members of the regulated community that are
most in need of financial assistance, such as small local governments using USTs to
provide emergency services and small retail marketers serving isolated communities.
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APPENDIX A
STATUS OF STATE FINANCIAL ASSISTANCE PROGRAMS
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APPENDIX A
STATUS OF STATE FINANCIAL ASSISTANCE PROGRAMS
At this time, 17 states have developed or proposed programs to provide
financial assistance that can help owners and operators of USTs to comply with the
technical standards regulations, which include tank installation, upgrading, and
replacement. This Appendix provides brief descriptions of existing state financial
assistance programs.
• Alaska has two active financial assistance programs for UST owners and
operators. One program provides a combination of grants and loans to
cover a maximum of $1 million in cleanup costs per site and per
applicant. Grants are available to compensate ninety percent of future
estimated cleanup costs or costs already incurred. The remaining 10
percent of costs are covered by a state loan not to exceed $25,000. The
other program provides grants to reimburse 60 percent of tank upgrade
costs up to $60,000 per site and $200,000 per applicant. This program
will provide reimbursement for all or a portion of costs to remove a tank,
replace a tank, and upgrade a tank system to meet federal and state
requirements.
To be eligible for coverage under the program, an applicant must have
registered the tank system registration includes payment of a fee.
Another eligibility requirement is compliance with federal and State
regulations, although the applicant can use the financial assistance
program to come into compliance. The program is financed through
state legislative appropriations and is administered by the Alaska
Department of Environmental Conservation, Division of Spill Prevention
and Response.
• Arizona is currently in the process of developing a loan program. The
Arizona UST Act created a loan account where a portion of the fee
collected from LIST owners and operators is deposited. The account
may be used to make loans between $5,000 and $100,000 for any
activity necessary to meet state performance standards, including tank
upgrade and replacement. Loans may also be used to pay for
corrective action required to clean up contamination discovered while
upgrading or replacing a tank. In addition, loans can be made for the
costs of corrective action below the lower coverage limit of the state
assurance fund.
Although rules outlining eligibility criteria are not yet complete, the Act
requires that an owner or operator must have been rejected by at least
one lending institution to be eligible to receive a state loan. The Act also
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requires that loans be issued only if it is possible to do so on a
commercially sound basis with provisions for adequate security of loan
repayment.
California offers a direct loan for the replacement of existing tanks.
Loans are available for $30,000 to $50,000 per tank, up to a maximum of
$350,000 per applicant. The amount loaned may not exceed 90 percent
of costs necessary to achieve compliance. The loan program was
instituted to help small businesses comply with technical requirements.
The program is administered by the Department of Commerce and is
currently funded through a tax collected on wholesale sales of petroleum.
Idaho's guaranteed loan program is administered jointly by the Idaho
Department of Commerce {DOC} and the U.S. Small Business
Administration (SBA). Banks participating in this assistance program can
borrow DOC money at low interest rates (currently 4 percent) to make
loans to LIST owners and operators for UST improvements. SBA will
guarantee up to 90 percent or a maximum of $750,000 of eligible bank
loan amounts. Coverage is restricted to UST improvements to meet
federal and state requirements but a limited amount of coverage will be
provided for state approved cleanup of minor contamination.
UST operations must be a for-profit business, demonstrate ability to pay
back the loan from business earnings, and have insurance through the
State Insurance Fund to be eligible for this program. Applicants must
also pay SBA a service fee equal to 2 percent of the loan amount. Idaho
legislators are in the process of redefining procedures for State Treasury
money disbursements to this program although the program is active.
Iowa has a program to guarantee 90 percent of loans for upgrade or
corrective action costs. The program is available to independent owners
and operators that own at least one, but no more than twelve tanks at no
more than two sites. The owner or operator must have a net worth of
$400,000 or less and have been turned down for a loan by two financial
institutions.
Loans may be used to pay (1) tank improvement needed to meet federal
and state standards, or (2) corrective action costs. Loans may be used
to pay for leak detection equipment is an allowable cost. To receive a
loan, an owner or operator must complete an application including
current and historical financial information, cash flow projections, and a
copy of the contractor's cost estimate for the work to be done. In
addition, there is a $150 application fee. Although there is no maximum
loan amount, the program administrator may only approve applications
for loans under $75,000. For larger loans, approval by the UST Board is
required.
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Maine provides no- or low-interest direct loans for the replacement of
commercial USTs and grants for residential USTs. Commercial
businesses that have one facility, a net worth of less than $500,000, and
meet a debt service earning ratio cutoff, are eligible for the loans.
Homeowners earning less than $24,000 are eligible for grants. The
maximum loan amount is $200,000 per owner or operator. The initial
funding source for the program was a bond to make $500,000 available
for loans to retailers, $1 million to commercial owners, and $2 million to
homeowners with tanks. A supplemental funding source is a fee on
petroleum products brought into the State.
Maryland has a direct loan program to assist UST owners and operators
with upgrading and replacing tanks to comply with federal and state
requirements. Eligibility for the program is based on the several
characteristics: payment of State annual tank fees, applicant's financial
status, geographical location and community importance of tank site,
essentiality of the tanks for use by public services, and previous effort to
maintain compliance. The program provides loans for a maximum of
$50,000 for each upgrade and a maximum of $150,000 per applicant, per
year. The Maryland Department of the Environment supervises this
program.
Michigan offers an interest subsidy program to pay for replacing old
USTs with new USTs that meet the new tank standards. To be eligible
for the program, owners and operators must have registered their tanks,
be in compliance with all record-keeping and reporting requirements,
and not have defaulted on a previous loans subsidized through the
program. The amount of the interest subsidy paid by the state is the
difference between the rate at which the loan was obtained from a
private lender and the current interest rate on a 6-month Treasury Bill.
The program is funded by a petroleum products tax.
New Jersey has approved a direct loan program to pay for upgrading
USTs. The minimum loan amount is $5,000 and the maximum loan
amount is $100,000 per owner or operator. Only small businesses
(those with an independent owner or operator employing fewer than 100
people) are eligible for the loan. The program is funded by a one-time
appropriation by the State.
North Carolina's program provides direct loans to UST owners and
operators to cover the costs of tank upgrade and replacement to comply
with Federal and State requirements. Coverage will be available for a
maximum $100,000 of costs per site and a maximum $500,000 of costs
per applicant. Applicants will be charged a loan application fee at a
minimum $750 and equal to one percent of the loan amount, and a
yearly loan sen/icing fee at a minimum $650 and equal to one percent of
the loan amount. The program is financed by gas tax revenues.
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Owners and operators must have paid their State tank fees to qualify for
these loans. Major contamination on the applicant's site will disqualify
the applicant from this program. The State is in the process of drafting
the program rules. The program should be active by September, 1992.
Ohio offers a linked deposit interest subsidy program for replacement or
upgrading costs. The fund was established to help small businesses
without funds to improve their tank systems. To be eligible for the
programs owners or operators must own six or fewer tanks. The
program is funded through tank fees.
Oregon provides reimbursement grants for site assessment and tank
tightness testing costs as well as an 80 percent loan guarantee for minor
soil remediation, tank upgrade, and tank replacement. A subsidized
interest rate of 7.5 percent may be available to some loan guarantee
applicants. Grants are available for 50 percent of the costs and are not
to exceed $3,000 per facility. The State will guarantee 80 percent of the
loan, but the guaranteed amount is not to exceed $64,000. The program
has four funding sources: a transferral fee (not to exceed $10) for each
import into State or withdrawal of petroleum products from bulk storage
facilities, (2) a backup fee of 5 cents per quart of oil, (3) a fee of 25
cents per pound of grease, and (4) a $50 surcharge on each UST.
Pennsylvania has proposed a direct loan program for taking corrective
action. Owners and operators owning 20 or fewer tanks would be
eligible to receive funds. The proposed maximum loan amount is
$15,000, with an interest rate of 2 percent or less. The program would
be funded by a contribution of appropriations and 2 percent of collected
registration fees. A notice from the Department of Environmental
Regulation (DER) that the site is in need of corrective action must
accompany an application.
Rhode Island has a direct loan program for the replacement of leaking
USTs. All tank owners and operators in the State are eligible for the
program, but priority is given to applicants whose tanks pose the
greatest threat to public health. There is no minimum or maximum loan
amount as long as bids are reasonable. The program is funded by a
bond issue.
South Dakota has a 90 percent loan guarantee program. Money may be
used for tank replacement or other costs incurred to comply with UST
regulations, including clean-up costs below the deductible amount of the
state fund. The guarantee is offered under the Small Business
Administration Section 7(a) program; to be eligible, owners or operators
must qualify for an SBA loan guarantee. The purpose of this program is
to encourage or speed upgrades to reduce the demand on the state
fund. The program will have no more than $2 million of the money
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collected for the state fund. The State also has an interest rate subsidy
program for large businesses ineligible for SBA loans.
Vermont offers a direct loan program to pay for replacing USTs. The
loans are available to small retailers selling less than 20,000 gallons per
month and municipalities with populations under 2,500. Applicants
receive a priority ranking based on environmental considerations. The
maximum loan amount is $40,000 per location. The program is funded
with up to one half of the money collected for the state fund.
Washington's Pollution Liability Insurance Agency administers a grant
program to assist upgrade and corrective action at rural and remote
gasoline service stations. To qualify for grants service stations must
display several characteristics: location at least five miles from another
service station; twelve or fewer tanks on site; serious financial hardship;
registration with the State Department of Ecology; and regularly provide
services to government vehicles. A maximum grant of $150,000 per site
is available to qualified applicants. Up to $75,000 of the grant can be
used to pay for corrective action. Currently, there is $50 million in the
fund supporting this program, which was financed by taxes on wholesale
petroleum products. Preference is given to applicants who can provide
their own money to pay for part of the costs of either upgrade or
corrective action on their site.
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APPENDIX B
SUMMARY OF STATE FINANCIAL ASSURANCE FUND PROGRAMS
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APPENDIX B
SUMMARY OF STATE FINANCIAL ASSURANCE FUND PROGRAMS
This Appendix presents summary descriptions of state financial assurance fund
programs for 43 states. Of these 43 state fund programs, 29 fund programs have
EPA approval, and 7 fund programs have been submitted for EPA approval. Although
the District of Columbia, Massachusetts, Rhode Island, and Hawaii have written
legislation to develop financial assurance fund programs, descriptions of the status of
these states' programs are not included in this Appendix because they do not have
programs.
Alabama. Alabama's Trust Fund has been in effect since October 1,
1988, and has received EPA approval. Participation in the Trust Fund is
mandatory for all tank owners and operators. The Fund program
provides up to $1 million coverage for both cleanup costs and third party
liability costs. The tank owner or operator must be able to pay a $5,000
deductible on cleanup costs and a separate $5,000 deductible on third-
party liability costs before coverage will be provided through the Trust
Fund. The Trust Fund is financed by annual tank fees which will vary
from $10 to $150 depending on the Fund balance. The size of the Fund
is capped at $10 million.
• Alaska. Alaska's Fund became be effective September 5, 1991. The
Fund program will provide up to $1 million coverage for the costs of
cleanup only. Tank owners and operators are responsible for a co-
payment equal to 10 percent of the first $250,000 of cleanup costs. All
tank owners and operators must participate in the Fund program.
Participating tank owners and operators must pay an annual tank fee of
$50 per tank on fully upgraded tanks. If the tank is not fully upgraded,
then the annual fees are based on tank volume: $150 for tanks with
capacities less than 1,000 gallons, $300 for tanks with capacities of 1,000
to 5,000 gallons, and $500 for tanks with capacities greater than 5,000
gallons. Annual tanks fees are currently the sole source of monies for
the Fund. No fund size or limit has been established.
Arizona. Arizona's Fund has been in effect since July 1, 1990. Through
1991, the Fund provided coverage for cleanup costs up to $150,000 or
$250,000, depending on the amount of deductible. After 1991 the
coverage will be up to $135,000 or $225,000 depending on the amount
of deductible. The deductible on cleanup costs is $5,000 or $25,000. All
tanks owners and operators must participate in the Fund program. The
Fund is financed by an annual fee of $100 per tank and a fee of one
cent per gallon on regulated substances stored in tanks. No fund size
or limit has been established.
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Arkansas. The Arkansas Fund has been in effect since February 22,
1989, and has been approved by EPA. The Fund program provides $1
million coverage for cleanup costs and separate coverage of up to $1
million for third-party liability costs. There are separate $25,000
deductibles for cleanup and third-party liability costs. Participation in the
Fund program is mandatory for tank owners and operators. The Fund is
financed by two sources: annual fees of $35 per tank and, a fee of 0.2
cent per gallon on motor fuels, which is assessed only when the Fund
drops below $12 million. The Fund has a cap of $15 million.
California. California's Fund program has been in effect since January 1,
1988, and has been submitted for EPA approval. The Fund program
provides separate coverage of up to $1 million for cleanup costs and
third-party liability costs. The tank owner and operator must pay
separate deductibles of $10,000 on cleanup costs and third-party liability
costs. Participation in the Fund program is mandatory for all tank
owners and operators. A 0.6 cent per gallon fee levied on all petroleum
products generates revenues for the Fund. No fund size or limit has
been established.
Colorado. Colorado's Fund has been in effect since July 1, 1989, and
has been submitted to EPA for approval. The Fund program provides
up to a total of $1 million coverage for both cleanup and third-party
liability costs. Coverage is limited to an annual aggregate of $1 million
for facilities with less than 100 tanks and $2 million for facilities with 100
or more tanks. There is a $10,000 deductible on cleanup costs and a
$25,000 deductible on third-party liability costs. All tank owners and
operators must participate in the Fund program. The Fund is financed
by a $25 to $50 variable surcharge on each tanker load of gasoline. The
Fund size is estimated at $4 million.
Connecticut. Connecticut's Fund has been in effect since July 5, 1989,
and has been approved by EPA. Coverage of up to $1 million is
provided through the Fund program for both cleanup and third-party
liability costs. There is a $10,000 deductible on cleanup and third-party
liability costs. Participation in the Fund program is mandatory for tank
owners and operators. One percent of gross earnings at the first point
of sale of petroleum products in State is collected by the state to finance
the Fund. The Fund size is capped at $15 million.
Delaware. Delaware's Fund has been in effect since January 16, 1989.
The Fund program provides separate coverage of up to $1 million for
cleanup costs and third-party liability costs. There is a $100,000
deductible on cleanup costs and a $300,000 deductible on third-party
liability costs. Participation in the Fund program is voluntary. Delaware's
Fund is financed by annual appropriations of State revenues. No fund
size or limit has been established.
B-2
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Florida. Florida's Fund has been in effect since July 1,1986, and has
been submitted to EPA for approval. The Fund provides $1 million
coverage for cleanup costs only. That coverage is limited to an annual
aggregate of $2 million. Tank owners and operators contribute a co-
payment of up to $25,000 of cleanup costs. {In 1990 there was a $500
deductible on cleanup costs). The Fund is financed by four sources: a
$50 tank registration fee, an annual $25 tank fee, a $25 tank replacement
fee, and a 10-20 cent per barrel production and import tax on petroleum.
All tank owners and operators must pay the tank fees. The program
also provides liability insurance and restoration services which are
optional. The Fund size is set at $50 million a year.
Georgia. Georgia's Fund has been in effect since July 1, 1988, and has
received EPA approval. Coverage is provided for both cleanup and
third-party liability costs, but the amount of coverage is dependent on
the number of tanks at the facility: up to $1 million coverage is provided
for facilities having one to 13 tanks, and up to $2 million coverage is
provided for facilities having 14 or more tanks. There is a $10,000
deductible for cleanup and third-party liability costs. The Fund is
financed by a 0.1 cent per gallon fee on petroleum products stored in
USTs. The Fund size is capped at $20 million.
Idaho. The Idaho Fund has been in effect since approximately July 2,
1990, and has received EPA approval. The Fund program provides up
to $1 million coverage for cleanup costs and up to $500,000 coverage
for third-party liability costs. There are separate annual aggregate limits
of coverage for cleanup costs and third-party liability costs: $1 million for
facilities having above-ground storage tanks (ASTs) or one to 100 USTs,
and $2 million for facilities having 101 or more USTs. There are separate
$10,000 deductibles on cleanup costs and third-party liability costs.
Participation in the Fund program is mandatory for tank owners and
operators. The Fund is financed by annual tank registration fees that
vary from $5 to $25, and a 1 cent per gallon fee on petroleum
transported into Idaho. The Fund size is capped at $20 million.
Illinois. The Fund has been in effect since July 28, 1989, and has
received EPA approval. The Fund program provides up to $1 million
coverage for both cleanup and third-party liability costs. There are
separate $10,000 deductibles on cleanup costs and third-party liability
costs. The Fund covers only registered tanks where the owner had no
knowledge of release at the time of registration. All tank owners and
operators must participate in the Fund program. The Fund is financed
by revenues generated by a 0.3 cent per gallon tax on motor fuel. No
fund size or limit has been established.
Indiana. Indiana has not set a date on which to activate its Fund. The
Fund is designed to provide up to $1 million coverage for both cleanup
B-3
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and third-party liability costs. Depending on the tank upgrade status, the
tank owner and operator will have to pay a deductible of $25,000,
$30,000, or $35,000 of the cost of cleanup and third-party liabilities.
Participation in the Fund program is mandatory for tank owners and
operators. The Fund is financed by an annual tank fee of $290. The
Fund size is capped at $10 million.
Iowa. Iowa's Fund has been in effect since May 5,1989, and has
received EPA approval. The Fund program provides coverage of 75
percent of cleanup costs up to a maximum of $1 million. Tank owners
and operators must make a co-payment of $5,000 or 25 percent of total
cleanup costs, whichever amount is greater. The Fund program also
offers insurance coverage for cleanup costs. Participation in the Fund
program is mandatory for tank owners and operators. The Fund is
financed by an annual $65 tank fee, a 0.7 cent per gallon charge on
petroleum products, and a bond issue. The Fund size is $6 million.
Kansas. Kansas's Fund has been in effect since December 22, 1988,
and has received EPA approval. The Fund program provides up to $1
million coverage for cleanup costs. Facilities having less than 100 tanks
are limited to an annual aggregate of $1 million coverage for cleanup
costs. Facilities having 100 or more tanks are limited to an annual
aggregate of $2 million coverage. The deductible varies depending on
the business and size of facility: non-marketers having one to four tanks
pay a deductible of $5,000; non-marketers having five to 12 tanks and
marketers having one to 12 tanks pay a deductible of $10,000; tank
owners and operators having 13 to 99 tanks pay a deductible of
$20,000; and tank owners and operators having more than 99 tanks pay
a deductible of $60,000. Participation in the Fund program is mandatory
for tank owners and operators. Revenue is generated for the Fund
through the levy of a 1 cent per gallon fee on petroleum products
distributed, manufactured or imported in State. The Fund size is $5
million.
Kentucky. Kentucky's Fund program is not yet in effect, but has been
submitted for EPA approval. The Fund program provides up to $1
million coverage for both cleanup and third-party liability costs. Tank
owners with less than six tanks must pay a $10,000 deductible on
cleanup costs and on third-party liability costs. Tank owners with six or
more tanks must pay a $25,000 deductible on cleanup costs and on
third-party liability costs. All tank owners and operators must participate
in the Fund program. The Fund is financed by a 0.4 cent per gallon fee
on gasoline and special fuels received in Kentucky. The Fund size is
capped at $10 million.
Louisiana. Louisiana's Fund has been in effect since July 15, 1988, and
has received EPA approval. Up to $1 million of cleanup and third-party
B-4
+1
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liability costs are covered through the Fund program. There are
separate $15,000 deductibles on cleanup costs and third-party liability
costs. Participation in the Fund program is mandatory for tank owners
and operators. A fee of $13.50 per 9,000 gallons of motor fuel loaded at
a bulk plant is charged to finance the Fund. The Fund size is capped at
$6 million.
Maine. Maine's Fund has been in effect since April 1, 1990, and has
been approved by EPA. The Fund program provides $1 million
coverage for both cleanup and third-party liability costs. Coverage is
limited to an annual aggregate of $2 million with a limit of $200,000 per
claimant for third-party liability costs. The deductible amount is
dependent on the number of facilities: owners and operators having one
facility must pay $2,500; two to five facilities, $5,000 payment; six to 10
facilities, $10,000 payment; 11 to 30 facilities, $50,000 payment; more
than 30 facilities, $100,000. Participation in the Fund program is
mandatory for all tank owners and operators. The Fund is financed by
four sources: a 44 cent per barrel fee on gasoline, a 25 cent per barrel
fee on other refined petroleum products imported into Maine, an annual
$35 tank registration fee, and annual $130 fees on non-conforming tanks.
No fund size or limit has been established.
Michigan. Michigan's Fund has been in effect since July 18, 1989, and
has received EPA approval. The Fund program provides up to $1 million
coverage for both cleanup and third-party liability costs. The deductible
on cleanup and third-party liability costs is $10,000. Participation in the
Fund program is mandatory for tank owners and operators. The Fund is
financed by a 0.875 cent per gallon fee on refined petroleum products
consumed in the state. No fund size or limit has been established.
Minnesota. Minnesota's Fund has been in effect since June 4, 1987, and
has received EPA approval. The Fund program provides up to $1 million
coverage for both cleanup and third-party liability costs. Tank owners
and operators must meet a co-payment of 10 percent of cleanup and
third-party liabilities costs, not to exceed $100,000. Participation in the
Fund program is voluntary. A one cent per gallon fee on gasoline is
charged to generate revenue for the Fund. The Fund size is capped at
$5 million.
Mississippi. Mississippi's Fund has been in effect since May 18, 1988,
and has been approved by EPA. The Fund provides separate coverage
of up to $1 million for cleanup costs and third-party liability costs. Until
June 30, 1992, there is no deductible on the coverage of cleanup and
third-party liability costs. After June 30, 1992, the deductible for cleanup
costs will be $5,000 and the deductible for third-party liability costs will
be $10,000. Participation in the Fund program is mandatory for tank
B-5
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owners and operators. A 0.2 cent per gallon fee is charged on motor
fuels to finance the Fund. The Fund size is capped at $6 million.
Missouri. Missouri's Insurance Fund has been in effect since August 28,
1989. The Fund program provides up to $1 million coverage for both
cleanup and costs of property damage to third parties. There is a
deductible of $25,000 and co-payments that equal 50 percent of the next
$25,000 in costs and 25 percent of an additional $50,000 in costs for
coverage of both cleanup and third party liability costs. The total
deductible and the co-payments can add up to $50,000. Participation in
the Fund program is voluntary. The Fund is financed through the
premiums paid by the participants and one-time $100 tank fees. The
Fund size is capped at $6 million.
Montana. Montana's Fund program has been in effect since April 13,
1989, and has been approved by EPA. The Fund provides coverage for
up to $1 million of both cleanup and third-party liability costs. There is a
required co-payment equal to 50 percent of the first $35,000 in cleanup
and third-party liability costs. Participation in the Fund program is
mandatory for tank owners and operators. The Fund is financed by fees
of one cent per gallon of gasoline distributed from July 1, 1989 to June
30, 1991, and 0.75 cent per gallon of gasoline distributed after June 30,
1991. The Fund size is capped at $8 million.
Nebraska. Nebraska's Fund has been in effect since July 17, 1986, and
has been submitted to EPA for approval. The Fund program provides
coverage for up to $1 million of the cost of cleanup only. Tank owners
and operators must pay the first $10,000 and 25 percent of the next
$60,000 in cleanup costs. Participation in the Fund program is
mandatory for tank owners and operators. The Fund is financed by
annual $25 tank fees, fees of 0.3 cent per gallon on motor fuels, and fees
of 0.1 cent per gallon on other petroleum products. The Fund size is
capped at $5 million.
Nevada. Nevada's Fund has been in effect since October 1, 1989, and
has received EPA approval. The Fund program provides separate
coverage of up to $1 million for cleanup costs and third-party liability
costs. Coverage is limited to an annual aggregate of $2 million. There
are separate $25,000 deductibles on cleanup costs and third-party
liability costs. Participation in the Fund program is mandatory for tank
owners and operators. The Fund is financed by annual $50 tank
registration fees, and fees of 0.6 cent per gallon of gasoline and diesel
fuel. The Fund size is capped at $7.5 million.
New Hampshire. New Hampshire's Fund has been in effect since July 1,
1988, and has received EPA approval. The Fund program provides up
to $1 million coverage per facility for both cleanup and third party costs.
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There are separate deductibles for cleanup and third-party liability costs
coverage that vary with the number of facilities owned by the claimant: a
tank owner having one facility pays $5,000; two to 19 facilities, $20,000;
and 20 or more facilities, $30,000. Participation in the Fund program is
mandatory for tank owners and operators. The Fund is financed by
revenues from a 0.6 cent per gallon loading fee charged on gasoline and
special fuels sold or produced and sold in State. The Fund size is
capped at $10 million.
New Mexico. New Mexico's Fund has been in effect since July 1, 1990,
and has received EPA approval. The Fund provides coverage for
cleanup costs only. No limit on the amount of coverage or deductible for
coverage has been established. Participation in the Fund program is
mandatory for tank owners and operators. The Fund is financed by a
loading fees of $80 per 8,000 gallons of gasoline and special fuels sold
or produced and sold in the state. The Fund size is capped at $25
million.
North Carolina. North Carolina's Fund program has been in effect since
June 30, 1988, and has been approved by EPA. The Fund provides up
to $1 million coverage for both cleanup and third-party liability costs.
There are separate deductible amounts of $50,000 per tank for cleanup
costs and $100,000 for third-party liability costs. Participation in the
Fund program is mandatory for tank owners and operators. The Fund is
financed by annual tank fees of $45 on tanks having capacities 3,500
gallons or less, and $75 on tanks having capacities greater than 3,500
gallons. The Fund size is capped at $15 million.
North Dakota. North Dakota's Fund program has been in effect since
June 30, 1988, and has been approved by EPA. The Fund program
provides coverage for up to $100,000 of cleanup costs only. There is a
co-payment of $7,500 plus 10 percent of the next $92,500 of cleanup
costs. All tank owners and operators must participate in the Fund
program. The Fund is financed by annual fees of $25 per UST and $10
per AST, and fees of 0.22 cent per gallon on petroleum products sold.
The Fund size is capped at $3 million.
Ohio. Ohio's Fund has been in effect since July 11,1989, and has been
approved by EPA. The Fund program provides up to $1 million
coverage for both cleanup and third-party liability costs. Tank owners
with six tanks or less must pay a $10,000 deductible on cleanup and
third-party liability costs. Tank owners with seven or more tanks must
pay a $50,000 deductible on cleanup and third-party liability costs. All
tank owners and operators must participate in the Fund program. The
Fund is financed by an annual $150 tank fee. The Fund size is capped
at $30 million.
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Oklahoma. Oklahoma's Fund has been in effect since December 23,
1988, and has been approved by EPA. The Fund program provides
separate coverage for both cleanup and third-party liability costs. The
Fund program provides up to $1 million coverage for marketing facilities
or operations with monthly throughput of 10,000 or more gallons of
product. Operations with monthly throughput of less than 10,000 gallons
are provided up to $500,000 coverage through the Fund program.
There are separate $5,000 deductibles for cleanup and third-party liability
costs. Participation in the Fund program is mandatory for tank owners
and operators. The Fund is financed by revenues generated by a one
cent per gallon fee on motor and diesel fuels and blending materials sold
at the wholesale level. The Fund size is capped at $10 million.
Pennsylvania. Pennsylvania's Fund has been in effect since
approximately January 1991. The Fund program provides separate
coverage of up to $1 million for cleanup and third-party liability costs.
There is a $75,000 deductible for cleanup costs and a $150,000
deductible for third-party liability costs. Participation in the Fund
program is mandatory for tank owners and operators. The Fund will
financed by fees but they have not been determined yet. No fund size
or limit has been established.
South Carolina. South Carolina's Fund has been in effect since October
1, 1988, and has been approved by EPA. The Fund program provides
up to $1 million coverage for both cleanup costs and third party liability
costs. The tank owner or operator must pay separate $25,000
deductibles for cleanup costs and for third-party liability costs.
Participation in the Trust Fund is mandatory for all tank owners and
operators. The Fund is financed.by annual tank fees of $100 and a 0.5
cent per gallon environmental fee. The size of the Fund is capped at
$15 million.
South Dakota. South Dakota's Fund has been in effect since April 1,
1990, and has received EPA approval. The Fund program provides up
to $1 million coverage for both cleanup and third-party liability costs
(although third-party liability cost coverage is not yet in effect). The
deductible for both cleanup and third-party liability costs is $10,000.
Participation in the Fund program is mandatory for tank owners and
operators. The Fund is financed by a one-time inspection fee of one
cent per gallon on stored gasoline and diesel fuel. The Fund size has
been set at $5 million.
Tennessee. The Tennessee Fund has been in. effect since July 1, 1988,
and has been approved by EPA. The Fund program provides separate
coverage of up to $1 million for cleanup costs and third-party liability
costs. There are separate deductibles for cleanup costs of $10,000 for
tank owners and operators having one to 12 tanks, $20,000 for tank
B-8
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owners and operators having 13 to 999 tanks, and $50,000 for tank
owners and operators having 1,000 or more tanks. The deductible for
third-party liability costs are $10,000 with one to 12 tanks, $25,000 to
$50,000 with 13 to 999 tanks, and $50,000 with 1000 or more tanks.
Participation in the Fund program is mandatory for all tank owners and
operators. The Fund is financed by annual tank fees of $125 and
environmental assurance fees of 0.4 cent per gallon of petroleum. The
size of the Fund is capped at $50 million.
Texas. Texas' Fund has been in effect since September 1, 1989, and
has received EPA approval. The Fund program provides coverage for
up to $1 miliion of the cost of cleanup only. Tank owners and operators
must pay a deductible of $10,000 for cleanup costs. Participation in the
Fund program is mandatory for tank owners and operators. The Fund is
financed by loading fees for gasoline and diesel fuel that vary from
$12.50 to $50 depending on tank size. The Fund size is set at $125
million.
Utah. Utah's Fund has been in effect since July 1, 1990, and has
received EPA approval. The Fund program provides up to $1 million
coverage for both cleanup and third-party liability costs with a $300,000
limit on coverage of third-party liability costs. The deductible for both
cleanup and third-party liability costs is $25,000. Participation in the
Fund program is mandatory for tank owners and operators. The Fund is
financed by an annual tank fee of $250 which will decrease to $150 on
August 1, 1993, (fees may even be less for some non-marketers) and a
0.5 cent per gallon surcharge on all petroleum sold, used or received for
use or sale in Utah. The Fund size is $17.5 million.
Vermont. Vermont's Fund has been in effect since January 1, 1987, and
has received EPA approval. The Fund program provides separate
coverage of up to $1 million for cleanup costs and third-party liability
costs. There is a $10,000 deductible on cleanup costs and no
deductible or co-payment for third-party liability costs. .Participation in
the Fund program is mandatory unless the tank owner or operator can
self-insure. The Fund is financed by revenues raised by fees of one cent
per gallon of gasoline and diesel fuel and annual tank fees that vary
depending on tank size. No fund size or limit has been established.
Virginia. Virginia's Fund has been in effect since December 22, 1989,
and has been submitted for EPA approval. The Fund program provides
up to $1 million coverage for both cleanup and third-party liability costs.
The deductible for coverage for cleanup costs is $50,000. The
deductible on coverage for third-party liability costs is $150,000. There
are separate limits for aggregate deductible payments of $200,000.
Participation in the Fund program is mandatory for tank owners and
B-9
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operators. The Fund is financed by taxes of 0.2 cent per gallon of motor
fuels. The Fund size has been capped at $20 million.
Washington. Washington's Reinsurance Fund has been in effect since
November 1, 1990. The state reinsures private insurers of tank owners
and operators up to $1 million for both cleanup and third-party liability
costs. There is a annual limit on aggregate coverage of $2 million. The
deductible is specified in the contract that the insurer has with the Fund
program. All tank owners and operators must participate in the Fund
program. The Fund is financed by premiums paid by the insurers and a
0.5 percent tax on petroleum products produced or transported in State.
The Fund size is $15 million.
West Virginia. West Virginia's Fund is not in effect. No coverage
amounts have been established but tank owners and operators will have
to pay separate deductibles of $5,000, $15,000 or $25,000 for cleanup
costs and costs of third-party liability. Participation will be mandatory for
the first year that the Fund is effective but voluntary in the following
years. The Fund will be financed by annual premiums based on the age
of the tank and deductibles. No fund size has been established.
Wisconsin. Wisconsin's Fund has been in effect since August 1, 1987,
and has been submitted for EPA approval. The Fund program provides
up to $1 million coverage of both cleanup and third-party liability costs
for those owners and operators with 100 to 999 tanks. There is a $2
million annual limit on aggregate coverage. All other tank owners are
provided with $200,000 coverage per site for both cleanup and third-
party liability costs. Tank owners and operators must pay a $5,000
deductible for both cleanup and third-party liability costs through July
1993. Afterwards, the deductible will rise to $10,000. Participation in the
Fund program is mandatory for tank owners and operators. The Fund
size is $25 million.
Wyoming. Wyoming's Fund has been in effect since July 1, 1989, and
has received EPA approval. The Fund program provides separate
coverage of up to $1 million for cleanup costs and third-party liability
costs. There is a $30,000 deductible for third-party liability costs. There
is no co-payment or deductible on cleanup costs if the tank is registered
and in compliance with State and Federal requirements. Although using
Fund coverage is optional, all tank owners and operators must pay fees
into the Fund. The Fund is financed by two sources: annual fees of
$200 per tank (self-insured owners pay $150 per tank) and a tax of 0.1
cent per gallon on gasoline. The Fund has a cap of $10 million.
B-10
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APPENDIX C
METHODOLOGY FOR ESTIMATING FINANCIAL IMPACTS OF UST REQUIREMENTS
ON THE REGULATED COMMUNITY
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APPENDIX C
METHODOLOGY FOR ESTIMATING FINANCIAL
IMPACTS OF UST REQUIREMENTS ON THE REGULATED COMMUNITY
In this report, EPA estimated the potential impacts on firms in the retail motor
fuel, general industry, and local government sectors of a variety of UST regulatory
requirements and State fund scenarios. Wherever possible, EPA relied on the data
and methodologies that had been developed in the 1988 regulatory impact analyses
(RIAs) that accompanied the promulgation of the UST technical standards and
financial responsibility requirements. The model used to develop the present report is
described in both RIAs, and complete documentation for it appears in an appendix to
the RIAs entitled Documentation of the Affordabilitv Model.
To develop this report, it was necessary for EPA to analyze additional data and
use the model in ways that were somewhat different from the approach used in the
RIAs; this appendix documents these differences. To evaluate impacts on firms in
general industry and local government sectors that were not analyzed in the original
RIAs, additional data were collected. In addition, to provide more measures of impact
and to cover a broader variety of regulatory requirements and State fund scenarios
than were included in the RIAs, the model was used differently. The first section of
this appendix documents the data used in this analysis and emphasizes differences
between the data used in this analysis and the data in the RIAs. The second section
discusses differences in assumptions, measures of impact, and methods of using the
nodel. Finally, the third section presents the results of this analysis for all sectors,
regulatory requirements, and State fund scenarios.
Data Used in the Analysis
Three sets of data are needed to determine the impacts of the UST financial
responsibility rules on the regulated community: (1) the probability that a firm will
incur costs as a result of a regulatory requirement, (2) the costs imposed by these
regulatory requirements, and (3) the financial variables pertaining to the firms that will
hcur these costs. The probability that a firm will incur these costs and the magnitude
of the costs associated with various regulatory requirements are the same as those
used in the RIAs. Exhibit C-1 shows the probabilities associated with various
regulatory events, and Exhibit C-2 shows the costs of these events.
The types of retail petroleum outlet owners in the analysis are refiners (such as
Eixxon and Amoco), "jobbers" (which sell petroleum at the wholesale level as well as at
retail outlets), convenience stores (such as 7-11), independent chains of gas stations,
"open dealers" (which are single independent gas stations), and stations that are
leased rather than owned by their operators. Within some ownership types,
distinctions are made according to size (measured in terms of assets) and profitability.
C-1
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EXHIBIT C-1
PROBABILITIES OF UST-RELATED EVENTS
Event
Annual Leak Detection
Tank Repair
Tank Replacement
Closure
Tank Upgrading
Small Corrective Action
Large corrective Action
Premiums1
Payments of Tank Fees2
Accelerated Tank Replacement3
Third Party Liability
Probability in Years
1 to 5
1.0
0.0408
0.0272
0.0272
0.0
0.058
0.011
1.0
1.0
0.375
0.000224
Probability in Years
6 to 10
1.0
0.02145
0.01155
0.01155
0.15
0.03
0.002
1.0
1.0
0.0
0.00004
For those groups expected to be in compliance by given years.
For those tanks in states with tank fee programs.
Replacement is assumed to take place over 2 years rather than 5 years.
Exhibit C-3 presents the key characteristics of firms in the retail petroleum sector.1
EPA initially intended to update the financial data for the retail motor fuel
marketing sector. After reviewing the available data sources for this sector, however,
EPA found that many of them no longer provided the detail required to perform such
an analysis. Based on a comparison of currently available data for this sector and
data from earlier studies, however, EPA is confident that changes in the retail motor
fuel marketing sector have not been large enough to substantially alter the results
reported for this sector in the RIAs.
The RIAs developed a distribution of general industry firms by asset size but
did not model impacts on firms in this sector. For this report, EPA used this asset-
size distribution data to develop model firms that could be used with the affordability
model. Exhibit C-4 shows the characteristics of the model firms used in the genera!
industry sector analysis. To summarize the results of this analysis, this sector was
aggregated into three segments: small firms (defined as those with less than
1 The breakdown of the retail motor fuel industry by ownership type is presented in the RIA for the
Financial Responsibility Regulations in Exhibit 3-2.
C-2
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EXHIBIT C-2
COSTS OF UST-RELATED EVENTS
Events
Annual Leak Detection
Tank Repair
Tank Replacement
Closure
Tank Upgrading
Small Corrective Action
Large corrective Action
Premiums
Payments of Tank Fees
Accelerated Tank Replacement3
Third Party Liability
Affected UST or Entity cost
$520 per UST
$6,660 per UST
$30,500 per UST
$12.500 per Closed Tank
$9,950 per UST
$27,000 per UST1
$167,000 per Site2
$3,000 per Entity
$50 per UST
$9,950 per UST
$1,100,000 per Site
Cost declines to $14,000 in years 6 to 10.
Cost declines to $115,000 in years 6 to 10.
Replacement is assumed to take place over 2 years rather than 5 years.
EXHIBIT C-3
KEY CHARACTERISTICS OF FIRMS IN RETAIL MOTOR FUEL CATEGORIES
Category
Assets Below S200K
Assets S200K-400K
Assets $400K-600K
Assets $600K-1M
Assets $1M-$10M
Assets $10M-$100M
Assets $100M-$1B
Assets Above $1B
No. of
USTs
123,467
150,491
88,904
58,499
117,760
39,245
10.504
202,421
No. Of
Firms
30,114
33.410
20,478
3,567
2,063
76
4
27
Per-firm
Profits
($OOOs)
10
15
21
44
97
1,329
11,575
912,909
Per-firm
Assets
($OOOs)
130
218
499
746
3,613
29,283
364,838
18,438,826
Per-firm
Revenues
($OOOs)
591
764
835
5,646
22,081
172,167
1,004,828
22,107,151
Etased on Exhibit A-3 of Regulatory Impact Analysis for Financial Responsibility Requirements for Petroleum
Underground Storage Tanks.
$1 million in assets), medium firms (those with between $1 million and $20 million in
assets), and large firms (those with more than $20 million in assets).
C-3
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EXHIBIT C-4
KEY CHARACTERISTICS OF FIRMS IN GENERAL INDUSTRY CATEGORIES
Category
Assets $200K-400K
Assets $400K-600K
Assets $500-1 M
Assets $1M-$2M
Assets $2M-$5M
Assets $5M-$20M
Assets Above $20M
No. of USTs
64,000
64,000
80,000
52,000
38,000
128,000
207,900
No. of
Firms
12
20
32
60
140
500
4,000
Profits
(OOOs)
600
1,000
1,600
3,000
7,000
25,000
200,000
Assets
(OOOs)
300
500
800
1,500
3,500
12,500
100,000
Revenues
(OOOs)
600
1,000
1,600
3,000
7,000
25,000
200,000
EPA obtained data about the finances of governments from the "Economic
Impact Analysis of the Proposal for a Self-Insurance Test for Government Entities to
Demonstrate Financial Responsibility for Underground Storage Tanks" (EIA). This
report, prepared in the spring of 1990, includes information about all types of
government entities (special districts, municipal governments, local governments, state
governments, etc.) that own USTs. Key data about these government entities,
including their number, typical revenues, and the number of USTs they own, are
shown in Exhibit C-5. The definitions of small, medium, and large firms are taken from
the EIA.
Use of the Model
For this report, two measures of impact were used: severe financial distress
and business failure. For both measures, the time horizon is the next 10 years.
Severe financial distress is defined, for private-sector firms, as a situation in
which the costs imposed by regulatory requirements depress a firm's return on assets
to less than negative 4 percent at any time in the 10 years analyzed. This cutoff is
based on research showing that firms with returns on assets at or below -4 percent
show signs of distress (e.g., closing all or a portion of the business, selling assets,
defaulting on loans, or missing required debt payments).
For government entities, severe financial distress is said to occur at any time
that the regulatory costs imposed on the government entity exceed 4 percent of the
government's revenue in any given year.
Business failure is defined as a firm closure or bankruptcy. (Since governments
rarely fail or enter bankruptcy, this measure is not used for entities in the local
government sector.)
C-4
-------
EXHIBIT C-5
KEY CHARACTERISTICS OF GOVERNMENT ENTITIES
Category
General Purpose
GP Small 1
GP Small 1!
GP Medium 1
GP Medium II
GP Medium III
GP Medium IV
GP Medium V
GP Medium V!
GP Medium VII
GP Large 1
GP Large 1
Special Districts
SO Small 1
SD Small II
SD Small III
SD Small IV
SD Small V
SD Small V!
SD Medium 1
SD Medium II
SD Medium III
SD Medium IV
SD Medium V
SD Large 1
SD Large II
SD Large III
No. of USTs
No. of Entities
Revenues (OOOs)
1,721
1,165
2,595
2,660
3,692
5,915
3,742
2,866
3,232
2,702
1,310
1,645
1,058
2,079
1,747
1,845
1,855
693
306
179
66
26
140
380
1,200
2,900
6,100
14,000
31,000
64,000
152,000
451,000
593,000
10
4
25
91
251
517
1,630
3,915
8,253
7,374
5,170
1,929
1,026
203
10
4
25
92
245
487
1,413
2,835
4.016
1,855
545
87
19
2
0.5
2
6.5
20
65
200
650
2.000
6,500
20,000
65,000
2300,000
650,000
1,500,000
Source: U.S. Environmental Protection Agency, "Economic Impact Analysis of the Proposal for a Self-Insurance
Test for Government Entities to Demonstrate financial Responsibility for Underground Storage Tanks," June
1990.
C-5
-------
Each of these measures has particular applications. For example, severe
financial distress is useful to capture the maximum potential impact of a regulatory
requirement. In contrast to firms in failure, most firms in severe financial distress do
not fail or close their facilities but continue on in serious difficulty. Business failure, on
the other hand, is a measure that is designed to identify those firms that will be hit
hardest by the regulatory requirements.
For private firms, both severe financial distress and business failure were
determined by using the affordability model. Model runs were conducted with given
regulatory requirements or groups of requirements and various State fund scenarios.
Each model run provided estimates of the number of firms that would fail and the
number that would be placed in severe financial distress in a single year. To
determine the number of firms that would incur severe financial distress at least once
in the 10-year period or that would fail within a given time period, EPA assumed that
regulatory events were random and statistically independent of each other. Using this
assumption, the probability that an event will occur at least once in given time period
T, assuming that it occurs with probability P in any given year, is:
This approach does not take account of those firms who would leave the industry
even if no regulatory requirements were imposed; thus, a portion of the firms
predicted to become severely financially distressed or to fail are financially weak firms
that might well close even in the absence of regulatory requirements.
The affordability model was designed to analyze private-sector financial
situations and cannot therefore be applied in the case of governments. To analyze
the incidence of severe financial distress among governments, EPA assumed that a
government would experience severe financial distress if the regulatory costs incurred
exceeded 4 percent of its revenue in any given year. If an UST-related cost was
determined to exceed 4 percent of annual revenues, the probability that the
government would become severely financially distressed was calculated using the
formula presented above.
Results
Exhibit C-6 provides an overview of the number of firms projected to be placed
in severe financial distress or to enter business failure under each State fund scenario.
Four State fund scenarios were considered:
• No State Fund: This scenario assumes that no State funds are in place.
This is not a realistic scenario because many State funds are already in
place and operational; however, this scenario is included for comparative
purposes, i.e., to enable the reader to examine the difference that State
funds make.
C-6
-------
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• Current Mix: This scenario assumes that all State funds that have been
approved by EPA or that have applied to EPA for approval are in place
and operational. State funds are classified according to the deductible
they provide: $10,000 or $50,000. EPA assumed that State funds would
apply to all firms and government entities within a given State.
* State Fund with $50K Deductible: This scenario assumes that all firms
and governments are covered by a State fund with a $50,000 deductible
that must be met by the UST owner/ operator.
* State Fund with $10K Deductible: This scenario assumes that all firms
and governments are covered by a State fund with a $10,000 deductible
that must be met by the UST owner/ operator.
For each scenario, EPA assumes that 22 percent of all medium and small retail
motor fuel marketing firms have insurance but that no other firms or government
entities have insurance. In states with State funds, EPA assumes that firms will use
their insurance to cover their deductibles.
Exhibits C-7 to C-14 provide additional details on the impacts of specific
regulatory requirements and combinations of requirements.
C-8
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