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                         BACKGROUND   DOCUMENT


                           Repository Material

                         Permanent Collection

                      STANDARDS APPLICABLE TO OWNERS AND OPERATORS
                   OF HAZARDOUS WASTE TREATMENT, STORAGE, AND DISPOSAL
                     FACILITIES UNDER RCRA, SUBTITLE C, SECTION 3004
                                 Financial Requirements
                            (40 CFR 264 and 265,  Subpart H)
                This document (ms 1941.11) provides background information
                    and support for EPA's hazardous waste regualtions
                            u  ^        USEPA
                            Headquarters and Chemical Libraries
                                 EPA West Bldg Room 3340
                                      Mailcode 3404T
                                 1301 Constitution Ave NW
                                  Washington DC 20004
                                      202-566-0556
      EJBD
      ARCHIVE
      EPA
      530-
      R-
      80-
      042                  U.S. ENVIRONMENTAL PROTECTION AGENCY
                                     December 1980

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                                 FOREWORD

     This Background Document accompanies regulations  (40  CFR Parts  264
and 265, Subpart H) that set forth financial  requirements  applicable to
owners and operators of hazardous waste treatment,  storage and disposal
facilities.
     The purpose of the document 1s to explain why  EPA developed the
regulations and why they are written as they are.   In  so doing, EPA
addresses  (1) the Congressional mandate for regulations, (2)  the need
for the regulations, (3) precedents set by State and Federal  regulations,
and (4) the many public comments on the reoroposed  version of these
regulations which was published In the Federal Register on May 19,  1980
(45 FR 32260-78), and (5) the rationale for specific provisions of the
final regulations.  Comments on the original proposal  of December 18,
1978  (43 FR 58995, 59006-7), were addressed in the Background Document
and Preamble to the reproposal and are not discussed in detail here.
One part of the original proposal, liability requirements to be used as
permit standards, was not Included as part of the reproposal  but the
comment period for it was reopened.  Comments received during the latter
comment period on these liability requirements are addressed 1n this
Background Document.
      The Background Document Is 1n two parts.  Part One addresses
financial  assurance for closure and post-closure care and all other
provisions except liability coverage.  Part Two addresses requirements
for liability coverage.

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                               CONTENTS

                                                                   Page

PART ONE FINANCIAL ASSURANCE FOR  CLOSURE  AND POST-CLOSURE CARE
I.    INTRODUCTION	1-1
II.   RATIONALE FOR REGULATION	1-5
      A.  EPA Authority and Basis for Regulation	1-5
      B.  Damage cases	1-8
      C.  Federal, State, and Local  Precedents  	  1-14
III.  SYNOPSIS OF REPROPOSED REQUIREMENTS  	  1-26
IV.   ANALYSIS OF COMMENTS AND RATIONALE  FOR FINAL STANDARDS  ...  1-29
      A.  Applicability	1-29
      B.  Estimating Closure and Post-Closure Costs   	  1-36
      C.  General Issues Regarding The Financial  Assurance
          Mechanisms	1-37
      D.  Trust Funds	1-46
      E.  Surety Bonds	1-91
      F.  Letters of Credit  	  1-102
      G.  Revenue Test for Municipalities  	  1-122
      H.  Financial Test and Guarantee 	  1-123
      I.  Variations 1n Use of Instruments .  .  .	1-125
      J.  Incapacity of Issuing Institutions  	  1-128
      K.  Applicability of State Financial  Requirements   	  1-129
      L.  State Assumption of Financial Responsibilities  	  1-130
      M.  Other Mechanisms Reviewed  	  1-131
      N.  Other Issues	1-134
      Appendix to Part One	1-140

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                                 CONTENTS
                               (continued)
PART TWO.  INTERIM AND GENERAL STANDARD  LIABILITY REQUIREMENTS
I.    INTRODUCTION	   II-l
II.   RATIONALE FOR REGULATION	   II-5
      A.  EPA Authority and Basis for Regulation  	   II-5
      B.  Need for the Regulation	   11-7
      C.  Alternative Regulatory Mechanisms   	   11-15
      D.  EPA Hazardous Waste  Site Requirements   	   11-19
III.  SYNOPSIS OF PREVIOUSLY PROPOSED  REGULATIONS   	   11-21
IV.   ANALYSIS OF COMMENTS  AND RATIONALE FOR  STANDARDS	   11-21
      A.  Legal Authority	   11-22
      B.  Need for the Regulation	   11-23
      C.  Need for the Regulation for Specific Facilities   ....   11-25
      D.  Regulatory Strategy	   11-29
      E.  Use of Insurance  as  the Appropriate Regulatory Mechanism   11-29
      F.  Amount of Insurance	   11-30
      G.  Availability of  Insurance  	   11-38
      H>  Cost and AffordablHty of Insurance	   11-48
      I.  Other Issues   	   11-51

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     PART ONE.  FINANCIAL ASSURANCE FOR CLOSURE  AMD  POST-CLOSURE  CARE
                                       S
I.   INTRODUCTION
     Financial responsibility requirements for owners  and operators  of
hazardous waste treatment, storage, and disposal facilities constitute
Subpart H of Parts 264 and 265 (Chapter 40, Code of  Federal Regulations).
Part 264 contains facility standards that will be used in the permitting
process.  Part 265 contains standards that apply to  owners and operators
with "interim status", i.e., they have notified EPA  as required by Section
3010 of the Resource Conservation and Recovery Act,  properly applied for
a permit, and are awaiting final administrative action on their permit
applications.
     Under the Subpart H  regulations of both Parts 264 and 265, an owner
or operator of each treatment, storage, or disposal  facility nust establish
financial assurance for  its closure.  For a disposal facility, the owner
or operator must also provide financial assurance for post-closure care.
Financial assurance may  be provided through use of one or more of several
mechanisms allowed—trust funds, surety bonds,  letters of credit, equivalent
mechanisms required by the State, or guarantees by the State.  (Three mecha-
nisms  that were  proposed, the financial test, a guarantee based on the financial
test,  and a revenue test for municipalities,  are not allowed but. are still
under  consideration by the Agency.)  The  level  of financial assurance must
keep up with  cost estimates for closure and post-closure care that the owner
or operator must prepare.  The cost estimates must be based on closure and
post-closure  plans required by Subpart G.  When a change in the plans affects
the cost of closure or post-closure care, the cost estimates must be revised.
The cost estimates must  also be adjusted annually for inflation.
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     On May 19, 1980, EPA promulgated the first regulations to go Into
Parts 264 and 265.  The Part 265 regulations Included Subpart H (45  FR
33243), which set requirements for estimating the costs of closure and
post-closure care.  Subpart H also exempted the State and the Federal
government from the requirements of the Subpart.  The effective date of
the cost-estimating regulations was postponed from November 19,  1980,  to
May 19, 1981, by an amendment Issued October 30, 1980 (45 FR 72040).
     The regulations that this Background Document accompanies establish
Subpart H, Part 264, for the first time and add to Subpart H, Part 265.
     The development of these regulations has been greatly Influenced  by
public comments received on two sets of proposals.  The first, Issued
December 18,  1978 (43 FR 58995,  59006-7), allowed only trust funds as
the means of assuring availability of funds for closure and post-closure
care.   The closure trust fund had to be established 1n a lump sum.  The
post-closure fund could build over the life of the facility up to 20
years.   The amounts to be assured were to be estimated by the owner or
operator on the basis of the plans required to be prepared for closure
and post-closure care of the facility.  The financial assurance provisions
were essentially the same for both Interim status and general standards.
     Many of the commenters on this original proposal said that the up-
front closure trust fund was so costly that >1t would put them out of
business.  Commenters also said other financial mechanisms besides trusts
should be allowed.
     EPA reanalyzed these and other Issues and developed a new proposal
which was published May 19,  1980 (45 FR 33260-78).  The lump-sum feature
of the closure trust fund was replaced with a 20-year pay-In period
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because EPA was concerned that some firms would go out of business  If
they had to establish a paid-up fund and that this mioht contribute
to a capacity shortfall in hazardous waste management.  Alternatives  to
trust funds were allowed:  surety bonds, letters of credit,  a financial
test, guarantees of the closure and post-closure obligations of one
entity by another entity which met the financial test, a revenue test
for municipalities, and State guarantees of performance or funding.
Also, if a State required specific financial assurance mechanisms for
closure and post-closure care, the owner or operator could use such
mechanisms to meet .the Federal requirements as long as the State mechanisms
were substantially equivalent to EPA's mechanisms.  Much of this Background
Document 1s devoted to addressing the numerous comments the Agency received
on  this reproposal.
     These regulations are closely tied to the closure and post-closure
plans required  in  the Subpart G regulations (Closure and Post-Closure).
It will not be  possible  to fully understand the financial responsibility
regulations or  this background document without a basic understanding of
the function  and content of  the closure and post-closure plans.  (The
reader  is  referred to the background document entitled  "Closure and
Post-Closure  Care.")
     The following chapters  on the rationale for  the  regulation and
the analysis  of comments cover the financial assurance  requirements of
both Parts 264  (general  standards) and  265  (interim status standards).
There are  a few differences  between the financial requirements of  the two
parts:  (1)   Part  264 Includes provisions that  state when owners and
operators  of  new facilities  must establish financial  assurance mechanisms
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(60 days prior to first recefpt of hazardous waste  for treatment, storage,
or disposal).  Part 265 applies only to existing  facilities and becomes
effective 6 months after promulgation.   (2)   Under  Part 264, trust funds
must be paid up over the term of the initial permit (a maximum of 10 years).
Under Part 265, trust funds for existing facilities are allowed to hulld
at a rate of 5 percent a year;  If these facilities  receive permits, the
balance of the trust funds must be paid in over the term of the initial
permit.  (3)  The financial assurance mechanisms  allowed in Part 264
include two kinds of surety bonds—performance  bonds and financial guarantee
bonds, whereas only financial  guarantee bonds are allowed 1n Part 265.
(4)  The length of the post-closure period for  which financial assurance
for post-closure care must be established 1s 30 years 1n Part 265; in
Part 264 the post-closure period 1s the number  of years required at the
time of permitting.  The reasons for the different  provisions are explained
1n Chapter IV, Analysis of Comments and Rationale for Final Standards.
Key Definitions
     When used in these regulations and the Background Document, the
following definitions apply:
     "Compliance procedure" means any proceedings Instituted pursuant  to
RCRA or regulations Issued under authority of RCRA  which seeks to require
compliance or which 1s in the nature of an enforcement  action or an action
to cure a violation.  A compliance procedure Includes a compliance order
or notice of intention to terminate a permit or Interim status pursuant
to Section 3008 of RCRA or Part 124 of  this Chapter, or an application in
the United States district court for appropriate  relief pursuant to
Sections 3008, 7002, or 7003  of RCRA.  For the  purposes of this Subpart,
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a compliance procedure is considered to be pending from the time an order
or notice of Intent to terminate 1s Issued or judicial proceedings are
begun until the Regional Administrator notifies the owner or operator 1n
writing that the violation has been corrected or that the procedure has
been withdrawn or discontinued.
     "Standby trust fund" means a trust fund which must be established by
an owner or operator who obtains a letter of credit or surety bond as
specified  In these regulations.  The institution Issuing the letter of
credit or  surety bond will deposit Into the standby trust fund any
drawings by the Regional Administrator on the credit or bond.
II.  RATIONALE FOR REGULATION
A.  EPA Authority and Basis for Regulation
     Section 3004 of Subtitle C of the Resource Conservation and Recovery
Act (RCRA) of 1976 (P.L. 94-580) requires that the Environmental Protection
Agency promulgate regulations establishing such performance standards
applicable to owners and operators of facilities for the treatment,
storage, or disposal of hazardous waste identified or listed under this
Subtitle,  as may be necessary to protect  human health and the environ-
ment.  Section 3004(6)  states that these  standards shall include require-
ments  respecting  "... the maintenance  of operation of such facilities
and requiring such additional qualifications  as to ownership, continuity
of operation,  .  .  . and financial responsibility as may be necessary or
desirable  . .  .  ."
     The Agency believes that compliance with its statutory mandate
necessitates regulations that will assure protection of human health
                        i
and the environment from potential adverse effects due to improper
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closure or lack of post-closure care as a result of an owner or operator
not having adequate financial resources.
     Congressional Intent that financial responsibility requirements
should be applied to the long-terra care needs as well  as the active
operation of hazardous waste facilities 1s indicated in the Senate report
accompanying the bill, the Solid Waste Utilization Act of 1976, which was
the Senate version of what was to become RCRA.  The Senate Public Works
Committee report noted 1n describing the bill:
          One of the specific conditions ... Is the requirement that
          facilities providing treatment,  disposal, or storage of
          hazardous wastes meet minimum qualifications on ownership,
          financial responsibility, and continuity of operations.  In
          a situation where the best accepted method of dealing with
          a hazardous waste may be long-term stabilized storage, a
          permit must contain provisions to assure that the storage
          site will be maintained over that period.  In addition,
          there must be adequate evidence of financial responsibility,
          not only for the operation of the site, but also to provide
          against any liability If the material  escapes the storage.!
     In the past 1t has been common practice to  abandon or cease ooeratlons
at hazardous waste management facilities with little or no effort made to
close or secure them in such a way as to minimize potential adverse effects
on human health or the environment.  Seldom was  any monitoring or main-
tenance work carried out after closure of disposal sites.  The reasons
for this failure 1n environmental  and health protection are probably
several:   lack  of understanding of the potential problems and how to
prevent or minimize them;  lack of legally enforceable closure and post-
closure requirements;  and,  most specific to our  concern here,  lack of
funds to pay for proper closure and post-closure care.  Furthermore, as
the instances of "midnight dumping" make clear,  there  are also those who
would deliberately and illegally avoid the responsibilities connected
with disposal of hazardous waste.
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     Today, there 1s available a large and increasing body  of knowledge
about potential health and environmental  problems and how to prevent or
minimize adverse effects.  Requirements for closure and post-closure
activities are set forth 1n Subpart G and other provisions  of Parts  264
and 265.   The financial requirements address the problem of owners  or
operators arriving at the point of closure with Inadequate  financial
                                          •»»
resources to pay for proper closure and post-closure care.   As illustrated
by cases discussed in this document, necessary closure and  post-closure
activities have not been undertaken or have been delayed or disrupted as
a result  of the failure of owners or operators to make funds available
for closure and post-closure activities.   Furthermore, society often has
had to bear the costs of these activities because owners or operators
did not have the funds to perform them.
     The risk  of failure of owners or operators to provide  for closure
and post-closure activities is Increased by the fact that these activities
begin when a facility has ceased to be an economic asset, at least as a
place where treatment, storage, or disposal services are performed.   Post-
closure care will be needed at most disposal sites for decades; over such
a period some  companies will fall, suffer severe economic reverses,  or
disappear for  any of a number of reasons.
     EPA has concluded that, at a minimum, financial responsibility  standards
for closure and post-closure care, and for liability coverage as discussed
in Part Two of this Background Document, are necessary and  desirable.
Other needs 1n financial responsibility related to hazardous waste management
are addressed  by the recently passed "Superfund" law, the Comprehensive
Environmental  Response, Compensation, and Liability Act of  1980, P.L.
96-510  (December 11, 1980).
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     In Its financial assurance regulations the Agency Is requiring an
owner or operator to estimate the cdsts of closure and of post-closure
care and to provide for financial assurance 1n the amount of the estimates.
The estimates will be based on Individual closure and post-closure plans
as required by Subpart G.  The amounts of the closure estimates, for
example, will be affected by the types and amounts of wastes managed,  by
the extent of the land disposal area to be closed, the number of monitoring
wells required, whether leachate collection and treatment are required,
the size of the Inventory of wastes that will need to be removed from a
treatment or storage facility, the steps necessary In decommissioning
and decontaminating equipment, etc.  The estimates thus directly reflect
what Is required for closure and post-closure care of the particular
facility In order to protect human health and the environment.  The
Agency believes that one or more of the financial assurance mechanisms
specified In the regulation will be available to any owner or operator
who has the means to provide for closure and post-closure care.   Neither
In the required amount of funds nor In the required means of demonstrating
financial  assurance,  therefore,  can the regulation be considered an
arbitrary preclusion of owners or operators.
B.   Damage Cases
     Many of the cases 1n the Agency's files of damage to health and the
environment from Improper hazardous waste management have Involved problems
of Inadequate closure and post-closure care.  In the eight cases summarized
below, closure and/or post-closure care was not provided for In  a timely
manner by the responsible parties.  When problems were discovered by the
         *
local community and funds were needed, the parties had gone out  of business,
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had vanished, simply did not have enough money,  or disclaimed responsibility
because they were no longer the current owners of the site.   The cases
also Illustrate other problems of hazardous waste managenient Involving high
cleanup costs, which should be greatly reduced in the future when the
regulatory program 1s fully established, e.g., massive contamination of
ground waters and streams due to poor siting and operation of the facility.
     Proper closure and post-closure care entail costs, but these measures
will help to prevent various other costs, including avoidance costs,
direct damage costs, Indirect damage costs, administrative costs, and
environmental costs.  Examples of such costs appear 1n the damage cases.
Avoidance costs are those Incurred in mitigating the threat from hazardous
wastes at a facility that has not been closed properly or maintained
adequately after closure, Including building berms or dikes or stabilizing
the movement of leachate 1n ground water by pumping ground water upgradient
from normal flow.  Direct damage costs Include out-of-pocket expenses
such as replacing a well supply or medical expenses.  Indirect damage
costs range from Inconvenience while the water supply is interrupted to
the anguish suffered from birth defects.  Administrative costs include
the expense of determining the extent of contamination, plans for remedial
action, and supervision of the Implementation of those plans.  Finally,
environmental costs, or degradation of natural resources, Include the
contamination of soil, air, surface water, and ground water.  By ensuring
availability of funds for carrying out closure and post-closure requirements,
the financial responsibility requirements should prevent such costs
caused by the unavailability of funds for adequate closure and post-closure
          9
care.
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     The following cases Illustrate the need for the existence of ade-
                       •t
quate and secure financial resources to provide for closure and post-closure
care.
     At Love Canal the failure to contain toxic wastes has severely affected
the physical, psychological, and economic well-being of families In the
surrounding area.  One aspect of the problem was the lack of adequate
monitoring and maintenance after the Hooker Chemical Company ceased disposal
operations at the Canal In 1953.  The site was sold to the city, then to
the school board, then to a developer, and finally to the residents.   No
financial or other provisions were made to assure that the migration of
toxic chemicals would be watched for and prevented.  It has been estimated
that 1f site decontamination measures such as those described in the study,
Analysis of Groundwater Contamination Incident 1n Niagara Falls, New York,
had been undertaken 1n 1953, and the site had been properly monitored and
maintained, the total  cost for the years from 1953 to 1978 would have been
about $3 million.2f3  In contrast, $36 million 1n State and Federal funds
has already been committed for cleanup and for evacuation of families,  and
damage claims totaling over $14 billion have been filed.4
     In Stringfellow,  California,  a hazardous waste disposal site established
in 1957 by a quarry company ceased operations in 1972 as a result of objec-
tions raised by the California Water Quality Control Board.  Toxic con-
taminants were being dispersed In  the ground water via leachate and through
surface runoff.  The Water Quality Board took over the site in 1975.   The
cost of cleanup will range from about $5 to $8 million, depending on whether
chemical fixation is used on the remaining liquid and sediments; annual
maintenance and monitoring costs are estimated at $36,000.   On March  5, 1980,
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the Regional Response Team determined that Stringfellow was leaching to the
Santa Ana River, and in Imminent danger of major structural failure.  A
total of $290,000 was spent over 10 days to remove 4 million gallons of
wastewater, reinforce containments, and repair the access road.   Leachate
was controlled, and there were no major discharges.  Since no funds were
set aside by management to assure that closure and post-closure  monitoring
and maintenance would take place, the public must bear the total  cost.
The Regional Board has been granted $370,000 from State funds for remedial
action.5
     In Elizabeth, New Jersey, approximately 35 to 40 thousand drums of
toxic, explosive, corrosive, and flammable chemical wastes have  been sitting
on a 4-acre site.  A chemical firm was licensed by the State to  incinerate
and neutralize certain hazardous wastes, until its operation was shut down
by court order in January 1979.  The estimated costs for cleanup of the
site are now set at $10 million.  The State Department of Environmental
Protection has taken the Chemical Control Corporation to court in hopes of
obtaining some money from either its parent company or from its  officers.
The company was subsequently placed in receivership.  Chemical companies
that consigned their wastes to the firm have been asked to reclaim them,
but only 20 to 30 percent of the containers are traceable; the rest may
have to be disposed of by the State.  While the legal and financial
processes are worked out, the facility continues to be a serious hazard
to the surrounding area.5
     Near Byron, Illinois, a salvage yard was established in 1970 over a
10-acre site and was run as a family operation.  Toxic wastes were dumped
or burled with and without containers, resulting in the contamination of
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surface water and ground water,  the family who ran the operation has no
funds for site closure.  Up to $625,000 In. public funds will  be needed
to close the site safely.  The family had also used an adjacent 5-acre
area for dumping and burial of wastes.  This area, however,  was purchased
1n 1973 by Commonwealth Edison who proceeded to contract for removal  of
wastes, other remedial measures, and a program to monitor surface and
ground waters at a total cost of over $250,000.5
     In Gary, Indiana, two facilities were established by the same owner
to accept general Industrial wastes.  Both operations were managed Im-
properly, resulting In surface and ground water contamination.  The owner
subsequently vanished, leaving at both sites the debris of fires and
explosions.  The costs to cleanup the sites could run up to  $6 million.
Since the owner has disappeared and no funds were set aside  for closure
or post-closure monitoring or maintenance, the public could  end up paying
a substantial portion of both the cleanup costs and the costs associated
with proper closure and post-closure monitoring and maintenance.5
     In Portage County, Ohio,  an Incinerator at an Industrial waste treat-
ment and disposal  facility ceased operating 1n 1976.  The facility currently
has no method of disposing of the liquid Industrial wastes It has on  hand.
However, In October 1979 the State of Ohio appropriated $1 million for
various containment measures at the site Including dike construction,
grading, and carbon filtration to treat recovered pond water.  The
estimated cost to  close the facility properly could exceed $1.8 million.
The State Is working with the owner to cover this cost.5
     In Grand Prairie,  Texas,  an Industrial  waste treatment  facility  was
shut down 1n 1978  by the Texas Department of Water Resources  for envlron-
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mental violations.  The facility Includes:   the remains  of an  Incinerator
which burned up during a fire, add and alkali  recovery  basins with  a
"homemade" fiberglass liner, waste oil  basins excavated  out of surficial
clay deposits, a clay-lined chemical landfill containing chromium sludge,
a variety of storage tanks and processing areas, and a number  of containers
of chemicals.  The owner declared bankruptcy and the court awarded $28,000
to the State to help fund surface containment.   The State is left with the
remaining costs.  A full cleanup and closure program which would address
the ground water contamination problem is estimated to cost $90,000.
Monitoring costs are estimated at $1,200 per year.5
     In St. Louis Park, Minnesota, between 1917 and 1972, a company
producing and applying creosote operated on an 8-acre site.  Creosote
wastes were discharged into open trenches on the property.  In the early
1970's complaints were filed against the company by the Minnesota Pollution
Control Agency  (MPCA), and the plant ceased operating 1n 1972.  At the
same time, part of the property was being considered for redevelopment
by the city of St. Louis Park.  The Company transferred ownership of the
property to the city, which in turn agreed to accept responsibility  for
any legal action which the State of Minnesota might bring relative to
the site.  Tests have since shown widespread contamination.  According
to the MPCA, the company contributed nothing to the investigation or
cleanup of the site.  The city and State have spent in excess  of $500,000
for containment, ground water monitoring and pollution studies, and  the
city has Incurred costs of about $1,800,000 for various  remedial  measures
Including well closures and for road construction on the site.  Total
cleanup costs are estimated at $20 to $200 million.  If  financial  provisions
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for proper closure and post-closure care had been made and transferred
to the city, the extent of damage could have been dramatically reduced.6
     These cases are presented 1n greater detail In the compilation,
Hazardous Waste Damage Cases, which covers a small portion of the hundreds
of damage Incidents that have been reported.7  in the future the financial
standards, by assuring Implementation of closure and post-closure requirements,
should contribute significantly to reduction of damages at hazardous  waste
facilities.
C.   Federal, State, and Local Precedents
     In gathering Information to use 1n developing financial requirements,
EPA examined Federal, State and local requirements that have purposes
similar to that of the closure and post-closure financial  requirements.
Review of these requirements provides not only precedents  for the RCRA
                                          *
regulations but also alternative regulatory scenarios and  helps ensure
that all types of financial Instruments which might be appropriate are
considered.  In a few cases, Information about experience  1n Implementing
these programs was valuable 1n pointing out the strengths  and weaknesses
of the various alternatives.  The following 1s a summary of regulations
which the Agency examined:
1.  Federal Maritime Commission Regulations
     Under Section 311 of the Clean Water Act, the Federal Maritime
Commission has Issued regulations "whereby vessel operators can demonstrate
that they are financially able to meet their liability to  the United
States resulting from the discharge of oil or hazardous substances" Into
waters over which the United States has jurisdiction (46 CFR §542.Kb)).
The regulations require vessel operators to select a financial mechanism
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approved by the FMC to ensure that they will  be able to meet potential
obligations arising from spills.
     These regulations are similar to other FMC regulations Implementing
two other statutes Involving financial responsibilities for water pollu-
tion.  They allow the following mechanisms for meeting the financial
responsibility requirement:  (1)  Insurance, (2) surety bonds, (3) self-
Insurance, based on maintaining specified levels of net worth and working
capital (each 1n the amount of $150 per gross ton of the largest vessel
to be self-Insured or $250,000, whichever 1s greater), (4) a guarantee,
where the guarantor meets the specifications for self-Insurance, and (5)
other evidence of financial responsibility.  In practice, no method
other than the first four has been accepted by the Agency.
     There are significant differences between the EPA's regulatory task
and the FMC's, since the FMC 1s requiring operators to assure payment to
the United States for cleanup 1n case of spills, while the EPA Is requiring
owners or operators to assure financial responsibility for operations
that must be carried out.  Spills may or may not happen, while carrying
out required closure and post-closure functions should be a normal part
of operations.
     Some FMC  regulations concerning financial responsibility for water
pollution have been 1n effect since 1971.  The FMC has advised us that by far
the most frequently used mechanism 1s Insurance, followed by self-Insurance,
the guarantee, and surety bonds.  To determine threshhold eligibility of
surety companies the FMC uses the U.S. Treasury 11st of surety companies
(Circular 570).8
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     According to the FMC, their financial  responsibility  program  has  had
no major problems.  About 50 percent of the payments are from Insurance
companies and 50 percent from sureties, self-Insurers,  and guarantors.
These percentages 4re roughly proportional  to the numbers  of vessels
using these types of mechanisms.  The amount of time It takes for  a
payment to be made varies widely.  Some payments are Immediate while
others can drag through the courts for years.  The latter  situation
however, has been very rare.  It has generally been most difficult to
collect from self-Insurers because they are giving up their own working
capital.  The revolving fund authorized by  Section 311  of  the Clean
Water Act covers payment delays, "mystery spins," and  spills that cost
more to clean up than can be legally collected under liability limits
set by the regulations.  The fund Is financed through appropriations  and
payments.
     The FMC has found that the mechanisms  easiest to administer are  those for
which the agency has standard forms—Insurance and surety  bonds.  Self-
Insurers and guarantors become eligible by  demonstrating net worth and
working capital requirements on yearly balance sheets and  auditors'
statements which must be checked by the FMC.
     There has been only one bankruptcy of a self-Insured  firm.  In Its
submissions to the FMC prior to bankruptcy  the company had solidly qualified
as a self-Insurer under the passenger vessel regulation.  Although no
passengers lost any money, had there been Injuries the firm may not have
had enough liquidity to pay claims.
2.   Federal Surface Mining Regulations
     The U.S. Department of the Interior Issued regulations (30 CFR
800-809) 1n March 1979 under authority of the Surface Mining Control
                                   1-16

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and Reclamation Act of 1977, requiring that surface coal  mining com-
panies obtain a performance bond as certification that the mining acti-
vities will be conducted 1n accordance with certain performance standards.
Performance bonds as defined 1n these regulations Include:  surety bonds;
collateral bonds; escrow accounts; self-bonds;  or a combination of the
above.  Collateral bonds may be supported by:   cash; certain negotiable
bonds; certificates of deposit; Irrevocable letters of credit;  or a
mortgage or security Interest In property, granted to the regulatory
authority, equal 1n value to the bond obligation.  Companies may establish
a self-bond 1f they can demonstrate a history of financial solvency and
continuous operation for 10 years, grant a mortgage or security interest
to the regulatory authority, and meet other requirements.  A study 1s
being conducted on self-bonding; it 1s scheduled to be ready 1n early
1981.
     The Department Issued  amendments on August 6, 1980.  The permanent
regulations are scheduled to become effective January 3, 1981.   At pre-
sent, interim programs are  being operated by States.  From comments by
the Office of Surface Mining^ and  surety representatives^ it seems clear
that strip mine operators have had difficulty obtaining performance bonds
to comply with the State programs, mainly because they are for periods
longer than Is traditional  for surety bonds.
     EPA's financial requirements  allow trust funds, bonds, and letters
of credit.  The Agency Is considering addition of a financial test, which
would be  roughly comparable to self-bonding without the contractual
involvement between the operator and the regulatory agency.  Collateral
and security interests are  not included since EPA does not have authority
                                   1-17

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to directly receive and utilize funds for the purposes of assuring closure and
post-closure care.  Furthermore such methods appear to be administratively
burdensome, as described below under "Other Mechanisms Reviewed."   Escrow
accounts are not Included for reasons given In the same section.
3.   Uranium Mill Licensing Requirements
     Pursuant to the Uranium Mill Tailings Radiation Control  Act of 1978, the
Nuclear Regulatory Commission has issued licensing requirements for uranium
and thorium milling activities which Include requirements for financial
assurance for proper decontamination and tailings reclamation (October 3, 1980,
10 CFR 40, Appendix A).  The Commission determined that surety bonds,  cash
deposits, certificates of deposit, deposits of government securities,  and
Irrevocable letters or lines of credit provide adequate public protection
against an operator's default with no great administrative burden.  The
Commission will also consider allowing other mechanisms on a  case-by-case
basis.
     The regulations also provide for long-term funding to finance the
care and monitoring required at sites after execution of the  mill  operator's
decommissioning responsibilities and termination of the license.   After
closure, title to the property Is transferred to the State or Federal
agency which will perform the long-term monitoring.  The long-term fund
would ensure that the operator provides enough financing for  this work
to be carried out.  Until termination of the operator's license,  the
amount of the long-term fund must be Included in the mechanism established
for assuring decommissioning.  The full charge is then paid to the govern-
                                                                     v
mental  agency upon termination of the license.  The fund will cover costs
of monitoring.  The Commission expects that virtually the only cost incurred
will be for the time and effort of government Inspectors who  visit the site.*1

                                   1-18

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     EPA's financial requirements allow surety bonds and letters  of credit
and allow deposit of cash, certificates of deposit, and marketable securities
1n trust funds.  As noted earlier, EPA cannot directly manage funds for
financial assurance of closure and post-closure without specific  legislative
authority.
4.   U.S. Coast Guard
     Under the Outer Continental Shelf Lands Act Amendments of 1978, the
Coast Guard has Issued regulations requiring coverage of liabilities that
may result from oil spills  (49 CFR Part 135).  The law allows the same
methods as those in the FMC programs except for "other evidence of financial
responsibility."
5.   State Precedents
     Thirteen  States have  financial requirements for closure and post-
closure care of hazardous  waste  facilities.  The programs vary considerably
from State to  State.  Four State programs are summarized below; this is
followed  by a  chart which  lists  all 13 States and  the status of their
programs.
     Kansas requires hazardous waste management facility owners or oper-
ators  to  submit a  closure  and post-closure plan.   The regulations specify
closure  and post-closure  responsibilities.  Owners and operators are
responsible for care of a  site for 10 years after  closure.  The State
may, however,  extend the  care period as necessary  to protect public health
and the  environment.  Kansas requires a trust fund or performance bond to
assure facility closure and monitoring.  The amount of financial  coverage
which  the owner or operator must obtain is specified by the State 1n the
permit.   In lieu of a trust or surety bond, the State will accept a
                                    1-19

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deposit by the owner or operator of cash or U.S. Treasury notes with the
State Treasury or an escrow agent deemed satisfactory by the State.   The
State may allow the owner or operator to build the required financial
coverage over the life of the site.  The State also has the authority to
require an owner or operator to Increase the amount of coverage if it
appears inadequate.12  A 1979 amendment to the Kansas Solid Waste
Management Act set up a statewide fund that will pay for additional  care
and/or monitoring at a site after the owner or operator's responsibility
has ended.  The fund will also pay the costs of repairing a site or
repairing environmental  damage caused by a site as a result of a post-
closure occurrence not anticipated In the plan of operation.13
     Maryland requires the owner or operator to demonstrate evidence of
financial ability to provide closure and post-closure care at a hazardous
waste management facility.   The owner or operator must obtain a surety
bond, or deposit with the State a certificate of deposit, cash, or negoti-
able government bonds, In an amount specified by the State, or transfer
ownership or operation of the site to the State prior to closure.  If
an owner or operator chooses to obtain a surety bond, the amount of the
bond Is set by the State in an amount to cover any costs for monitoring,
maintaining and closing a facility, ensuring the security of a facility
after Its closure, and guaranteeing fulfillment of all permit require-
ments.  The minimum amount of the bond Is $10,000.
     The Maryland bond obligates the surety to assure compliance with all
applicable statutes, regulations, and permit conditions as well as the costs
of closure, post-closure monitoring and maintenance, and any "corrective
or restorative" action required by the State.   Conceptually, the Maryland
                                   1-20

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bond can be differentiated Into a "performance"  component  and  Into an
"environmental Impairment" component.14
     Oregon requires the owner or operator to submit a  closure and post-
closure plan as part of a facility permit application.   The  State reviews
each plan and estimates closure and post-closure costs  from  the plan.
Oregon has not developed specific cost estimation procedures as there  is
only one disposal site located 1n the State.   Oregon requires  an owner
or operator to obtain a cash bond in the name of the State to  cover
closure and post-closure costs.  A cash bond is  a surety bond  which  is
gradually replaced by cash over time.  Before Oregon will  Issue a permit
to an owner or operator, the owner or operator must deed to  the State  all
portions of his disposal site in or upon which hazardous waste will  be
deposited.15
     Wisconsin requires the owner or operator to submit a  closure and
post-closure plan with facility permit applications.  An estimate of
costs must accompany the plan.  The State allows the owner or  operator
to obtain surety bonds, trust funds, escrow accounts and/or  certificates
of deposit as evidence of financial ability to provide proper  closure  and
post-closure care.  The owner or operator must set aside all funds  neces-
sary to close his facility before he may begin facility operations.
Payments may be made Into the post-closure fund  at regular intervals
during the life of the site.  The owner or operator Is responsible  for
long-term care of his site for either 20 or 30 years after closure.  After
that, the State assumes responsibility.  The State Waste Management Fund is
used to pay for costs of long-term care of a site occurring  after the
owner's or operator's responsibility has ended.   The Waste Management  Fund
Is supported by fees collected from facility owners or operators.
                                   1-21

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     The regulations did not go Into effect until  March 1980 so there has
been little Implementation experience.  The State  foresees two major
problems:  first, difficulty In setting aside the  money up front for the
entire closure and, second, availability of bonds  to municipalities.
     Wisconsin also has a Hazardous Substances Spill Fund which Is funded
through appropriations.  Ttie monies can be used to clean up abandoned or
Inactive sites.16
     The chart lists States which have financial requirements 1n their
regulations.  Some are still pending because the State Is waiting to
see what EPA's final regulations will be like.  In Minnesota they are
waiting until establishment of a hazardous waste facility 1s actually
proposed.  Many of the programs have just begun and are still being
worked on.
6.   Other Precedents
     Many local governments require the use of various financial Instru-
ments by their contractors to assure financial responsibility.  For example,
In Virginia, Fairfax County's Department of Public Utilities has allowed Its
contractors to post escrow accounts, letters of credit, and surety bonds.
The escrow account Is held by the County and 1s the most frequently used
Instrument.17
     The perpetual care of cemeteries Is generally assured by trust funds.
The State of Virginia, for example, requires that  a cemetery corporation
start with a minimum Initial deposit of $25,000 1n a perpetual endowment
fund.  With the sale of each lot, a minimum of 10  percent of the sale
must go Into this fund.  The Interest from this fund provides for mainte-
nance, security, and perpetual  care.18
                                   1-22

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STATE REQUIREMENTS FOR FINANCIAL RESPONSIBILITY  FOR CLOSURE AND POST-CLOSURF CARK, AUGUST  19RD
  Financial        Financial

 Requirements    Requirements for  Types of FlnanciaJ
 Years of

Regulatory   Closure Plan   Cost  Estimates
State tor Closure Post-closure Mechanisms experience Requirement Procedures
California
Kansas
Kentucky

Louisiana
Maryland
Michigan
Minnesota
Oklahoma
Ohio
Oregon
Texas
Washington
.Wlsconsi
Yes
Yes
Yes

Yes
Yes
Yes
Yes
Yes
(Pending)
Yes
Yes
Yes
Yes
Yes

Yes
Yes
(transfer to State)
Yes
Yes
Yes

Deed to State
Yes
Yes Yes
(For extremely Hazardous Wastes)
Ye s 1 Ye s
Bond
Monetary Reserve Fund
Bonds
Trusts
Letter of credit
Escrow
Trust Fund
Surety Fund
Bonds
Trust
Financial Test
Bonds
Financial Test
(Pending)
(Pending)
Bonds

Cash Bond
Bonds
Trust
Escrow
Letter of Credit
Bond
Bonds
0
2
0

1/2
2
0
0
1


3
0
0
Yes
Yes
Yes

Yes
No
No
Yes
Yes
No
Yes
No
No
Yes
Yen
No
No

No
Yes
No
No
No
.
No
No
Yes
No
Yes
                                                                                                             ro
                                                                                                             Cv!
                                                                                                             I

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                        References for Chapter II


1.   Solid Waste Utilization Act of 1976.   Report  of  the Committee on
     Public Works together with Individual  Views to Accompany §3622.
     Senate Report 94-988, 94th Congress,  2d  Sess., 1976, p.16.

2.   Information on Love Canal  case In Office of Solid Waste file of
     damage cases.  U.S. Environmental Protection  Agency, Washington, D.C.

3.   Analysis of Groundwater Contamination  Incident 1n Niagara Falls, New
     York.Report prepared under contract  for Office of Solid Waste, U.S.
     Environmental Protection Agency by Fred  C. Hart  Associates, Inc.,
     New York, N.Y., July 28, 1978.

4.   Memorandum dated April 28, 1980,  from  Kenneth Feldman of EPA to the
     public docket for the financial  requirements  regulations, reporting
     telephone conversations with (1)  Norman  Nosenchuck of the New York
     State Department of Environmental  Conservation on April 4,  1980,
     regarding costs of remedial  actions and  (2) with attorney Richard
     Berger of Grossman, Levlne and  C1v1letto of Niagara Falls,  New York,
     on April 15, 1980, and with attorney Richard  Llppes of Morfarty, Al.len,
     Llppes, and Hoffman of Buffalo,  New York,  on  April 28, 1980, regarding
     claims for damages.

5.   "Status of State Hazardous Waste Management Programs and Summary Reports
     on Sites/Incidents Involving Hazardous Waste  Management".   Compilation
     of Information, mainly from EPA Regional Offices, for use of Office of
     Solid Waste U.S. Environmental  Protection Agency, 1979.

6.   Information on St. Louis Park case 1n  Office  of  Solid Waste file of
     damage cases.  U.S. Environmental Protection  Agency, Washington, D.C.

7.   "Hazardous Waste Damage Cases".   A compilation.  Office of  Solid Waste,
     U.S. Environmental Protection Agency.  Unpublished Report.  April 1980.

8.   Memorandums on meetings between Federal  Maritime Commission staff
     and EPA staff on financial responsibility requirements, November
     16, 1979, March 7, 1980, and August 14,  1980.

9.   Memorandum on meeting between EPA and Office  of  Surface Mining staff
     on February 28, 1980.

10.  Memorandum on meeting between EPA and  surety  representatives 1n
     New York, June 18, 1980.

11.  Bounds, Ann, 'The Financial  Requirements Approach Taken 1n  the Proposed
     NRC Regulations on Reclamation  Uranium Mill Tailings", July 30, 1980.

12.  Kansas Solid Waste Management Standards  and Regulations (28-29-1
     et. seq.).
                                   1-24

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13.  Kansas Solid Waste Management Act,  amended 1979  (SB #170).

14.  Maryland Hazardous Waste Regulations  - Control of the Disposal of
     Designated Hazardous Substances,  08.05.05, 1977.

15.  Environmentally Hazardous Wastes, Oregon Solid Waste Control, Section
     459.600.

16.  1977 Wisconsin Hazardous Waste Management Act  (Assembly Bill 1024).

17.  Memorandum dated March 12, 1980,  from Polly P. Nelll of International
     Research and Technology (EPA Contractor) to George A. Garland of EPA,
     Reporting on personal communication with John  Linger, Fairfax County
     Department of Public Utilities, and with Robert  Sharon, Fairfax
     County Attorney's Office on November  19, 1979.

18.  Hazardous Waste Management Issues Pertinent to Section 3004 of the
     Resource Conservation and Recovery  Act of 1976.Prepared for EPA by
     International Research and Technology Corporation, McLean, VA.
     Lawrence de Blvort, project manager.  Published  by Office of Solid
     Waste, EPA, November 1979, report No. SW-183C, p. 264-265.
                                   1-25

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III.  SYNOPSIS OF REPROPOSED REQUIREMENTS

     Requirements for financial assurance of closure and post-closure
care of hazardous waste facilities were reproppsed on May 19,  1980  (45  FR
33260-78).  The reader Is referred to the Preamble and Background Document
for the reproposal for explanations of the differences between the  reproposal
and the original proposal of December 18, 1978  (43 FR 58995,  59006-7).
     The reproposal required the owner or operator of a hazardous waste
treatment, storage, or disposal facility to assure that funds will  be
available for properly closing the facility. For a disposal  facility,  the
owner or operator had to assure funds for 30 years of post-closure  care.
     The amounts to be assured would be determined by estimates prepared
and kept current by the owner or operator as required by final regulations
(S265.142 and 144, Issued May 19, 1980).  (The  latter regulations also exempt
States and the Federal Government from financial  requirements of owners and
operators (§265.140).)
     The reproposal allowed the following means of assurance:
     Trust funds.  Closure and post-closure trust funds would build over
the life of the facility up to 20 years.  Banks or other financial  Insti-
tutions could act as trustees.  Payments were to be adjusted for Inflation,
other changes 1n the closure or post-closure cost estimates, and changes
1n the value of the fund.  The owner or operator could be reimbursed for
closure and post-closure costs by submitting bills to the Regional
Administrator, who would forward them to the trustee for payment 1f they
were 1n keeping with the closure or post-closure plans or were otherwise
justified.  Excess funds would be refunded to the owner or operator.
                                   1-26

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     Surety bonds.  Surety bonds could guarantee performance  of  closure  or
post-closure care.  A bond could also be written to  assure that  a  post-
closure trust fund would be fully funded at the time of closure.   The
bond penalty amounts had to keep up with the cost estimates.   The  bonds
could be cancelled only with at least 90-day notice  to EPA and the owner
or operator.  If the owner or operator could not establish other financial
assurance in the 30 days after such a notice, the Regional Administrator
could order closure.  If closure began or was ordered to begin while the
bond was in effect, the bond could not be cancelled.
     Letters of credit.  Bank letters of credit could assure  funds for closure,
or for a lump-sum payment Into a trust for post-closure care  at  the time
of closure, or for monitoring and maintenance over the post-closure period.
The amount of the credit had to keep up with the estimates.  The period
of the letter had to be for at least a year with automatic renewal unless
the bank gave 60 days1 notice that It was not going to renew. After
such notice the owner or operator had 30 days to establish other financial
assurance; 1f he did not, the Regional Administrator could draw  on the
credit and the bank would place the money Into an escrow account with
payout provisions identical to those of the trust funds.
     Financial test and guarantee.  By demonstrating financial strength, an
entity would be exempt from providing other assurances.  The  test  criteria
were:  $10 million 1n net worth 1n the U.S.; a ratio of total liabilities to
net worth of not more than 3; and net working capital In the  U.S.  twice  the
amount of the closure and post-closure cost estimates.  An entity  with these
characteristics could guarantee closure and post-closure funds for another
entity.  Characteristics had to be demonstrated 1n quarterly  audited finan-
                                   1-27

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cial statements containing unconsolldated balance sheets.   If the company
no longer met the criteria, It; had to notify EPA and establish other
financial assurance within 30 days.
                         i
     Revenue test for municipalities.  If the owner or operator was a muni-
cipality, 1t could meet the requirements by having undedlcated tax revenues
amounting to 10 times the cost estimates.  The municipality had to send a
letter to EPA stating that 1t met this requirement.   If revenues fell below
the required level, the municipality had to notify EPA and establish other
financial assurance within 30 days.
     Variations.  The owner or operator could use more than one Instrument
to provide financial assurance for closure or post-closure care, he could
use a mechanism to cover multiple facilities, and he could use a mechanism
to cover both closure and post-closure care.
     State-authorized mechanisms.  States In which EPA administers the ha-
zardous waste regulatory program may have their own regulations requiring
financial assurances.  If specific mechanisms are required by a State, the
owner or operator could use them to satisfy the EPA requirements 1f they
were substantially equivalent to the mechanisms specified by EPA.
     State guarantees.  If a State assumed legal responsibility for closure
or post-closure care or liability coverage, or guaranteed that funds would
be available for these purposes, such State guarantees could be used to
satisfy the EPA financial requirements to the extent that they provided
substantially equivalent assurances.  The owner or operator had to send
a letter to EPA citing the State regulation providing for such assumption
of responsibility.
                                   1-28

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IV.  ANALYSIS OF COMMENTS AND  RATIONALE  FOR FINAL STANDARDS
     Comments on the reproposed requirements  for financial assurance of
closure and post-closure care, the Agency's responses, and the rationale
for the chosen actions are discussed In  this  chapter.
     This chapter is organized by the following topics:
          A.  Applicability
          B.  Estimating Closure and Post-Closure Costs
          C.  General Issues Regarding The Financial Assurance Mechanisms
          D.  Trust Funds
          E.  Surety Bonds
          F.  Letters of Credit
          G.  Financial Test and Guarantee
          H.  Revenue Test for Municipalities
          I   Variations 1n Use of Instruments
          J.  Incapacity of Issuing Institutions
          K.  Applicability of State Financial Requirements
          L.  State Assumption of Financial  Responsibilities
          M.  Other Mechanisms Reviewed or Under  Consideration
          N.  Other Issues
     Unless  otherwise specified, the discussions  below refer to  both
Part 264 and Part 265.  Also, the discussions of  financial  mechanisms
refer  to their  use for assuring either closure or post-closure  care unless
otherwise specified.
A.   Applicability
     The applicability of the Interim status financial  requirements was set
forth  In §265.140 as promulgated May 19, 1980 (45  FR 33243-44).   This  section
                                   1-29

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designated the applicability of the provisions on cost estimating (closure
cost estimates are required for hazardous waste treatment,  storage,  and
disposal facilities; post-closure cost estimates are required only for
disposal facilities).  It also exempted States and the Federal  Government
from the requirements of Subpart H on the grounds that these entitles will
always have adequate resources to conduct closure and post-closure activities
properly.
     Reproposed Regulation and Rationale.  The reproposal  contained an appli-
cability section since the applicability of the new sections being proposed
                                      4
had to be designated.  Essentially It said that the sections on post-closure
cost estimating and financial  assurance applied only to disposal facilities,
and the remaining sections applied to all hazardous waste  treatment, storage,
and'disposal facilities covered by Parts 264 and 265.  The  State and Federal
exemption was not Included In  the reproposal because that was already a final
rule.  No other exemptions were provided for.
     Comments and Responses.   Several  types of exemptions were recommended by
commenters:
     0  Financial  assurance requirements should not be necessary 1f the
        cost estimates are below a certain level.  In some  Instances,
        administrative costs could exceed closure costs.
     EPA believes that closure and post-closure funds should be available
for all facilities.  There Is  no reasonable basis for determining a cost
level below which the public should bear added risk.  For  a small cost
estimate, the financial burden of assuring funds will also  be small.
Therefore, allowing owners and operators with small cost estimates to be
exempt 1s not justifiable 1n the Agency's view.
     0  Requirements for financial Instruments and the financial test
        should be loosened for on-site facilities.  The owners and
                                   1-30

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        operators of these facilities are less likely  to  suddenly  abandon
        the site.  The Regional  Administrator could require  the  more
        stringent provisions upon a finding that a  facility  was  to
        close, that other on-slte operations were Insubstantial  In relation
        to the closure obligations, or that the responsibilities were  in
        danger pf not being met.  The St. Louis Park case EPA used for
        justifying same treatment for on-s1te as off-site facilities is
        not relevant.
     No valid distinction can be made between off-site and on-site facilities
for the purposes of these regulations.  All types of businesses  can fail
or suffer severe reverses.  Availability of funds is not  assured because
the owner or operator 1s not primarily 1n the hazardous waste management
business.  Furthermore, "on-slte" can refer to plants  where the  hazardous
waste facilities are very extensive or minor; the category does  not offer
a basis for allowing lesser requirements.  The site in the St. Louis
Park case was, in fact, on-slte and Is thus relevant.   The fact  that
ownership was transferred to the city before extensive pollution problems
were discovered does not destroy the relevance of the  case.   Examples  of
on-s1te facilities that were abandoned by their owners would include
the following:
     The American International Refining Corporation operated a  Bruin,
Pa., site until 1972.  In 1968, leakage from a waste storage lagoon con-
taining oils, add wastes, and alky! benzene sulfonate Into the  Allegheny
River killed fish valued at $108,000.  The firm could  afford to  pay only
$20,000 to cover the damage.  The site was abandoned in 1972 when the
company went out of business.  The State has spent over $20,000  for
cleanup since 1973.1
     At Nockanrixon, Pa., 3 of 11 Industrial waste lagoons operated by  the
Revere Chemical Company leaked into a stream.  After the  State ordered that
the site be cleaned up In 1970, Revere abandoned the site and left lagoons
                                   1-31

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containing 3 1/2 million gallons of waste.  The State Intervened and spent
over $400,000 for cleaning up the site,1
     0  Electric utilities should be exempt since they are highly regulated
        and there 1s little likelihood that they would be allowed to fall.
     0  Rural electric cooperatives have had an excellent record 1n avoiding
        default and have access to Federal financial  support.
     The Agency has granted a generic exemption to States because it
believes that States will always have adequate resources to conduct
closure and post-closure activities properly.   They have proven longevity,
access to tremendous assets, and have generally avoided bankruptcy.
Electric utilities or other public utilities do not necessarily exhibit
these characteristics.  Their assets are not always large.  Indeed, an
electric utility may consist of a single power generating facility or of
a facility only distributing power to a very small area.  A facility
of this type may not be able to afford an unplanned expenditure for closure
or post-closure care of a treatment, storage,  or disposal facility.
     In the past,  electric utilities and other highly regulated Industries
have experienced bond defaults2 and other severe financial difficulties.3
Although a utility may continue to exist and provide customer service
following liquidation, this could possibly result 1n delays In obtaining
adequate funds for closure and post-closure care.  Even though rural
electric cooperatives have successfully avoided default and receive special
Federal  government support, 1t 1s not clear that every rural  electric
cooperative could afford the closure and post-closure expenditures that
would be required of them.   Furthermore, the qualification of a rural electric
cooperative for Federal financial support 1s under the discretion of the
Administrator of the Rural  Electrification Administration (REA).4  The
                                   1-32

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Federal loans and loan guarantees mandated by the Rural  Electrification
Act of 1936 to be made to the rural electric cooperatives are contingent
upon the cooperatives1 loan application passing legal,  engineering,
economic, and financial tests developed by the REA.5
     0  Hazardous waste transporters should be required to assure
        financial responsibility.
     EPA has Issued standards for transporters of hazardous waste In
conjunction with the Department of Transportation.  Over 90 percent of
hazardous waste transportation 1s via trucks.  Under the Motor Carrier
Act of 1980  (P.L. 96-296), carriers of hazardous wastes and other hazardous
materials will have to have liability Insurance ranging up to $5 million
for "extremely hazardous" materials.  This would appear to be a very
major  step forward.  The Department of Transportation Issued an Advanced
Notice of Proposed Rulemaklng on August 28, 1980 (45 FR 57676), setting
forth  a  number of questions for the purpose of gathering Information to
assist DOT 1n promulgating regulations 1n the area of motor carrier financial
responsibility.
     The major railroads have liability coverage with $5 and $10 million
deductibles.  Some of  the short-line railroads do not have liability insurance.
Thus  far, the railroads  have cleaned up all spills.  At present, their
operations are heavily subsidized  by the  government, however.6
      0  Some commenters  favored exempting municipalities; others felt
         they should be treated like other entities.
     There have  been municipal bankruptcies and  defaults on debts, although
these  events are  relatively rare and the  recovery rate has been high,
especially 1n recent years?  (see Tables 1 and 2).   It seems clearly possible
that municipalities, especially smaller ones, could find that they were
                                    1-33

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                                    TABLE 1


                 MUNICIPAL DEFAULT EXPERIENCE  UNDER  CHAPTER  ix
                                     Recovery Rate           Total  Business
                 Number of          For Cases Filed            Bankruptcy
Period
1938-40
1941-50
1951-59
1960-72
1973-79
a Source:
Cases Filed9
210
115
27
10
•7
Hempel, George H.
and Concluded"
66%
65%
75%
95%

The Postwar Quality of State
FlledC
-
56,766
89,880
211,340
195,785
and Local Debt.
Columbia University Press,  New York,  1971.

b Percentage of admitted debt In default ultimately paid for cases filed
and concluded.

c Source:   Tables of Bankruptcy Statistics.   Administrative Offices of the
United States Courts, 1980.
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                                    TABLE 2
                       DEFAULTS ON STATE AND  LOCAL DEBT*
States

Counties and
   Parishes

Incorporated
  Municipalities

Unincorporated
  Municipalities

Special Districts

Other
1940-49

   0


   6


  31


   7

   5

  30
                                    1950-59
1960-65
 Number of
Governmental
 Unlts-1962
0
12
31
4
23
42
0
17
70
20
41
44
50
3,043
17,997
17,144
34,678
18,323
Source:  Hempel, George H.  The Postwar Quality of State and Local Debt.
Columbia University Press, New York, 1971.

*Th1s record of defaults 1s the result of a study of the municipal default
record examining a variety of sources of default data.  There 1s no single
data base from which the total number of municipal defaults can be gathered,
and this record could not, therefore, be brought up to date.
                                      1-35

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unable to afford closure or post-closure costs,  because  closure  became
necessary prematurely or the costs were not adequately planned for.
Even 1n the case of larger communities, if funds are  not set  aside  for  the
purpose of closure and post-closure care,  it may take some  time  before
funds can be allocated, particularly if legislative processes, bond issues,
or voter approval of new taxes are necessary.  For these reasons EPA believes
municipalities should not be exempted from the financial  requirements.   How-
ever, the special characteristics  of municipalities—their  record on bank-
ruptcies and defaults, their responsibility for  public health, their general
longevity—are being considered 1n the work being done on the revenue test
and financial test.
     Final Regulation   The "Applicability" section for  Part  265, Subpart H,
1s amended to designate applicability of the new sections.  Again,  except
for sections strictly on post-closure financial  assurance,  which apply
only to disposal facilities, all sections  apply  to all treatment, storage,
and disposal facilities.  The same provisions are established for Part  264,
Subpart H.
B.  Estimating Closure and Post-Closure Costs
     Interim status standards for  estimating the costs of closure and post-
closure care (5265.142 and 144) were promulgated May  19, 1980 (45 FR
33243-44).  They require the owner or operator to prepare estimates based
on the closure and post-closure plans and other  requirements  of  Part 265.
The estimates must be adjusted for inflation and for  changes  in  the plans.
The closure cost estimate must be  for closure at the  point  in the facility's
operating life when the extent and manner of Its operation  would make closure
the most expensive, as Indicated by Its closure  plan. The  post-closure estimal
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must be for 30 years of post-closure.  These provisions help assure the
adequacy of the estimate whenever closure becomes necessary.
     The same standards are now promulgated for Part 264, except that:
requirements for completing actions by the "effective date of the regulations"
are deleted since they would not be applicable to new facilities; the post-
closure estimate must be for the period of post-closure care assigned at the
time of permitting  (to conform to Subpart G of Part 264); and a comment Is
added saying that the estimates must be submitted to the Regional Administrator
with Part B of the  permit application under Part 122 and EPA may require
modifications as a  condition of any permit Issued.
C.  General Issues  Regarding the Financial Assurance Mechanisms
     In the final regulations, as 1n the reproposal, the owner or operator
of each hazardous waste treatment, storage, or disposal facility must establish
financial assurance for Its closure.  The owner or  operator of a disposal
facility must also  provide financial assurance for  post-closure care.
He may use one or more of the several mechanisms allowed by the regulations
to meet those requirements.  The amount of funds assured must at least
equal the adjusted  cost estimates.
     For existing facilities, financial assurance must be established by
the effective date  of the Part 265 financial assurance requirements.  For
new facilities, assurance must be established as specified  in Part 264
at least 60 days before hazardous waste Is first received at the facility
for treatment, storage, or disposal.
     The Agency believes that at least 60 days must be allowed for adequate
Agency review of evidence of financial assurance and for any necessary
modifications that  may be required of the owner or  operator.  Financial
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.assurance meeting the specifications  of these  regulations should be
 established before hazardous wasta Is first  received for treatment,
 storage, or disposal  since such receipt may  mark  the beginning of need
 for eventual closure  and pp$t-closure care In  accordance with Part 264
 standards.
 1.  Compliance Proceedings*
           Reproposed  Regulation and Rationale.  In the reproposal, the Regional
 Administrator could direct the use of trust  funds, draw down on a letter of
 credit, or call In a  surety  bond or guarantee  upon "determination of a violation
 of the closure or post-closure requirements  rendered In a proceeding pursuant
 to Section 3008 of RCRA".  This referred to  an administrative decision reached
 after notice of violation, 30 days for the owner  or operator to comply, and
 then opportunity for  a hearing—the process  outlined In Section 3008 for
 determining violations of  the Subtitle C regulations.  The process was not
 required 1n the reproposal for drawing on a  letter of credit after a bank
 gave notice of nonrenewal  and the  owner  or operator had not established
 other financial  assurance, or for  ordering closure because a bond was about
 to be cancelled,  or because  of nonpayment of a trust payment, or because a
 company failed the financial  test  but did not  establish other financial assurant
 1n 30 days, etc.   The  Agency reasoned that In  these circumstances the situation
 was clearly ascertalnable without  the Section  3008 process, and In several of
 the Instances delay would mean loss of the assurance provided by the Instrument
 or Increasing likelihood of  bankruptcy of the  owner or operator.
      Comments,  Response, and Final  Regulation.  Several commenters thought
 that the procedures In the reproposal  were not sufficiently protective
 of the rights of the  owner or operator:
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     0  Funds should not be expended until  a final  judicial  determination
        of the Issue 1s made or the owner or operator and the  Regional
        Administrator reach an agreement.  To do otherwise would be  to
        deny the right of appeal and cause premature closing of a facility.
     0  Invoking any of the financial vehicles prior to a final  legal
        determination or a final disposition of the dispute  may have an
        adverse effect on the credit of the company. . . . The Regional
        Administrator should be able to call 1n a bond or letter of  credit
        after notice of nonrenewal  only after a temporary or permanent  in-
        junction is obtained.
     The procedures to be used for enforcing compliance with regulations under
Subtitle C of RCRA are prescribed 1n Section 3008 of RCRA, which authorizes
the Administrator, to determine when violations have occurred and to  Issue
compliance orders.  Pursuant to Section 3008 an opportunity  for a public
hearing Is provided before a compliance order or suspension  or revocation
of a permit becomes final.
     The final regulations have clarified procedures relating to cancellation
of financial assurance devices.  Although continuous availability of funds
is a basic consideration of EPA in developing requirements for financial
assurance for closure and post-closure care, the Agency recognizes the
desire of financial Institutions and surety companies for means of
terminating letters of credit and bonds Issued on behalf of  owners and
operators.  Consequently, the final regulations Include provisions for
cancellation under limited circumstances.  However, the owner or operator
will be deemed to be without financial assurance and in violation of
these regulations upon receipt by EPA of a notice of cancellation or
nonrenewal, and EPA thereupon will begin compliance proceedings under
Section 3008 of RCRA.  In the event the owner or operator cannot satisfy
a compliance order requiring alternate financial assurance,  EPA will
require funding of a standby trust (described below) by the  surety or
issuer of the letter of credit.
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     In order to assure that funds will  be  available  for closure and post-
closure care, and that Initiation of compliance  proceedings does not
Immediately precipitate termination of surety  bonds and letter  of  credit,
all such Instruments must provide that no termination shall occur  while
compliance proceedings are pending, Irrespective of the subject matter
of the compliance proceedings.
2.  Levels of Assurance Among Mechanisms
     Reproposed Regulation and Rationale.  In  the reproposal  trust funds were
allowed to build over 20 years or facility  life, whichever was  shorter,
but the other mechanisms were required to assure funds for the  whole
amount of the cost estimate from the effective date of the regulations.
The Agency believed that financial assurance for the  whole amount  should
be established from the start so that whenever closure became necessary,
adequate funding would be available.  A major  exception was made for
trust funds because the Agency was concerned that establishing the trusts
1n a lump sum would cause some owners and operators to go  out of business
and therefore possibly contribute to a capacity  shortage.
     Comment, Response, and Final Regulation.  Several commenters  expressed
the following objection:
     0  For equ1tab1!1ty, EPA should allow  all mechanisms to  build
        financial assurance over 20 years like the trust fund.
     EPA 1s allowing owners or operators to select from a variety  of
financial mechanisms to meet the requirements  of these regulations.  It Is
doing so to minimize their cost.  Since an  owner or operator Is free to
choose from among the devices, he may select that alternative which seems
most advantageous.  Thus, no Inequity 1s created.
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3.  Allowing Use of Mechanisms, and Forms Not Specified 1n the Regulations.
     Reproposed Regulation and Rationale.  The reproposal  allows only specific
                             t
mechanisms and forms.  The Intent was to allow all  feasible and effective mechan-
isms but with specifications and forms that would enable the Agency to monitor
the program without excessive administrative burdens.  Use of standard forms
for the financial Instruments means that individual owners and operators,
banks, and sureties would not have to develop the Instrument's language,  nor
would EPA have to evaluate the language of each instrument submitted.
     Comments, Responses and Final Regulation.  A number of commenters
recommended greater flexibility and openness to suggestions:
     0  RCRA requires performance standards, whereas these regulations
        prescribe exclusive means.
     0  It 1s obvious that EPA cannot think of all possible situations;
        the Regional Administrator should be able, on special requests,
        to review other proposals and either accept or reject them.
     6  Standard forms may cause a problem because financial institutions
        have different informational requirements.
     0  EPA should set up an evaluation  group to monitor financial and
        insurance impacts in coming months.  There are many uncertainties.
        Keep open the comment period and have another public hearing In the
        fall of 1981.
     Section 3004(6) requires EPA to promulgate regulations establishing
performance standards, including requirements respecting qualifications
for financial security.  There is nothing in the language of the statute
that implies that EPA cannot make specific requirements regarding demons-
tration of such financial security.  To  the contrary, EPA is clearly
empowered to choose specific modes of performance where such specificity
is necessary or desirable to demonstrate compliance with the performance
standards.
     After an extensive period of proposals, public comment, and analyses,
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EPA believes 1t has. Included those mechanisms that adequately provide
financial assurance and that are feasible.   The Agency will  continue to
be receptive to proposals and fay add. tp, subtract from,  or alter the
currently allowed mechanisms In light of such suggestions and Its
experience during Implementation..  Allowing proposals 1n  place of specified
mechanisms, however, would Impose an .Intolerable administrative burden
on the Agency, especially 1n light Of 1^s limited experience and resources
1n the area of evaluating financial  mechanisms.  The Agency expects that
a large number of owners or operators might seek to demonstrate financial
assurance by alternative mechanisms If they are allowed to do so.  The
Agency believes that In such an event, mechanisms that do not adequately
assure that funds will be available In a timely manner would Inadvertently
be accepted.  This would result In Inadequate protection  of human health and
the environment and, In addition, an Inconsistent and possibly Inequitable
administration of these requirements.  Consequently, the  Agency concluded
that It must require specific mechanisms for financial assurance.
     The Agency has developed standard language for trusts and other
Instruments with extensive consultation with the financial community.
We believe the forms will be acceptable to most, 1f not all, financial
Institutions.   EPA believes that standard language 1s necessary for the
same reasons that standard mechanisms are needed.  The Agency simply
does not have the resources or expertise to review every  trust or other
Instrument to determine whether 1t adequately assures the availability
of funds for closure or post-closure care.
     EPA does have an evaluation plan for the financial requirements and
the other Subtitle C regulations, as required by Executive Order 12044,
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"Improving Government Regulation."  The objective will  be to obtain  data
1n order to spot problems 1n the program and make needed changes;  satisfy
Information needs of EPA management, Office of Management and Budget,  and
Congress; and continuously upgrade the regulations to more effectively
achieve their goals.
     The Agency will be continuously open to suggestions for improved
financial assurance methods and will be especially Interested to hear
about experiences of owners and operators in using the specified mechanisms.
At this time the Agency has no plan for another hearing since a specific
need for one is not clear.
4.  Degree and Duration of Risk
     Commenters noted that the level of risk that the management of hazardous
waste posed was not considered In the regulations and that this was
required by the last paragraph of Section 3004 of RCRA.  The Agency's
position on this issue 1s explained further In Chapter II (Rationale for
Regulation) of this document.  There 1s a variable and contingent risk
of accidents associated with the management of hazardous waste, which Is
addressed by the liability insurance requirements, discussed in Part II
of this Background Document.  However, closure and post-closure care are
required activities, and as such they do not represent a contingent
liability.  Further, the Agency believes Its financial responsibility
requirements represent the minimal level of efforts that responsible
companies would undertake in the operation of hazardous waste management
facilities.  Should the degree and duration of risk associated with the
management of hazardous waste indicate more stringent requirements are
necessary, EPA will make adjustments to its requirements to reflect that
need.
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5.  Standby Trusts to Accompany Letters of Credit and Surety Bonds
    Reproposed Regulation and Rationale,  In the reproposal  whenever a
letter of credit was drawn on or funds received from a surety,  the  money
went Into either an escrow account or, In the case of post-closure  surety
bonds, a trust fund.  EPA believed the escrow used In conjunction with
the letter of credit was a simple mechanism for holding the  funds until
they were used for'closure or until the owner or operator established
another mechanism.  If funds for closure and post-closure activities
were paid directly to EPA, they would have to go Into the Treasury
and could not be specifically allocated for closure or post-closure
duties (see 31 U.S.C. 5484).
     Comments, Responses, and Final Regulation.   There were  no  comments  on
these arrangements except:
     0  The escrow account should be more closely specified, such as how
        much Interest 1s to be paid.  Several  bank representatives  said
        they would prefer not to have the escrow account mentioned  In the
        letter of credit (to limit responsibility); others said It  did not
        bother them.
     After comparing escrow accounts and trust funds, the Agency decided that
for the purpose of the regulations, escrows were less secure and potentially
more burdensome to the Agency than trust funds (see Section  N).
     The final  regulation requires that owners and operators who obtain
letters of credit or surety bonds to provide the required financial
assurance must also establish a standby trust fund at the same  time, so  that
a depository mechanism Is available whenever needed.  Under  the terms of the
letter of credit or surety bond, any funds drawn under those Instruments are
to be placed directly Into the trust fund by the Institution making the
payment.  EPA plans to seek authority from Congress to directly receive  and
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disburse fund?, derived from financial assurance mechanlsrns under RCRA.
IF EPA obtains that authority, owners and operators would no longer be
required to establish standby trust funds.
     Mention of the standby trust fund was kept 1n the letter of credit
despite the preference of some banks not to have 1t since EPA felt 1t
was needed to ensure payment directly Into the trust.
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 D.    Trust Funds
      Generally, a trust Is an arrangement 1n which  one party, the grantor,
 transfers legal title to property (usually money) to another party, the
 trustee, who manages the property for the benefit of one or more beneficiaries
 For the trust funds specified in these regulations, the owner or operator
 is the grantor; a bank or financial  institution, as specified in the
 regulations, is the trustee; and EPA is the beneficiary.
      These trusts are irrevocable; they cannot  be changed or terminated
 by the grantor without the consent of the beneficiary and the trustee.
 A trust is established when the trust agreement is signed by the grantor
 and the trustee fl.
      A standby trust fund, which an owner or operator must establish if
 he uses a surety bond or letter of credit for the purposes of these
 regulations, is essentially the same as the trust fund used as a primary
 financial  mechanism.   However,  after a nominal  Initial payment as agreed
 upon  by the owner or operator and the trustee,  further payments as specified
 In  the regulations are not required until  the standby trust is funded by
 a payment to it made  by a  surety company  or an  institution issuing a
 letter of credit,  or  by the owner or operator In order to comply with the
 regulations.   From that point,  further payments as specified in the
 regulation will  be required In  order to maintain the trust fund 1n the
 amount  of  the  closure and/or post-closure  cost estimate.
1.   Suitability of Trust Funds  for  Purposes  of These Regulations
     Reproposed Regulation  and Rationale.  Under the original  proposal  of
December 1978  the  trust fund  was  the only mechanism allowed for assuring
closure and post-closure funds.   In  the reproposal,  the trust fund continued
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to be allowed because 1t was considered to be reliable,  available, and
administratively manageable.  Other methods for demonstrating  financial
assurance were added In the reproposal 1n response to comments received
by the Agency.
     Comments and Responses.  Comments received on the use of  a trust
fund as a mechanism for demonstrating financial assurance of closure and
post-closure care can be grouped as follows:
     o  Some commenters said the trust fund was an expensive Instrument
        since companies will lose the use of capital.  Snail companies,
        especially, would be hurt.
     o  Other commenters said 1t 1s the only mechanism that assures  payment
        of closure and post-closure costs, and companies that have difficulty
        funding the trust could obtain a loan in order to make payments.
     o  Compared with the other mechanisms, the trust funds are better
        protected from the  claims of creditors in the event of bankruptcy.
        Other commenters disagreed, contending that no one really knows
        the effects of the  new bankruptcy law.
     Under the final regulations, trust funds continue to be one of the
acceptable instruments for  assuring closure and post-closure funds.   If
the closure and post-closure cost obligations are large, the trust fund
payments may be burdensome  to the owner or operator, and opportunity
costs are incurred, since companies lose the use of capital that must be
diverted to the trust fund.  Nevertheless, the trust fund is a mechanism
that should be widely available for the purposes of these regulations  and,
as discussed later in this  document,  it appears that the assets are better
protected from the claims of creditors than Is likely with many of the
other mechanisms that were  considered.  The Agency examined the trust
fund instrument and  found it to be effective;  therefore, it is retained
among the Subpart H  options.
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     o  Trust funds are available to all owners or operators;  no  one  1s
        favored because of slle or other factors.
     o  The standard trust agreement will help Increase availability,  as
        will authorization of commingled funds for Investment  activity
        by the banks and  Investment 1n the banks'  certificates of deposit.
     o  Larger banks said that some of the trust fund amounts  will  be
        too small for  banks  to accept; they would not be worthwhile due
        to administrative and potential legal costs.  Smaller  banks said
        they would consider  the smaller trust funds.
     The Agency believes, on the basis of discussions It had with bankers
and other commenters In the  financial community, that trust funds will
be widely available.   The standard form should Increase availability
because It will reduce the time, effort, and costs of preparation that
would otherwise be required  of the owner or operator and the trustee  In
establishing a trust fund to meet the requirements of these regulations.
     To Increase  availability, EPA authorized Investments 1n a trustee
Institution's certificates of deposit and requested the Securities and
Exchange Commission (SEC) to Issue a "no-action" letter concerning commingling
of funds.  The Agency  received such a letter from the SEC dated October 20,
1980, Indicating  that  It  would not recommend any enforcement action.
(see the discussion on Investments below).
     EPA notes that many  of  the commenters from large banks were  familiar
with corporate trusts.  A corporation, to finance Its capital  requirements,
will  often borrow funds by Issuing bonds or other debt securities.  A
trust 1s established so that the trust Institution may act on  behalf  of
the Individuals or Institutional Investors who purchased the securities,
enabling the corporation  to  work with the trustee rather than  numerous
lenders.  Generally, these corporate trusts will Involve amounts  much
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greater than the closure and post-closure trusts.
     EPA contacted trust officials at some of the smaller banks to determine
whether the size of the trust would play an Important role in availability;
those commenters said size was not an essential factor and they would
consider accepting the trusts 1n smaller amounts.  Some of these commenters
compared the size of the smaller closure trust funds with those established
under a Keogh or Individual Retirement Account plan^.  Therefore, EPA
believes the size of the trust fund should not be a significant problem
regarding trustee availability.
     Final Regulation.  The trust fund is retained as one of the acceptable
methods for demonstrating financial assurance for performance of closure
and post-closure activities.  The Agency believes the trust fund instrument
will be effective for the purposes of these regulations and that it will
be the most widely available mechanism.  In addition, the Agency continues
to allow other mechanisms for demonstrating financal assurance, which
may be less expensive for owners and operators and which are discussed
later in this document.
2.   Comments on Who Should be Authorized to Act as  a Trustee
     Reproposed Regulation and Rationale.   In  the original proposal, a bank
or other financial institution approved  by  the Regional Administrator could
act as a trustee.  Under the  reproposed  regulations, this was modified to
exclude the requirement of the Regional  Administrator's approval.  EPA
believed this change would avoid the delay  to  owners or operators and
the administrative burden to  the Agency  that was likely to result from
instituting an  approval process.   In addition, EPA  recognized  that banks
frequently act  as trustees, are  subject  to  considerable governmental
                                    1-49

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institution's activities, and the interests of the parties  to  the
trust agreement.            '
     If branches of foreign banks are able to meet the criteria  for
trustee institutions set forth in the regulations, owners or operators
may choose them as trustees.
     The Federal Home Loan Bank Board (FHLBB), a part of the FSLIC,  is
currently developing regulations under authority of the Monetary Act of
1980 (P.L. 96-221 Title I, 94 Stat. 132-141), to allow savings and
loans to act as trustees^.  When those FHLBB regulations become effective,
an owner or operator may select a savings and loan which meets the EPA
regulatory criteria to act as a trustee.
     Final Regulation.  The final regulation authorizes a bank or
financial institution which has the authority to act as a trustee and whose
trust operations are regulated and examined by a Federal or State agency
to act as a trustee.
3.   Objections to the Trust Fund Agreement
     Reproposed Regulation and Rationale.  The originally proposed
regulations Hid not include a standard trust agreement.  One was set forth
1n the reproposed regulations because EPA believed a standard trust
agreement would ease the administrative burden to the Agency,  the trustee,
and the owner or operator.  The form contained purpose, property, and
period clauses, as well as provisions for the operation of the trust and
the duties of the trustee.  It did not contain an investment clause  and
a number of other standard provisions that EPA thought could be left to
coverage by State law or private arrangement between the owner or operator
and the trustee.
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     Comments and Responses.   Commenters suggested several  changes In
the tryst fund agreement,  along the  following lines:
     o  There shouldn't be a  standard  form  because of the different
        State fiduciary laws; the Regional  Administrator should be given
        permission  to review  and approve any necessary adaptations.
     o  The  standard form will Increase availability and cut down on
        time and cost requirements for establishing the trust funds.
     o  The  regulations should not be  specifically referenced in the
        agreement since they  give the  appearance that the trustee is
        responsible for their implementation, and because the regulations
        could  be changed.
     The  Agency  believes the  trust agreement form, after changes made as
 suggested by various banking and trust experts, should be acceptable in
 all  States and increase availability of trustees.  It 1s necessary to
 devise  a  standard form in order that excessive  efforts by the Agency
 will  not  be required 1n monitoring the content  and treatment of these
 instruments.  The standard trust agreement in the final regulations
 accomplishes Its intended purposes per the trust fund requirements, yet
 it will require  only minimal  effort, time,  and  cost on the part of EPA,
 trustees, and owners or operators to establish  the  trust.
     An "acknowledgment page" generally accompanies every trust agreement.
 This page contains a notary public's attestment as  to who signed  the
 agreement, thus  serving as evidence should questions  about the identity
 of the  grantor arise.  However, the American Bankers Association, which
 assisted  EPA in  this area, advised the Agency that  a  standard acknowledg-
 ment page would  not suffice for all States11.   Therefore, It will  be
 up to the owner  or operator and the trustee to see  that an acceptable
 formal  certification of acknowledgment accompanies  the trust agreement.
     The  Agency  does not intend that the trustee  be responsible  for
 implementing the regulations and, understanding the need to  refer only
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generally to statutory authority, has removed specific  references to the

regulations.

     o  Trust assets can be attached if the owner or operator  goes
        bankrupt.  Also, the bank or financial institution  might be
        named in a suit brought against the hazardous waste management
        facility and therefore, the assets could be used for some other
        purpose.  To protect against these occurrences, EPA should modify
        the trust language.

     o  Trust assets cannot be attached in the event of bankruptcy of
        the owner or operator.  It seems highly unlikely that  bankruptcy
        courts would allow access by creditors to monies in a  trust  fund
        that was established to fulfill National policy. There would be
        no  reason for the trustee to be named in a suit brought against
        the owner or operator for problems at the site.

     EPA agrees that it seems unlikely that trust assets would be used

to settle the accounts of a bankrupt company, particularly  since  there

is little reason for a court to allow use of these trust assets for

other than  their Intended purposes.  The Agency also believes  that  if

the trustee is brought into any  suit filed because of activities  at  the

hazardous waste management facility, the limits of his liability  should

be clear under the terms of the  revised trust agreement.  Moreover,  the

Agency added language to the trust agreement that describes the general

purpose of  the trust fund, stating that it is established for the benefit

of the Agency and 1t is not intended that any third party have access  to

the funds,  except as provided  In  the agreement.

     o  Most commenters said the  trust agreement should have language
        on  investment activity limiting trustee discretion, thus
        lessening the possibility for  litigation.

     o  A few commenters said  there  shouldn't be any restrictions on
        investment activity, some said investments should be guided by
        the "prudent man"  standard,  and some  said such activity should
        be  as permitted under  the rules of the jurisdiction in which
        the trust is administered.
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     o  Different commenters said specified Investments should be made In:
        cash and marketable securities to parallel the pay-In provision;
        conservative Investments, such as government  securities, to
        preserve the corpus; more speculative Investments, such as common
        stocks and real estate, to possibly Increase  earnings.
     o  There should be options or ratios among conservative and more
        speculative Investments.
     o  Investments 1n the hazardous waste facility or other operations  of
        the owner or operator, or his affiliates should not be allowed.
     EPA sought the advice of several financial specialists from banks
and associations In developing the Investment language used In the trust
agreement; 1t received widely divergent opinions. The Agency does not
believe 1t has the expertise to develop language on specific Investment
activity, or that such specification Is entirely necessary.  However,
certain basic qualifications are appropriate and are  addressed 1n the
trust agreement.
     The trust agreement provides that the trustee, or any fiduciary of
the trust, will manage the trust assets 1n acccordance with a modified
"prudent man" rule, with certain exceptions.  Generally,  a fiduciary 1s
one who acts In a capacity of trust and confidence on behalf and for the
benefit of another.  The prudent man standard for trust  Investment 1s a
doctrine well established from a rule originally stated  1n 183012.  It
calls for trustees to conduct themselves with the prudence, discretion,
and Intelligence they would exercise 1n the management of their own
affairs 1n regard to the permanent disposition of their  funds, taking Into
account the probable Income and safety of the capital to be Invested.
     The Employee Retirement Income Security Act of 1974 (ERISA), an
act which established provisions for management of the assets of trusts
established for pension plans, requires the fiduciary to discharge his
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duties "...with the care, skill, prudence,  and diligence  under the
circumstances then prevailing that a prudent man acting in  a  like capacity
and familiar with such matters would use in the conduct of  an enterprise
of a like character and with like aims	". (29 USC §1104).
     This statutory language constitutes the basis of the investement
guidelines for management of the trust assets by the trustee  or  fiduciary.
In addition, the Agency added three exceptions.  The first  is that  investment
in the activities of the owner's or operator's businesses,  or of any of
its affiliates, will not be allowed; such investments could be worthless
in the event of bankruptcy.  The term "affiliate" is to be  interpreted
in accordance with §2(a)-(f) of the Investment Company Act  of 1940,  as
amended, (15 USC §80a-2.(a)), which defines an affiliate  generally  as  an
individual or company which has control of 5 percent or more  of  the out-
standing voting securities of a company.
     However, securities and other obligations of the Federal or a  State
government are specifically exempted from this restriction.  While  Federal
and State governments are exempt from the financial requirements, there
could be situations where the Federal or State government is  the owner
of the land but the operator is some other entity who, consequently,
may be the party responsible for meeting the financial requirements.  In
that situation, without the above exemption, Federal or State bonds, for
example, would technically be excluded from allowable investments because
they are securities of the owner.  Clearly, such an exclusion is not
desirable since these investments are highly secure.
     The second exception is authorization for the trustee  to invest the
funds in time or demand deposits of the trustee, up to the  insured  amount.
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This 1s  a  fairly common trust practice and,  as discussed In the section
on suitability of trust funds,  may Increase  the availability of trustees
for trusts that Involve relatively s.medl  amounts.
     The third exception authorizes the trustee to hold cash awaiting
Investment or distribution uninvested  for a  reasonable time and without
liability  for the payment of Interest  on  that amount.  This facilitates
bill payments and Investment activities,  since cash would be available
for anticipated bills and for short term  build up of funds, 1n order
to bring about better rates of return  with larger Investments.
     EPA believes, after considering the  advice of experts, that options
and ratios among types of Investments  are too complicated and would Impose
unnecessary activity on the trustee, causing higher trustee fees to be
                       j
paid by  the owner or operator
     o   Various commenters said that,  In  managing the Investments,  the
         trustee should be able to register them 1n nominee form, and
         hold them 1n bearer or book-entry form; to hold some cash 1n
         non-Interest bearing accounts  pending Investment or distribution;
         to vote shares.
     o   Investment management by others,  especially 1f registered with
         the SEC under the Investment Advisors Act of 1940*  should be
         authorized.
     o   The Agency should seek  a "no-action" letter from the SEC so that
         banks can commingle trust funds for  better Investment performance;
         there should be authority to Invest  In common trusts maintained
         by the trustee.
     o   There should be an accounting  of  Investment actlvltes to cover a
         certain period, and which Is subject to review and approval.
     Holding securities In bearer form means they are not registered
and are  the property of the bearer until  title to the security 1s passed
by delivery.   Nominee form means  titles to registered bonds and other debt
securities  are held In the name of a person, firm or corporation holding
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them, rather than the true owner.  Book entry is the method by which  the
ownership of securities is registered and transferred on computers
rather than on paper.  All of these methods are fairly common treatment of
securities in trust administration, since they simplify transfers and
paperwork, and all such investments are shown in the books and records
of the trustee as part of the trust fund.  Accordingly, these activities
are provided for in the trust agreement.
     Financial commenters told EPA that usual hanking trust practice
allows for the retention of some cash in non-interest bearing accounts
pending investment or distribution, in order to allow more flexibility
and better investment activity.  As previously discussed, should funds
be needed for any payments, they will be available without having to
cash in a long-term note, for Instance.  Commenters from the banking
community also advised that it is common trust practice to authorize  the
trustee to vote shares at his discretion.  Again, the trust agreement
reflects authorization of these practices.
     Trust assets can be managed by persons other than the trustee,
such as investment advisors having extensive experience in this area.
Therefore, EPA has authorized the management of trust assets by trustees
and fiduciaries, as defined 1n the agreement, who invest in accordance
with the prudent man standard discussed above.
     A commingled trust fund is a common fund in which the funds of
several accounts, often pension funds, are mixed.  Since it involves
large sums, investment returns are often increased.  However, the Glass-
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Steagall  Banking Act of 1933 (p.U  66-89, 48 Stat, 184) prohibits banks
from managing commingled trust funds.   In order for banks to have commingled
trust  funds for trusts established  under the regulations, financial
commenters  told EPA special  legislation* or a "no-action" letter from the
Securities  and Exchange Commission  (SEC) would be required.   Such a
letter would mean the SEC would not take enforcement action  against  the
bank for operating such a fund.  EPA requested that the SEC  determine
whether  such a letter 1s necessary, and If so, to Issue one;  the SEC
Indicated a no-action letter would  be  appropriate and Issued such a  letter,
dated  October 20, 198Q13.
     The trust agreement allows authorized Investments In common, commingled
and collective funds created by the trustee 1n which the fund Is eligible
to  participate, which should provide a better rate of return, since
larger amounts can be Invested more profitably.  This should Increase
the availability of trustees as well.   Commenters told EPA there would
be  no  problem with the collective Investment of funds paid by one owner
or  operator covering several  facilities with one trust fund.
     Usual  trust practice entails a periodic accounting of the Investment
activities  of the trust funds.   The purpose Is to permit the grantor,
and sometimes the beneficiary,  to review the transactions and state  any
objections.   When the accounting report Is approved, It lessens  the
possibility  of litigation based on  the propriety of Investment decisions
and activities that took  place  years before a complaint was  made.  This
report also  provides  a  current  statement of the value of the trust fund.
Accordingly,  the  regulations  and trust agreement provide for an  annual
report to the  owner or  operator and the Regional  Administrator of the
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value of the fund and the investment activities.  The owner or operator
will have 90 days to review the report and state any objections.
     o  The trust agreement should address the duties and powers  of the
        trustee, especially regarding payments from the trust.
     o  There should be provisions for the compensation of the trustee.
     o  There should be guidance for the trustee if the Grantor is
        unavailable.
     o  Language 1s needed to address the extent of the trustee's liability.
     o  The procedure for trustee resignation and replacement should be
        stated.
     o  It 1s peculiar, for this type of trust, that trustee consent is
        required for termination of the trust.
     In response to these comments, the Agency added certain provisions to
the trust agreement and clarified others.  The trustee is now responsible for
notifying the Regional Administrator when an owner or operator, during the
pay-In period, fails to make a payment to the trust fund within 30 days
of the due date, and when 20 percent of the amount allocated for closure
remains in the fund; for periodic valuations of the trust fund and reporting
of investment transactions; and for making disbursements from the trust
fund as directed.
     Provisions for compensation of the trustee are Included.  While
specific fee structures are often proprietary information, EPA learned
that trustees fees are usually based on a percentage of the amount of
the trust fund.  Some trustees also charge for transactions, or for
the extent of the trustee responsibilities.  The Agency attempted to keep
trustee activities to a minimum, while still assuring that the purposes of
the trust fund are carried out.
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     If the owner or operator  1s unavailable or uncooperative  during  the
existence of the trust fund, the trust agreement now addresses what actions
may be necessary In situations such as trustee resignation  and amendment  of
the trust agreement.
     The trustee 1s responsible for any errors 1n the administration  of
the trust that are the result  of not acting In good faith.  This  Includes
errors made through willful negligence or gross misconduct.
     Upon written agreement of the owner or operator, the trustee, and the
Regional Administrator,  the trustee may resign or the owner or operator
may replace the trustee.   In that event, the owner or operator may appoint
a  successor trustee.  If the owner or operator cannot or does  not appoint
another trustee, the present trustee will request a court of competent
jurisdiction to appoint  a successor.  The owner or operator must  change
the trustee 1f the trustee Institution falls to meet the requirements of
the regulations.  The name of  the successor trustee and the date  on which
it takes over administration of the trust will be sent to the  Regional
Administrator, the owner or operator and the present and successor trustee
10 days before that change becomes effective.
     Trustee consent Is  required for termination of a trust, because  the
SEC Indicated that this  would  have some bearing on Its decision to Issue
a no-action letter^.
     Final Regulation.   The standard language for the trust agreement
has been revised to Include those provisions and practices  that are In
keeping with common trust practice, and that do not Interfere  with the
Intent of providing financial  assurance for the closure or  post-closure
care of hazardous waste  management facilities.  The extensive  chances
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include the addition and clarification of language regarding the  duties,
                      <
investment activity, compensation, replacement,  and liability of  the
trustee.
     The Introductory material to the trust fund agreement describes  the
parties to and the purpose of the trust fund.  Section 1 defines  "fiduciary",
"grantor", and "trustee" for the purposes of the trust.  Section  2  provides
for the identification of the facilities and the amounts of the closure
and post-closure cost estimates covered by the trust agreement.  Section  3
describes the general establishment of the trust.  Section 4 provides for
the reimbursement by the trustee of the owner's or operator's (or any other
person authorized to conduct closure and post-closure activities) closure
and post-closure expenditures and for other payments in connection with
closure and post-closure care.  Section 5 discusses the payments  that
comprise the fund.  Section 6 addresses general trusteee management of
the fund, while Sections 7 and 8 more specifically discuss commingling
and investment and the express powers of the trustee.  Section 9  concerns
the treatment of taxes and expenses associated with the trust.  Section
10 provides for the annual valuation of the trust and the reporting of that
valuation to the owner or operator and the Regional Administrator.  Section
11 allows for consultation of the trustee with counsul.  Section  12
authorizes trustee compensation.  Section 13 sets forth the procedure
for successor trustees.  Section 14 addresses instructions to the trustee
by the owner or operator and the Regional Administrator.  Section 15
calls for notice by the trustee of nonpayment to the fund by the owner
or operator, to be provided to the owner or operator and the Regional
Administrator.  Sections 16 and 17 cover amendment and irrevocability and
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termination of the trust agreement,  Section 18 addresses the extent of
trustee liability.  Section 19 provides for the choice of state law for
the administration of the trust.  Section 20 1s a discussion of the
Interpretation of the Section headings and use of grammar 1n the trust
agreement.  The regulations also provide an example of an acknowledgment
page, which must accompany the trust agreement and may differ 1n content
according to  state requirements.
     The Agency believes the trust agreement language as presented In
the final regulation should be acceptable to the affected parties and Is
appropriate to carry out the Intent of the regulations.
4.   Comments on Payments to the Trust Fund.
     Reproposed Regulation and Rationale.  The originally proposed
regulation required that the owner or operator make an Initial  cash
payment to the closure trust fund In an amount equal to the closure cost
estimate, multiplied by the appropriate present value factor.  The
owner or operator had to make annual cash payments during the life of
the facility to the post-closure trust fund based on multiplying the
annual post-closure operating costs by 16.35, then dividing that product
by the "sum of annuity" factor for the appropriate period of payment.
     The reproposed regulation called for payments to the closure and
post-closure trust funds to be made over 20 years or the operating life
of the facllty, whichever period was shorter.  The payments had to be In
cash or marketable securities; the securities were to be valued by
the IRS method for valuing securities for estate tax purposes.   All
valuations were to be made by this method.  The reproposed regulation
required that the payments be adjusted for Inflation, changes 1n the
cost estimate, and changes 1n the value of the fund.
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     The Agency Increased the pay-In period for the closure trust funds
because: It was consistent with the maximum pay-In period allowed for
accumulation of the post-closure trust fund In the originally proposed
regulation; 1t would eliminate the need for firms to suddenly divert a
large amount of cash Into a trust fund; and EPA felt the risk of inadequate
funds in the trust in the event of early closure was acceptable since the
lump-sum payment might threaten the life of some smaller facilities, thus
precipitating a capacity shortage.
     Under the reproposal, 1f an owner or operator failed to make the
annual payment within 30 days of the scheduled date, the trustee had to
notify the Regional Administrator within 5 days thereafter.  The Regional
Administrator could then order the owner or operator to begin closure
for failure to meet the financial requirements.
     The amount of any change In the cost estimate was to be distributed
equally among the remaining annual payments.  Each year the owner or
operator had to determine the value of the fund and make payment adjustments
accordingly.  Payment adjustments after the pay-In period had to be made
within 30 days of any change 1n the estimates.  Owners or operators
could pay 1n the entire amount of the estimate at once or in accelerated
payments if they so desired.
     If an owner or operator established a trust fund having Initially
used one of the other financial assurance mechanisms, the amount deposited
in the trust had to equal the amount the trust fund would have contained if
the trust had been established on the effective date of the regulations,
and payments had been made as specified in the regulation.
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     Comments and Responses.  The Agency received several comments regarding
the mechanics and tax consequences of payments to the trust, as follows:
     o  The payments to the trust funds should be tax deductible in the
        year of payment and the  trust Income should be tax-exempt if it
        1s not withdrawn  from the trust.
     o  Legislation to provide for favorable tax treatment should be
        enacted, such as  that enacted for the Black Lung Disability
        Trust Fund.
     o  An Internal Revenue ruling regarding the tax treatment of these
        trust funds should be obtained.
     o  The owners or operators  should have the option of directing
        excess funds to a charity or government agency 1n order to obtain
        more favorable tax treatment.
     EPA made several Inquiries  at the Internal Revenue Service (IRS)
concerning the tax treatment of  the trust funds under the reproposed
regulations, although the Agency has no jurisdiction or responsibility
In tax matters*  The IRS  is reluctant to issue rulings on regulations
that are only proposed, not final.
     According to IRS staff, under current tax rules, while the costs of
closure and post-closure  care are considered necessary and ordinary
business expenses, the activities, and therefore the expenditures, will
generally not take place  until some years after the trust payments are
made.  Consequently, the  IRS staff said, payments would not be tax deductible
in the year of payment, and the  trust Income would be taxable to the
owner or operator at the  corporate rate.  IRS staff also advised the
Agency that the irrevocability of the trust and options of directing
excess monies to a public charity or government entity do not change the
tax treatment of payments to this trust.  However, the fees for the
trust will be deductible  in the year of payment since the funds do not
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create or enhance a capital asset, provided that no lump-sun fee payments
are made.  In that case, the fee would have to be amortized over the
period covered by the fee.14
     The IRS staff cautioned EPA that, since there 1s no formal ruling on
tax treatment of this trust fund, Its opinions may not reflect actual  tax
treatment.  It was suggested that the best approach to the situation is to
obtain specific statutory  language from Congress addressing the tax
treatment.  The Agency agrees that statutory action such as the Black
Lung Disability Trust Fund may desirable, but that is beyond the scope of
this regulation.
     o  Commenters said the type of marketable securities for payments
        to the trust fund  should be specified.
     o  There should be authorization for the trustee to retain assets
        received 1n kind.  The payments should be acceptable to the trustee.
     o  Payments to the trust should not Include securities in the owner's
        or operator's businesses.
     o  The IRS method for valuing securities is too complicated;
        securities should  be valued at fair market value.
     The Agency made changes 1n the trust agreement and regulations
taking into account many of these comments.  The payments to the trust
fund must be in cash or securities that are acceptable to the trustee,
who must act within the prudent man guideline.  Therefore, the trustee
can retain assets received in kind only 1f they are acceptable under the
provisions of the Investment section.  Payments to the trust should be
acceptable to the trustee, so that securities which may be relatively
worthless or difficult to convert to cash are not used.  This Is a typical
trust provision.
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     All payments and Investments will not Include securities 1n any

business operation of the owner or operator, except for a Federal  or

State entity, for reasons of potential bankruptcy discussed above.

     The Agency agrees that the IRS method of valuing securities for

estate tax purposes may be too burdensome and not In keeping with  this  type

of trust.  To ease the administrative burden of the trustee, which helps

to keep trustee fees down, securities are to be valued at market value

In all valuations of the trust fund payments and assets.  Market value  1s

the price at which an Investment may be sold at free sale at a recognized

trading center-^

     The Agency received several comments on the length of the pay-In

periods for  closure and post-closure trust funds:

     o  Several commenters favored a 20 year pay-In period for both
        closure and post-closure trust funds, In order to avoid the
        commitment of large sums of capital by an owner or operator at
        the  outset.  These commenters were of the opinion that lump-sum
        payments or the shorter pay-In periods that had been proposed
        would Impose too great a burden on the regulated community,
        forcing many firms out of operation and discouraging new firms  from
        beginning operations—and thus reducing the national capacity
        for  hazardous waste disposal at a time when acceptable facilities
        may  already be too few 1n number.

     o  Other commenters objected to the 20 year pay-In period as  too long,
        reasoning that the funds available during the lengthy buildup
        would be Inadequate 1n any of several circumstances, Including
        those where an owner or operator went bankrupt, used up his
        capacity before Intended by the closure plan, chose not to comply
        with stringent permit requirements, or was forced Into closure
        for violation of any RCRA standards.  These commenters warned that
        It Is dangerous to prolong the lives of marginal firms, that an
        extended pay-In period would not add to the pool of environmentally
        sound facilities, and that such a pay-In period would, In  effect,
        compel  the taxpayer to subsidize closure or post-closure where  the
        owner or operator failed to provide It.

     o  Some commenters suggested various middle-ground approaches; e.g.,
        since permits will  be Issued for a maximum of 10 years, the pay-'
        1n period should not exceed 10 years.
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     Under the first proposal Issued December 1978 the Agency required  that
the closure trust fund be fully funded when established.  The Agency  selected
the fully funded trust to provide financial assurance whether closure takes
place as planned or closure becomes necessary prematurely due to economic
difficulty or as a result of a government agency's order based on problems
associated with the operation or maintenance of the facility.  Immediate
full funding of the trust fund represents a significant financial burden
to the regulated community, however, in that it requires the owner or
operator to set aside a large sum of capital at one time.  This burden
assumes an added significance under current tax laws, which do not allow
payments into these trusts to be considered a deductible business expense
because no expense occurs in a tax sense until the funds are used for closure.
     The environmental impact of this economic burden might be substantial.
It would tend to drive companies out of hazardous waste management and
discourage new companies from entering the field, thus  reducing the national
capacity for hazardous waste disposal at a time when we may be short of
sites which are acceptable from a health and environmental standpoint.
     The Agency responded to this problem  in the reproposal of May 19,  1980,
by allowing a pay-in period of 20 years or facility life, whichever is shorter,
for both closure and post-closure trust funds.  Also, several alternative
mechanisms were allowed which are expected to be substantially less costly
to the regulated community.
     In the final regulation for interim status, EPA continues to allow
both closure and post-closure trust funds  to build at 5 percent per year.
Interim status is supposed to be a period  of transition for hazardous waste
facilities from no Federal hazardous waste regulation to fairly complex
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Federal hazardous waste regulation.  As such, EPA wants the transition to be
gradual.  The Agency has, set the buildup period for trust funds to prevent
the dislocations and capacity problems that might occur from a faster buildup
of trust funds.
     For Interim status facilities which become permitted, the owner or
operator must fund the balance  of the trust funds over the term of the
Initial permit  (a maximum  of 10 years under §122.9 of this Chapter).  At the
end of this  term, the Agency may decide not to renew the permit.  Based on
that consideration, the Agency  decided to  establish a pay-In period equal
to the term  of  the permit.  The Agency does not want to be 1n the position
of having  to consider whether to allow a poorly managed site to remain 1n
operation  so that It could continue  to build  Its trust fund to afford
closure and  post-closure care.  The  trust  should therefore be fully funded
at the end of the term of  the permit to assure that proper closure and post-
closure care can be carried out.
     EPA will require that trust funds for new fadlltes also be built over
the life of  the permit.  New facilities, Hke existing facilities, present
a potential  for premature  closure during the  fund buildup period.  Again, an
apparent simple solution Is full funding up front.  The Agency need not be
concerned  about dislocations Induced among new facilities by too stringent
a pay-In requirement as 1t does with existing facilities.  A decision for
Immediate  full  funding, however, sets up a significant differential In RCRA
    *
compliance costs between new and existing  facilities whose owners or
operators  need  to use trusts to meet the financial requirements.  EPA believes
1t may be counterproductive to  establish an Immediate pay-In requirement for
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new facilities, especially when old facilities can build trusts over time.
This would encourage the continued use of existing facilities and discourage
the building of new sites conforming to current technical standards.
     The 5 percent a year pay-in period, which was in the reproposal and is
now allowed only during interim status, was criticized by some commenters.
They pointed out that the public might have to bear a significant portion
of total closure and post-closure costs over that time due to the failures
of firms.  With a faster buildup, however, there are also closure and
post-closure obligations which would fall to the public from firms which
close immediately when faced with the higher costs.  The Agency believes
that some closure and post-closure costs will be borne by the public
regardless of the pay-in period.
     Although the preceding was the basis for the Agency's decision,
extensive analysis was conducted In response to comments that the trust
funds should be paid in at once, not over 20 years, in order to minimize
the effects of the bankruptcy rate on the amount of closure and post-
closure costs borne by the public.  This analysis was done separately for
existing and new facilities.  It required various assumptions and
predictions about uncertain future events.  The Agency has reached no
position on which of these future events are most likely.
EXISTING FACILITIES
     Existing hazardous waste facilities will Initially be governed by the
Part 265 (interim status) regulations.  When issued a permit, a facility will
then be governed by the Part 264 (permitted status) regulations.  It will take
several years to Issue permits for all existing facilities.  Interim status  is
designed to be a period of transition for hazardous waste facilities from no
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Federal regulation to fairly comprehensive regulation-  As such, the Agency's
objective 1s that the transition  be  gradual, 1n order to avoid dislocations or
capacity problem* that comprehensive  regulations plight otherwise cause.
The Bankruptcy Rate and Recovery  of Unfunded Trust Payments
     A study was undertaken to  calCHlate  an optimum pay-In period that
would minimize the costs  the public will  assume when the funds 1n an
owner's or  operator's trust are Insufficient for closure or post-closure,
recognizing that, 1n events, of  premature  closure, complete assurance of
funds  for closure and post-closure will not be provided through the
trust  fund  mechanism.
     Fundamentally, the study was concerned with comparing the potential
for bankruptcy of owners  or operators using trust funds for existing
facilities  building over  a 20 year period with alternative pay-In periods.
                                     V
To begin the study, the annual  bankruptcy rate was estimated for the
type of firms expected to use trust  funds.  The percentage of trust fund
payments that would go unfunded at that rate of bankruptcy for various
pay-In periods were then  computed.
     To get an Idea of what the bankruptcy rate might be for trust fund
users, the  staff focused  on three probable attributes 1t believes firms
that would  establish trusts are likely to have.  First, nearly all of
these firms will be manufacturing companies, since 95 percent of the
waste generated In 1980 1s from manufacturing Industries.16  Second,
most trust users will be  Intermediate-size firms; small firms would be
most likely to dispose of waste off-site  and large firms would be more
likely to obtain a letter of credit or a  surety bond.  Third, many trust
fund users will be firms that do  not  have strong credit ratings or
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sufficient collateral — they must establish a trust fund,  because these
factors preclude them from employing other financial assurance mechanisms.
     An analysis of historical bankruptcy data focusing on  the first  two
attributes — manufacturing companies of Intermediate size  -- showed
that the annual failure rate for firms of this size would most likely be
about 1 percent (Appendix A).  A separate analysis, however,  focusing on
the first and third probable attributes of trust fund users -- manufacturing
companies with poor credit ratings — indicated the annual  failure  rate
would probably be 1.5 percent  (Appendix B).  Both estimates of the  bankruptcy
rate were used to provide a reasonable range for what the actual  rate of
business failure might be for  trust fund users.
     To estimate the effect of these bankruptcy rates for different
pay-in periods, the  staff then constructed a computerized financial
model to calculate the percent of trust payments that would be left
unfunded under different pay-In periods at each bankruptcy rate (Appendix
C).  Exhibit I shows the results of the analysis when the assumption is
made that EPA will not recover any of the money that has not yet been
placed in the trust  funds of  firms that go  bankrupt each year.
Exhibit I - Percentage of Total Trust Funds Not Collected*
Trust Fund User
Annual Bankruptcy Rate
1.0%
1.5%
Length of
1
0%
0%
Trust Fund Pay-In Period (Years)
5 10
2.5% 5.1%
3.7% 7.5%
15
6.8%
9.9%
20
7.8%
11.2%
      *The  exhibit 1s based on no recovery of funds  from  bankrupt firms,
       and  a  2%  real  discount rate.
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     The 2Q-year pay-in period would allow for 7.8-11.2 percent  of  the
closure and post-closure costs to go unfunded.  This is a substantial cost
for the public to bear.  Considering that industry will expend millions
of dollars 1n the coming years for proper closure and post-closure
care under RCRA, and that much of this will be funded through  trusts,
even the unfunded payments of 2.5-3.7 percent with the 5 year  period
are not negligible.
     It Is reasonable  to assume that the Agency would be able  to recover
some of the funds from firms that would fall Into bankruptcy each year.
However, It Is doubtful that the Agency could recover most of  the money,
and In some Instances  recovery may take several years of litigation and
cons 1 de,rable legal resources.
     Th.£ facts 1n Exhibit I show a greater public burden with  longer
pay-In periods.  Other facts, however, must be taken into account.
Effects of the Reduction of the Pay-in Period from
20 Years for Existing  Facilitie's
     A group of plants were selected from two Industries believed to
be typical of the type of firms that would require trust funds.   The
effect on these firms  of shortening the pay-In perlgd frqm 20  years
was analyzed (Appendix D).
     Exhibit II shows  the results of an attempt to estimate the percentage
of plants that would shut down under different pay-In periods due to  the
costs of compliance with the RCRA regulations.  Clearly, the shorter  the
pay-in period, the more expensive the compliance costs are and the  more
plants that will close down as a result.  (For the purposes of this
discussion, "plant closures" refers to the shutting down of an industrial
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plant's operations and "site closures" refers to the closure of a hazardous
waste facility as specified under the RCRA regulations.)
Exhibit II - Percentage of Plant Closures Induced by
             the RCRA Regulations Under Varying"
             Pay-in PerTooT           '
                       Length of Trust Fund Pay-In Period (Years)
                                 1        _5_       10       20
Plant Closures                 21.5%     13.1%     8.4%     2.8%
     If the trust fund had to be fully funded Immediately, more than
seven times as many plant closures would result as under a 20 year pay-In
period.  Assuming that the results of this analysis can be applied to
the general population of firms that will use trusts, 1t 1s obvious that
the Impact of a decision to significantly reduce the pay-In period 1s
severe.  Most Importantly, most of the firms forced to close because of
a reduced pay-In period may be unable to afford, or unwilling to use
their remaining assets, to perform proper closure or post-closure care
of their facilities.  Therefore, simply reducing the pay-in period does
not address the problem of unfunded site closure and post-closure care.
     Some of the on-s1te closures predicted in the analysis might not occur
because the owner or operator would switch to off-site waste management
and thus avoid the need to establish a financial assurance mechanism.
However, the staff was unable to ascertain how often this avoidance would
be possible.  Importantly, for many plants that operate hazardous waste
surface Impoundments, which are common In many of the manufacturing
Industries, this will be Impossible.  Also, presuming that a firm managed
waste on-s1te because 1t was cheaper, a move to off-site disposal might
be economically impossible.  In many areas of the country off-site commercial
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capacity for managing hazardous waste 1s Insufficient and  therefore,  In
the future disposal prices for the use of off-site services  may  Increase
substantially.16  The staff assumed, In analysis discussed below,  that
the percentage of plant closures under various pay-In periods  would
range between those 1n Exhibit II and half those percentages.  These
amounts will be referred to in the discussion that follows as  the  "full"
induced plant closures and "half" Induced plant closures for simplicity.
     After analyzing the induced plant closures, the staff decided to
analyze the combined effect of the bankruptcy rate and the amounts of
induced plant closures.
Balancing of the Bankruptcy Rate and Induced Plant Closures
     The staff looked at the combined effects of annual  bankruptcy rates
of 1.0-1.5 percent and the Induced plant closures under varying  pay-in
periods to assess what portion of the trust users'  closure and post-closure
costs may not be paid.
     Considering that only a modest amount of the funds for  closure and post-
closure may be recovered from firms induced to shut down because of the
pay-In period and from firms falling for other reasons (those  reflected in
the bankruptcy rate), the staff assumed a 25 percent fund  recovery rate from
both types of firms.   The induced closure amounts from the Industry analysis
mentioned In the previous segment (Exhibit II) and half those  amounts, to
reflect the capability of some firms to adjust and not close,  were each
used to discover what percentage of closure and post-closure costs would
be unfunded due to induced plant closures and the bankruptcy rates.
Exhibit III displays  the results of the "full" induced plant closure
analysis, while Exhibit IV shows those of the "half" Induced closure
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analysis.  The analyses used the same computer model  as used to assess
the effect of the bankruptcy rates.  (Appendix C).
Exhibit III - Percentage of Total Closure and Post-Closure Costs
              Unfunded with "Full" Induced Plant Closures by
              Bankruptcy Rate, by Pay-In Period*
Annual Trust User
Bankruptcy Rate              Length of Trust Fund Pay-in Period (Years)
                              1          5         10      20
      1.0%                  19.9%      14.0%      11.5%     8.3%
      1.5%                  19.7%      14.6%      13.0%    10,8%
      *  The exhibit  1s based on a 2% real discount rate.
Exhibit IV - Percentage of Total Closure and Post-Closure  Costs
             Unfunded with "Half" Induced Plant Closures by
             Bankruptcy Rate, by Pay-In Period*
Annual Trust User
Bankruptcy Rate              Length of Trust Fund Pay-In Period (Years)
                             _1_        _5_        10       20
      1.0%                  10.3%       8.1%       7.7%     7.1%
      1.5%                  10.2%       8.8%       9.4%     9.6%
      *  The exhibit  1s based on a 2% real discount rate.
     The analysis  using full plant closures Indicates that an Immediate
pay-In period  would result  In the highest rate  (19.7-19.9%) of unfunded
closure and post-closure  costs.  This 1s  due to the very large number of
closures this  requirement would Induce.  The smallest problem Is caused
by  allowing a  20 year pay-In period—8.3  to 10.8 percent of the trust
payments would go  unfunded.  The unfunded costs are half the amount they
would  be under an  Immediate pay-In  scheme.
      In Exhibit IV, however, using  "half" Induced plant closures, a
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significant change occurs.  At a bankruptcy rate of 1.0 percent,  again  a
20 year pay-in period results in the lowest amount of unfunded  costs.
However, with a bankruptcy rate of 1.5 percent, a 5 year pay-in period
yields the smallest percent of unfunded closure and post-closure  costs
(8.8 percent), although there is less than a 1 percent difference between
it and a 20 year pay-in period.
      Two fundamental insights are gained from looking at the forecasted
ranges for the bankruptcy rate and induced closures.  First,  no matter
how  the pay-in scheme is  structured, one cannot be assured that the
costs of closure and post-closure care would be covered for all existing
sites.  At best, one can  hope to maximize the  funds available for these
activities from trust users.  Second, given the best estimates of the
range of the  bankruptcy rate and  induced plant closures, a 5 to 20 year
pay-in period ensures the availability  of more funds for closure  and
post-closure  than  does an immediate  pay-in  scheme.
     Within the ranges for estimated bankruptcies  and  induced closures, one
cannot predict what the actual  bankruptcy  rate will be in the future for
trust fund users and how  many plants the RCRA  regulations will induce to
close.  In addition, uncertainty  inherently existed in forecasting the
ranges for these two critical variables.   In  light of  these  uncertainties,
the  staff decided  next to analyze  the cost of  a wrong  decision In setting
the  pay-in period.
The  Cost of a Wrong Decision on the  Pay-in  Period
     The staff examined the cost  of  establishing  a 5 year trust  fund pay-In
 period coupled with the discovery  that  the period ought to be  20 years;
 the  reverse situation was also  examined.   Considering the uncertainties
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of the bankruptcy rate and Induced plant closures, the staff believed
that the most prudent selection would be a pay-In period that would
cause the least problem 1f 1t proved to be Incorrect.  One could  adjust
the pay-In period after the RCRA regulations had been 1n effect for a
few years and benefit from the Initial experience gained In administering
the regulations.  It was therefore Important not to make a mistake that
could have relatively severe consequences before 1t could be corrected.
     The analysis of this Issue was constructed using the computer model
built for the earlier analysis, with the addition of the following
assumptions built Into the model:
          0  The average cost of site closure and the money required
             at closure for post-closure activities would be $200,000.
          0  About 4,350 existing waste management facilities  would
             require trust funds under RCRA.
          0  A mistake would be detected and corrected in 5 years.
     The first two assumptions were developed solely for illustrative
purposes.  Currently, the average site costs for  closure and  post-closure
activities are not certain.  However, costs will  vary by the  type and
size of waste management fadltles.  The number of waste management
facilities requiring trusts 1s also uncertain.  The approximation provided
here resulted from a rough assessment of the regulated community  In  the
Draft Economic Impact Analysis for the May 19, 1980 RCRA regulations
(Appendix E).  The last assumption was made considering that 1t would
take several years to collect and evaluate data,  decide the Agency had
made a mistake, and go through the rule-making process to correct for
it.
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     The staff analyzed the following scenarios:
     SCENARIO (1):  The pay-In period 1s set at 5 years,  because one
accepts the 1.5 percent annual bankruptcy rate  and the  "half" Induced
plant closures amount.  The Agency discovers that the induced plant
closures 1s wrong ~ that the number Is really the amount of the "full"
Induced plant closures.  Or, EPA discovers that both beliefs were wrong,
that "full" Induced plant closures was right and that the annual bankruptcy
rate 1s 1.0 percent.  EPA corrects the mistake and sets  the pay-In period
at 20 years.  This occurs 5 years after the RCRA program's Implementation.
     SCENARIO (2);  The pay-In period 1s set at 20 years, because one
accepts that the annual bankruptcy rate would be 1.0 percent and that
"full" Induced plant closures would occur for the entire population of
trust fund users.  However, the Agency discovers the Induced closure amount
Is wrong when only half the expected Induced plant closures occur, and
the annual bankruptcy rate Is 1.5 percent.  EPA corrects the mistake and
sets the pay-In period at 5 years.  This correction occurs 5 years after the
RCRA program's Implementation.  Notably, 1f EPA discovered only that the
amount of Induced plant closures was wrong and that It was "half" the
Induced plant closures, 1t would still want to leave the pay-In period
at 20 years.  (See the discussion on Exhibit IV).
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     Exhibits V-VI show what happens under the  two scenarios.

Exhibit V - Present Value of Additional  Unfunded Closure/
            Post-Closure Costs Resulting From EPA's Setting
            a 5 Year Pay-In Period That Is Corrected to 20
            Years after 5 Years - SCENARIO 1
     Contrary to Initial beliefs
     the Agency discovers:
                                                (Millions $)
                                    "Full" Closures*
Unfunded Closure/Post-
Closure Costs for 5 Year
Pay-In                                  101.4?

What Unfunded Closure/
Post-Closure Costs Would Be
If EPA Had Initiated 20 Year
Pay-In                                   51.86

Additional Unfunded Costs
In the Initial 5 Years
Resulting from a Wrong Decision          49.63

*  The 1.5% bankruptcy rate was right.
"Full"  Closures
 & 1.0$ Bank-
 ruptcy Rate
     96.17
     40.87
     55.30
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Exhibit VI - Present Value of Additional Unfunded Closure/
	Post-Closure Costs Resulting from EPA's Setting a
             20 Year Pay-in Period That is Corrected to 5 Years
             after 5 Years - SCENARIO 2

                                             (Millions $)
     Contrary to Initial beliefs
     the Agency discovers:
                                                          "Half" Closures
                                                           * 1.5 Bank-
                                    "Half" Closures*       ruptcy Rate

Unfunded Closure/Post-
Closure Costs for 20 Year
Pay-In                                   32.04              .  61.13

What Unfunded Closure/Post-
Closure Costs Would Be  If
EPA Had Initiated 5 Year
Pay-In                                   54.30                60.02

Additional Unfunded Costs  In
the Initial  5 Years Resulting
from a Wrong Decision               Not Applicable**            1.11

  * The 1.0%  bankruptcy  rate was  right.

** In this situation, a 20 year  pay-In  period remains  the preferable  choice.
   See Exhibit  IV.

     Exhibits V and VI  demonstrate  that the  cost of a  mistake  1n setting

a 20 year pay-In period that can be corrected 1s much  less than  that  for  a

mistake with a  5 year pay-In period.   (The same  analysis was done assuming

the mistake  could be corrected In two years, and similar results were obtained.)

 It costs  about  $1 million  to be  Initially wrong  In  setting a 20  year

pay-In period.  It costs between $50-$55 million In additional unfunded

costs to  be  Initially wrong 1n setting  a 5 year  pay-In period.  The

 primary  reason  for this Is that  one cannot "bring back" the higher number

 of  plants forced to close  because of  the shorter pay-In period once 1t

 1s  established.
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     Considering this  stiff penalty for being wrong In establishing  a
5 year pay-1n period at the RCRA program's outset, one can see that
setting a 5 year pay-In period would be unwise.  One other Important
fact reinforced this posltlpn.  As pointed out 1n the previous segment,
1n the case where  there 1s an annual bankruptcy rate of 1.5 percent  and
"half" the Induced plant closures for trust users, the 5 year pay-In
period 1s not significantly superior to the 20 year period.  Yet It  was
only In that Instance  that the 5 year period was preferable at all.
     Although the  analysis 1n this segment confirms the Agency's decision
to move away from  requiring a 5 year pay-In period and toward the 20
year period, another material consideration weighs against allowing  a  20
year pay-1n period for all existing sites.
RCRA Permit Life
     In the Consolidated Permit Regulations published May 19, 1980,  In
the Federal Register,  EPA announced that hazardous waste management
facilities were not to be Issued an Initial permit for a period to exceed
10 years.  At the  end  of the Initial permit term, EPA would review the
permittee's situation  and decide whether to renew the permit, or deny  a
renewal and require a  facility to close.  However, EPA would not want  to
require a facility to  close without being assured that the permittee's
trust was fully funded.  Also, the Agency would not want to be In a
position where 1t must consider allowing a poorly managed site to remain
1n operation because the closure and post-closure trusts were not yet
fully funded.  To  prevent these potential circumstances, EPA believes,
as a matter of policy, that trust funds should not be allowed a pay-In
period that exceeds the term of the Initial permit of a hazardous waste
management facility.
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Pay-In Period Decision and Rationale for Existing Facilities
     The Agency decided, In the final regulations for Interim status
(Part 265), to allow both closure and post-closure trust funds to build
at a rate of 5% a year unless the remaining operating life of the site
1s less than 20 years.  In that case, the fund would build over the
life of the site.  For Interim status facilities which become permitted,
the owner or operator must fund the balance of the trust fund over the
term of the Initial RCRA permit (a maximum of 10 years).
     EPA believes that Its decision on the trust fund pay-in period
for existing hazardous waste management facilities is consistent with the
overall regulatory philosophy of the Interim status, Part 265 regulations.
The Part 265 standards establish a set of general  requirements for facilities
awaiting permits that require the regulated community, during the transition
period from Interim status to permitted status, to undertake important,
fundamental waste management practices.  The Agency does not intend the
requirements to be overly burdensome for the regulated community.
     Recognizing, In events of premature closure, that a trust fund
mechanism will not provide complete financial assurance of closure
and post-closure care, the Agency is currently studying a variety of
private sector and governmental  programs, Including mutual and pooled fund
approaches.  The Agency will  probably request legislation from Congress
on these subjects.  If a legislative, administrative, or private sector
remedy to the problems of premature closure does not evolve, EPA will
review the present trust fund mechanism and actual program experience,
and reconsider the pay-in period's length.
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NEW HAZARDOUS WASTE MANAGEMENT FACILITIES
     Owners and operators of new hazardous waste management facilities
will be required to provide financial assurance for closure and post-closure
activities In accordance with the final Part 264 requirements only.
However, when compared with existing facilities, one unique and important
aspect for post-RCRA facilities exists for trust fund users that are
building new facilities -- new facilities will be built in conformance
with current technical standards.
A Comparison of New and Existing Facilities
     New hazardous waste management facilities present the same potential
for premature closure during  the  trust fund pay-In period that was discussed
above for existing facilities.  Again, an  apparent simple solution is to
require full funding up  front, particularly  since the Agency need not be
concerned about closures  of  new  facilities  Induced by too stringent a
pay-In  requirement, as  is  the case with  existing facilities.  A decision
for immediate full funding would,  however,  create a  significant differential
in the  burden of  RCRA  regulatory compliance between  new and existing
facilities where  owners  and  operators need to use trusts to meet the
financial  requirements.   Shorter pay-In  periods  lead to greater tax
costs,  opportunity costs of capital and problems of  capital availability
than  do longer  pay-In  periods, all of which will be  of  special concern to
owners  and  operators  of new facilities.
      The  Agency believes 1t could be counterproductive  to  establish an
 immediate pay-in  requirement for new facilities,  particularly  1n that
existing facilities  are allowed to build trusts over time.  This differential
would encourage the  continued use of existing facilities while  discouraging
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the development of new facilities conforming to current technical  standards.
Existing facilities were not built under the environmentally protective
Part 264 technical standards that EPA is establishing, and they may not
be upgraded in the permit process for many years.  Conversely,  new facilities
will be built in conformance with the new technical standards.   In the
near future—a period of transition in which the nation needs to implement
better hazardous waste management practices--the Agency seeks to encourage
the building of new, better treatment facilities to replace old capacity.
An Immediate pay-In requirement for trusts would not be consistent with
this objective.
Pay-in Period Decision and Rationale for New Facilities
     Having considered these factors, the Agency has decided to require that
trust funds for new facilities be built over the life of the initial  permit.
This allowance for new facilities will significantly reduce the cost of the
trusts when compared with an upfront pay-In scheme, thus significantly
reducing the overall RCRA compliance cost, of which the trusts are a
substantial part.  This decision removes a large disincentive for building
new facilities.
     Again, recognizing that some closure and post-closure costs will be
borne by the public regardless of the pay-in period, the Agency is studying
a variety of private sector and governmental programs to deal with premature
closures.  EPA believes that using a mechanism such as a public fund to
handle unfunded closures and post-closure activities is more appropriate.
The Agency plans to devise an approach it can recommend to Congress in
the near future.
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      o Some commenters suggested that notice of non-payment to the
        trust fund should be sent to the owner or operator as well  as
        to the Regional Administrator, reasoning that an expensive,
        long-term mechanism like the trust fund should not be dismantled,
        and closure ordered, 1f payments were late for reasons beyond
        the control of the owner or operator.  Other commenters suggested
        that notice by the trustee to the Agency should be made within
        five business days.

     EPA agrees that notice of non-payment should be sent to the owner

or operator as well as to the Regional Administrator.  However, 1t

remains the responsibility of the owner of operator to make payments

In a timely fashion, as they will be recurring, annual obligations for

which the owner or operator should be able to plan ahead.

     The Agency also believes that there should be a change 1n the time

requirement for notice of non-payment, although the change was to Increase

the number of days allowed, rather than to refer to business days.

     o  Many commenters said there should be clarification as to
        who Is responsible for determining the amount of payments to
        the trust.  Commenters also said the trustee should not be
        responsible for determining the amount or adequacy of the
        payment, or for enforcing payment to the trust.

     The Agency Intended that the owner or operator be responsible for

determining the amount of the payment, and that the trustee would be

responsible for notifying the Regional Administrator when payment was not

made to the fund.  An annual statement of the value of the trust assets

will be sent to the owner or operator by the trustee before the payment

1s due.  However, 1t will be the owner or operator's responsibility to

perform the calculation regarding the amount of the adjusted cost

estimate, the value of the fund, and the amount of the next payment.

The trustee Is not required to determine the amount or adequacy of the

payment, or to enforce payment to the trust fund.
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     o  A few commenters believed that if a trust fund is  established
        after the owner or Operator had Initially used another  Instrument,
        the amount deposited 1n the trust should be  paid-in over the
        remaining life of the site or some other period, rather than 1n
        a lump-sum.
     The Agency has determined that It cannot accept the risk that would
be presented 1f the pay-In period began whenever a switch  was made to the
trust fund Instrument.  If the change Is the owner's or operator's choice,
he should be able to provide the necessary funds.  If he Is not able to
do so, It would Indicate exactly the situation the Agency  must  avoid—lack
of adequate financial assurance for the proper closure and post-closure
care of the hazardous waste management facility.   However, the  owner or
operator who changes to a trust fund will  have the time remaining 1n the
pay-In period to bring the value of the trust up  to  the amount  of the
cost estimate, as long as the first payment Is  in  the  amount the trust
fund would otherwise contain If the trust  fund had been established on
the effective date of the regulations.
     Final  Regulation.  The final  regulation provides  that payments to
the trust fund will  be made In cash or  securities  that are acceptable
to the trustee.  No securities or other obligations  of the owner or
operator,  unless it 1s the Federal  or a State government,  will  be permitted
as payments or Investments.
     Owners or operators of existing facilities will  have  the shorter of
20 years or the remaining operating life of the facilities, as  estimated
1n the closure plan,  to fund the trust  fund.   When an  existing  facilities
receives a permit,  the owner or operator must fund the remaining obligation
over the term of the initial  RCRA permit.
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     Owners or operators who use a trust fund to demonstrate  financial
assurance for new facilities must make payments to the trust  fund over
the term of the Initial RCRA permit.
     If the owner or operator switches to a trust fund mechanism after
using another Instrument, the Initial payment must be at least  equal  to
the sum that would have been paid 1n the trust If, for an existing  facility,
•ft had been established on the effective date of the Part 265 regulations
or, for a new facility, 1t had been established at least 60 days before
the date on which hazardous wastes were first received at the facility.
     Adjustments to the value of the trust fund must be made, In any  case,
during the operating Hfe of the facility to account for any changes  1n
the cost estimate or the value of the trust fund.
5.  Comments on Payments from the Trust Fund
     Reproposed Regulation and Rationale.  The originally proposed  regulation
only allowed reimbursement from the closure trust fund after the closure
activities were completed.  Post-closure expenses could be reimbursed once
a year, as long as an  Itemized 11st of Incurred costs was presented to the
Regional Administrator and he found them 1n accordance with the approved
plan or otherwise justified.  The reproposed regulation allowed owners
or operators to be reimbursed for closure expenses before closure was
completed, as follows: 1f the Regional Administrator determined that
bills for closure were 1n accordance with the closure plan or were  otherwise
justified, he would approve the bills and forward them to the trustee,
who would pay the bills as long as the trustee determined that  the  amount
remaining 1n the fund  allocated for closure of the facility would be
at least 20 percent of such amount before any closure bills were paid.
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The Agency believed that retaining 20 percent provided a significant
level of financial assurance until closure was completed.  Reimbursements
for post-closure expenses would be made In the same manner as post-closure
                         \
activities were performed, although there was not a retention of 20% of the
trust assets until the post-closure period was completed.
     In all cases where the owner or operator applied to the Regional
Administrator for release of excess funds, the Regional Administrator
had 30 days to direct the trustee to release excess funds, unless he
found that the cost estimate was not prepared and adjusted 1n accordance
with the applicable regulations.
     Comments and Responses.  The comments made to the Agency on the
pay-out provisions of the trust fund were as follows:
     o  Language on the pay-out provisions should be clarified,
        especially regarding the trustee's actions.
                                     *
     o  Perhaps the Agency should require that three bids be made
        for performance of closure activities so funds would be
        less likely to be depleted before all closure activities
        were performed.
     o  It should be clarified that the refund of excess amounts
        Is a possibility, and not a requirement, since the owner or
        operator may want to keep the funds In the trust to reduce
        future payments.
     For clarity, the Agency has rewritten some of the language on payments
out of the trust fund. The trustee will act at the direction of the
Regional  Administrator In making payments from the trust fund.  Payments
generally will  be made In the same manner as the reproposal stipulated.
     In the event that a  person other than the owner or operator Is
directed or authorized to perform closure or post-closure care as
a result of a judicial proceeding Instituted under Sections 3008,
7002, or 7003 of RCRA, the Regional  Administrator will  authorize the
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trustee to make reimbursements to that person for closure and post-closure
expenditures.  When the value of the closure trust fund reaches 20  percent
of the amount allocated for the closure activities, the trustee will
notify the Regional Administrator, and further reimbursements will  not
be made for closure expenditures until closure 1s completed, unless the
Regional Administrator directs the trustee to make further reimbursements.
     EPA will not require that bids be made on closure activities,  as 1t
believes owners or operators of most facilities should be able to make
reliable estimates of the costs of closure and post-closure activities.
To Impose this requirement would constitute an unnecessary burden on the
owner or operator, especially since the owner or operator may obtain
such bids 1f he so chooses.
     The Agency believes the final regulations are clear 1n stating that
the owner or operator may request the Regional Administrator to authorize
the release of excess funds from the trust fund.
     The time allowed for the Regional Administrator to act on requests for
refunds from the trust during the operating life of the facility has
been Increased to 60 days.  The Agency believes that Its Regional personnel
may be faced with a considerable Influx of communications regarding the
Individual financial mechanisms, In addition to the efforts required during
the transition from Interim to permitted  status, and the longer period
will remove some administrative pressure  from EPA staff.
     Final Regulation.  The final regulation 1s essentially the same as
the reproposed regulation regarding payments made from the trust fund
for closure and post-closure expenditures.  The owner or operator will
submit Itemized bills for closure or post-closure activities to the
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Regional Administrator.  If the Regional Administrator determines that
the bills are 1n accordance with the plans or otherwise justified, the
Regional Administrator will direct the trustee, within 60 days of the
submlttal, to reimburse the owner or operator In those amounts.   When
reimbursements decrease the size of the closure trust fund to 20 percent
of the amount that was allocated for closure of the facility, the trustee
will notify the Regional Administrator and will not make further
reimbursements until he Is so directed.  There Is no such restriction
on reimbursements for post-closure expenditures.  The same procedure
will be followed when reimbursements are made to Individuals other than
the owner or operator who are directed or authorized as a result of a
judicial procedure Instituted under Sections 3008, 7002, or 7003 of RCRA
to perform closure or post-closure activities.
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E. Surety Bonds
        Reproposed Regulation and Rationale.  The reproposed regulation
   gave owners and operators of hazardous waste management facilities the
   option to purchase surely bonds  1n the amount of the cost estimates to
   meet the requirements  for financial  assurance for closure and post-closure
   care.  Three types of  surety bonds were  allowed in the reproposal.  They
   guaranteed performance of closure, payment of a lump sum Into a post-closure
   trust fund at  the time of closure, or performance of post-closure care.
   The lump-sum option was allowed  for  post-closure care after the Agency
   determined that sureties would be extremely  reluctant to write bonds
   guaranteeing performance of  any  activity for a 30-year term.
        The main  provisions 1n  the  bond regulation and standard bond forms
        were:
        0  Sureties writing the bonds had  to be certified by the U.S. Department
           of the Treasury in Circular 570, "Surety Companies Acceptable on
           Federal Bonds." This 11st Includes  almost 300 companies, and is
           under  continuous review.  The use of Circular 570 relieves  the
           Agency of  the burden of  evaluating sureties.  Certification 1s  a
           minimum criterion;  the Agency reserves  the right to  require
           further qualification of sureties.
         0  Once  closure activities  began,  or were  ordered  to begin,  the
           bond  coverage had to continue until  the obligation  guaranteed was
           completed.   This provision was considered necessary  to prevent  the
           surety from cancelling the bond when coverage  1s  needed most,
           I.e.,  when the owner or operator 1s 1n  financial  trouble,  when
           the  facility 1s not meeting the technical  requirements of the
           permit,  or when the date of closure Is  approaching.
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    0  A cancellation clause  allowed  the  surety to cancel a bond with 90
       days'  notice  to the  owner or operator and EPA.  The regulation allowed
       the  owner or  operator  30 days  to obtain other financial assurance,
       thus leaving  the Agency 60 days during which 1t could order closure
       1f financial  assurance was not restored.  If closure was ordered,
       In accordance with the previous provision the surety would remain
       liable on the bond until all obligations were met.  The owner or
       operator could cancel  a bond upon  30 days' notice to the
       surely, but only after demonstrating other financial assurance
       to the Regional Administrator.
     0 If  a surety was determined to  be liable on a performance bond
       guaranteeing closure or post-closure care, It could choose between
       two  options.   First, It could  arrange  for closure or post-closure
       care to be performed.   If the  surety did not choose to perform
       the  activities covered by the  bond,  It had to pay the penal sum
       of the bond Into an escrow account or  trust fund as directed by
       the  Regional  Administrator. Allowing  this choice between performance
       or payment on the part of the  surety Is standard practice.
     Comments and Responses.  EPA received several conments on the surety
bond provisions.
     0 Closure and post-closure obligations cannot be met with surety
       bonds.  Only  through a direct  cash payment by an owner or operator
       equal to the  entire amount of  the  estimated closure cost of the
       facility Into a trust  fund on  the  effective date of the regulations
       can  these long-term financial  assurances be provided.  In the
       case of post-closure care, owners  or operators of disposal facilities
        should be required to  deposit  the  estimated cost of post-closure
       monitoring and maintenance Into a  trust fund during the operating
        life of the facility.
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     EPA disagrees with this comment.  The Agency believes that surety
bonding 1s a viable optlpn.  This conclusion was reached after consultation
with representatives of Industry trade associations, analysis of the mechanics
of surety bonds under the conditions that win apply during both Interim and
general status, and a review of existing State hazardous waste programs as well
as similar governmental programs that require or permit the use of surety bonds.
     An advantage of surety bonds 1s that, for some owners and operators,
their cost may be lower than that of the trust funds.  Owners and operators
do not have to commit large sums of capital for long periods, although
they of course remain liable for the eventual cost of closure or post-closure
care.
     Another advantage  1s  that surety bonds not only provide full Indemnification
In the financial  sense  but also, 1n the  case  of performance bonds as
allowed under Part  264, establish a responsible party to  arrange for
performance of the  required work 1n the  absence of  the owner or operator.
     The  sureties are  likely  to meet their obligations fully and in a
timely manner, since the Treasury Department  may  decertify a surety from
Circular  570 for  failure  to pay or  perform as required17.  Because
government contractors  are major purchasers of  surety bonds, and are
prohibited from conducting business with sureties which  are not certified,
it is  likely that decertification will  result 1n  lost business  to the
surety, which  is  obviously a strong Incentive to  retain  certification.
The  final  surety  bond  regulations  for  Interim and general  status are written
so that,  once  a  facility  1s properly bonded,  either the  owner  or operator
or the surety  must assume responsibility for  funding the standby trust
or performing  closure or post-closure  care.  Because a  responsible  party
will  at all times be liable for complying with  this regulation, EPA has
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determined that surely bonds meet the standard of providing financial
assurance for closing hazardous waste management facilities, and for
monitoring and maintaining them during the post-closure period.
     0  If EPA allows the use of surety bonds to guarantee the closure
        and post-closure maintenance of hazardous waste disposal facilities,
        owners and operators will be encouraged to default on those bonds
        before they are forced to use their own funds.  There Is no Incentive
        for them to set aside the funds necessary to neet their obligations,
        when they know that the surety company 1s legally bound to assume
        their liabilities.
     The fact that the surety will meet the obligations takes care of EPA's
main concern.  Nevertheless, EPA does not agree with this statement.
Owners or operators who are able to obtain bonds guaranteeing that they
will carry out their closure or post-closure  responsibilities are unlikely
to force EPA to call 1n their bonds for several reasons.
     Surety companies are extraordinarily selective 1n their choice of
clients.   A surety typically strives to reduce Its risk exposure to
zero.  It 1s unlikely that any but financially sound and responsible
corporations will be able to obtain these bonds for hazardous waste
disposal.lfi,22  In addition, sureties have Indicated that they may
1n some cases require collateral amounting to 100% of the penal sum or
even more.1** If a bonded owner or operator were to default, he would
forfeit that collateral to the surety.  Also, an owner or operator who
defaults on a bond may find 1t difficult to obtain any form of third-party
financial guarantee In the future.
     0  A surety association executive commented that a performance bond
        which gives a surety the option of performing closure or forfeiting
        the penal sum of the bond Is preferable from the sureties' viewpoint
        to a financial guarantee bond which guarantees only that the owner or
        operator will have In his possession at the required time sufficient
        funds to perform closure.  Frequently the surety finds that
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        performing the work guaranteed by the bond is less costly  than
        forfeiting the entire penal sum.  For example, sureties  which
        have bonded surface (strip) coal mining operations under the
        Department of the Interior's surface mine reclamation regulations
        are, as they gain experience In the field, discovering that it
        1s often less costly for them to contract out the work themselves,
        should a mine operator default.  The sureties thus prefer  that
        the performance option be retained In the final regulation.

     0  A government surety specialist advised strongly against  EPA's
        inclusion of the performance option In bonds written under interim
        status standards.  During Interim status many closure and  post-
        closure plans will not be closely examined by EPA until  shortly
        before closure.  At that time, the plans may be significantly
        altered.  Such changes might be interpreted as material  alterations
        of the bonding contract.  Unless consent of the surety is  obtained
        for such changes the surety might be able to present a successful
        legal defense against liability on the bond; material alteration
        of the work requirements of a performance bond is in fact  one  of
        the few legally valid defenses against liability.  Therefore,
        EPA should not allow performance bonds to be written during the.
        interim status phase of permitting, and may not wish to  allow
        them under the general status regulation either.17

     EPA agrees that In some cases a surety may wish to accept responsibility

for closing a facility instead of paying the penal sum into a trust fund.

Surety bonds which guarantee performance of activities such as construction,

land reclamation and oil spill cleanups are common, but each clearly

specifies, at the time the bond is written, the nature and extent of the

performance guaranteed by the surety.  During interim status, however,

some closure and post-closure plans may not be closely examined by the

Regional Offices until shortly before closure.  At that time, It is

possible that the Regional Administrator may determine that the plans

require changes which might affect both the cost and type of work  required.

The actual required performance for the particular facility therefore  may

not be specified in any detail during most of the term of the bond.

     Consequently, in the final regulations for interim status only surety

bonds that guarantee payment into standby trust funds for closure and
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post-closure care are allowed.  In the general standards, performance as

well as financial guarantee bonds are allowed since the closure and

post-closure plans will be reviewed as part of the permitting process.

     0  Several sureties suggested that EPA 1s creating an "Impossible"
        situation for them by requiring bonds which remain In effect
        during the entire operating life of the facility.  A 30-year
        post-closure bond would be even riskier.  Unlike an Insurance
        company, a surety expects to suffer no losses, so bonds will not
        be readily available for what Is perceived to be an Inherently
        risk-prone Industry, especially since the cancellation clause
        does not allow the surety to get off a risk easily.  Only after
        the RCRA regulations have been In effect for 20, 30, or even 40
        years will sureties be able to properly assess the risks.

     0  Several commenters Indicated that EPA's requirement that an
        Increase In the cost estimate be reflected In the facility's
        financial assurance mechanism within 30 days would Increase the
        surety's "exposure" and decrease the likelihood that bonds would
        be available.  A surely prefers to write a bond for a fixed
        penal sum, or at least have some Idea of the eventual size of
        the bond.  One commenter noted that "No business judgments
        can be made since bond amounts can be Increased arbitrarily."

     EPA understands that some of the provisions 1t requires to be In

bonds written for hazardous waste management facilities may not be entirely

consistent with the current bond-writing practices of the surety Industry,

and may discourage sureties from writing the bonds at this time.  Long-term

coverage must be provided, however, since closure or post-closure costs

may not be Incurred for up to twenty years or more.  Continuous coverage

of anticipated obligations Is required by the regulations, but could not

be guaranteed 1f a surety were permitted to avoid liability simply by

cancelling a bond or allowing 1t to expire regardless of whether the

owner or operator had provided another form of financial assurance to

take Its place.  It Is likely that such cancellation would come at a

time when coverage Is essential; for example, when a facility Is approaching

financial Insolvency or 1s having difficulty complying with the technical

 requirements of the permit.


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     In the final regulation, the surety must provide at least 90 days'
notice to the owner or operator and EPA prior to cancellation.  Upon
receiving a cancellation notice, the Regional Administrator will consider
the owner or operator to be In violation of the financial assurance
regulations, and will Issue a compliance order pursuant to Section 3008
of RCRA.  If the owner or operator cannot  demonstrate to the Regional
Administrator alternate financial assurance within 30 days of Issuance
of the compliance order, the Regional  Administrator may direct the surety
to place the penal sum of the bond 1n  the  standby trust fund.  EPA 1s
encouraged by the fact that solid waste disposal facilities permitted
under State programs  have been able  to obtain bonds with similarly strict
provisions for guaranteeing continuity of  financial responsibility.20,21
     The requirement  that financial  assurance Increase as the cost
estimates Increase 1s also necessary  for adequacy of financial assurance,
and cannot be substantlvely changed.   This requirement 1s applicable to
all financial assurance mechanisms.  The surety bond language In the final
regulation Includes an optional  rider  by which the owner or operator and
surety agree to  adjust the penal sum of the bond yearly  so that 1t equals
the adjusted cost estimate, provided that  the Increase 1s no more than
20 percent and no decrease takes place without the written consent of the
Regional Administrator.    Inclusion  of such a provision would help
assure that the  bond  will continue  to  provide for coverage of the full
cost estimate.   The owner or  operator  may  find such a provision
advantageous and convenient since  1t allows for adjustment of the penal
sum within a range mutually acceptable to  him and the surety.
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     The Agency realizes that during the next several years 1t 1s likely
that only the sureties' favored clients way be able to obtain bonds for
their facilities, but 1t believes that as sureties' experience with
hazardous waste facilities Increases, bonds may become more readily
available, especially for those facilities with RCRA permits.

     0  EPA's proposed standard bond forms are confusing, excessively
        complex, and contain language and references to the regulations
        which could be misconstrued!  A bond form 1s a formal agreement
        by which a surety agrees to assume a principal's (owner s or
        operator's) obligation to an obligee (EPA) to meet the terms of
        an underlying contract (the regulations).  It should be kept as
        simple as possible.
     After examining numerous bond forms, several of which were written
specifically for hazardous or solid waste disposal facilities, EPA has
determined that Its proposed bond forms were Indeed overly complex and
subject to misinterpretation.  The text of the revised bond forms avoids
unnecessary duplication of the language of the regulations by eschewing
the detailed discussion of the actions required of the surety, principal,
and obligee under various contingencies, which the proposed bond forms
contained.  This change should minimize the possibility that the language
of the bond Itself could be used to subvert the Intent of the financial
responsibility regulation17. Individual forms have been written for
closure and post-closure financial  guarantee bonds, which may be used during
both Interim and permitted status,  and for closure and post-closure performance
bonds, which may be used only by permitted facilities.  The surety and the
owner or operator are required to certify that the EPA standard language
has been used when 1t writes a bond.
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        Sureties expressed concern that an Issuer of a bond for  closure
        or post-closure activities might be held responsible for third-
        party damages resulting from some aspect of the facility's
        operation not related to the closure or post-closure guarantee.
        Even If such Incidents are covered by a separate liability  policy
        It 1s conceivable that 1f the regulations are written Into  the
        bond form, the surety might still be held liable.
     The Agency believes that the extent of a surety's liability on a
closure or post-closure bond 1s made clear both 1n the regulations  and
on the form Itself, and Is explicitly limited to the stated guarantees.
     Final Regulation.  EPA has changed several provisions of its surety
bond regulation 1n response to comments and as a result of Its own  research.
     The final regulation for Interim status allows owners or operators
to obtain financial guarantee bonds which guarantee payment of the penal.
sum Into a standby trust fund.  The penal sum must be in the full amount
of the estimated closure (§265.143(b)) or post-closure (§265.145(b))
costs, unless part of these costs are covered by other allowed mechanisms.
     The final general standard also allows owners or operators to obtain
financial guarantee bonds which guarantee funds for closure  (§264.143(b))
or post-closure (§264.145(b)) costs, or  to obtain surety bonds which
guarantee the performance of facility closure  (§264.143(c))  or post-closure
monitoring and maintenance  (§264.145(c)).
     Some of the key provisions of  the reproposed regulation remain Intact.
Significant modifications Include the requirement that the owner or
operator must establish a standby trust  fund to receive  funds to be paid
by himself or the  surety.   Also,  1f the  owner  or operator  chooses a
financial guarantee bond for closure, he must  fund  the standby  trust fund
at least 60 days before closure is  scheduled to begin.   If a post-closure
financial guarantee bond is chosen, the  owner  or operator  must  fund the
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standby trust fund by the time closure begins.  The closure and post-closure
financial guarantee bonds must guarantee that the owner or operator will
fund the standby trust fund within 15 days 1n the event that closure Is
ordered by the Regional Administrator or a U.S. district court, pursuant
to Sections 3008, 7002, or 7003 of RCRA, or within 15 days of a notice
of termination of the facility's operating permit or Interim status.  If
the owner or operator falls to perform as guaranteed, the surety must
deposit funds in the amount of the penal sum Into the standby trust.  If
the owner or operator falls to perform the activities guaranteed by a
closure or post-closure performance bond, the surety must perform in his
stead, or deposit the penal sum Into the standby trust fund.
     In addition, the surely must provide at least 90 days'  notice of its
Intention to cancel a bond to the Regional Administrator and the owner
or operator.  Upon receiving such a notice, the Regional Administrator
will consider the owner or operator to be in violation of the financial
assurance regulation and will Issue a compliance order pursuant to
Section 3008 of RCRA.  If the owner or operator cannot demonstrate to
the Regional Administrator alternate financial assurance within 30 days
of Issuance of the compliance order, the Regional Administrator may
direct the surety to place the penal sum of the bond In the standby
trust fund.  The latter change was made so that financial assurance can
be maintained without the need to require closure.  In all cases,  a bond
cannot be cancelled if a compliance procedure Is pending.
     Finally, If the adjusted closure or post-closure cost estimate Increases
beyond the penal  sum of the bond,  the owner or operator must, within 60
days, Increase the penal sum accordingly or obtain other financial assurance.
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The surety and owner or operator may elect to attach to the bond form a
rider for adjustments of  the  penalty amount  to the adjusted cost estimate
provided that increases do  not  exceed  20 percent  and decreases take
place only with the Regional  Administrator's approval.
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F.   Letters of Credit
     A letter of credit Is an Instrument by which the credit of one party,
whose financial standing 1s considered more desirable than that of a second
party, 1s extended to a third party.  These three parties to a letter of
credit are the account party, or customer, who Is the applicant requesting
the  issuance of a letter of credit; the Issuer, who is the entity under-
taking the obligation of the account party; and the beneficiary, who is
the  party in whose favor the credit is Issued.  Accordingly, for the
purposes of these regulations, the owner or operator will be the account
party, the bank or financial institution, as defined in the Subpart H
regulations, will be the Issuer, and the EPA, through Its Regional Admin-
istrators, will be the beneficiary.
     The letter of credit specified in these regulations 1s Irrevocable
for  one year periods; no terms or conditions may be changed during this
time without the consent of the parties to the letter of credit.
     The Issuer Is responsible for accepting drafts and documents presented
in accordance with the terms of the credit and is not concerned with any
other arrangements which may exist between the owner or operator and the
EPA.23
     Establishment of the letter of credit Is considered to take place at
the  time of receipt by the beneficiary of the issuing institution's
terms and conditions as set forth In the letter of credit.24
1.  Suitability of letters of Credit for Purposes of These Regulations.
     Reproposed Regulation and Rationale.  The original proposal did not
 allow letters of credit as a method for demonstrating financial assurance
 for  closure and post-closure care.  The reproposed regulation authorized
 letters of credit as a means of assuring funds for closure, for a lump-sum
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payment at the time of closure for post-closure care, and for care  over the

post-closure period.  The Agency included letters of credit in the  reproposal

because it learned that  they could be written so that they could not be

cancelled on short notice.  The Agency believed that irrevocable standby

letters of credit would  be  reliable  instruments that have the additional

advantage of relatively  lower costs  than trust funds, although availability

is generally limited  to  highly credit-worthy customers of the issuer.

     Comments and Responses.  EPA  received  the following general comments

regarding letters of  credit as appropriate  financial instruments:

     o  Letters of credit will not be  viable mechanisms because it
        is rare that  they would  be issued for the long terms EPA
        contemplates;  they  are too expensive for the smaller owners
        and operators;  they are  a  liability on the  bank's books; and
        financial institutions will  be reluctant to issue them because
        EPA can draw  on them if  they are cancelled.

     o  Even if they  are issued  for  long terms,  letters of credit  inter-
        ject an element of  uncertainty in a firm's  financial projections,
        cause a use  of funds that  reduces their  utility, and could  inhibit
        a company's  ability to borrow  at present, even though closure
        and post-closure will  not  occur for years.

     o  Letters of  credit do not provide continuous assurance when  they are
        issued  for yearly periods.  It will be  difficult  to  get  continuous
        coverage,  since the credit amount will  vary as the cost  estimates
        change!  The  banks may not pay when drafts  are presented.

     o  Other commenters said the  proposal  to  allow letters  of  credit is
        feasible  and would have  their support,  since they  ensure adequate
        funds,  yet allow well  established,  responsible companies to
        avoid needlessly tying up  large sums  of money.  They  would be
        useful  for temporary coverage or in combination with  other mechanisms.

     o  Even  if letters of credit are not widely available,  they should
        be  authorized in order to  encourage their development and  imple-
        mentation.   They should only be rejected if they  won't  demonstrate
         secure  financial assurance.

     The  Agency recognizes that letters of credit may not be available to

 all  owners  or operators, especially on an unsecured basis.   However, they

 remain as an option since they will  be available to some,  may reduce the
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cost of compliance for those who can obtain them, and provide satisfactory
financial assurance In EPA's view.  The long time periods for the letters
of credit are necessary 1n order that some continuity of assurance Is
provided.  Letters of credit can be Issued for one-year periods with
automatic renewals.  The length of the letters of credit 1s discussed
1n further detail below.
     While there will be collateral requirements In some cases, 1n addition
to yearly fees, the Agency continues to believe that the letter of credit
will be helpful to owners and operators who can obtain them, since they
Involve costs that may be lower than those for trust funds.  The fee
structure and collateral requirements are proprietary Information and
vary from Institution to Institution.  However, commenters Indicate that
fees may vary from one-half of one percent to three percent of the face
value of the letter of credit, and collateral requirements may vary from
none to full collateralIzatlon.  The Issuing institution performs an
analysis of the business to whom they are Issuing the letter of credit,
and based on the Institution's assessment o^ the financial  strength and
customer standing of the firm, as well as the risk Involved, determines
the amount of the fee and collateral.
     It Is possible that smaller firms with good credit standings will  be
able to obtain letters of credit.   While credits are contingent liabilities
on the bank's books,  as are any loans, the Issuing Institution decides
what risks It 1s willing to assume.
     Some commenters  from the financial  community expressed concern
about the ability of  the Regional  Administrator to draw on the credit
once notice of nonrenewal Is sent; others were not so concerned, even
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suggesting language to clarify the ability to draw on the  credit after
nonrenewal notice is sent.25
     The fees and possible collateral requirements may or  may  not  result
1n higher costs than the other Instruments, and it 1s possible that a
letter of credit may inhibit the borrowing abilities of the owner  or
operator.  However, the owner or operator may choose from  any  of the
authorized instruments after taking Into consideration their advantages
and disadvantages 1n particular situations.
     The underlying purpose of using letters of credit as  a financial
assurance mechanism 1s for the issuing institution to assure that  funds
for closure or post-closure will be available when needed; the Issuer
assumes the risk of bankruptcy or failure to pay on the part of the
owner or operator.  As long as the proper documents are presented, the
issuing Institution will pay the amount stated 1n the sight draft, up to
the full amount of the credit.
     The credits are In effect for at least one year periods.   If the
Regional Administrator receives a notice of nonrenewal, a compliance order
will be Issued pursuant to Section 3008 of RCRA.  If the owner or operator
does not secure another authorized Instrument to demonstrate financial
assurance as  required by the  regulations within 30 days of issuance  of the
compliance order, the Regional Administrator may draw on the letter  of credit.
In addition,  due to the requirements of the Section 3008 hearing procedures,
the final regulations require that the term of the letter of credit
continue  until any compliance procedure is completed.  Provisions for
changing  the  amount of the credit and assuring continuous coverage are
discussed later  in this Background Document.
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     The provision 1n the reproposal  for a letter of credit assuring a
lump-sum payment at the time of closure for post-closure  care  is  not in
the final regulation.  Under the reproposal, the lump-sum payment would
have been made to a trust fund.  With a letter of credit,  an underlying
contract between the Issuing Institution and the owner or operator  defines
their respective obligations.  This contract could be used to  assure the
Issuing institution that the owner or operator Intends to terminate the
post-closure letter of credit and establish a trust fund  at the time of
closure.  This does not differ significantly from the option any  owner
or operator has to establish a trust fund at any time to  demonstrate
financial assurance.  Therefore, the regulatory provision for  this  use of
a letter of credit was deleted.
     EPA believes availability of letters of credit will  Increase as the
issuing Institutions and owners or ooerators become more  familiar with
their use for the purposes of providing financial assurance for the
closure and post-closure costs of hazardous waste management facilities,
particularly since letters of credit provide the necessary level  of
assurance without undue administrative burden.
     Final Regulation.  The Agency continues to allow letters  of  credit
as means of establishing financial assurance for closure  and for  care
over the post-closure period.  As described below, the regulations  and
the  standard language for the credits have been modified  in response  to
several of the comments.
2.   Comments on Who Should be Authorized to Issue Letters of  Credit.
     Reproposed Regulation and Rationale.  The reproposed regulation
authorized any bank which 1s a member of the Federal Reserve System (FRS)
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to Issue the letters of credit.  The Agency believed at that time  that
only those banks that were members of the FRS could Issue letters  of credit
for periods longer than a year, and that such banks would be more  financially
stable than those that were not members of the FRS.
     Comments and Responses.  The comments EPA received regarding  who should
be authorized to Issue letters of credit were as follows:
     o  Banks other than those that are FRS members can Issue credits
        for more than one year.  Falling banks have been members of
        the FRS; FRS membership doesn't necessarily Imply financial
        strength; nor non-membership, financial weakness.  National vs.
        State banks might be a better distinction since national banks
        generally have broader powers, higher lending limits, and  have
        to abide by Regulation H.
     o  The distinction of who should issue should be made on the  basis
        of assets of the bank.
     o  Limitation to FRS members would eliminate savings and loans,
        some of which can issue credits.
     o  Any entity can issue a letter of credit.
     The Agency learned that banks that can Issue letters of credit for
more than one year are not limited to FRS members.26  The Agency also
believes that distinguishing between national and state banks on the
basis of legal lending limits would unnecessarily restrict the availability
of this instrument.  The total amount of the letters of credit issued by
a bank must be under its legal lending limit.  However, one commenter
who has broad experience with letters of credit said If a bank issues a
letter of credit that exceeds Its lending limit, a drawing by EPA  would
be enforceable nonetheless.^
     Regulation H (12 CFR 208) was issued by the FRS and covers general
factors to be evaluated should the bank wish to become a FRS member, in
addition to treatment of letters of credit.  Regulation H requires that
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the credits be treated as ordinary loans, which Invites more scrutiny of
the credit, particularly as to the legal lending Hm1t requirement.   In
and of Itself, however, the requirement does not necessarily provide
better protection for the Agency or the owners or operators.  Letters of
credit may be Issued by ar\y national bank, and by any State bank  that
has the explicit authority to do so.
     As was the case with authorized trustees, the Agency believes that
the Issuing Institution should be subject to some type of regulation and
examination.  Requiring such appropriate regulation and examination  will
help assure an acceptable level of safety and soundness for the financial
operations of the Issuing Institution and for the Interests of the parties
to the letter of credit Instrument.
        The Agency believes a determination of Issuing Institutions
based on the amount of their assets would Indicate little more than
relative size, and that other distinctions are more Important.  Some
savings and loans can Issue letters of credit, and should logically  be
able to do so for the purposes of the Subpart H regulations.  The Agency
will not, however, allow nonfinanclal Institutions to Issue the credits;
to do so would Impose a tremendous administrative burden on the Agency
1n examining their financial standing,  attempting to determine which of
those Institutions would be able to provide adequate assurance that they
themselves would not go bankrupt and reviewing their ability to conform
with letter of credit practices.
     Final Regulation.  The final  regulation authorizes any bank  or
financial Institution with the authority to Issue letters of credit, and
whose letter of credit operations are regulated and examined by a Federal
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or State agency to Issue letters of credit for the purposes of the Subpart
H regulations.
3.   Objections to the Letter of Credit Form.
     Reproposed Regulation and Rationale.  The reproposed regulation
included a standard letter of credit form in the Appendix in order to
ease the administrative burden to the Agency, the Issuing institution
and the owner or operator.  The standard form provided for Identification
of the facility, the amount for closure and/or post-closure costs to  be
covered by the credit, a purpose clause, and provisions for drawing on the
credit, depositing the amount of the draft in an interest-bearing escrow
account, and renewing the credit.  The form also called for the credit  .
to follow the Uniform Commercial Code  (UCC) and the Uniform Customs  and
Practice (UCP) for Documentary Letters of Credit.  EPA believed a standard
form would ease the time and effort required to obtain a letter of credit
since all terms are set out and only minor additional information would
be required.  In addition, it would not require an excessive amount of
time on EPA's part to review the instruments.
     Comments and Responses.  Commenters suggested several changes in
the standard letter of credit form, as follows:
     o    Reference to the regulations do not belong 1n the form since
          they constitute  superflous detail, which the UCC and UCP authorize
          ignoring.  Their inclusion speaks  to the legal concept of a
          guaranty, which  creates  Inconsistent legal approaches.
     o    The purpose clause is of no  concern to the bank; it speaks to
          matters between  the owner or operator and the EPA and, therefore
          should be covered in whatever contractual arrangements exist
          between those parties.
     o    The check-off for coverage of closure, a lump-sum for post-closure,
          or  funding during post-closure is  confusing and  doesn't stipulate
          amounts for each activity.   Some commenters said the form should
                                   I.  109

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          not allow a listing of the amounts for each facility  and  each
          purpose 1f more than one facility and activity were covered  by
          the Instrument; others said it was possible to do  so  and  was not
          too far from the usual practice involved with documentary letters
          of credit.
     o    The letter of credit should be on the letterhead of the Issuing
          bank.
     Based on the numerous comments it sought and received from the
financial community and others, the Agency learned that some of the
language of the form In the reproposed Subpart H regulations was confusing
or not In keeping with standard letter of credit practice.   References
to the regulations that are not necessary or appropriate have been  removed.
The purpose clause of the letter of credit has been modified, 1n accordance
with comments from the financial community, and is now generally included in
the statement necessary, along with the sight draft, to draw on the letter
of credit.  The form has been rewritten so the amounts for closure  and/or
post-closure care of each facility are clearly stated.  Although some
commenters Indicated this should not be Included, such specification is
necessary since EPA anticipates that many owners or operators who can
secure letters of credit will cover several facilities and both closure
and post-closure activities with the Instrument.  With the amounts  clearly
specified, any drawings will not exceed the level of financial  assurance
provided by the letter of credit for each facility and activity.
     The Agency decided that letters of credit must Include  a statement
certifying that the wording of the Instrument Is Identical to the wording
set forth 1n the regulations.   This Is necessary to avoid an additional
administrative burden that would occur 1f EPA staff had to examine  each
letter of credit to make sure 1t contained all  the necessary terms  and
conditions.
                                  I.  110

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     o   Many  commenters said the language triggering a payment by the
        issuing Institution was far too complicated.  Commenters said
        the wording of that statement should be  Included in the letter
        of credit Itself.

     o   The  reference to the escrow was not in keeping with standard
        practice; It should be prepared and signed separately.  The
        Interest rate for the escrow should be stipulated.  Some
        commenters said 1t would not be possible for them to make a
        payment to an escrow, others said it would be.  Some commenters
        said EPA will have to check to make sure the funds go to the
        right fund.

     o   The  termination clause is unnecessary.  For termination of the
        letter of credit, 1t is only necessary that the beneficiary
        return the original letter of credit to  the bank, along with a
        written statement of that Intention; consent of the owner or
        operator 1s not necessary.

     Again,  the Agency has relied on information supplied by commenters

from the financial and legal communities.  The language necessary to draw

on the  letter of credit has been simplified and  placed  appropriately in

the Instrument.

     The Agency decided that escrows would not serve  its  purpose  as well

as trust funds  (see Section M).  Instead, reference to  the  standby trust

fund is Included in the letter of credit form.  The reference  to  the

trust fund must be Included 1n the form because of the  need for  a

depository mechanism  for funds payable to the Regional  Administrator

(see Section C).   It  Is a  condition  of the credit that while the  Regional

Administrator  is the  one who must  request the payment,  the Issuing

Institution will deposit the amount  of the  draft promptly and directly

Into the owner's or  operator's  standby trust  fund.  Commenters advised

that, in practice, when many letters of  credit are drawn on, the draft

1s not  presented in  person and  the funds  are  often deposited from one

account to another 1n that same  Institution or another Institution.28
                                   I.  Ill

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     Based on Information supplied by comroenters,  the  regulations have
been rewritten to provide that the Regional  Administrator will return
the letter of credit, along with a written statement that termination is
requested, when the Instrument 1s no longer required in order to demonstrate
financial assurance.  The standard language for the letter of credit no
longer Includes a termination clause, 1n keeping with  normal practice
for this instrument.
     o  Commenters said reference to the UCC or UCP does not belong in the
        form, that the Comptroller of the Currency ruled that only
        one or the other must be followed.
     o  Commenters said the Instructions to send the form to the Regional
        Administrators do not belong In the form.
     o  One commenter said there should be language to the effect that
        all banking charges other than those of the issuing bank should
        be charged to the beneficiary.
     o  One commenter said the credit should be non-assignable and  non-
        negotiable.
     In the commenters collective opinion,  Article 5 of the Uniform Commercial
Code (UCC) Is a complex guide for the practice  of  letters of credit, often
causing the credits to be more expensive since  an  attorney must  review
each one before 1t Is Issued.29  Most felt the  Uniform Customs and
Practice for Documentary Letters of Credit (UCP),  published by the  Inter-
national Chamber of Commerce, Is the preferred  guide.  However,  the
Agency decided that issuing institutions may follow the UCC or the  UCP.
They must Indicate which guide will be followed In the Instrument,  which
Is standard practice.
     The regulations have been modified so the  owner or operator must
see that the properly executed letter of credit Is delivered by  certified
mall to the appropriate Regional Administrator, rather than Including
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this direction 1n the letter of credit itself.
     The comment that all charges other than those of the issuing
institution should be charged to the beneficiary refers to instances
where two or more banks are involved.  This may occur when the issuing
bank has no relationship with the beneficiary, or when the owner's
or operator's bank 1s unable to Issue a letter of credit, but vouches for
the owner's or operator's credit standing so another bank may issue the
mechanism.  This situation  generally occurs with documentary letters of
credit, where the account party 1s  billed by one bank while the beneficiary
may be billed by the second bank.   The Agency does not expect this arrangement
to occur frequently In meeting the  Subpart H requirements.  In any case,
EPA will not assume payment for any charges associated with this instrument;
therefore, such a provision is not  in the standard letter of credit form.
     Under the final regulations, the credit amounts will not be assignable
to any other entity.  Although the  draft amounts will be deposited into
the standby trust fund, the beneficiary of both instruments is the EPA.
The letter of credit language does  not provide for a negotiation of the
credit, 1n which the Issuer's obligation is extended to third parties
who purchase the beneficiary's draft.  The letter of credit form does
not Include such a provision, since EPA has the responsibility for the
implementation of these regulations, and the funds, if the letter of
credit 1s drawn on, will be deposited 1n the standby trust fund.
     Final Regulation.  With the help of commenters in the financial
community, the Agency has developed a greatly simplified letter of credit
which accomplishes all necessary alms.  The letter of credit now requires
that the facilities and amounts for closure and/or post-closure activities
                                   I.  113

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covered by the Instrument be specified.   The purpose of  the  letter of
credit Is set forth In the statement triggering payment  by the  Issuing
Institution.  The standard language also provides that the amount of
any payment triggered by the draft will  be deposited promptly and directly
Into the standby trust fund that was established as  a condition of using
the letter of credit for financial assurance.  Other provisions In the
form, covering length of Issue and renewal, are discussed below.
4.   Comments on Changing the Amount of  the Letter of Credit.
     Reproposed Regulation and Rationale.  The reproposed regulation
required that the owner or operator obtain the credit 1n at  least the
amount of the adjusted cost estimate. The amount of the credit would  .
have to be Increased whenever changes 1n the cost estimate required a
greater amount than was currently covered by the credit. The difference
had to be made up within 30 days of the  change 1n the cost estimate.  If
the cost estimate decreased, the amount  of the credit could  be  reduced,
and 1f requested to do so, the Regional  Administrator had to send written
notice to the Issuing bank of any reduction within 30 days after receiving
the request from the owner or operator.   The Agency  wanted to make sure
that the level of financial assurance provided by the letter of credit
was an adequate amount, based on the most recent adjusted cost  estimates.
However, 1f the cost estimate decreased, the Agency  believed that the
owner or operator should not have to maintain a higher amount of credit
than was necessary.
     Comments and Responses.  Commenters made the following  points on
changing the amount of the letter of credit:
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     o  Some commenters said it would be a simple, automatic  process
        to change the amount, where an additional letter of credit would
        be issued to cover the additional amount.  In the alternative,
        the regulations could provide that the Regional  Administrator
        would notify the bank of the lower limit and pledge not to draw
        on the existing credit above the new amount, or authorize
        automatic decreases.
     o  Others said it would involve a repeat of the original  review
        process, including an examination of the bank's existing credit
        obligations under the legal lending limit, surrender  of the
        existing letter of credit, a written application form for
        amendment and the written consent of all parties before the
        amount of the credit could be changed.
     The Agency has learned from commenters that banking practices, as
well as fees, vary from institution to institution.  Certain  restrictions
on the treatment of the letter of credit are imposed by the Agency  in
order to ensure that the intent of the regulations will be carried out.
However, EPA does not believe it is appropriate  to stipulate  the method
by which issuing institutions must change the amounts of credit covered
by the instrument.
     Some banks will follow practices for increasing and decreasing the
amount that may pose an additional burden on all affected parties.  This
could occur when the issuing institution requires the consent of all
parties for modification of the credit amount, or other requirements
noted by commenters.  Therefore, EPA  decided that coverage of closure  and
post-closure financial assurance for  facilities  in more than  one Region
will not be permitted.  An undue administrative  burden would be imposed
on the Agency if the issuing institution required that the original
letter of credit must be surrendered, an additional application form
must be submitted by the owner or operator, and  the written consent  of
all parties must be obtained before changes in the credit amount could
take place.  The Regional Administrators that were beneficiaries of  that
                                   I.  115

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letter of credit would have to act 1n concert In complying with those
requirements, and the possibility existed that the original  Instrument
would expire before the new one was effective.  However,  coverage of
several facilities within one Region under a single letter of credit 1s
still permitted.
     A letter of credit, which assures funds for closure  or post-closure
care must be Increased within 60 days of an Increase In the cost estimate
during the operating life of the facility.  The credit amount may be
reduced 1f the cost estimates decrease and the Regional Administrator
approves the reduction 1n writing.  However, during the period of post-
closure care, the amount of the letter of credit may be reduced only 1f the
owner or operator Is able to demonstrate to the Regional  Administrator
that the remaining expected cost of post-closure care Is  less than the
amount of the credit.  This 1s necessary since no upward  adjustments In
the amount of the credit are required after the operating life of the
facility, yet the need for assurance or post-closure costs remains.
     Final Regulation.  The final  regulation retains most of the language
of the reproposed regulation 1n requiring modifications of the credit
amount based on changes In the cost estimate.   The period allowed for
making changes Is Increased from 30 to 60 days.  If the amount of the cost
estimate decreases prior to closure, the owner or operator may request
that the Regional Administrator send written notice to the Issuing Insti-
tution that the level  of credit may be reduced.  If the Regional  Adminis-
trator approves such a reduction,  he must notify the letter  of credit
Issuer of the reduction within 60  days of the  request.  During the post-
closure care period, a reduction 1n the amount of the letter of credit will
                                  I.  116

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be approved if the owner or operator can demonstrate that the cost of the
remaining post-closure care will  be less than the amount of the credit.
5-   Comments on the Length of and Drawings on the Letter of Credit.
     Reproposed Regulation and Rationale.  The reproposed regulation
called for the letter of credit to be  Issued for a period of at least one
year.  The letter also had to contain  a clause providing for automatic
extensions of the credit, subject to 60 days' notice by the issuer to
both the owner or operator and the Regional Administrator of the bank's
intention not to renew the credit.  The Regional Administrator could
draw on the credit if the owner or operator was not able to provide
other evidence of financial assurance  within 30 days after the notice of.
nonrenewal was received, or within 30  days after the beginning of closure
when he used a letter of credit for a  lump-sum payment at the time of
closure for post-closure care.  The Regional Administrator could also
draw on the credit 1f there was a legal determination of a violation  of
the closure or post-closure requirements of these regulations.  If the
credit was drawn on, the Regional Administrator would deposit the funds
in an interest-bearing escrow acccount and disbursements would be made
as specified for trust funds.  The owner or operator had to keep the
amount of the escrow equal to any changes in the cost estimate.
     Comments and Responses.  The Agency received numerous comments on
the term and renewal of the letter of  credit:
     o  Some commenters said the  term  of the credit was far too long,
        the treatment of credits  could change in that time, and
        the performance obligation of  the owner or operator covered
        by the credit could not be completed within one year.
     o  Some commenters said many banks will not issue credits with automatic
        renewal clauses as a matter of Internal policy; the bank would
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        have to examine the financial  standing of the owner or operator
        each year before making the decision to renew.   Other commenters
        said an automatic renewal was possible.
     o  Marty commenters from the financial  community said that
        the renewal provisions constituted  an automatic  lock-In to the
        credit, since the Regional Administrator could draw on the
        credit 1f a nonrenewal notice were  sent and the  owner or
        operator was not able to obtain other financial  assurance.
     EPA learned from commenters that the reproposed regulation calling
for automatic renewals indefinitely was not in keeping with standard
practice for letters of credit, although provisions for  automatic renewals
for certain specified periods of time are Included 1n some letters of
credit.  However, the main criterion for financial mechanisms which the
Agency will authorize Is that the mechanisms provide financial assurance
for the costs of closure and post-closure care 1n order  to protect human
health and the environment.  If the letters of credit provided assurance
for only one year at a time, excessive compliance procedures under Section
3008 of RCRA or other administrative burdens may result.  The commenters
from the financial  community were not able  to express clearly the difference
between one year terms and automatic renewals of the Instrument, since in
both Instances the letter of credit could be drawn on 1f a renewal notice
was sent and the issuing Institution may be liable for the amount of
the credit.  Therefore, the Agency decided  to retain the provision of at
least one year terms with automatic renewals.  If the owner or operator
secures other financial assurance in the time allotted (i.e. within 30
days of a compliance order Issued pursuant  to Section 3008 of RCRA)
there 1s no problem for the Issuer.  However, if the owner or operator
is unable to demonstrate alternate financial assurance,  funds will be
available to deposit Into the standby trust fund so closure and post-
                                  I. 118

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closure activities can take place.
     o  Commenters said the Regional Administrator, in the event of
        a notice of nonrenewal, should not be able to draw up to the
        full amount; that he should have to wait until 10 days before
        the credit terminates  before drawing; and that he should be
        required to order closure so the money would not go to the
        government and the facility continue to operate.
     o  EPA should hold the Issuer liable until closure is completed  if
        the credit is not renewed, so the owner or operator could not
        scheme with the issuer to wait until the credit is terminated to
        perform closure and then declare bankruptcy.
     o  EPA should require the Regional Administrator to draw on the
        credit if there is a notice of nonrenewal.
     o  Other commenters said  EPA should refund any funds which are  not
        needed If the owner or operator secures other financial assurance
        after the Regional Administrator draws on the credit.
     o  The Agency must be certain it knows of the renewal timing, so lack
        of communication does  not cause the credit to expire unintentionally
        without a necessary drawing.
     As discussed earlier, the Agency must be able to draw on the credit
1n the event of non-renewal of the mechanism by the financial institution
and a failure to provide alternate financial assurance by the owner or
operator, since the intent of  the regulations is to provide assurance of
adequate funds for the proper  closure and post-closure care of facilities.
As discussed In Section C, the Agency has decided that Section 3008
procedures must be instituted  when a notice of nonrenewal Is received.
The Regional Administrator will Issue a compliance order to the owner or
operator.  If the owner or operator fails to obtain alternate financial
assurance within 30 days, the  Regional Administrator will be entitled to
to draw on the letter of credit.  The Issuing institution may not terminate
the credit while a Section 3008 compliance procedure  is pending.  The owner
or operator is required to maintain financial assurance until he receives
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notice from the Regional  Administrator that such assurance  Is  no longer
required.  These provisions will assure that letter of credit  funds will
be available 1f there 1s a notice of nonrenewal  of the Instrument or until
closure Is completed.  Expiration of the letter of credit cannot occur, 1n
any case, until 90 days after the date on which the Regional Administrator
received the notice of nonrenewal, as shown on the signed return receipt.
     If the Regional Administrator draws on the credit, the money will  be
deposited by the Issuing Institution Into the standby trust fund established
when the letter of credit was Issued.  Once the standby trust  fund Is so
activated, the owner or operator 1s responsible for maintaining the fund
1n the amount of the most recent adjusted cost estimate. If the owner
or operator then follows the regulations governing trust funds he will
be In compliance with the financial assurance requirements. Therefore,
there would not be a need to order closure for a violation  of  the
financial requirements, or to refund the money since the funded trust
would demonstrate financial assurance.  Reimbursement to the Issuing
                           •1
Institution by the owner or operator Is not the responsibility of the
Agency, but, as 1s the case with such Instances Involving surety bonds
(see Section E), will be of concern to the owner or operator.
     Final Regulation.  The final regulation provides that  the letter of
credit must be Irrevocable for a term of one year, and that there must be
automatic renewals of the minimum one-year periods, unless  the Issuing
Institution notifies both the owner or operator and the Regional Adminis-
trator, by certified mall, of Its Intention not to renew the credit at
least 90 days before the current expiration date.  Unless the  owner or
operator has established other financial assurance as specified 1n the
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regulations, the Regional Administrator will, upon receipt of a  notice
of nonrenewal, Issue a compliance order pursuant to Section 3008 of
RCRA.  If the owner or operator 1s not able to demonstrate alternate
financial assurance within 30 days after the order is Issued, the Regional
Administrator may draw on the credit and the Issuing Institution will
deposit the funds promptly and directly Into the standby trust fund
established at the time  the credit was obtained.  The length of notification
has been Increased to 90 days In order to allow adequate time to make
necessary arrangements for obtaining other  financial assurance and to  hold
compliance hearings.  In most Instances these compliance procecures
should be completed within 90 days.  In the event they are not, a provision
has been added that the  letter of credit may not be terminated while a
compliance procedure  1s  pending pursuant to Section 3008.
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6. Revenue Test for Municipalities
     In the reproposal, municipalities, as defined 1n RCRA,  could demonstrate
financial assurance by passing a revenue test.   A municipality  passed the
test by having annual general tax revenues which were 10  times  the cost
estimates to be covered.  The test was Intended to Identify  those local
governments which have a tax base sufficient to readily  support the
costs of closure and post-closure care.
     The proposed revenue test was the subject of numerous comments.   While
some commenters thought 1t was a reasonable approach, others felt that
municipalities should be required to provide the same forms  of  assurance
that other entitles must provide.  They cited the delays  In  funding that
could occur 1f cities failed to plan adequately for meeting  closure
costs.
     Several commenters thought that a test which requires a local
government to have only 10 times the cost estimates was  Inadequate.  They
contended that many cities would find It extremely difficult to reallocate
In any year 10 percent of their budget to cover closure  and  post-closure
costs.  One commenter suggested that the multiple be Increased  to 20,
     Several commenters objected to the test because It  limited revenues
to be counted to property, Income, and sales taxes.  They suggested
that fees, contract payments, and any other Income should be Included.
Other commenters suggested alternatives to the test be allowed, Including
municipal bond ratings, bond pledges, annual audits, and requirements
for enterprise accounting.
     Because of the complexity of the Issues regarding the revenue test,
the Agency could not analyze them adequately In time for this promulgation.
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The Agency expects to announce Its decision on whether It will  promulgate
the revenue test within the next few months.  At the same time the Agency
will also announce its declson regarding the financial test (see below)
and self-Insurance for liability coverage.  The Agency decided to proceed
with today's promulgation  of  financial  responsibility standards despite
the fact that these key decisions are yet  to be made, in order to begin
assuring financial responsibility for hazardous waste management and to
meet the court-ordered schedule for  issuing RCRA regulations.  In planning
how they will meet the financial responsibility requirements promulgated
today, owners and operators  should not  consider the  revenue test, financial
test, or self-insurance as available or Imminently available options at
this time.
H.  Financial Test and Guarantee
     The financial test was one of the  means that could  be used to provide
financial assurance  under  the reproposed regulations.  The test Included
three criteria;  the  firm had to have at least  $10 million in net worth in
the U.S., a ratio of total liabilities  to net  worth  not  greater than 3 to
1, and net working capital in the U.S.  at least twice the amount of the cost
estimates to  be  covered.   The firm had  to demonstrate these characteristics
in quarterly, unconsolldated, audited  reports. A firm meeting the test
could guarantee  the  closure and post-closure obligations of another entity.
It was expected  that this  guarantee  would be used primarily by parent firms
to  guarantee  the obligations of their  subsidiaries.
     Many commenters supported inclusion of the  financial test.  Others
criticized the  test  as  being too  weak  or too stringent,  difficult  to administer,
and costly for  companies  to use  because of the reporting requirements.  Many
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alternative test criteria were suggested.
     As with the revenue test, the Agency  could not complete Its study
of the Issues 1n time for this promulgation.   As noted above,  the Agency's
decisions regarding the financial test and the guarantee based on the
financial test will be announced at the same  time as the decision on
the revenue test.
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                                      -55-
burdens on owners and operators, the Agency has included j revisions in the

revised proposal that would allow owners or operators to use  state-authorized

mechanisms to meet the federal financial requirements if such mechanisms

provide assurances that are substantially equivalent to that  of mechanisms

specified in the federal requirements during interim status and equivalent

mechanisms during general status.
           o  Allow parent companies to assume financial responsibility for
              subsidiaries.
      EPA is currently considering self-insurance provisions,  and will  address

this comment in that connection.


           o  Do not require separate liability coverage if coverage  in
              overall insurance program is adequate.


      The Agency is not clear how to interpret "adequate."  If the  overall

insurance program includes liability coverage for sudden and non-sudden

occurrences from hazardous waste management operations and the limits of  that

coverage are equal, in the aggregate, to the amounts specified in  the

regulation, then the policy would meet the requirements of the regulation.   In

its absence, the Agency requires evidence of separate liability coverage.

There appears to be no reason to make an exception and the Agency  will make
none,
           o  Allow  "blanket" insurance coverage for all of a firm's
              operations—hazardous waste management as well as other
              operations.  In such cases, increase minimum liability limits to
              prevent  depletion of coverage from incidents not related to
              hazardous waste.

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                                   IT  -56-









      The Agency will accept "blanket" coverage only if a portion of that




coverage {in the amounts prescribed)  is targeted  specifically toward hazardous




waste occurenpes.  As the cojnmenter has recognized, an occurence unrelated to




hazardous waste can leave little funds to cover damages from a hazardous waste



occurence.  If EPA were to set higher insurance amounts for "blanket" coverage




to ensure sufficient funds for hazardous waste occurences, it would have to




analyze the potential for damages from all other types of occurences.  This




would burden the Agency with analysis  not required for these regulations.  A




far better solution, the Agency feels,  is to allow "blanket" policies but




insist on the prescribed amounts within the policy being targeted solely



towards hazardous waste occurences.

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I.   Variations 1n Use of Mechanisms
     Reproposal Regulation and Rationale.   To improve flexibility  in  use
of the mechanisms specified in these regulations,  the reproposal allowed
owners and operators to:
     (1)  Use more than one type of Instrument to  meet the financial
assurance requirements for a facility, selecting from the trust funds,
surety bonds, and letters of credit as specified in these regulations.
One of the situations 1n which this provision may  be useful  is  the
following:  The closure cost estimate for a facility increases  markedly
because of changes in the closure plan.  The owner or operator  has been
using a bond or letter of credit but finds that the Issuer will not
agree to expanded coverage.  In that case he may he able to use one of
the other instruments to make up the difference rather than establish
assurance for the entire estimate using another instrument and  cancelling
the original one.
     (2)  Use the mechanisms to assure closure or post-closure  funds
for more than one facility.  Many firms have more than one facility and
may find it cheaper 1n terms of fees and administrative costs to cover
them all with one mechanism rather than set up a separate one for  each.
     (3)  Use a single mechanism to provide financial assurance for both
closure and post-closure care of one or more facilities.  Again, fees
and administrative costs may be reduced if coverage can be combined
under one mechanism.
     Comments, Responses and Final Regulations:  The following  comments
were received on these provisions:
     0  All of these provisions are appreciated because they are
        potentially cost-reducing and provide owners and operators
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        with greater flexibility.  They should not add significantly
        to EPA's administrative burden.
     0  Allowing coverage of multiple facilities is a  good  idea  and
        will probably reduce the paperwork  required.
     0  Sureties said if the owner or operator has coverage through
        several instruments, the trust fund should be  used  first,
        before the bond, since trust monies are directly  from  the
        owner or operator.  The order in which instruments  will  be
        Invoked should be clear.
     0  If the trust fund Is providing only part of the coverage,
        does the 20-year buildup period still  apply?
     Since many owners and operators believe that these provisions are
useful, the EPA has retained them 1n the final  regulations  with  some
qualifications.  In the provision allowing  use of more than one  Instru- .
ment, a phrase was added to make it clear that the specifications  for
the Individual Instrument are to be followed except that  the single
instrument need not cover the whole amount  of the cost estimate.   If
more than one instrument is used, 1t is  the coverage provided  by all  of
the instruments that must at least equal  the amount of the  estimate;  if
one of the instruments Is a trust, however,  the 20-year buildup  provisions
for existing facilities would apply to the  portion of  the cost estimate
covered by the trust.
     An owner or operator using multiple Instruments may  include a surety
bond guaranteeing payment but not a surety  bond guaranteeing performance
of closure or post-closure care.   The latter type of bond is excluded
because of the potential complexity of combining the performance option
In the bond with funds from other instruments  in case  of  default.
     The final regulation states that if an owner or operator  uses a  trust
fund and a letter of credit or surety bond, he may use the  trust fund in
place of the standby trusts required for letters of credit  and surety bonds.
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If an owner or operator uses only letters of credit or surety bonds,
only one standby trust fund 1s required for all Instruments.   Requiring
a separate standby trust for each Instrument means added costs for the
owner or operator and added administrative burden for the Agency.
     Despite the sureties' point that trust funds should be used first,
and that an order 1n which the Instruments will be Invoked should be
established, the final regulation says that the Regional Administrator
may Invoke use of any or all of the Instruments to provide for closure
and post-closure care.  This was necessary to give flexibility to the
Agency in obtaining needed funds as quickly as necessary.  If a set
order In which the instruments would be invoked were established,  EPA
could conceivably be delayed by legal actions required to release
funds from one Instrument before proceeding to the next Instrument.
This could result 1n the inadequate closure of a facility, or none at
all.
     In the provision allowing coverage of multiple facilities, letters
of credit are not allowed to cover facilities 1n more than one Region.
Without this restriction, increases and decreases 1n the amount of the
letter of credit, even if they resulted from changes in a closure plan at
one facility, would have to be agreed to by all the Regional  Administrators
who are addressees of the letter.  This could mean possible delays in
effecting changes needed in the amount of the letter of credit and add
to the administrative burden of the Regional staff.  The restriction to
one Region does not apply to the other instruments, since only the approval
by the Regional Administrator for the Region in which the affected facility
is located need be obtained in order to decrease the coverage, and increases
may be made without prior approval  or return of existing Instruments.
                                  T-1?7

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     Combining financial  assurance for closure and  post-closure  care  in
one Instrument Is allowed for the letter of credit  and  the trust fund but
not for surety bonds.  Unlike the other instruments,  the  surety  bonds must,
1n order to specify the conditions of the guarantees, differentiate between
what is to be done to assure closure and post-closure care.  The Agency
believes that combining the closure and post-closure  language  in one  bond
form would add to Its complexity and risk confusion.
J.   Incapacity of Issuing Institutions
     A section was added to the final regulations  (§§264.148 and 265.148)
to clarify what must be done by the owner or operator when the
Institution Issuing a bond, letter of credit, or insurance policy goes
bankrupt, becomes Insolvent, or loses its license or  charter.  The owner
or operator must obtain other financial assurance or  liability coverage
within 60 days.
     The basic qualifications for Issuing Institutions  for the purposes
of the financial assurance requirements are stated  in the regulations
for each instrument.  The Agency believes these qualifications generally
offer adequate assurance that the issuers'  Instruments  are sound.  Should
the Issuer no longer meet the qualifications, the Instrument would no
longer be acceptable evidence of financial  responsibility under  these
regulations and the owner or operator would no longer be  in compliance.
There may be Instances, however, when the institution suffers  Insolvency
or 1s otherwise Incapacitated for some time before  they lose the qualifi-
cations stated 1n the regulations.  The owner or operator Is required to
act  under such circumstances to obtain other evidence of  financial
responsibility.
                                  I. 128

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K.   Applicability of State Financial Requirements
     Reproposed Regulation and Rationale.  A number of States have adopted
hazardous waste regulations which require owners or operators to demonstrate
financial assurance for closure and post-closure care.  (See Chapter II
for examples.)  Several States also require liability coverage.   Like
the Federal regulation, many of these State regulations require  owners
or operators to use specific financial mechanisms for these purposes.
     The Agency recognizes that differences between State and Federal
financial responsibility requirements might result in duplication and
unnecessary costs to owners and operators.  In those States that receive
authorization to operate a hazardous waste regulatory program in lieu of
the Federal program, there will be no duplication since only the State's
requirements would apply.  However, in those States which have not obtained
Federal authorization, the owners or operators would be subject  to Federal
hazardous waste regulations and also to any State hazardous waste regulations
that are in effect.  To avoid unnecessary duplication and costs, the Agency
included a section in the reproposed regulations (§265.149) that allowed
owners or operators to use State mechanisms to meet the Federal  financial
requirements if such mechanisms provide assurances that are substantially
equivalent to those of mechanisms specified 1n the Federal requirements.
     If the amount of assurance or coverage from the State mechanism 1s
less than that required by EPA, the owner or operator had to establish
additional financial assurance or liability coverage for the remaining
amount using any of the means allowed in the Federal regulation.
     No comments were received specifically on this section.
                                  I. 129

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     Final Regulation.  This provision has been retained  In the final
regulation (§§264.149 and 265.149) with several  changes.   Where the owner
or operator was allowed to use "State-authorized"  mechanisms,  the term
has been changed to "State-required.11  This means  that  the owner or
operator may use a State mechanism If that 1s  required  by the  State; If
he has the option to meet the State requirements by  using the  mechanisms
specified 1n these regulations, he must comply with  the Federal require-
ments.  This change will reduce the burden upon EPA  of  having  to evaluate
various mechanisms allowed by States to determine  equivalence  to Federal
mechanisms.  Another change was the addition of a  requirement  that evidence
of the establishment of a State-required mechanism be sent to  the Regional
Administrator so that the Agency could review  the  adequacy of  these
mechanisms.  Inclusion of a reporting requirement  was overlooked in the
reproposal.  A third change was the substitution of  "equivalent to or
greater than" for "substantially equivalent" in referring to the financial
assurance that the State mechanisms must provide.  The  Agency  intends
that they should not be less effective than the EPA-specified  mechanisms
and has decided that the revised wording better conveys this intent.
L.   State Assumption of Financial Responsibilities
     Reproposed Regulation and Rationale.   In  the  same  section as the
provision allowing use of State mechanisms (§265.149),  the reproposal
had a provision stating that If a State assumed the  legal  responsibility
for a facility's closure, post-closure, or liability coverage  requirements
or assured that State funds would be available to  cover the requirements,
the owner or operator was In compliance with EPA financial  requirements
to the extent that such State assurances were  substantially equivalent
                                  I. 130

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to those required by EPA.  The Agency considered this to be  a logical
extension of the exemption of State facilities.
     The owner or operator with such guarantees was required to send a
letter to the Regional Administrator describing the nature of the
guarantees and citing the State regulation providing for them.  The
letter had to be sent to both EPA and the responsible State agency.  The
letter to the State agency would help Inform the State that the guarantee
was being employed 1n this manner.  No comments were received on this
provision.
     Final Regulation.  Since the State guarantee is a potentially
important mechanism, and does not belong under the heading for State
financial requirements, the State guarantee provisions have been put Into
a separate section (§264.150 and 265.150).  The letter describing the
guarantee must now be signed by the State agency rather than the owner  or
operator, to save the need for verification by EPA.  "Substantially
equivalent" has been changed to "equivalent to or exceed" to make it clear
that the degree of assurance should be no less than that provided by the
other mechanisms allowed by these regulations.
M.   Other Mechanisms Reviewed
     EPA believed that escrow agreements might be a useful financial
mechanism and therefore actively solicited Information about them.  Most
of the commenters said there is little difference between trust funds
and escrows and therefore there is little point in offering both.  Trust
funds appear to be preferable because the law of trusts places obligations
upon trustees to protect the Interests of the beneficiary (i.e., EPA 1n
this case).  An escrow agent is responsible only for what is specified
                                  I. 131

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1n the escrow agreement.   The Agency believes It would be extremely
difficult to draft an escrow agreeement that would adequately specify
all the actions that the  Agency  would want the escrow agent to take  In
all situations to assure  that the  Instrument served Its Intended purpose.
Some commenters said that If the escrow agreement was carefully worded,
escrowed funds could be safer from creditors' claims than trust funds,
but other commenters and  the Agency's analysis Indicated that trust
assets are better protected.  Under trust law, legal title to property
1n a trust Is transferred from the grantor to the trustee.  With an
escrow agreement legal title Is  not transferred  to the escrow agent;
since the grantor retains legal  title while property 1s 1n escrow, such
property 1s more likely to be subject to creditor's claims than property
1n a trust.  Some commenters said  fees for escrow accounts tend to be lower
than for trusts, but other commenters said that, 1f an escrow agreement were
written to be comparable  to the  trust agreement, the fees would also be
comparable.  Based on the Information obtained,  EPA believes trust funds
are preferable to escrows and has  decided not to add the escrow agreement as
an option.
     Commenters suggested that EPA reconsider allowing owners and  operators
to pledge collateral, deposit funds, certificates of deposit, or other
property with EPA.  EPA has several problems with this approach.   As
described 1n Section C, General  Issues,  EPA  at  present lacks authority
to directly receive and spend funds  for  closure or post-closure care.
This may  be resolved through legislation, however, another problem exists
 In the  large amount of administrative work  that would be  Involved  In
maintaining long-term accounts for owners  and  operators,  evaluating
                                  I. 132

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property, and assuring that the required amount of value Is contfnously
available.
     EPA examined the prospects for usinq a security interest  as a
financial assurance mechanism.  Since the early 1960's it has been
a uniform method by which a debtor can use personal property (but
not realty) to guarantee payment to a creditor.  The security interest
is created when a debtor signs a written security agreement describing
the collateral and when the creditor gives value to the debtor.  To be
of use, the security agreement must also describe the agreement between
the two parties and define what shall constitute a default.  A financing
statement describing the agreement must be filed with the State.  The
Office of Surface Mining, in  regulations to go into effect in 1981,
includes  the  security  interest among their financial assurance mechanisms.
     While there are advantages to the security interest, largely because
of its simplicity and  availability as a mechanism, it appears to be
unsuited  to the purposes of these regulations.  The obligations to be
covered will  often  be  for very long terms, and the policing of the
collateral to assure that value is maintained may  be a major problem.
Furthermore,  over a 30-year post-closure period EPA would have to refile
the financing statement a number of times with the State.  During
interim status, when a closure or post-closure plan may not be closely
reviewed  by the Agency until  shortly before closure, the definition of
default would not be sufficiently precise  for  the  purposes of  the
security  agreement.  For these various reasons the Agency has  decided
not to include the  security agreement in the present regulations.
     Use  of  Insurance  to guarantee payment into a  trust fund may be a
                                   I.  133

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possible option, according to one commenter.   Foments by  the  owner or
operator would be considered premiums  and therefore  tax  deductible.
This would be an annuity-type arrangement and  possibly attractive  to
large life Insurance firms, the commenter said.  The Agency will continue
to look Into the possibilities for such  a mechanism  and  Invites  comments on
Us feasibility and the features that  should be  considered.
     Two commenters said they thought  the States should  guarantee
closure and post-closure care of facilities owned  or operated  by munici-
palities.  One of the commenters advocated legislation requiring that States
assume this responsibility.  EPA does  not have authority to direct the
States to provide such guarantees. The  regulations  allow  such guarantees
(§§264.150 and 265.150) among the options owners and operators may use to
meet the financial assurance and liability requirements.  Although the
Agency sees the State guarantee as a highly acceptable option, especially
for long-term post-closure care, other means of  financial  assurance are also
effective and may be viewed as being more economically efficient.   Also, the
wide variety and number of entitles covered by the term  "municipality"
should be kept 1n mind — guaranteeing the closure and post-closure obliga-
tions of municipalities may amount to  a  large  fiscal burden 1n some States.
For these reasons EPA does not plan to Initiate  legislation requiring
State assumptions of such responsibility at this time.
N.   Other Issues
1.  Unavailability of Instruments during Interim status
     One commenter Implied that the financial  assurance  Instruments would
 not be  available during Interim status:
                                  I. 134

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          0  The regulation requires the permit applicant to  submit
             Information (trust Instrument, performance bonds)  as
             part of his application which he will  not obtain until
             the permit is actually Issued.
     The permit regulations do not require that financial instruments  be
submitted with the permit application.  The instruments for existing
facilities are to be submitted by the effective date of the Part 265
financial assurance regulations; for new facilities they are  to be submitted
60 days before hazardous waste 1s first received, as explained above  (see
Section C).
     The Agency received no Information that owners and operators  would be
precluded from obtaining financial instruments because they lacked permits.
Some representatives of financial Institutions did express concern,  however,
about potential liability associated with hazardous waste facilities.
Supposedly, such concern would be lessened if the facilities  were  awarded
permits.  Financial representatives also placed emphasis on the financial
standing of the owner or operator as a basis for Issuing the  instrument.
2.  Release Statements from EPA
     Two comments were received concerning the statement releasing the
owner or operator from financial assurance for closure (§265.143(h)):
          0 As in the closure section, the post-closure section should
            contain a paragraph requiring the Regional Administrator to
            send a letter releasing the owner or operator from financial
            assurance.
     The Agency recognizes that a release may be needed or desirable and
has provided for It in §264.145(h) and §264.145(1).
     0  In the reproposal, a release  is to be provided unless EPA
        has reason to believe the closure was not 1n accordance with
        the closure plan.  EPA should be specifically required to
        notify the owner or operator  1f he Is not condsidered to be
        in compliance and state why.
                                  I. 135

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     Since the owner or operator should be  notified of violations  under
Section 3008 of RCRA, special  provision for such  notification  In these
regulations seems unnecessary.   In  the  final  regulations,  no requirement
1s made for such notification.
3.   Effective dates
     Comments were received concerning  effective  dates:
     0  We recommend that EPA  not require preparation of closure and post-
        closure plans and cost estimates until November 19, 1981,  or 180 days
        prior to closure, whichever occurs  first,  because  of the amount  of work
        that must be done to comply with all  the  regulations.
     0  Requirements for closure and post-closure plans and estimates should
        be deferred until the  effective date of permanent  standards since
        they must be based on  final  closure and post-closure regulations, not
        Interim status regulations.
     The effective dates for closure and post-closure plans and cost estimates
have been delayed 6 months, to May  19,  1981.  This will be comparable to the
effective date of the general  standards. Further delay seems  unjustified,
1n view of the need, emphasized by  the  Congress and numerous others, to
Implement a complete regulatory system  as soon as possible.
                                  I.  136

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                         References for Chapter  IV


1.   Damage and Threats Caused by Hazardous  Material  Sites.  EPA Report No.
     EPA/430/9-80/004, January 1980.

2.   Several public utility bond defaults are Indicated on p. 432 of Harold
     G. Fralne and Robert H. Mills, "Effects of  Defaults and Credit Deterio-
     ration on Yields of Corporate Bonds", The Journal of Finance, 1961.

3.   An electric utility which experienced liquidation is cited on p. 466 of
     Richard C. Edwards, "Stages in Corporate Stability and the Risks of
     Corporate Failure", The Journal of Economic History, June 1975.

4.   See e.g. Sioux Valley Electric Assn. v. Butz,  367 F. Supp 686, (DCSD,
     1973), affd, 504 F.Zd 168 (8th Clrc., 1974).

5.   7 CRF 1700.1

6.   DOT staff Information on financial responsibility of transporters,
     telephone conversations, August 25, 1980.

7.   Hempel, George H.  The Postwar Quality of State and Local Debt.  Columbia
     University Press, New York, 1971.

8.   Bogan, J.E., editor, Financial Handbook, Ronald Press, New York,
     1968, p. 6.8.

9.   Memorandum dated June 25, 1980 from Carole J.  Ansheles of EPA to the
     public docket for the financial requirements regulations, reporting
     telephone conversations with  (1) J1m Ashburn of First National Bank
     and Trust Co., Hamilton, Ohio on June 24, 1980, (2) Walter T. Bagnell
     of Peoples National Bank of Washington, Seattle, Washington on June 24,
     1980,  (3) Joseph Baker of First National Bank, Mobile, Alabama on June
     24, 1980, (4) Charlie Gibbons of First National Bank and Trust Co.,
     Hamilton, Ohio on June 25, 1980 and (5) Charles J. Connor, Jr., of
     First Virginia Bank, Falls Church, Virginia on June 25, 1980, regarding
     availability of trustees for  small trust funds.

10.  Memorandum dated June 22, 1980 from Carole J.  Ansheles of EPA to the
     public docket for the financial requirements regulations, reporting a
     telephone conversation with Kit Harahan of the U.S. League of Savings
     Associations, Washington, DC  office on July 16, 1980,  regarding savings
     and loans acting as trustees.

11.  Memorandum dated August 20, 1980 from Carole J. Ansheles of EPA to the
     pubic  docket for the financial requirements regulations, reporting a
     telephone conversation with James D. Mclaughlin of  the American Banking
     Association, Washington, DC on August 15, 1980.

12.  Trust Fact Book, American Banking Association, second  edition,  1980,  p.  16,
                                   I. 137

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13.  Letter to James  A.  Rogers, Office of General Counsel, EPA, from Stanley
     B.  Judd,  Deputy  General Counsel, Division of Investment Management,
     Securities and Exchange Commission, dated October 20, 1980.

14.  Memorandum dated August 20, 1980 from Carole J. Ansheles of EPA to the
     public docket for  the  financial requirements regulations, reporting
     telephone conversations with  (1) Susan Sottlle, (2) Ed Cohen, (3) Tom
     Nines, (4) Al Craft, (5) Barry Roy, (6) Bill Coppersmith and (7) Dave
     Crawford, all of the Internal Revenue Service, on August 13, 14 and 15,
     1980.

15.  Glossary of Fiduciary  Terms,  American Bankers Association, Trust Division,
     1968, 1980 reprint, p. 26.

16.  Booz, Allen, and Hamilton, Inc. and Putnam, Hayes, and Bartlett, Inc.,
     Hazardous Waste  Generation and Commercial Hazardous Waste Management
     Capacity—An Assessment, November 1980.

17.  Memorandum dated July  23, 1980 from Thomas Tebo of EPA to the public
     docket for the financial requirements regulations, reporting on a
     meeting between  U.S. Department of the Treasury Audit Staff and EPA
     contractor's staff on July 10, 1980.

18.  Memorandum dated August 18, 1980 from Thomas Tebo of EPA to public docket
     for the financial  requirements regulations, reporting on telephone
     conversation with  Lloyd Provost, Secretary for Surety Rating of the
     Surety Association of America on August 18, 1980.

19.  Contact report dated July 14  from Judith Welntraub of International
     Research  4 Technology  (IR&T)  on telephone conversation with Joe McHugh,
     Fidelity  Deposit Compnay on July 14, 1980.

20.  Comments  by Ben  Bialek, Assistant Attorney General for the State of
     Maryland, on the Maryland Environmental Service's hazardous waste
     management regulatory  program, with regulations attached, August 25,
     1980; Telephone  conversation  between Mr. Bialek and EPA staff, memorandum
     from Thomas Tebo of EPA to public docket dated August 25, 1980.

21.  Telephone conversation between Vera Starch, Wisconsin Department of
     Natural Resources,  and EPA staff on the bonding of a solid waste
     disposal  landfill,  July 22, 1980; memorandum from Thomas Tebo of EPA to
     public docket dated July 22,  1980.

22.  Meeting between  Robert Skall  of the Federal Maritime Commission and
     EPA staff on FMC and EPA financial responsibility regulations, March
     7, 1980.   Memorandum from Emily Sano of EPA to the public docket, same
     date; Telephone  conversation  between Robert Drew of the FMC and
     IRST staff, July 2, 1980, contract report by Judith Welntraub of IR4T,
     same date.
                                   I.  138

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23.  Harfleld, Henry.  Letters of Credit.  American Law Institute-American Bar
     Association, Philadelphia, 1979,  p. 7.

24.  Ibid., p. 27.

25.  Letter to George Garland, Chief,  Economic & Policy Analysis Branch, EPA,
     from Henry Harfleld, Shearman and Sterling,  dated June 10, 1980.

26.  Transcript of meeting at American Bankers Association (ABA) with Martin Shea,
     Morgan Guaranty of New York, Robert Bevan of ABA, Pedro Areau, Vice
     President, Riggs National Bank, Richard Peterson, CHief Counsel, Inde-
     pendent Bankers Association, William  C. Prlbble, Jr., of Northwestern
     National Bank, Minneapolis, Charles W.  BIsset,  Vice President, Citibank,
     N.A., New York, James D. McLaughlln of  ABA,  Jo  Sabol, of ABA, William
     Smith of ABA and others, on June 11,  1980, p. 93.

27.  Memorandum dated September 4, 1980 from Carole  J. Ansheles of EPA  to the
     public docket for the financial requirements regulations, reporting
     telephone conversation on September 3,  1980 with Henry Harfield,
     Shearman and Sterling, regarding clarification  of comments made earlier
     by Mr. Harfleld on letters of credit.

28.  Ibid.

29.  Memorandum dated August 5, 1980 from Carole J.  Ansheles of EPA  to  the
     public docket for the financial requirements regulations, reporting
     on June 17, 1980 meeting 1n New York with (1) S. J. DiaSparra of
     Irving Trust Co., New York (2) J. F.  Savola of  Irving Trust Co., New
     York  (3) Ray P. Agostlno of Citibank NA, New York  and  (4) Kathleen
     Tripp of Morgan Guaranty & Trust Co., New York.
                                   I. 139

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      APPENDICES TO  PART OME
Analyses Related to Pay-In  Period
         For Trust Funds
               I.  140

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                                 Appendix A

                 BANKRUPTCY RATE BASED ON INTERMEDIATE SIZE
                            MANUFACTURING FIRMS


     The bankruptcy rate used 1n the model should reflect the bankruptcy
rate of the manufacturing firms which will be required to set up trust funds.
To derive an estimate of this rate, EPA staff began with the bankruptcy
rate for all businesses.  The mean and standard deviation of the bankruptcy
rates for historical time periods are:

                                     Bankruptcy Rate!

                                     Mean    Standard Deviation

             1950 - 1978             0.44%           0.107%
             1960 - 1978             0.45%           0.114%
             1969 - 1978             0.37%           0.067%
             1973 - 1978             0.34%           0.077%

The 1960-1978 bankruptcy rate was selected as a reasonable estimate of
the future rate of bankruptcy.

     However, this estimate Is for all businesses including retail stores,
mining, construction and service companies.  Data over the 1973-1978 period
revealed that the bankruptcy rate for manufacturing firms 1s higher on
average than non-manufacturing firms.  Over the 1973-1978 period, manufacturing
firms had an average bankruptcy rate of 0.48 percent with a standard deviation
of 0.089 percent.2  Over a comparable time period, the bankruptcy rate
for all firms averaged 0.34 percent with a standard deviation of 0.077
percent, as shown above.  Thus, the mean bankruptcy rate is approximately
41 percent higher than average for manufacturing firms and the standard
deviation is approximately 16 percent higher.  Applying these factors to
the data for the 1960-1978 period gives a mean bankruptcy rate of 0.64
percent and a standard deviation of 0.132 percent.

     Dun and Bradstreet also provides data on the size of the businesses
which go bankrupt.  Eighty (80) percent of the businesses which went bankrupt
I/ All data on bankruptcy rates are from The Failure Record, Dun & Bradstreet,
~  Inc., 1979.

2/ Dun & Bradstreet  (D&B) gave total number of manufacturing failures
~~  rather than the rate,  to derive the rate the total number of failures
   was divided by an estimate of the total number of manufacturing companies.
   The Census of Manufacturers shows that there were 267,422 manufacturing
   companies in 1972.  D&B indicate that the number of businesses started
   each year is almost equal to the number of businesses discontinued each
   year.  Hence, the 1972 figure has been used for each year of the 1973-1978
   period.


                                   I. 141

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in 1978 had between $25,000 to $1  million in current  liabilities.   Firms
of this size are also the most likely to require trust  funds.  Firms  with
less than $25,000 in current liabilities are more likely  to use  off-site
disposal facilities; firms with greater than $1  million in current  liabilities
are apt to be able to provide another financial  instrument rather than  a
trust fund or pass the financial  test.   According to  Internal  Revenue
Service statistics, approximately 52  percent of  the corporations fall
into the middle category.   Therefore, 80 percent of the bankruptcies
occur in this group which contains only 52 percent of the firms. Their
bankruptcy rate is, therefore, higher than average.

     To adjust the mean bankruptcy rate to account for  this, the manufacturing
bankruptcy rate computed above is multiplied by  the factor 0.80/0.52.
This yields a bankruptcy rate of  0.98 percent for manufacturing  firms of
this size category.  This rate was rounded to 1.0 percent for  this  analysis.
The standard deviation was adjusted slightly upward from  0.132 percent  to
0.15 percent.     ,

     It should be noted that these bankruptcy rates do  not represent
business discontinuances.   As defined by Dun A Bradstreet, failures include
only those firms Involved in court proceedings or voluntary actions which
resulted in a loss to creditors.   If  operations  were  discontinued but all
creditors were paid in full, the  firm is not considered a failure.
 Prepared under the direction of EPA by Putnam,  Hayes  and Bartlett,  Inc,
 (September  1980)
                                   I.  142

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                                APPENDIX B


                 FAILURE RATES FOR FIRMS WITH TRUST FUNDS

     In addition to analyzing bankruptcy rates on the basis  of  size  and
industry type, an analysis could also focus on several  other factors.
These factors are of two general kinds: those related to the phenomenon
that those using the trust fund will have been rejected by banks  and
sureties for letters of credit and surety bonds, and those relating  to
the special problems associated with hazardous waste disposal sites.

     Firms using trust funds will not be the more viable firms  in any
industry.  The more viable and financially sound firms in  general will be
able to use letters of credit or surety bonds.  In general the  firms using
a trust fund will come from one of four classes:

     (1)  Smaller firms with poor credit ratings:  A small firm that also
has small closure/post-closure costs will still probably be  able to  obtain
a letter of credit of surety bond it if has a generally good credit  rating,
or adequate collateral.

     (2)  Smaller firms with good credit rating but very large closure and
post-closure costs:  There nay exist firms with basically  sound financial
ratios and a favorable credit rating for most purposes that  may be unable
to get a letter of credit or surety bond for closure/post-closure due  to
the fact that the associated costs are extremely large compared to the size
of the firm, and the firm lacks adequate collateral.  This may not be an
uncommon situation.  For example, one can set up a competitive landfill
for an investment of from one to three million dollars, but  the associated
closure and post-closure costs will not normally appear in the financial
records of the firm and could account for up to $800,000.  Such a firm
might well have a good credit rating for most purposes, but  still be
unable to obtain credit for this specific purpose.

     (3)  Larger firms with poor credit ratings:  At least some large
firms will lack adequate collateral and have such poor financial  ratios
and credit ratings that they will be unable to retain a letter of credit
or surety bond, no matter what their size.

     Given these considerations, 1t appears that firms that  use trust
funds will not be the average firm, but a firm with somewhat greater
prospects of failure than the average firm.  The first question to be
examined is the effect of increased failures of simply having a poor
credit rating (as is the case with classes I and 3 cited above).   A
study for the National Bureau of Economic Research by Edgar  P.  Fiedler,
entitled Measures of Credit Risk and Experience, provides  a  useful review
of the literature on the significance of various kinds of  credit ratings.

     In general, this study concludes that for business firms,  credit
ratings are in fact a meaningful measure of the viability  of firms.  Two
                                  I. 143

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kinds of specific quantitative data are established  In  this  report.   For
Dun and Bradstreet credit ratings from the period 1952  to  1957,  It was  found
that firms with a "high" credit rating from Dun and  Bradstreet had a  loss
rate of .09 percent, those with a "good" credit rating  had a  loss  rate
of .5 percent, and those with credit ratings that were  "fair" or "limited"
had loss rates of 1.84 percent.  If firms with good  credit ratings are
compared to those with fair or limited credit ratings,  the loss  rate  is
approximately 3.7 times greater.  From 15 to 24 percent of all firms
rated by Dun and Bradstreet during this period had a rating  of "fair" or
"limited".

     This same study also notes that Moody's bond rating have a  similar
effect.  For the period 1900-1943 there were defaults on 11  percent  of  all
bonds rated of Investment quality.  For the same period, the  default
rate for bonds rated of less than investment quality was 42  percent.  In
this case, firms of poor credit ratings (ranging for most  years  from  between
12 and 25 percent of all firms rated) failed at 3.8  times  the rate of
firms with Investment quality ratings.

     A review by IR&T of various accounting studies  which  attempt to  use
statistical methods to predict failure rates show that  in  general  such
tests succeed 1n dividing firms Into two groups,  with the  lower  rated group
having from 3 to 5 times the failure rate of the higher rated group.  The
ratio of failure rate for poor credit rated firms to the average failure rate
for all firms (as against high rated firms only)  is  approximately 2.5 for
Dun and Bradstreet and Moody1s ratings data given above.   This adjustment
assumes the low rating categories contain from 15 to 25 percent  of all
firms for both Dun and Bradstreet and Moody's.

     Finally, there is the category of firms which have sound financial
ratios and might be considered good credit risks under  most  circumstances,
but which have such high closure and post-closure costs that they will
be forced to use a trust fund and be unable to get credit  for this purpose.
Such firms will again be a high risk category.   This is most clearly  seen
for one special class of such firms—off-site hazardous waste management
firms.  Such firms will be exposed first of all to a variety of  technical
risks.  As noted In the IR4T draft final  report,  a variety of contingencies
can occur at such a site which would easily cost from $250,000 to a
million dollars to repair.  While the probability of such  events is
difficulty to ascertain, It 1s high enough to represent a  significant
source of risk In Itself.   Added to this are the set of risks imposed by
RCRA regulations.  It 1s Inherent in the enfocement  system for RCRA  that
inadequate technical performance by such a firm could lead to immediate
cessation of their ability to do business at all.  In many cases,  it
could lead to temporary suspension of business.  In  the roughly  comparable
case of low level nuclear waste disposal sites, three of the  six existing
have been forced to completely suspend operations for significant periods
of time.  Were this to occur at a relatively small firm for  which the
                                  I. 144

-------
hazardous waste disposal site is the only source of revenues,  1t would
virtually ensure failure.  It would thus not be unreasonable to assume
that firms of this kind would be exposed to significantly higher failure
risks than the baseline firm.

     Taking all of these diverse factors into account, one could assume
that a failure rate of 1.5% might be appropriate for hazardous waste
firms which must use trust funds.
                                   I. 145

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                                 Appendix  C
                        COMPUTERIZED  FINANCIAL MODEL
                        FOR TRUST FUND  PAY-IN PERIOD
     As discussed above, in order to  maximize  the  amount of RCRA  site
closure and post-closure care costs paid  by  firms  that would  require trust
funds, it is necessary to trade-off the following  two factors:

     1)  The amount of the trust payments left unfunded due to  firms going
         bankrupt during the trust fund pay-In period, and

     2)  The unfunded closure and post-closure costs resulting  from plants
         which close rather than establish a trust fund.

The amount of the unfunded trust payments because  of bankruptcy rises  as
the pay-in period 1s extended since more  firms go  bankrupt prior  to completion
of their trust fund payments.  Analysis of this factor alone  would therefore
lead to a short pay-in period.   The Induced  plant  closures, however, rise .
as the trust fund pay-In period Is shortened.   The shortening of  the pay-in
period causes the cost of the trust fund  to  be prohibitively  high for  some
firms.  They would shut down and would be unable,  or unwilling  to pay  for
proper RCRA site closure and post-closure care.  Analysis of  only this
factor would argue for a long pay-in  period.   Therefore, a tradeoff must
be made between the two factors such  that the  total closure and post-closure
costs covered by firms needing trust  funds is  maximized (the  minimization
of unfunded closure/ post-closure costs). In  order to make this  trade-off,
EPA conducted a computerized financial analysis.   The model used  for
this purpose is described below.  The inputs and assumptions  to the model
are then described.  Finally, the results of the analysis are presented.

Description of the Model


     The model  computes the present value of the unfunded closure and
post-closure costs as a percent of the present value of the total trust
funds needed to ensure proper closure and post-closure care of  all waste
management facilities.^

     The present value of the unfunded site  closure and post-closure costs
due to induced plant closures is simply the  number of Induced closures
multiplied by the cost of closure and post-closure care.  All Induced
closures are assumed to occur Immediately.
    The present value equivalent of  all  amounts  is  used  in  order to be
    able to directly compare the cost  of immediate  closures with the cost
    of partially unfunded trusts in  later years  due to firms going bankrupt
    during the trust fund pay-In period.
                                   I.  146

-------
     These costs are then added to the present  value  of  the unfunded
trust payments due to bankruptcy.   The present  value  of  the unfunded trust
payments due to bankruptcy Is derived from the  number of firms which go
bankrupt each year multiplied by the amount of  the unfunded trust payments
in that year and the application of a discount  factor.   The number of
firms which go bankrupt in any given year is calculated  by multiplying the
bankruptcy rate by the number of remaining firms.   The unfunded amount
of the trust fund is a function of the pay-in period  and the year in which
the firm goes bankrupt.  The trust fund payments are  constant  in real
terms (that is, the payments rise at the rate of inflation).  Thus, if the
firm goes bankrupt in year 3 of a 5 year pay-in period,  three-fifths of
the closure funds are available in the trust fund.2  The remaining two-fifths
is the unfunded amount.  This amount is discounted to its present value by
the real (net of inflation) discount rate.

Inputs to the Model

     The model begins with the following inputs:

     1)  The bankruptcy rate,
     2)  Trust fund pay-in period,
     3)  Induced closures given the pay-in period,
     4)  The real (net of inflation) discount rate before taxes,
         and
     5)  Recovery rate.

Each of these is discussed briefly below.

1)   Bankruptcy Rate

     As explained previously, EPA believes that the trust fund users annual
bankruptcy rate could be between 1.0 and 1.5 percent. The  derivation  of
these rates is explained in Appendices A and B.  The sensitivity of the results
to different bankruptcy rates was analyzed by varying the annual bankruptcy
rate between 0.5 to 3.0 percent.  Unless "half" the predicted  induced
plant closures and a greater than 2 percent bankruptcy rate occur, the
pay-in period should be set between 5 and 20 years, regardless of  the
bankruptcy rate that exists.

2)   Trust Fund Pay-In Period

     EPA focused attention primarily on trust fund pay-in periods  of 1, 5,
10, and 20 years.  Fifteen years was also briefly examined.

3)   Induced Closure Rate

     A schedule of induced plant closures is provided in Appendix  D  for
the pay-In periods EPA primarily examined.  Those percentages  and  half of


Y.Trust fund payments are assumed to be made at the beginning  of each
    year while bankruptcies were assumed to occur at the end  of  each year.
                                   I. 147

-------
those amounts were used 1n this analysis  and are  referred to  1n  the  tables
that follow as "full" closures and "half" closures.  The closures  for  a  15
year pay-In period presented In the tables that follow were extropolated from
Appendix D data.   This option 1s not present In the  preceding text,  because
1t was not given the same level of consideration  as  the other pay-in
period options.

4)  Real Discount Rate

     This represents the real  (net of inflation)  discount rate before
taxes.  Since the cost to the government  1s being measured (i.e.,  the
costs which the government must pay to cover the  closure/post-closure
costs defaulted by private Industry),  the discount rate should reflect the
cost of government funds.  A two percent  real  rate of return  has been  used
in this analysis.  The analysis was done  varying  the discount rate from  0
to 6 percent.  The staff found that varying the discount led  to  very
similar results In the trade-off analysis.   The staff's pay-in period
decision, 1f solely based on the trade-off analysis, would remain  the  same
under the various discount rates.

5)   Recovery Rate

     In bankruptcy, creditors could receive some  portion of the  funds  owed
them.  In the trade-off analysis presented in the text a 25 percent  recovery
rate was used for both Induced plant closures and bankruptcies,  because  the
staff believes it would be unable to recover most of the money.  However, the
staff also examined a zero and 50 percent recovery rate and found  that they
did not make a difference 1n pay-in period choice In the trade-off analysis.

Model Assumptions

     In addition to the above inputs,  the following  assumptions  were made:

     o  Induced closures occur immediately.

     o  All post-closure and closure costs are discounted to  their present
        value equivalents assuming these  costs are Incurred during the
        year closure occurs.

     o  In the absence of bankruptcy,  sites would be retired  in  a  straight-line
        fashion over the twenty year period between  year 6 and year  25.
        (That Is, It was assumed that 5 percent of the hazardous waste
        management facilities had a remaining life of 6 years, 5 percent
        had a remaining life of 7 years and so forth.)

     o  Firms must build their trust fund over the life of their site  or
        the trust fund pay-in period,  whichever is shorter.
                                   I.  148

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Model Results

     The model makes a trade-off between the Impact of  bankruptcies  and
the effect of induced closures on unfunded payments.  Each  of  these  effects
is discussed separately and then the combined effect is discussed.

     Bankruptcies

     Exhibit C-l through C-3 give the percentage of trust  funds  not  collected
due to bankruptcy assuming zero, 25, and 50 percent recovery,  respectively.

     Induced Closure

     Exhibit C-4 presents the percentage of trust funds not collected  due
to induced closures.

     Combined Effect
     The combined effect of "full" or "half" closures and  bankruptcies  is
shown in Exhibits C-5 through C-10.
Model developed under the direction of EPA by Putnam,  Hayes and Bartlett,
Inc.  (September 1980),
                                   I. 149

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                                      EXHIST C-l
                     PE3CZNTACE OF TOTAL TRUST FuKDS NOT COLLECTED
 Real Discount Rate » 0%

 Bankruptcy Rate
      0.57,
      1.0
      1.5
      2.0
      2.5
      3.0

Real  Discount  Race  « 1%
Bankruptcy Race
      0.55
      1.0
      1.5
      2.0
     3.0

?.e-3L Discount Rare - 4%
Bankruptcy Rate
     0.52
     1.0
     1.5 "
     2.0
     3.0

Real Discount Rate » 6%
Bankruptcy Race
     0.5S
     1.0
     1.5
     2.0
     2.5
     3.0

_1 	
0.0%
0.0
0.0
0.0
0.0
0.0
0.0%
0.0
0.0
0.0
0.0
0.0
0.02
0.0
0.0
0.0
0.0
0.0
0.0%
0.0
0.0
0.0
0.0
0.0
Leneth
_5 	
1.02
2.0
3.0
3.9
4.9
5.8
1.32
2.5
3.7
4.9
6.0
7.1
1.6%
3.1
4.6
5.9
7.2
8.5
2.0*
3.8
5.5
7.1
8.5
9.9
of Trust
10
2.1%
4.1
6.1
8.1
10.0
11.8
2.62
5.1
7.5
9.7
11.9
14.0
3.2%
6.2
8.9
11.5
14.0
16.3
3.92
7.3
10.5
13.4
16.1
13.6
(Years)
13
2.9%
5.7
8.3
10.9
13.4
15.3
3.5%
6.8
9.9
12.8
15.6
18.2
4.2S
8.1
11.6
14.9
17.9
20.8
5. OX
9.4
13.4
17.0
20.4
23.4
"o Closures
0" Recovery
20
3.42
6.6
9.6
12.5
15.3
18.0
4.0%
7.8
11.2 •
14.5
17.6
20.5
4 . 72 • _
9.0
13.0
16.6
20.0
23.1
s.s:
10.4
14.8
18.3
22.4
25.7
                                    1-150

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                                     EXHIBIT  C-2
                    PERCENTAGE OF TOTAL TRUST FUNDS NOT COLLECTED
Real Discount Rate = 0%                                                  No Closures
                                        ,     ,   , ,.     ,„    \          25% Recover'.
                                        Length of Trust (Years)
Real Discount Rate =  2%
Bankruptcy Rare
     0.5%
     1.0
     I. 5
     2.0
     2.5
     3.0

Real Discount Rate -  4%
Bar.'itr--" ::'".• Rare
     0.5;;
     1.0
     1.5
     2.0
     2.5
     3.0
Real Discount Rate
Bankruptcy Rate
     0.5;;
     1.0
     1.5
     2.0
     2.5
     3.0
                      6%
1
0.0%
0.0
0.0
0.0
0.0
0.0
0.0%
0.0
0.0
0.0
0.0
0.0
0.0%
0.0
b.o
0.0
0.0
0.0
0.0%
0.0
0.0
0.0
0.0
0.0
5
0.8%
1.5
2.2
2.9
3.7
4.4
1.0%
1.0
2.8
3.6
4.5
5.3
1.2%
2.3
3.4
4.4
5.4
6.3
1.5%
2.9
4.1
5.3
6.4
7.4
10
1.6%
3.1
4.6
6.1
7.5
8.9
2.0%
3.3
5.6
7.3
8.9
10.5
2.4%
4.6
6.7
8.6
10.5
12.2
2.9%
5.5
7.9
10.1
12.1
14.0
15
2.2%
4.2
6.2
8.2
10.0
11.8
2.6%
5,1
7.4
9.6
11.7
13.7
3.2%
6.0
S.7
11.2
13.5
15.6
3.7%
7.1
10.1
12.8
15.3
17.6
20
2.5%
4.9
7.2
9.4
11.5
13.5
3.0%
5.8
8.4
10.9
13.2
15.4
3.6%
6.8
9.7
12.5
15.0
17.3
4.1%
7.8
11.1
14.1
16.8
19.3
                                     1-151

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                                      EXHIBIT C-3
                     PERCENTAGE OF TOTAL TRUST FuNDS NOT COLLECTED
 Real  Discount  Rate  « 0%                                                  No Closures
                                                                         50% Recoverv
                                         Length of Trust (Years)
 Bankruptcy  Rate
      0.5%
      1.0
      1.5
      2.0
     .2.5
      3.0
Real Discount Rate » 2%
Bankruptcy Rate
     0.5%
     1.0
     1.5
     2.0
     2.5
     3.0

•veal. Discount Rate - 4%
Bankruptcy Rate
     0.5%
     1.0
     1.5
     2.0
     2.5
     3.0

Real Discount Rate * 6%
Bankruptcy Rate

     1.0
     1.5
     2.0
     2.5
   .  3.0
1
0.0%
0.0
0.0
0.0
0.0
b.o
0.0%
0.0
0.0
0.0
0.0
0.0
0.0%
0.0
0.0
0.0
0.0
0.0
0.0%
0.0
0.0
0.0
0.0
0.0
5
0.5%
1.0
1.5
2.0
2.4
2.9
0.6%
1.3
1.8
2.4
3.0
3.5
0.8%
1.6
2.3
3.0
3.6
4.2
1.0%
1.9
2.8
3.5
4.3
4.9
10
1.1%
2.1
3.1
4.0
5.0
5.9
1.3%
2.6
3.7
4.9
6.0
7.0
1.6%
3.1
A. 5
5.8
7.0
8.1
1.9%
3.7
5.3
6.7
8.1
9.3
15
1.4%
2.8
4.2
5.5
6.7
7.9
1.8%
3.4
5.0
6.4
7.8
9.1
2.1%
4.0
5.8
7.4
9.0
10.4
2.5%
.4.7
6.7
8.5
10.2 .
11.7
20
1.7%
3.3
4.8
6.3
7.7
9.0
2,0%
3.9
5.6
7.3
S.S
10.2
2.4%
4.5
5.5
8.3
10.0
11.5
2.8%
5.2
7.4
9.4
11.2
12.3
                                    1-152

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                              EXHIBIT C-4

             PERCENTAGE OF TOTAL TRUST FUNDS NOT COLLECTF.D
                       .  INDUCED CLOSURES ONLY
                                    Lensrh of Trust  (Years)
                              1       5       10      15      20


Full Closure  •

    Recovery
           o%                21.5%   is.is    s.4%    4.3%    2.8%
          25%                16.1     9.8     6.3.    3-6     2.1
          50%                10.S     6.6     L.I    2.4     1.4


Half Closure


    Recovery
           0%                10.8%    6.6S    4.2%    2.4%    1.4*
          25%                 8.1     5.0     3.2    1.8     1.1
          50%                 5.4     3.3     2.1    1.2     0.7
                             1-153

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                                      EXHIBIT C-5
 „   .  _.        ,    PERCENTAGE OF TOTAL TRUST FUNDS NOT COLLECTED
 aeal  Discount Rate » OS                                                 r ,. r.
                                                                         Full Closures
                                        Length of  Trust  (Years)	°j; Recovery
Real Discount  Rate  -  2"
Bankruptcy Rate
     0.52
     1.0
     1.5
     2.0
     2.5
     3.0

Real Discount:  Rate  *  4*
oarkrurtcy Rate
     0.5"
     1.0
     1.5
     2.0
     2.5
     3.0

Real Discount  Rate  *  67,
Bankruptcy Rate
     0.52
     1.0
     1.5
     2.0
     2.5
     3.0
1
21. 52
21.5
21.5
21.5
21.5
21.5
«- v • //•
26.5
26.3
26.1
25.9
25.7
32.32
31.8
31.3
30.8
30.4
30.0
38.02
37.1
36.3
35.6
34.9
34,3
5
14 . 0%
14.8
15.7
16.5
17.3
18.1
1 / . S«.
18.6
19.5
20.3
21.1 "
21.9
22.1%
22.9
23.7
24.4
25. 2
25.9
26.7%
27.4
28.1
28.7
29.4
30.0
10
10.32
12.2
14.0
15.8
17.6
19.2
13.2%
15.3
17.4
19.3
21.1
22.9
16.62
18.8
21.0
23.0
25.0
26. S
20.32
22.7
24.9
27.0
28.9
30.7
15
7.7%
10.3
12.3
15.3
17.6
19.9
9.7-
12.7
15.6
IS. 3
20. £
23.2
12.1%
15.5
IS. 6
21.5
24.2
26.7
li.SX
13.5
21.3
24.9
27.7
30.3
20
6. IS
9.2
12.2
15.0
17.7
20.3
7.6T;
11.1
14.5
17.6'
20.5
23.3
9.3%
13.3 •
17.0
20.4
23.5
26.4
11.3%
15.7
19.7
23.3
26.6
29.6
                                   1-154

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                                    EXHIBIT C-5
                   PERCENTAGE OF TOTAL TRUST FUNDS NOT COLLECTED
Real Discount Rate * 0%
                                       Length of Trust  (Years)
                                                 Full Closures
                                                 251', Recovery
Real Discount Rate
Bankruptcy Rate
   -  0 . 5J;
     1.0
     1.5
     2.0
     2.5
     3.0

Resl Discount R.ate
Sartkrup>cy Rate
     0.5%
     1.0
     1.5
     2.0
     2.5
     3.0

Real Discount Rate
Bankruptcy Rate
     0.5%
     1.0
     1.5
     2.0
     2.5
     3.0
2%
1
16.1%
16.1
16.1
16.1
16.1
16.1
20 . 1%
19.9
19.7
19.6
•19. A
19.3
24.2%
23.8
23.5
23.1
22.8
22.5
28.5-%
27.8
27.2
26.7
26.2
25.7
5
10.5%
11.1
11.7
12.4
13.0
13.6
13. 37.
14.0
14.6
15.2
15.9 -
16.5
16.5%
17.2
17.7
18.3 '
18.9
19.4
20.0%
20.5
21.0
21.5
22.0
22.5
10
7.8"
9.2
10.5
11.9
13.2
15.2
9.9%
11.5
13.0
14.5
15.9
17.2
12. AS
14.1
15.7
17.3
18.7
20.1
15.2.1
17.0
18.7
20.2
21.7
23.1
15
5.7%
7.7
9.6
11.5
13.2
14.9
7.3%
9.5
11.7
13.7
15.6
17.4
9.1%
11.6
13.9
16.1
18.1
20.0
11. 1Z
13.9
16.4
IS. 7
20.8
22.7
20
4.6%
6.9
9.1
11.2
13.3
15.2
5.7%
8.3
10.8
13.2'
'15.4
17.5
7.0%
10.0 .
12.7
15.3
17.6
19.8
8.4%
11.8
14.8
17.5
19.9
22. 2
                                    1-155

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                                     EXHIBIT C-7
                   PERCENTAGE OF TOTAL TRUST FUNDS NOT COLLECTED
Real Discount  Race *  O'i
                                        Length of Trust  (Years)
                                                   Full Closures
                                                   50? Recovery
Real Discount Rate * 2%
Bankruptcy Rate
     0.5!i
     1.0
     1.5
     2.0
     2.5
     3.0

     Discount Rate « ~
3 sr. k r u p^c c v^ Rajc e
     0.52
     1.0
     1.5
     2.0
     2.5
     3.0
Real Discount Rate
Bankruptcy Rate
     0.5?.
     1.0
     1.5
     2.0
     2.5
     3.0
6%
1
10.82
10.8
10.8
10.8
10.8
10.8
13. *r.
13.3
13.1
13.0
12.9
12.9
16.25
15.9
15.6*
15.4
15.2
15.0
19.0':
13.6
18.2
17.8
17.5
17.1
5
7.0Z
7.4
7.8
8.3
8.7
9.1
8.9%
9.3
9V7
10.2
10.6 '
11.0
11.02
11.4
11.8
12.2
12.6
13.0
13.4%
13.7
14.0
14.4
14.7
15.0
10
5.2%
6.1
7.0
7.9
8.8
9.6
6.62
7.7
8.7
.9.6
10.6
11.5
8.32
9.4
10.5
11.5
12.5
13.4
10.11:
11.3
12.4
13.5
14.5
15.4
15
3. BZ
5.1
6.4
7.6
3.8
9.9
4.9%
6.4
7.8
9.1
10.4
11.6
6.12
7.7
9.3
10.7
12.1
13.4 .
7.42
9.2
10.9
12.4
13.8
15.1
20
3. or:
4.6
6.1
7.5
8.8
10.1
3.3%
5.6
7.2
8.8
10.3
11.6
4.72
6.7 •
8.5
10.2
11.7
13.2
5.6,1
7.8
9.8
11.6
13.3
14.8
                                   1-156

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                                    EXHIBIT C-S
                   PERCENTAGE OF TOTAL TR'JST FUNDS NOT COLLECTED
Real Discount  Rate =  W,
                                         Leneth of Trust (Years)
Real Discount Rate =  27.
Bankruptcy Rate
     0.5f;
     1.0
     1.5
     2.0
     2.5
     3.0

Real _Discount Rate »  4;i
Bankruptcy Rate
     0.5%
     1.0
     1.5
     2.0
     2. 5
     3.0

Real Discount Rate  =  6/£
Bankruptcy Rate
     0.5™
     1.0
     1.5
     2.0
     2.5
     3.0
1
10.82-
10.8
10.8
10.8
10.8
10.8
13. SZ
13.7
13.6
13.4
13.3
13.2
17.4%
17.0
16.7
16.4
16.1
15.9.
21.23
20.6
20.1
19.5
19.1
18.7
5
7.5;:
8.4
9.3
10.2
11.1
12.0
9.7%
10.7
11.8
12.7
13.7
14.6
12.3%
13.4
14.5
15.5
16.5
17.5
15. 3%
16.4
17.5
15.6
19.6
20.5
10
6.22
S.2
10.1
12.0
13.8
15.5
8.0%
10.3
12.5
14.6
16.6
18.5
10.1%
12.7
15.1
17.4
19.6
21.6
« 1 C*'
j. — . Jrt
15.4
18.0
20.5
22.8
24.9
15
5.32
8.0
10.6
13.1
15.5
17.8
6.6%
9.8
12.3
15.6
13.2
20.8
8.2%
11.8
15.2
18.2
21.1
23.8
10.0%
14.1
17.7
21.1
24.1
26.9
20
4.7%
7.9
10.9
13.7
16.5
19.1
5 - 8%
9.4
12.9
16.1
19.1
21.9
7.0%
11.1 '
15.0
IS. 5
21.7
24.7
8.4%
13.1
17.3
21.1
24.5
27.6
                                     1-157

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                                      EXHIBIT C-9
                     PERCENTAGE  Or  TOTAL T?.:'ST FUNDS  NOT  COLLECTED
    a!  Discount  Rate -  02                                                Hal:  Closure,
                                         Length of Trus:  (Years)          2j"  r'eccverv
  Sar.kruntcy  Rate
       0.52
       1.0
       1.5
       2.0
       2.5
       3.0

 Real  Discount Rate
 Bankruptcy  Rate
      0.52
      1.0
      1.5
     2.0
     2.5   .
     3.0
     Discount Race  *  43
bankruptcy Rate
     0.52
     1.0 .
     1.5
     2.0
     2.5
     3.0

Real Discount Rate  » 62
Bankruptcy Rate
     o.sr;
     1.0
     1.5
     2.0
   .  2.5
     3.0
> 1
*
8.12
8.1
8.1
8.1
8.1
3.1
10.4%
10.3
10.2
10.1
10.0
9.9
13.0%
12.8
12.5
12.3
12.1.
11.9
15.92
15.5
15.0
14.7
14.3
ii.'o
5
5.6Z
6.3
7.0
7.7
8.3
9.0
7.32
8.1
8.8
9.6
10.3
11.0
9.22
10.1
10.9
11.7
12.4
13.1
11. 5%
12.3
13.1
13.9
14.7
15.4
:o
4.75
6.1
7.6
9.0
10.3
12.9
6.02
7.7
9.4
10,9
12.4
13.9
7.52
9.5
11.3
13.1
14.7
16.2
9.4S
11.5
13.5
15.4
17.1
18.7
15
4.0Z
6.0
7.9
9.8
11.6
13.4
5.0%
7.3
9.6
11.7
13.7
15.6
6.22
S.9
11.4
13.7
15.8
17.8
7.52
10.6
13.3
15.8
18.1
20.2
20
3.5;:
5.9
8.2
10.3
12.4
14.3
4.32
7.1
9.6
12.0
14.3
16.4
5.32
8.4-
11.2
13.9
16.3
18.6
6.32
9.8
13.0
15.8
13.4
20.7
                                   1-158

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                                   EXHIBIT C-10
                  PERCENTAGE OF TOTAL TRUST FJNDS NOT COLLECTED
Real Discount Race = 0%

Bankruptcy Rate
     0.5*
     1.0
     1.5
     2.0
     2.5
     3.0
                                                                      Half Closures
                                                                      50% Recovery
Real Discount Rate
Bankruptcy Rate
     0.52
     1.0
     1.5
     2.0
     2.5
     3.0

Real. Discount Rate
Bankruptcy Race
  '   0.5S
     1.0
     1.5
     2.0
     2.5
     3.0

Real Discount Rate
Bankruptcy Rate
     0.5J;
     1.0
     1.5
     2.0
     2.5
     3.0  .
                     2%
                     i%
                                       Lenzth of Trust (Years)
1
5.42
5.4
5.4
5.4
5'. 4
5.4
6.9%
6.8
6.8
6.7
6.7
6.6
8.7%
, 8.5
3.3
8.2
8.1
7.9
10. 62
10.3
10.0
9.3
9.5
9.3
5
3.7Z
4.2
4.7
5il
5.6
6.0
4.9%
5.4
5.9
6--
6.8
7.3
6.2%
6.7
7-3
7.S
8.3
8.7
. 7.6%
8.2
•3 . 3
9.3
9.8
10.3
10
3.1%
4.1
5.0
6.0
6.9
7.8
4.0%
5.1
6.2
7.3
8.3
9.3
5.0%
6.3
7.6
8.7
9.8
10.8
6.2%
7.7
9.0
10.2
11.4
12.4
15
2.6%
4.0
5.3
6.5
7.8
8.9
3.3%
4.9
6.4
7.8
9.1
10.4
4.1%
5.9
7.6
9.1
10.6
11.9
5.0%
7.0
8.9
10.5
12.1
13.5
20
2.47.
3.9
5.4
6.9
8.2
9.6
2.9%
4.7
6.4
8.0
9.5
10.9
3.5%
5.6 "
7.5
9.3
10.9
12.4
4.2%
6.6
8.6
10.5
12.3
13.8
                                   1-159

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                                 Appendix D
   NUMBER OF PLANT CLOSURES IN SELECTED  INDUSTRY SEGMENTS RESULTING  FROM
             COLLECTING TRUST FUNDS OVER DIFFERENT TIME PERIODS
       The number of plants that will choose  to close  rather  than comply with
an EPA regulation Is a function of  the cost Imposed on the  plants by the
regulation.  Collecting trust funds over a shorter time period Increases
the cost of the regulation; shorter periods for trust  fund  build-ups should
therefore lead to a higher closure  rate.

       The staff attempted to quantify the relationship between length of
trust fund buld-up and plant closures for segments of  the leather tanning
and textiles Industries.   From the  models used to compute the cost of the
Interim status standards Arthur D.  Little, Inc. calculated  the Incremental
cost of RCRA Imposed by the Interim status regulations as Inputs Into
Development Planning and Research Assocltes plan closure models for the
leather and textile Industries.

       The following table shows the results  of this analysis.
                                  I. 160

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                    NUMBER OF PLANT CLOSURES IN SELECTED INDUSTRY SEGMENTS RESULTING FROM
                             COLLECTING TRUST FUNDS OVER DIFFERENT TIME PERIODS
                                                        Number of Closures
 Industry and Segment
Leather Tanning
     Chrome Pulp
     Vegetable Non-Chrome
     Sheep
                 (Total  Leather)
Textiles
     Hosiery - Own Fabric
                                                Number  of  Plants
     Yarn 4 Stock
                 (Total  Textiles)
Trust Fund
1
1
4
4
9
4
10
14
2
1
3
4
8
4
8
12
Build Up (Duration)
5
0
3
3
6
4
4
8
10
0
3
1
4
4
1
5
20
0
0
0
0
3
0
3
Disposing On-S1te

25
8
9
42
12
53
65
Total Segments
23
20
14
107
Data provided by Richard  Seltzer  of Development Planning and Research Associates  on  August 27,  1980.   DPRA
calculated closures  by  running RCRA cost  numbers provided  by Arthur D.  Little  through DPRA impact  models
of Leather Tanning and  Textile Industries.

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                                 Appendix E
               NUMBER OF EXISTING HAZARDOUS WASTE  MANAGEMENT
                   FACILITIES THAT WOULD  USE TRUST FUNDS
     The Regulatory Analysis accompanying the RCRA C  Phase I  Standards
published 1n the Federal  Register on May 19,  1980 Indicated that the
Agency's RCRA C Economic  Impact Analysis for  these rules  covered about
29,000 generators of hazardous waste.  The staff estimated the number of
these generators who would use trust funds for RCRA C financial  assurance
by assuming: 30 percent of the 29,000 generators would dispose of their
waste on site and 50 percent of the  on-site generators would use trust
funds as opposed to any other financial assurance mechanism.   This results
1n an estimate of 4350 trust fund users.

     Considering that the economic analysis did not cover all generators of
hazardous waste, the staff believes  that the  estimate provided here 1s
probably low, but sufficient for Illustrative use 1n  the  "Cost of a Wrong
Decision" analysis In this background document.
                                   I. 162

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PART II

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                INTERIM AND GENERAL STANDARD LIABILITY fcEfJIr.Ey.XKTS


   i.  INTRODUCTION

       The Environmental Protection Agency is  issuing  final regulations or.

 financial responsibility requirements for the operating  life liability of

 interim status and general (permitted)  status facilities.*  The permitted

 status regulations were initially proposed on December  18, 1978  (FR59007, Vol.

 43,  No.  243}.   The interim status regulations were proposed on May  19, 1980

 (FR  33273,  Vbl.  45, No. 98) .   At that time the Agency also reopened the

 comment  period on the regulations affecting permitted status  facilities.  EPA

 had  received many comments in response  to the proposed  permitted  status

 regulations and  had analyzed  the issues raised.  The Agency  felt  that analysis

of these  issues  would benefit from further public comment.   In  addition,

 because  the issues raised by  the proposed interim status regulations have so

much in common with those raised by the proposed permitted  status standards,

 the Agency felt  that the public should  be given an opportunity  to comment on

 the entire set of financial responsibility regulations at one time.

       Comments have been received on the proposed regulations tha*. ranged from

questioning the  need for such regulations to questioning many of  the specific

requirements of  the regulations.  EPA has given considerable  thought to the

comments  and has analyzed further some  of the issues identified by the

comments.
      Facility  owners or operators are deemed to be in "interim status" until
      the date  final  administrative action is taken on their permit
      application.  Approved facilities pass into "permitted status."

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      In addressing these issues/ the Agency has tried to nrovide adequate

protection to human health and the environment and yet ensure that no owner or

operator is precluded from owning or operating a facility by standards that do

not reflect the "degree and duration" of risk at such facilities.  The two

objectives have conflicted at times and the Agency has sought to achieve the

best -balance feasible.   The most important aspects of the final liability

requirements are as follows;

           o  Non-sudden incidents could occur at some interim status
              facilities and these facilities must therefore secure insurance
              coverage  against non-sudden incidents.

           o  Nor.-sudden coverage is required during interim status and during
              permitted status only for land disposal facilities—surface
              impoundments,  landfills,  and land treatment facilities; the
              natore of the  problem indicates that the majority of non-sudden
              incidents will be restricted to such facilities.  However, the
              Regional  Administrator may extend the non-sudden requirement to
              other facilities if those facilities pose risks of non-sudden
              accident.

           o  Potential lack of availability of non-sudden coverage to small
              facilities and the need to allow time for a viable market for
              non-sudden coverage to develop are of considerable concern to
              the  Agency.   The non-sudden insurance coverage requirement,
              therefore,  is  phased in over time.  Owners or operators with
              annual sales greater than $10 million are required to obtain
              coverage  within 6 months from the effective date of the regula-
              tions, i.e.,  one year from the date the regulations appear in
              the  Federal Register.   Correspondingly, the non-sudden coverage
              requirement is deferred by 18 months (two years from the Federal
              Register  date)  for owners or operators with annual sales between
              $5 and $10 million and by 30 months (three years from the Federal
              Register  date)  for all other owners or operators.  During this
              time as well as subsequently, the Agency intends to monitor the
              insurance market.   Currently, the Agency is working on back-up
              mechanisms such as federal provision of insurance and/or
              reinsurance.   These mechanisms may be utilized if, in the
              future, the private sector insurance mechanism does not appear
              able to provide the liability coverage required by EPA's
              regulations.

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                                     It  -3-
            o  The base amount of insurance coverage required  is a minimum of
               $1 million per occurrence ($2 million annual  aggregate) for
               sudden occurrences and a minimum of $3 million  per occurence ($6
             " million annual aggregate)  for non-sudden occurrences.

            o  A financial test is being considered to allow those facilities
               to "self-insure" who can provide adequate evidence of their
               financial strength.  At present "self-insurance" is reserved but
               if promulgated EPA intends to adjust its effective date to
               coincide with the effective date of the rest  of the regulation.

            o  A variance procedure is included for facility owners and
               operators who can demonstrate that the levels of required
               coverage do not adequately reflect the degree and duration of
               risk at their facilities.  The procedure may  take the form of a
               revision in the level of the required insurance amounts.

            o  A provision is included by which the Regional Administrator may
               revise upwards the required insurance amounts where it is felt
               that such a change would more accurately reflect the degree and
               duration of risk at a facility.  The Regional Administrator may
               also require storage or treatment facilities  to obtain
               non-sudde
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                       3L-  -4-
"non-sudden accident" means an unforeseen and
unexpected occurrence which takes place over time
and involve continuous or repeated exposure.

"occurrence-based policy" means an insurance policy
that provides coverage for an event occurring during
the term of the policy regardless of when the claim
is filed.

"claims-made policy" means an insurance policy that
provides coverage if a claim is filed while the
policy is in force.  This policy may cover events
which occurred before the date the policy was first
issued to a firm as well-as events occurring while
the policy is in force, or may be restricted to
cover only events occurring while the policy is in
force•

"legal defense costs" means the expenses that an
insurer incurs in defending against claims brought
under the terms and conditions of the policy.

"net worth" means the difference between total
assets and total liabilities as measured by
generally accepted accounting principles.  Net worth
is equivalent to owner's equity.

"generally accepted accounting principles" mean
those accounting principles which have been given
formal recognition or authoritative support in any
particular jurisdiction  (e.g., the American
Institute of Certified Public Accountants in the
U.S.).

"assets" mean debit balances carried forward upon a
closing of books of account that represent property
values or rights acquired; these are economic
resources of an enterprise that are recognized and
measured in accordance with generally accepted
accounting principles.  Assets also include certain
deferred charges that are not resources but that are
recognized and measured in conformity with generally
accepted accounting principles.

"liabilities" mean to obligations carried forward
upon closing of books of account that are economic
obligations of an enterprise and are recognized and

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                                        -s-
            measured in conformity with generally accepted
            accounting principal.  Liabilities also include
            certain deferred credits that are not obligations
            but that are recognized and measured in conformity
            with generally accepted accounting principles.

            "working capital" means the excess of current assets
            over current liabilities.

            "current assets" means cash and other assets that
            are reasonably expected to be realized in cash or
            sold or consumed during the normal operating cycle
            of the business or within one year if the operating
            cycle is shorter than one year.

            "current liabilities" means liabilities expected to
            be satisfied by either the use of assets classified
            as current in the same balance sheet or the creation
            of other current liabilities; or those expected to
            be satisfied within a relatively short period of
            time,  usually one year.

            "total liabilities to net worth  ratio" means the
            value  of total  liabilities, which includes the" sum
            of short and long-term debts and obligations,
            divided by the  value of net worth.   This ratio
            indicates the degree of dependence  of art enterprise
            on creditors rather than on owners  for providing
            operating capital for the business.

            "deductible" means the liability amount agreed upon
            between the  insurer and the insured  and which  the
            insured must  incur in the event  of  a policy claim.

            "self-insurance"  means the  use of a  financial  test
            to provide evidence of financial responsibility in
            lieu of the  liability insurance  mechanism.


 II.  RATIONALE FOR  REGULATION

      A.  EPA Authority and  Basis for  Regulation

      Section  3004 of the Resource Conservation and Recovery Act of 1976 (P.L.

94-580)  mandates  that EPA promulgate regulations establishing performance

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                                       -6-
standards, applicable to owners and operators of facilities for the treatment,
                       r
storage, and disposal of hazardous waste.   Section 3004(b)  states that the

standards to be promulgated by the EPA shall include requirements respecting:

           "the maintenance of operation of such facilities and
           requiring such additional Qualifications as to
           ownership, continuity of operation, training for
           personnel, and financial responsibility as may be
           necessary or desirable;"

      EPA has interpreted the term financial responsibility to include the

ability to pay for injuries to third parties and property which result from
                 f
the operation of hazardous waste management facilities.  Congressional intent

that financial responsibility requirements should include provisions to meet

third party liability if the hazardous waste material escapes storage is

indicated in the Senate report accompanying the Solid Haste Utilization Act of

1976 (which was the Senate version of what was to become RCRA) .  The Senate

Public Works Committee report noted in describing the bill:

              "One of the specific conditions ... is the
           requirement that facilities providing treatment,
           disposal,  or storage of hazardous wastes meet
           minimum qualifications on ownership,  financial
           responsibility, and continuity  of operations.  In a
           situation  where the best accepted method of dealing
           with a hazardous waste may be long-term stabilized
           storage r a permit must contain  provisions to assure
           that the storage site will be maintained over that
           period.  In addition, there must be adequate
           evidence of financial responsibility, not only for
           operation  of the site,  but also to provide against
           any liability if the material escapes the storage."
           (Solid Waste Utilization Act of 1976.  Report of the
           Committee  on Public Works together with Individual
           Views to Accompany S. 3622.  Senate Report 94-988,
           94th Congress, 2d. Session, 1976,  p.  16.)

EPA interprets the use of the term "storage" by  the Senate  in the above report

as the management (i.e., storage,  disposal,  treatment)  of hazardous waste.

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                                    u:  -7-



 The language of the  report, "long-term stabilized storage," suggests that the

 Senate  intended to cover long-term management practices  such as land filling

 of wastes within the meaning of the word, "storage."

       EPA's authority to promulgate "necessary or desirable" standards under

 Section 3004(b) is qualified by the last paragraph of Section  3004:


               "No private entity shall be precluded by reason
            of  criteria established under paragraph (b)  from the
            ownership or operation of facilities providing
            hazardous waste treatment, storage, or disposal
            services where such entity can provide assurances of
            financial responsibility and continuity of operation
            consistent with the degree and duration of risks
            associated with the treatment, storage, or disposal
            of  specified hazardous waste."


       EPA interprets this paragraph to mean that private companies cannot  be

arbitrarily precluded from the ownership or operation of hazardous waste

management  facilities where as a result of criteria established  by the  Agency

such companies  can  provide assurances of financial responsibility and

continuation of operation consistent with the degree and duration of  risks

associated  with their facilities.   An example of an arbitrary  exclusion would

be a regulation which provided that only states could own and  operate

hazardous waste management facilities.  The Agency, in setting levels of

financial responsibility and allowing variances from those levels, will take

into consideration  the  degree  and  duration of risks associated with hazardous

waste management, as  mandated  by Section 3004.  This point is  further

elaborated  in Section IV.G.  of this document.

      B.  Need  for  the  Regulation

      Sudden and non-sudden  accidents could occur virtually any  time during

the operating life of a  hazardous  waste management facility.   When a hazardous

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 waste  site damage incident is discovered, the site owner or operator ma- be
                        • \
 inunediately faced with a number of financial demands.  There may be

 third-party damage claims and possibly court suits.  In addition, the local

 community or the state may sue to force clean-up of the site, to require

 continued monitoring of water supplies, and to have medical examinations

 performed on residents who may have been affected.  An accident requiring  site

 clean-up actions, therefore,  could prove to be a major financial burden on

 site owners and operators.  Any funds spent on site clean-up would erode the

 firm's financial base that could be used to pay any consequent damages.  If

 these owners or operators have insufficient financial resources to pay for

damages, private parties or the government may be forced to pay them,  in  many

of the hazardous waste damage incidents described below, when problems were

first discovered by the local community and funds were needed, the parties

responsible were found to have gone out of business,  had vanished, had

insufficient financial resources,  or disclaimed responsibility because they

were no longer the current owners  of the facility.

      Analysis of EPA damage  report files revealed 90 incidents of damage  at

hazardous waste management facilities.   Facilities involved in these accidents

were both "on-site" (adjacent to manufacturing facilities)  and off-site; they

were treatment, storage and disposal facilities;  they were owned by small,

independent operators as well as by large corporations.  (An overall summary

of the 90 damage incidents is provided  as Appendix A to the Background

 Document for Final and Reproposed  Financial Requirements,  Part 265 Subpart H,

 April 25, 1980.)

      The damage report files indicate  that 17 percent of  the incidents

occurred suddenly.  Most of these  incidents (13 of 15)  took place on sites

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                                        -9-
 which were operating at the time, and the majority were  on  sites operated in




 conjunction with manufacturing operations.  The more frequent sudden incidents




 involved the collapse of a dike supporting a wastewater  lagoon and the




 subsequent contamination of soil or surface waters and involved spills or




 waste discharges onto the ground causing soil contamination.  Reported




 explosions, fires, and toxic fumes, which were the only  incidents causing




 immediate deaths, occurred in off-site hazardous waste management facilities




 where different wastes were mixed.  Where sudden incidents  were reported,




 groundwater contamination was not an immediate problem except where  gradual




 leaching  had  also occurred over long periods of time.




       Most  of  the hazardous waste site incidents (83 percent) were gradual




 (non-sudden)  in that the actions and the damage occurred over a long period of




 time.  When the damage was discovered, 40 percent of the sites had already




 been  closed or  abandoned.   The more frequent gradual incidents involved




 improper  dumping on the ground or burial of untreated hazardous wastes,




 leakages  from  unlined settling or storage ponds and leakages  from rusting




 drums  and tanks without any back-up containment facilities. As with sudden




 incidents,  the  majority of gradual incidents in the EPA  files occurred on




 sites operated  in conjunction with manufacturing operations,   inevitably the




 result was  contamination of the soil and either surface  or  groundwater or both.




       Since many of the incidents reported to EPA have not  been thoroughly




 investigated, damage and clean-up cost estimates exist for  only a portion of




 the reported incidents.   Cost estimates are generally more  complete  for the




more serious incidents  because those incidents have been more fully

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                                      -10-
 investigated by EPA.  In order to improve the cost information available  on

 the  90 damage cases in the EPA files, efforts were made to contact individuals

 in organizations at the federal, state, and local level who were directly

 involved in the case investigations.

      Table 1 contains a summary of the costs in 1979 dollars from the 52

damage cases for which clean-up or third-party damage cost estimates could be

obtained.*/  Nineteen of these cases were the subject of detailed case

studies published by EPA.!/  For these cases, Level I and Level II clean-up

cost estimates were available.  As defined by EPA, Level I clean-up actions

are designed to alleviate existing damages to groundwater and third-parties.

Level II clean-up actions are designed to prevent future damage to groundwater

or third-parties due to  contaminant migration through the soil.  The cost

estimates available for  the other cases included actual costs incurred, damage

suit settlement amounts,  and clean-up cost estimates for planned actions.

Since the incidents reported are often those with the most serious damage, the

cost estimates generally represent the maximum level of costs which would be

incurred to clean-up and pay third-party claims on unregulated hazardous waste

management  sites.

      An investigation of the 15 sudden incidents identified only two cases

where third-party damages could be quantified.   Four million fish, valued at
I/    ICF Incorporated,  Review  and Analysis of  Hazardous Waste Site Clean-Up
      and Third-Party Damage Costs, March  14, 1980.

2/    EPA, Preliminary Assessment of  Clean-Up Costs  for National Hazardous
      Waste Problems, 1979.

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                                                     TABLE  1

                                 SUMMARY OF EPA DAMAGE REPORTS FOR WHICH CLEAN-UP
                              AND  THIRD  PARTY  DAMAGE  COST  ESTIMATES  COULD  BE  OBTAINED
                                                  (1979 dollars)
Type of Incident

Sudden

Gradual
                                          Clean-Up Costs
                                                                               Cost of Damages**
               Total    Number of     Average      Range of Cost   Number of     Average      Range of Cost
              Incidents  Incidents  Cost Incurred*    Estimates*    Incidents  Cost Incurred*    Estimates*
                  15
                       90
                             42
                             48
$277,700

1.64 million
$8,700-519,900

24,800-200 mill.
_9
11
$218,000      $216,500-220,000

 539,000      $11,700-3 million
 *   Upper bound of cost estimates are Level II estimates for complete waste removal and redisposal at a secured
     facility, while average cost incurred relates to actions already taken or which are to be taken.
 **
Does not include pending court suits,  some  of  which  seek over  $1  billion  in damages.
 Source:   ICF  Incorporated, "Review and Analysis of Hazardous Waste Site Clean-Up and Third-Party Damage Costs," March
          14,  1980.

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$216,500 (1979 dollars), were killed when the collapse of a lagoon dike led to

a temporary contamination of surface water. —'   Six deaths and many injuries

were reported when twelve tanks explodedat a site in New Jersey.-/  This

case is currently under litigation.   Conversations with the lawyers of the

injured parties indicate that compensation might be around $1-2 million for

all parties in the aggregate.  One party reportedly has recently  settled for

$220,000.   Other sudden incidents in Ohio,  Pennsylvania, Texas, Illinois, and

other states have resulted in actual and potential contamination  of

groundwater and damage to aquatic life.   Since most sudden incidents involve

relatively small quantities of waste, discharges into the soil or surface

water do not cause the permanent surface or  groundwater damage" generally

associated with major third-party damage claims.

      An investigation of the 75 non-sudden  incidents identified  many cases of

potential and proven groundwater contamination.  Although some very large

damage suits have been filed to date, no significant health damages have been

awarded by the courts.  Consequently, the significant third-party damage costs
                           »
are associated with the cost of water supply replacement and to a lesser

degree with the loss in value of property adjacent to hazardous waste disposal

sites.  Excluding the Hooker Chemical site cases,V the largest third-party
I/    The problem was discovered in 1968 in Pennsylvania and involved the
      American international Refining Corp.

2/    The firm involved was Rollins Environmental Services in Bridgeport, New
      Jersey.

3/    The cost estimates cited in the Hooker Chemical cases do not distinguish
      between clean-up, monitoring, and third-party damages, but third-party
      damages have exceeded $3 million at the Love Canal site.

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                                   HI  -13-



  caa.age  cost  to date  is  $3  million at a site operated by the  story chemical

  Company  in Michigan.  in this case, many years of dumping and  burying

  untreated chemicals  led to the contamination of groondwater  used as a source

  of drinking  water.!/  Efforts to provide affected individuals  with

  uncontaminated  water  from  new wells failed, and safe water must now be

  transported  a considerable distance to 36 homes in a sparsely  populated  area.

  In other situations where  contaminated wells have been replaced with  new

 wells, the total third-party damage costs have not exceeded  $136,000  (1979

 dollars) .

       Despite the lack of  significant third-party damage cost  awards  in  the

 past,  a  growing number of court suits are being filed and some request damages

 in excess of  $1 billion.   If any of these suits are even partly successful,

 the potential third-party damage costs associated with operating existing

 hazardous waste disposal sites could become very large in magnitude.

       The environmental problems which have occurred on unregulated hazardous

 was.te  management sites in the past have been due in most cases to poor

 management practices.  The most prevalent incident in the files is simple

 dumping or burial of untreated wastes with no effort to prevent leaching of

 chemicals from the site.  The truly major costs in the past  have been due to

 massive groundwater contamination and the oozing of liquid wastes  into homes

 built  on  closed or abandoned waste sites.
I/    The  problem was discovered in 1977.   Efforts to deal  with the  problem
~     are  still ongoing.

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                                      -14-
      Por m?ny reasons, the frequency of occurrence and the severity of damage




of hazardous waste site incidents should be much lower in the future.  Even



without the RCRA regulations, increased public attention to the problem of




hazardous waste disposal is causing hazardous waste site operators to improve




their practices.  Additionally, in order to obtain permits to operate




hazardous waste disposal sites under the general status regulations, operators



will have to make a large number of changes in their sites' structural




characteristics that should make the type of incidents which have occurred in




the past less likely to occur.  When accidents or unintended gradual incidents




do occur,  the new site structural characteristics and periodic inspections by




EPA personnel required by the regulations, should greatly  reduce the damage.



      It may be that future problems are unlikely to approach the magnitude of




the problems in the Hooker cases.  Nevertheless, serious problems occasionally




may arise in the future.  Any serious future problems are  likely to  be




primarily associated with groundwater contamination because unless a




groundwater problem arises, there rarely will be any way of knowing  that  a




major problem exists on a permitted site.  The groundwater contamination




problem at the Story Chemical Company site in Michigan provides one  example of




possible future problems.  Once wastes leach and contaminate ground  water  that




is used as a source of drinking water, alternative sources of supply may  be




quite expensive to use.  The Story Chemical Company case provides cost




estimates of piping in drinking water over considerable distance from  the




nearest town.  Since the possibility of such a problem occurring in  the future




remains despite RCRA regulations, and since such a problem has proven  to  be

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                                       -15-
 one of the most expensive to rectify,  the cost  estimates of the Story Chemical

 Company incident provide an upper estimate of the  likely financial magnitude

 of future problems.*

       Independent of EPA's analysis of the hazardous waste site problems, many

 states have conducted parallel analyses of their own.  As a result, four

 state, Washington,  Oregon, Oklahoma, and Kansas, require sites to obtain

 liability insurance.  South Carolina and Illinois  are  currently considering

 instituting insurance requirements.  Four other states, California, Texas,

 Wisconsin,  and  Maryland, require hazardous waste sites to post a bond for

 closure or  to make  periodic contributions to a  waste management fund.  These

 state  regulations provide further support for EPA's position" that financial

 responsibility  requirements are necessary for hazardous waste management sites.

       C.  Alternative Regulatory Mechanisms

       EPA explored  many regulatory mechanisms which could potentially be used

 to deal with the financial responsibility problem.  The Agency was guided in

 its. efforts by  federal and state requirements that have purposes similar to

 those  of  the liability requirements.  These requirements served as potential

 regulatory  solutions.   EPA's review of these requirements ensured that no

 financial instrument which might be viable would be overlooked by the Agency.

 In a few  cases,  information about experience in implementing  these programs

was valuable in pointing out the strengths and  weaknesses of  the various

alternatives.   The  following is a summary of relevant  regulations which the

Agency examined :
*     ICP Incorporated, Review  and Analysis of Hazardous Waste Site Clean-Up
      and Third Party Damage Costs, March  16, 1980.

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                                  re  -16-



      1.  Federal Maritime Commission Regulations.   Under Section 311 of the

Clean Water Act, the Federal Maritime Commission (FMC)  has issued regulations

"whereby vessel operators can demonstrate that they are financially able to

meet their liability to the United States resulting from the discharge of oil

or hazardous substances" into waters over which the United States has

jurisdiction (46 CFR $ 542.l(b)}.   The regulations  require vessel operators to

select a financial mechanism approved by the FMC to ensure that they will be

able to meet potential obligations arising from spills.

      The FMC regulations allow the following mechanisms for meeting the

financial responsibility requirement:   (1)  insurance,  (2)  surety bonds, (3)

self-insurance, based on maintaining specified levels of net'wbrth and working

capital, in the United States,  (4)  a guarantee,  where  the guarantor meets the

specifications for self-insurance,  and (5)  other evidence of financial

responsibility.  In practice,  no other acceptable method has yet been found

for the last category.

      The FMC regulations concerning financial responsibility for water

pollution have been in effect since August 1971. By far the roost frequently

used mechanism is insurance, followed by self-insurance, the guarantee, and

surety bonds.  To determine threshhold eligibility  of  surety companies, the

FMC uses the U.S. Treasury list of surety companies (Circular 570).!/
I/    Meeting between Federal Maritime Commission staff and EPA staff on
      financial responsibility requirements, November 16, 1979.

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                                       -n-
       2'   Liability insurance Requirements for the Nuclear  Industry.  TO




protect the public from damages from a possible accident  involving nuclear




facilities. Congress required the operators of nuclear  power plants and




certain other nuclear facilities to secure liability  insurance.  The risks to




be covered were of a magnitude that were beyond the financial resources of a




single company.  Insurance companies, therefore,  created  special "pools" where




a group of companies pledged assets that together could provide adequate




resources to insure nuclear risks.  Congress felt, however, that damage from a




nuclear accident could potentially exceed the amount  of liability insurance




available from the nuclear pools.  To protect the public  against that




contingency and to prevent the liability potential from discouraging




investment in nuclear power,  Congress enacted the Price Anderson Act.  This




Act limited the liability of nuclear reactor facilities to  $560 million.




Since  private insurance companies were unable to  provide  that much liability




coverage,  the Nuclear Regulatory Commission (NRC)  was authorized to indemnify




operators of  nuclear reactors for that portion of any liability claims which




exceed  the pool's policy limits up to the $560 million  limit on liability.




Reactor operators pay a fee to the government for this  indemnification.  It is




anticipated that NRC's role as an indemnitor for  nuclear  reactor will decline




with gradual  increases in the capacity of the private insurance industry to




provide the requisite amount  of coverage.*
      American Nuclear  Insurers,  Insurance for the Nuclear Industry, undated.

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                                      -18-
      3.  Federal Strip Mine Regulations.   The U.S.  Department of the Interior
                                i
issued regulations (30 CFR 800-809)  in March 1979 under authority of the

Surface Mining and Reclamation Act of 1977, requiring that surface coal mining

companies obtain a performance bond as certification that the mining

activities will be conducted in accordance with certain performance standards.

      The permanent regulations are scheduled to become effective in 1981.  At

present, interim programs are being operated by states.  It appears that strip

mine operators have had difficulty in obtaining performance bonds to comply

with the state programs.  The surety industry has suffered severe losses in

the past five years from defaults due to inflation-induced financial

failures.*  This has resulted in increasing reluctance to provide bonds

without stringent collateral requirements.

      4.  Insurance Programs Managed by the Federal Authorities Riot

Insurance.  In the aftermath of urban riots in the 1960's, many insurers were

no longer willing to provide property insurance in urban neighborhoods.

Congress acted to correct this problem through the Urban Property Protection

and Reinsurance Act of 1968.  This Act authorized the Federal insurance

Administration (FIA) to provide reinsurance for property losses resulting from

riots to insurers who agree to participate in state FAIR plans.  State FAIR

plans establish state-wide insurance pools through which all participating

insurers share equitably in the risks insured by the pool.  Flood insurance;

Flood insurance was characterized by availability and/or af fordability
      Conversations with surety industry officials.

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problems.  FIA  acted  to solve  these problems by setting up insurance pools to

handle flood  insurance.  After about  eight years of effort, the pool approach

proved inadequate  and a federally run program was  introduced.

      5.  State Hazardous Waste Site  Requirements.  Many states have

promulgated or  are in the process of  formulating financial responsibility

regulations for hazardous waste sites.   Four states, Washington, Oregon,

Oklahoma and  Kansas require sites to  obtain liability  insurance in addition to

posting a bond  for closure. ' South Carolina and  Illinois are currently

considering instituting an insurance  requirement.  Four other states,

California, Texas, Maryland and Wisconsin, require hazardous waste sites to

post a bond for closure or to  make periodic contributions to'a waste

management fund.

      D.  EPA Hazardous Waste  Site Requirements

      Different instruments have been utilized by  the  various federal and

state agencies  in  dealing with problems of financial responsibility depending

upon the specific  nature of the problem at hand.   Financial liability at

operating hazardous waste sites may require, with  a low probability, the

payment of large sums of money.  Liability insurance is the instrument most

commonly used to deal with such problems of financial  risk.  Insurance can be

handled through the private sector or through public funds.

      Insurance, in many cases, is routinely provided  by the private sector.

Through insurance  of a large number of firms, the  insurance industry is often

able to provide liability compensation to a single firm at reasonable cost.*
      The  insurance industry does not normally  accept  risks,  it merely spreads
      them over  a  large number  of policy  holders  enabling the industry to
      provide  low  cost risk protection.

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                                      -20-
Though insurance 'is some tines unavailable and/or unaffordable for some kinds

of risks and under some conditions, there are many ways of rectifying these

problems to ensure availability and affordability .  Self -insurance is one

mechanism which can be used by some firms to obtain liability insurance at

lower cost.  Some other mechanisms are reduction of risk through loss control

programs and spread of risk through reinsurance and other program's,  in

addition, the insurance industry is used to handling compensation claims from

injured parties.  Consequently,  with private sector liability insurance, no

separate institutional mechanism has to be set up to process claims.

      Alternatively,  public funds could be used to provide liability insurance

in lieu of the private sector.   Congress has recently adopted "superfund" — a

national fund designed in part  to address the problems created by abandoned  '

sites.*  It may be possible,  therefore, to expand superfund coverage to

include compensation  to parties  injured by accidents at operating sites.  A

new fund could also be Created for this purpose.  In any case, however, the
                       i
Agency presently has  no authority to set up a national fund to address

problems at operating sites.  Accordingly, the Agency prefers to rely on the

private sector.  In the event that "none of the private sector mechanisms can

be successfully utilized,  the Agency may explore the feasibility of federally

provided insurance.
      The problem of post-closure  liability may also be addressed through the
      superfund (S.14BO).

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                                       -21-
 11 1-   SYNOPSIS OF PREVIOUSLY PROPOSED  REGUI .VTIONS




       The proposed regulations for permitted status hazardous waste facilities




 (PR 59007, December 18,  1978)  required the owners and operators of such




 facilities to establish financial responsibility for sudden and for non-sudden




 occurrences to meet claims arising out of injury to persons or property from




 the operations of these facilities.  The required amount was $5 million per




 occurrence,  exclusive of legal defense costs, for sudden occurrences and $5




 million per occurrence (£10 million annual aggregate) for non-sudden




 occurrences.   Financial responsibility for sudden occurrences had to be




 maintained for each facility;  financial responsibility in the stated amount




 for non-sudden occurrences was to be maintained for a facility or group of




 facilities.   Financial responsibility  could be established. through evidence of




 liability insurance, self-insurance, or other evidence acceptable to the




 Regional  Administrator.         .  . •




      Regulations subsequently proposed for interim status facilities (FR




33273, May  19,  1980)  required  the owners and operators of such facilities to




secure liability  insurance coverage for sudden occurrences only.  The amount




of required insurance was  $1 million per, occurrence (£2 millipn annual




aggregate), exclusive of legal defense costs, for a facility of group of




facilities.   Interim status facilities were restricted to a  5 percent




 deductible  in  their  insurance policy.  Insurance coverage ha
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                                      -22-
are discussed in this section.   The section is organized eccording to  the

following topics:


           A.  Legal Authority
           B.  Need for the Regulations
           C.  Need for the Regulation for Specific  Facilities
           D.  Regulatory Strategy
           E.  Use of insurance  as  the Appropriate Regulatory Mechanism
           F.  Amount of Insurance
           G.  Availability of Insurance
           H.  Cost and Affordability  of  Insurance
           I.  Other Issues


      A.  Legal Authority

    •  Issue;   Has EPA exceeded its  statutory authority by requiring financial

responsibility to cover private  damage suits?

      Comments and Responses:  The  following comments  were .received which

addressed this issue:
           o  Financial' responsibility requirements to  cover private damage
              suits  exceed EPA's statutory authority.   Such requirements would
              more appropriately be established by Congress.

           o  There  is no explicit statement in the statutes allowing EPA to
              make this requirement and therefore this  requirement should be
              deleted.
      As discussed in Section II.A. above, RCRA requires EPA to include

necessary or desirable financial responsibility requirements in its

regulations*   EPA believes that Congress intended that human health and the

environment would best be protected when the costs of third party damage

caused by the operations of hazardous waste facilities are borne by such

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                                      -23-
facility  owners  and operators.  Specifically, in the Report of the Senat*

Committee on  Public Works, Congress mentions a need for a provision to meet

any liability if stored hazardous wastes escape storage.  The word "storage1

SPA believes,  is used to refer to the management (storage, disposal,

treatment)  of hazardous waste.

      B.   Need for the Regulation

      Issue;   Is there a financial responsibility problem?

      Comments and Responses;  The following comments were received which

related to this  issue:
           o  There  is no financial responsibility problem in general  and
              therefore no need for such requirements.

           o  There  is no financial responsibility problem.in the case of
              regulated sites and therefore no need for financial
              responsibility requirements for regulated sites.

           o  There  is a financial responsibility problem and therefore there
              is  a need for financial responsibility requirements.
      Section II.B. above discusses 90 incidents of damage that took place on

hazardous waste management sites (the appendix contains detailed accounts of

each case) .  In many of these cases, when problems were discovered and funds

were needed to rectify the problems, the funds were seldom made available by

the responsible parties.

      Some of the following cases outline the problem.  Hooker Chemical

Company waste facilities in New York have been the site of major problems.

The company has spent far less in cleaning up the site than is actually

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                                     -24-
xequired.—   In addition, the Justice Department had to file suit against

Hooker seeking damages for-injured parties.-   Until Hooker or other

responsible parties  are forced to provide the necessary funds, the state and

injured parties have had to bear the burden.  Story Chemical Company in

Michigan declared bankruptcy and abandoned vast quantities of toxic waste on

the site.  A new owner agreed to spend $600,000 to clean up the site, but the

nearby wells used by communities for drinking water have been polluted and an

estimated £3 million is required to provide the community with safe drinking

water.  Another company, American International Refining Corporation of

Pennsylvania declared bankruptcy thereby making it uncertain whether funds

would be available to compensate parties injured from their improperly

"stored" waste.  These are just a few examples of what is evidently a very

serious problem.  EPA believes that its financial responsibility requirements
                      >
will ease this problem by ensuring that necessary funds are available to

compensate injured parties.

      EPA does believe that the frequency of occurrence and the severity of

damage of hazardous  waste site incidents should be much lower in the future.

EPA's regulations concerning site characteristics and operations are designed

to ensure that this  will be the case.  Growing public awareness of hazardous

waste site incidents will also exert pressure on site owners to perform

better.  Nevertheless, there is a distinct possibility that despite the best

efforts of all concerned parties, incidents will continue to occur.  It is
 I/    ICF, Inc. Review and Analysis  of  Hazardous Waste  Site Clean Up  and Third
      Party Damage Costs,  March 14,  1980.

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                                  IP  -25-



 towards this possibility and the likely consequences of these incidents  that

 tne financial responsibility requirements are directed.  EPA firmly believes,

 therefore, as stated in the proposed regulation, that there may be a problem

 on some regulated sites.  Consequently,  the Agency believes that financial

 responsibility requirements are necessary for regulated sites both during

 interim status and during permitted status.

       C.   Need for the Regulation for Specific Facilities

       Issue;   Should some facilities be excluded from the insurance

 requirement?

       Comments and Responses:


            o   Exclude on-site  facilities from the financial responsibility
               requirements because  there is no risk of an accident at such
               facilities.


       EPA  disagrees with this  comment.   As discussed in Section II.B., the  EPA

 damage case files clearly show that in the past hazardous waste incidents have

 occurred at both  off-site and  on-site facilities.  There is no reason to

 believe that  the  situation will alter in the future,  similarly, there is no

 evidence to indicate that damage incidents are restricted primarily to

facilities  owned  or operated by small, independent firms.  As the appended

case summaries  show,  incidents  have  occurred at facilities owned or operated

by companies of all sizes ranging from small firms to one of the nation's

largest hazardous waste  management firms.  Consequently, EPA believes that

this comment does not necessitate a  change in the regulation.


            o  Exclude service stations because there is no history that  such
              liability potentially exists.

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                                     -26-
      EPA disagrees with this comment.  The fact that no accidents have

occurred in the past is  not  a perfect indicator of future accidents.  There is

always some likelihood that  an accident may occur in the future.

Nevertheless,  EPA realizes that the financial responsibility requirements for

storage facilities (as many  service stations are likely to be) need not in all

cases be as stringent as for land disposal facilities.  Many storage

facilities may pose no substantial risk of non-sudden accident, for instance,

and such facilities will not be required to obtain non-sudden coverage.  EPA

has tailored its  regulations to reflect the.differences between facilities in

types of risk, and therefore does not see any need to exclude service stations

entirely from the requirements.


           o  Exclude utility industry because its already subject to detailed
              financial  regulations by state and federal agencies and
              utilities  cannot go bankrupt.


      EPA disagrees with this comment.  The utility industry may be subject to

detailed financial regulations but those regulations are not primarily

intended to ensure financial responsibility in the event that hazardous waste

incidents cause damage to persons or property.  While it may be true that

utilities do not  often become insolvent, the Three Mile island incident

clearly shows that a utility may face financial trouble and hence have

difficulty meeting its financial obligations,  consequently, EPA believes that

it must require utilities to meet the regulations.


           o  Public facilities should not be excluded due to taxing authority.

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                                   TC. -27-




      Th e Agency  disagrees with this comment in regard to federal and state

facilities but agrees  in  so far as local facilities (municipality-owned)  are

concerned.  The Agency believes that state and federally-owned facilities will

always have adequate resources (tax-based or otherwise) which can be  utilized

to provide liability compensation to injured parties.  The Agency is,

therefore, exempting these facilities from the financial responsibility

requirements.

      The financial strength of local entities (cities, counties, etc.)  on the

other hand, is not as  certain,  some local governments do become insolvent.

Consequently, in  the liability requirements, local government facilities are

treated no differently from private facilities.  Many local government

facilities indicated that they have set up funds which they use to self-insure

their liability exposure.  At present, the financial test required for

self-insurance is reserved.  If and.when the self-insurance regulation is

promulgated, these local  government facilities, like private facilities,  will

be permitted to utilize the self-insurance option.


           o  Exclude  storage facilities which are forced to store wastes
              somewhat over 99 days due to the requirements of bulk shipping
              arrangements.


      EPA agrees  in part with this comment.  The Agency believes  that the risks

of a non-sudden incident  should be minimal at most storage facilities.  Such

facilities, therefore, are now not required to obtain non-sudden  insurance

coverage.  However, as long as there is some risk of sudden incidents at

storage facilities, and EPA believes that there is such a  risk, such

-------
                                      -28-
facilities cannot be excluded from the  sudden incident requirements.   Thf

Agency therefore believes that the regulations are  sufficiently  flexible  to

allow storage facilities to meet  a level  of  requirements  in a manner  that

would be appropriate to the risk  characteristics  of such  facilities.   In

addition/ if the risk of damage from a  sudden incident at these  facilities is

very small,  the insurance industry asserts that this fact will be reflected  in

the premiums.  Further, if $1 million per occurrence of insurance seems to be

too high in relation to the risk  of incidents at  the firm, then  the firm  may

apply for a variance to have the  required amounts of insurance adjusted

downward for its facilities.


           o  Do not exclude: hazardous  waste resource recovery facilities.


      EPA is not excluding hazardous waste resource recovery facilities.  It

is deferring Subtitle C regulation of the actual  use and  reuse of hazardous

waste and hazardous waste recycling and reclaimation activities  until

standards can be developed.


           o  Owners of oil tankers are allowed to  use their full equity  to
              establish financial responsibility  requirements for oil spills.
              Require the same for hazardous waste  facilities.  The 10 percent
              equity limitation is unsupported.

           o  Allow financial teat as evidence  of financial  responsibility.

           o  Level of self-insurance should be left to the  market place.

           o  County of San Diego is self-funded  and self-administrates its
              general public liability  exposures.   Consequently,  the financial
              responsibility requirements are unrealistic for the County.

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                                      -29-
      A  financial  test for "self-insurance"  is currently reserved.  These

consents are  being considered and  will  be discussed in detail when the

self-insurance  regulation is promulgated.

      D.  Regulatory_Strategy

      Jssue:  Are  EPA's regulatory efforts misdirected?

      Comments  and Responses; A few commenters pointed out the following:


            o  Large chemical plants pose far greater evironmental hazards than
              small waste disposal operations, and yet, are not required to
              carry insurance.  EPA should resolve the inconsistency in
              requirements.


      EPA does  not disagree with the basic premise of the comment.  Even

though the  waste disposal operation does pose environmental problems while a

large chemical  plant may pose a greater environmental hazard than a small

waste disposal  operation.  However, the Congress, not EPA, has determined

policy in this  area.   Through RCRA, Congress has chosen to deal with the

problems posed  by  hazardous waste  management operations.  Under the RCRA

mandate, therefore,  EPA must seek  to address financial responsibility
•
requirements  for hazardous waste disposal.   It has done so and believes that

this is  a necessary part of the hazardous waste management program.

      E.  Use of insurance as The  Appropriate Regulatory Mechanism

      _issue:  Is insurance the appropriate regulatory mechanism to deal with

the financial responsibility problem?

      Comments  and Responses; A few commenters stated the following:


            o  A national indemnity fund for  all waste facilities funded by a
              charge per unit of waste  handled would be a better mechanism
              than insurance to deal with the financial responsibility problem.

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                                      -30-
      Section JI.C.  Discusses the reasons for EPA's disagreement with this

comment.  As far as possible, EPA prefers to allow the private sector to

respond to the financial responsibility problem.  If private sector efforts

are unsuccessful, J3PA may have to advocate federal intervention.  The Agency

presently does not have the statutory authority to set up a national indemnity

fund.  This would require major new legislation which would probably not be

accomplished in the near term.   For all these reasons, the Agency believes

that private sector insurance is a superior alternative to a national

indemnity fund.

      F.  Amount of insurance

      Issue?  is the amount of insurance required during interim and general

status appropriate for all facilities?

      Comments_and Responses t  Many comments were received on the appropriate

amount of insurance that should be required.  They are as follows:


           o  Amounts ar
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                                  1C-   -31-



            o  $1 million and $2 million  (annual aggregate) for coverage of
               sudden incidents for  interim  status  facilities are too low ar.d
               should be raised to $5 million and $10 million  (annual
               aggregate) ,

       In  its proposed December 18,  1978  regulations, EPA  required insurance in

the  amounts of $5 million per occurrence for sudden occurrences, exclusive of

legal  defense costs,  and $5 million per occurrence  (10 million annual

aggregate)  for non-sudden occurrences with  no exclusion of legal defense

costs,  for permitted facilities.  Subsequently, • EPA proposed  regulations on

May  19, 1980 which required $1 million per  occurrence  (2  million annual

aggregate)  for sudden occurrences for interim status facilities.

       As  EPA pointed out at the time of  the proposed regulations, selecting

the  appropriate amount of insurance is a very difficult task  in the absence of

actuarial data or experience with a regulated hazardous vaste  industry.  A

very large  number of comments (summarized above) were  received reflecting

various cominenters1  satisfaction or dissatisfaction with  the  amounts of

insurance required by the Agency.  The Agency, therefore,  felt that it would

be desirable to undertake a thorough reinvestigation of this  issue.  In its

subsequent  analysis, the EPA considered  a technical  risk  assessment analysis

on which  it could base its requirement of specific insurance  amounts.  This

did  not prove feasible, given the present state of knowledge  of the technical

aspects of  hazardous waste management and the diversity of wastes, site

characteristics, and waste management practices.—/ The Agency then attempted

to improve  its existing damage case data through intensive follow-up procedures.

All states  that had  hazardous waste site regulations were contacted for any

additional  damage case data and their experience with  selection of appropriate
I/    See  "Identification,  Assessment,  and Evaluation  of  Hazardous Waste
~     Facility  Siting Risks," Teknekron Research,  Inc., July  1980.

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                                      -32-
      The damage cases show that damages of  up to $1 million are likely for

most sudden incidents.   Costs of damage in the two cases where they could be

quantified were about $220,000.   There were  other cases where costs could not

easily be quantified; the nature of  the sudden problem, however, indicates

that damage costs could conceivably  mount to $1 million in some cases but are

unlikely to exceed this amount by any  significant margin.*  in addition,

conversations with some small facility owners indicate that if they could

afford $1 million of insurance they  would obtain that amount.  Many of the

states that require liability insurance for  hazardous waste sitaes have set

amounts that are consistent with $1  million  for sudden incidents.  Oregon

requires $1 million for sudden incidents. Washington requires $1.2 million

(it does not specify whether coverage  is for sudden or non-sudden incidents) .

Oklahoma requires $100,000-500,000 and the exact amount must equal two times

the value of all property within one mile of the site.  Kansas requires

$300,000 per occurrence.  Finally, South Carolina is considering requirements

of $1 million per occurrence.  These states  are dealing with a limited number

of sites, and therefore, have been able to tailor the required insurance

amounts to the operational characteristics of the sites.
      The one sudden case where  six  deaths were reported due to explosions at
      the site is currently under  litigation.   Conversations with the lawyers
      of the injured parties indicated  that compensation might be around $1-2
      million for all parties in the aggregate.  One party reportedly has
      settled for $220,000.

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                                      -33-
      The estimated damages  from non-sudden incidents to date have ranged  from

$11,700 - $3 million.*   The  damage costs  incurred have averaged $539,000.   The

$3 million cost estimate of  the incident  at the Story Chemical Company site is

suggestive of  the maximum  costs likely to be incurred from non-sudden

accidents since it  involved  transporting  fresh water to residents from a town

situated at a  considerable distance.  The Agency recognizes that some

non-sudden incidents may result in damages in excess of $3 million.  EPA

believes, however,  that  $3 million is an  appropriate minimum level of

liability coverage  for all facilities.  In .addition, the insurance industry

indicated that a smaller amount of insurance will improve the availability of

insurance in that more insurers can write coverage at lower levels.  State

regulations were also examined for the amount of non-sudden, coverage they

require,  Washington requires $1.2 million, Kansas requires $300,000 per

o'ccurrence and South Carolina requires $1 million per occurrence.

      The analysis  indicates that insurance amounts of $5 million per

occurrence for sudden incidents and for non-sudden incidents each are

inappropriate  for all facilities.  EPA agrees with the comment that insurance

amounts should vary by the "degree and duration of risks" presented by

facilities.  Yet, as insurance industry officials and other commenters have

stated, to set insurance amounts on a case-by-case basis would be an

impossible administrative  task.
      Damages in  the Love  Canal case have exceeded $20 million.  This case,
      however, is not  included in this analysis because the damages at love
      Canal occurred after the end of the operating life of the facility.

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                                      "34-
      Th e Agency has given considerable thought to the p-oblero and has devised




an approach that will tailor the required insurance amounts to the risk




charcteristics of facilities without requiring specification of different




amounts for each and every facility.




      EPA is reducing the required amount of insurance for interim status and



permitted status facilities from $5 million per occurrence ($10 million annual




aggregate)  to $1 million per occurrence ($2 million annual aggregate)  for




sudden occurrences and to $3 million per occurence ($6 million annual




aggregate)  for non-sudden occurences.  These amounts are exclusive of legal




defense costs.  They are set at levels, which, in the Agency's view, are




appropriate minimum levels to cover the sudden and non-sudden incidents likely




to occur at facilities.   However,  lower amounts (than those, initially



prescribed)  are permissible if the risk characteristics of the facility do not




Warrant the prescribed amounts.   Facility owners and operators requesting such




variances must prove to the satisfaction of the Regional Administrator that a




variance is warranted.  Higher amounts are permissible if a facility wishes to



carry higher coverage.  Higher amounts may be required on a case-by-case




basis, if in the view of the Regional Administrator the risk characteristics




of the facility warrant a higher amount.  Correspondingly, the Regional




Administrator may require,  on a case-by-case basis, storage or treatment




facilities to carry non-sudden coverage.




      As the damage case data indicates, coverage for sudden occurrences is




appropriate for all facilities.   Only surface impoundments, landfills, and




land treatment facilities,  however, are initially required to carry coverage




for non-sudden occurrences.  While sudden incidents (e.g., an explosion) can




conceivably occur at any facility, non-sudden incidents are expected to occur

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                                        35-
most frequently at  land  disposal  facilities.  Host non-sudden incidents

involve plow  leaching  of waste  into groundwater which is unlikely to occur at

above-ground  storage or  treatment facilities.  Consequently, the Agency has

decided to  require  all facilities tq carry  insurance coverage for sudden

incidents but only  land  dispose}  facilities need initially carry coverage for

non-sudden  incidents.

      Facilities  in interim status are  required to carry the same amount of

coverage as permitted  facilities. It is possible that damages from incidents

at interim  status facilities may  exceed those from incidents at permitted

facilities.   With no data or experience, however, the Agency feels it is best

to require  uniform  amounts for  both sets of facilities.  Later, as experience

accumulates,  EPA  may adjust amounts accordingly.  Similarly., inflation may

necessitate adjustment of insurance amounts.

      The amounts required do not vary  by facility because the insurance

industry has  indicated that premiums charged will reflect quite accurately the

risk potential at each facility.   Besides,  the required amounts are minimum

amounts.  Many facilities that  have a high  risk exposure may choose to get

greater amounts of  insurance,  It is possible that some facilities that should

secure higher insurance  amounts may not do  so voluntarily.   In such cases, the

Regional Administrator may revise upwards the amount of insurance required for

these sites and may require storage or  treatment facilities  to obtain

non-sudden coverage.   Some of the factors that the Regional  Administrator may

consider, on  a case-by-case basis, for  tbe  risk assessment at facilities are

as follows:

           o   Proximity  to groundwatert
           o   Geological structure underlying the facility.
           o   Proximity  to population centers.

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                                      -36-
           o  Degree of risk associated with the type of product handled.
           u  Degree of risk management and ioss control practiced at the
              facility,
           o  Number of facilities covered by one insurance policy.

      The amounts required vary  by the  type of occurence.  The damage case

data as well as the nature of sudden and non-sudden occurences indicate that

higher amounts are necessary for non-sudden occurences relative to sudden

occurences.

      For all of the reasons discussed  above,  the Agency is convinced that,

through its  approach,  it has been able  to tailor the required amount of insur-

ance to the  "degree and duration of  risks" presented by facilities without

actually undertaking the near impossible administrative task of specifying

different amounts for  each and every facility.   In particular,  the Agency

believes the level and types of  coverage required will allow the implementa-

tion of these liability requirements with a minimum of interpretation and

adjustment for individual facilities.

           o  The insurance coverage requirement should te on a per company
              basis and not on a per facility  basis.

      The Agency agrees with this comment for  several reasons.   Liability

insurance is normally  written on a per  firm basis rather than a per facility

basis because insurance companies generally provide coverage to all facilities

owned or operated by a firm under a  single policy.*  The insurance industry

provides coverage in this manner because through the use of an annual

aggregate they are able to take  into account the risk of multiple incidents

occurring at a firm which owns one or more facilities.  EPA has reviewed all

15 incidents of sudden damage in their  files and has not discovered a single

case of multiple incidents occurring at a hazardous waste management firm in a
      Conversations with  insurance  industry  officials.

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                                       -37-
 given year.  The 75 incidents of non-sudden damage in the files also do not




 revee} any case of multiple incidents.  Some firms have been involved in




 multiple incidents but these incidents have been spread over a number of years




 and the source of the problem has usually remained unchecked over the years.




 These cases cannot be classified as cases of multiple incidents occurring in  a




 given year.  The risk of multiple accidents occurring at a firm in a given




 year increases, though at a diminishing rate, with the number of facilities




 owned or operated by a firm.  It appears that the number of facilities owned




 by a firm must be very large before the probability of two or more accidents




 at a firm becomes significant.   Yet recent EPA studies indicate that the most




 sites owned by a commercial waste management firm is 10.  The hazardous  waste




 management industry profile is  shown in Table II.  Further,  the maximum  number




 of on-site hazardous waste facilities, based on a review of the number of




 sites owned by DuPont and its own estimate of this number,  would appear  to be




 somewhere  between 20 and  40.  Consequently,  the Agency believes that an  annual




 aggregate  per  firm  twice  that of the liability limit per occurrence should




 provide  adequate coverage for sudden and  non-sudder. incidents.




            o  Insurance coverage should be inclusive of legal defense costs.




       EPA  disagrees with  this comment.  It is true  that excluding  legal




 defense  costs  from  the liability limits may  raise the uncertainty  facing  the




 insurance  companies as to their  financial  exposure  in such  coverage.  The




 costs of  legal  defense, however,  could be  considerable and,  if included  in  the




 limits, could consume  the major  portion of insurance coverage and  leave  little




 coverage for actual damages.  The exclusion  of  legal  defense  costs is also




consistent  with  standard  Comprehensive General  Liability policies.  Many




 insurance  industry  officials contacted by  EPA also  indicated  their  preference

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                                      -38-
           o  An annual aggregate limit should be placed on the required
              insurance coverage for sudden and accidental occurrences.


      EPA agrees that there is a need for such an annual aggregate because an

aggregate limits the exposure that insurance companies face in any given year

and the»eby increases the willingness of insurance companies to provide

coverage.  At the same time, as was explained above, such a limit does not

reduce significantly the degree of protection available to the public.

Consequently, an annual aggregate limit has been placed on the required

insurance coverage for sudden occurrences.

      G.   Availability of insurance

      .Issue:  Is insurance of the required type available during both interim

status and permitted status to all facilities?

      Comment s_and Responses:  Some commenters stated that:


           o  Sudden coverage would be available to all facilities.


      The Agency agrees with this comment.   In the preamble accompanying the

proposed regulations, EPA had stated that sudden coverage would be available

to all facilities.  Since then the Agency has obtained additional information

which supports its earlier position,   insurance industry officials, insurance

brokers,  and others familiar with the situation indicated that liability

insurance coverage for suddent events is generally available as part of the

Comprehensive General Liability (CGL)  policy carried by almost all

companies.*  The majority of large firms dealing with hazardous waste
      ICF Incorporated, "Availability and Cost of Third-Party Liability
      Insurance for Permitted Hazardous Waste Disposal Sites," February 20,
      1980.

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                                       -39-
 for  excision pf legal defense costs,  Some of them ment-oned  that  this

 approach has also been followed in the case of products liability insurance.

 Excluding defense costs, it was stated,  would keep policies  consistent with

 other  types of insurance on the market and thus make them easier for  insurance

 agents to understand.*

       One commenter suggested that in cases where  companies  had existing

 coverage inclusive of legal defense costs EPA allow them to  retain  the

 inclusion but require them to double the liability limits.   At the  present

 time EPA finds it rather difficult to assess the magnitude of potential legal

 defense  costs.   To simply double the liability limits  to account for defense

 costs  could  introduce a significant measure of uncertainty in the regulation.

 EPA believes that the correct procedure  is to require  insurance exclusive of

defense  costs.

       EPA's  initial proposal  for non-sudden coverage of  $5 million per

occurence  did not specify that this coverage must  exclude  legal defense

costs.   As stated above,  defense costs could consume a  significant portion of

 the limits of liability unless specifically excluded from  these limits.

 Hence, while EPA is moving  to a lower  level of required  non-sudden coverage in

these  final  regulations,  because this  level of coverage  is exclusive of legal

defense  costs,  there is greater certainty  that there will be funds available

to compensate  third  parties.


           o An  annual aggregate  limit  should be  placed on the required
              insurance coverage for sudden and  accidental occurrences.
      Conversations with representatives of American Insurance Association,
      Alliance of American Insurers and Comments from Liberty Mutual and
      Alexander and Alexander.

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                                      -40-
      Coverage for non-sudden incidents could be made available from foreign




as well as domestic insurance companies.  EPA believes that sufficient




domestic capacity exists in the insurance industry to make provision of such




coverage feasible.  EPA estimates that the number of firms that would reauire




insurance would vary from 5,000 to 15,000.  The total amount of premiums




required to provide coverage to all these facilities would be well within the




range of the industry's capacity.*  The critical issue is whether the industry




will be willing to provide this coverage.




      Currently, seven companies (domestic and foreign)  offer or are currently




in the process of offering coverage for non-sudden events.  The companies are




Travelers, Howden Agencies, Kemper Group,  Alexander & Alexander, Shand




Korihan, American International Group, and American Home Assurance Company.




Many other insurance companies are presently undecided about providing




coverage for non-sudden events.  Some companies have indicated that they would




provide coverage but would proceed with caution.  A few companies have felt




that they would not be able to provide any coverage.  The consensus, however,




appears to be that more and more companies are likely to provide coverage as




tirae passes.  The Agency's efforts to acquaint insurance companies and other




interested parties with the requirements of the regulation are likely to speed




up the entry process of insurance companies into the market for non-sudden




coverage.  This should further ensure that firms will be able to obtain the




necessary coverage.
      Background document for the  regulations proposed on May 19, 1980.

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                                   JT  -4;-








       The specifics of the coverage varies by the offerer.   Insurance industry




officials have indicated that no one policy is clearly superior  to another.




The  Agency believes that it is not crucial to specify all the  policy details




that wii.i be acceptable to the Agency.  EPA intends to accept  policies




providina coverage for non-sudden incidents as long as they  include provisions




set  out  in the regulation (e.g., coverage should be.exclusive  of legal defense



costs) .   1-his decision will considerably ease the availability situation




without  deferring from the primary objective of providing protection to



injured  parties.




       It is possible that some small facilities ana some facilities in interim




status will not be able to secure coverage for non-sudden incidents.  EPA does




not  feel,  however, that this is a sufficient reason to exclude these



facilities from the insurance requirements.  Small facilities  as well as




interim  status facilities present considerable risk of an accident.  Exclusion




of small facilities could provide an incentive for large facilities to be




sub-divided into  smaller facilities.  Exclusion of interim status facilities




•would provide an  incentive for facilities with intentions to phase out their




facilities prior  to permitted status to indulge in negligent practices during




interim  status.   This would leave an important gap in the degree of protection



available to the  public.  In addition, requiring these facilities to obtain




sudden insurance  coverage but not non-sudden insurance coverage  would provide




an incentive for  insurance companies to attempt to classify  accidents as



non-sudden to avoid payments.  EPA does not wish to set up such  perverse




incentives.

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coverage feasible»  EPA estimates that the number of firms that would require




insurance would vary  from  5,000 to 15,000.  The total amount of preniuius




required to provide coverage to all these facilities would be well within the




range of the industry's capacity.—   The critical issue, therefore, is




whether the industry  will  be willing to provide this coverage.




      Currently,  five companies (domestic and foreign) offer or are currently




in the process of offering coverage for non-sudden events.  The companies are




Travelers, Howden Agencies, Kemper Group, Shand Morahan, and the American




International Group.   Many other insurance companies are presently undecided




about providing coverage for non-sudden events.   Some companies have  indicated




that they would provide coverage but would proceed with caution.  A few




companies have felt that they  would not be able to provide  any coverage.  The




consensus, however, appears to be that more and more companies are likely to




provide coverage as time passes.  The Agency's efforts to acquaint insurance




companies and other interested parties with the requirements of the regulation




are likely to speed up the entry process of insurance companies into  the




market for non-sudden coverage.  This should further ensure that firms will be




able to obtain the necessary coverage.




      The specifics of the coverage varies by the offerer.   insurance industry




officials have indicated that  no one policy is clearly superior to another.




The Agency believes that at this point it is not  possible to specify  all the




policy details that will be acceptable to the Agency.  The  insurance  market is




in the early stages of developing policies to cover non-sudden occurrences,




and EPA does not want to prematurely define the scope of these policies.  EPA




intends to accept policies providing coverage for non-sudden incidents as long
 I/    Background document for the regulations  proposed on May 19,  1980.

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                                      -43-
 as  they  include  provisions set  out in the regulation (e.g., coverage  should be




 exclusive of legal defense costs).  This decision will considerably ease  the




 availability situation without  deviating from the primary objective of  provid-




 ing protection to injured parties.  Jn addition, EPA intends to carefully




 monitor  the market and may specify policy requirements if it finds that




 current  policies carry exclusions that significantly lower the extent of




 protection available  to the public.  The Agency is also seeking additional




 public comments  on this issue.




      It is possible  that some  small facilities and some facilities in  interim




 status will not  be able to secure coverage for non-sudden incidents,  EPA does




 not feel,  however,  that this is a sufficient reason to exclude these  facili-




 ties  from the insurance requirements.  Saall facilities as well as interim




 status facilities present considerable risk of an accident.  Exclusion  of




 small facilities could provide an incentive for large facilities to be  sub-




 divided  into smaller  facilities.  Exclusion of interim status facilities  would




 provide  an incentive  for facilities with intentions to phase out their  facili-




 ties prior to permitted status to indulge in negligent practices during




 interim  status.   This would leave an important gap in the degree of protection




 available  to the public.   In addition,  requiring these facilities to  obtain




 sudden insurance coverage  but not non-sudden insurance coverage would provide




 an  incentive for insurance companies to attempt to classify accidents as  non-




 sudden to  avoid  payments.   EPA does not wish to set up such perverse




 incentives.




      There  is an added advantage in requiring interim status facilities  to




obtain non-sudden coverage.  Insurance companies provide non-sudden coverage




after an engineering  inspection of the facility and an upgrade of the facility

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                                      -44-
should it prove unsatisfactory to the insurance company  wj th  regard to




engineering specifications.   Consequently,  with the  non-sudden coverage




requirement during interim status,  the public  will benefit fron the insurance




industry's oversight of facilities.   This insurance  industry  oversight will




not replace the Agency's efforts at oversight;  it will simply supplement EPA's




resources in their oversight  efforts.




      For all these reasons,  EPA is requiring  snail  facilities and interim




status facilities to obtain non-sudden insurance coverage.  At the same time,




EPA is taking many step to ensure insurance availability.   The Agency is




considering a self-insurance  regulation which  may allow  many  firms to




demonstrate their financial strength as evidence of  financial responsibility




in lieu of liability insurance.   In addition,  3PA is initially requiring only




land disposal facilities to obtain non-sudden  coverage because these are the




facilities most likely to encounter a non-sudden incident.  Both of these




provisions, by limiting the number of companies seeking  insurance, will




considerably aid the availability situation.




      EPA's concern with the  availability problem has also  prompted it to




phase the non-sudden coverage requirement.   The other options considered by




EPA were either to require all firms to obtain coverage  soon  after




promulgation or give all firms three years  from the  promulgation date to




obtain the requisite coverage.  Given various  commenter's  and insurance




industry's concern regarding  the availability  of insurance to small firms, and




the necessity for firms to carry coverage as soon as feasible, EPA is




requiring firms to obtain coverage  in three equal batches.  Large firms are




required to obtain non-sudden insurance coverage within  six months from the




effective date of the regulations (i.e., fully one year  from  the date of

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                                       -45-
 promulgation) .   Medium-sized firms will  have  a corresponding eighteen mor.ths

 (i.e.,  two years from the promulgation date)  and small firms will have a

 corresponding thirty months (i.e., three years from the promulgation date)  to

 obtain  coverage.

      Firm sales will be used as a proxy for  size and the sales figures used

 to  group the firms are as follows:  firms with annual sales of less than $5

 million classify as small and firms with annual sales exceeding $10 million

 classify as large, with medium-sized firms falling in between the two

 amounts.   This  classification scheme was developed as follows.

      The total number of manufacturing  firms from industries that commonly

 generate hazardous waste were ranked in  terms of sales.  Firms with annual

 sales of less  than £3 million were excluded since these firms would, in all

 probability, go off-site for their waste disposal.—   The remaining firms

 were divided into three equal sets to provide the following sales figures.

                                     TABLE 2

                  Case    No.  of Firms            Annual Sales
                    I     Bottom One-Third       Less than $4.5 million
                          Top One- Third         $9.2 million or more
                   II     Bottom One- Third       Less than $4.5 million
                          Top one-Third         $9»3 million or more

                   Case  I: Includes firms from SIC codes 22 to 40»
                   Case II j includes firms from SIC codes within
                            codes 22 to 40 that generate in excess
                            of 1 percent  of all waste generated by
                            firms in all  manufacturing industries.

          SOUFCE:  EPA analysis of data provided by  pun and  Brads treet.
I/   This conclusion was  reached  in the following manner.  The economic  impact
"~    analysis  for  FCRA  regulations was examined which showed the costs of
     compliance with RCRA regulations for industries of varying sizes as a
     percent of their sales.   The analysis yielded an industry-average for  the
     minimum sized facility that  would find it economic to maintain on-site
     disposal  facilities. The minimum size proved to be approximately $3
     million in annual  sales.

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                                      -45-
Thusf £5 mill-'.on and $10 million in annual  sales  are  used ro divide  the f ims

into three equal sized sets.

      During the three years  it will take all  firms to obtain non-sudden

coverage, and subsequently, EPA intends  to  monitor the development of  the

insurance market.  If it appears that the private insurance  community  is

unwilling or unable to provide  the  required coverage,  the Agency may attempt

to encourage market development.  The following possibilities are currently

under consideration:


           o  Evaluation and  encouragement  of  alternative delivery systems,
              market assistance plans, and  oi:her  mechanisms.

           o  Encouragement of  individual state research  and innovation in
              assuring markets.

           o  Adoption of back-up federal mechanisms  (see below).


      EPA was concerned,  as were some conmenters, that coverage available now

could get cancelled in the future in the face  of  substantial adverse experience

with hazardous waste incidents.   Some insurance companies have indicated  that

they may not provide coverage in the ruture if they face  extraordinary losses.

 However, EPA believes that as  a result  of  its regulations,  the number of

incidents requiring compensation should  not be large,  so  extraordinary losses

should not occur.  For example,  the worst incident in the past were  often

caused by the long term leaching of wastes  into groundwater.   EPA's  groundwater

monitoring requirements will  hopefully ensure  that such situations are

detected earlier than in the  past,  so that  damage can be  prevented.  Finally,

many insurance companies have indicated  that they would,  in  all likelihood,

continue to provide coverage  once they enter the  market.   In the unlikely event

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                                      -47-
 that  a  substantial number of  insurance companies withdraw coverage in the

 future,  EPA may proceed with  certain  "back-up" options that it is curre.~ly

 considering »   These  may include;

           o   Direct provision of  insurance to hazardous waste facilities.

           o   Provision of reinsurance to the primary insurer.

           o   Guaranteed low  interest loans to insurers, or, to reinsurers
               that suffer surplus  depletion from hazardous waste events
               insured  at conditions and in response to EPA's regulatory  scheme.

      Consequently,  EPA is convinced  that it need not drop the insurance

 requirement despite  the concern that  insurance coverage would be withdrawn  in

 the future.

           o   Insurance coverage would not be available for non-accider.-^al
               injury and clairr.s.

      Insurance policies typically contain exclusions and definitions which

prescribe the  conditions and  scope of liability coverage provided by the

policy.  Terms such  as  "accidental" have generally accepted meanings within

the insurance  industry,  but the applicability of the terra to a given

occurrence may be the subject of dispute between injured parties and the

insurance company defending a policy against claims t  EPA intends to aor.itor

the insurance market and see  if this definition, apd others, will

significantly  detract from the  protection available to the public.  If so,  EPA

will then consider specifying policy details acceptable to the Agency.

Consequently, EPA regulations  remain unchanged as a result of this comment.

           o  Insurance  coverage would be void if the policy holder was  in
              violation  either  of  some policy condition or of EPA statutes.

      As stated above, insurance policies typically contain exclusions which

prescribe the  conditions  and  scope of coverage.   It is not clear to what

extent, if at  all, these  exclusions will work against the goal of EPA's

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                                      -48-
liability requirements, which is to ensure that funds will  be  available  from

which third parties can seek compensation for injuries or damages  resulting

from the operations of hazardous waste management facilities.   EPA intends  to

monitor the insurance market and if certain exclusions do in fact  detract froir.

the protection to the public provided by the liability requirement, EPA  will

consider limiting the exclusions in policies used to comply with the Agency's

liability requirements.  At this time, however, EPA sees no need to alter its

financial responsibility regulations.

           o  Insurance coverage would not be available until  the  hazardous
              waste site is active.  In some cases their funds would have to
              be spent without any assurance that the financial responsibility
              requirements would be met and an operating permit granted.

      EPA disagrees with this comment.  The potential insurers can be provided

with complete information as to the nature and method of future operations of

the facility, the surrounding area, and whatever other information is required

of the insured.   EFA has been informed by insurers that they would give  a

tentative commitment to provide coverage if all aspects of  the waste site meet

their approval.—   Consequently, EPA does not intend to change the

regulation as a  result of this comment.

      H.  Cost and Affordability of Insurance

      Issue;  Are insurance costs reasonable?  Will all facilities be able to

afford these costs?

      Comments and Responses;

           o  Insurance costs are unwarranted and should therefore be
              considered unreasonable.

      EPA disagrees with this comment.  In section II. B.  the Agency discussed

the need for financial responsibility regulations and concluded that liability
I/    Conversation with insurance industry officials.

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 requirements are an integral and necessary part of its program to protect

 human health and the environment.   The Agency showed (Section IV.D.) that

 under the circumstances insurance is  the  appropriate regulatory mechanism.

 Consequently, EPA does not believe that insurance costs are unwarranted.

            o  Small operators will not be able to fully pass on insurance
               costs due to competition from large operators who can spread
               these costs over greater volumes.  Many small operators will  not
               be able to afford to absorb the costs of insurance, will
               consequently go bankrupt, thus greatly reducing the nation's
               disposal capacity.

       EPA has extensively analyzed the cost issue.  Since only a few insurance

 companies currently offer the required coverage, estimates of cost must,  of

 necessity,  be based on the few data points available.  EPA attempted to con-

 tact  many insurance companies in an effort to obtain more cost information.

 Many  of the companies,  however,  were  reticent about committing themselves to

 certain cost numbers.  They did emphasize, however, that costs would be commen-

 surate with the  degree and duration of risks presented by facilities.—

 Costs are likely to go down in the future as experience with the coverage

 accumulates;  costs  could go up in the face of unfavorable experience.

      The cost of a CGL policy (inclusive of sudden coverage)  could range from

 less  than 1 percent to 10 percent  of  a firm's revenues depending upon its risk

 characteristics.  Costs of non-sudden coverage are more uncertain.  It is

 estimated,  however,  that these costs  would range from 1 to 5 percent for

 "average" risk facilities but could be considerably higher for "high" risk

facilities.—/
I/    Conversations with insurance industry officials.

2/    ICF Incorporated, Availability and cost of Third-Party Liability
      Insurance for Permitted Hazardous Waste Disposal  Sites, February 20.

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                                  If  -50-



      Even though costs of coverage are related to risk characteristics  of

facilities and not their size, the cost per unit volume will necessarily be

higher for small volume facilities than for large volume facilities.   EPA,

therefore, feels that there may be some firms  who are  not able  to  fully  absorb

insurance costs and,  as a result,  may  face insolvency  or economic

unviability.   EPA does hot want to preclude owners or  operators from owning or

operating a facility  by requiring  a  level  of insurance that  may not be

commensurate  with the risk presented by these  facilities.  EPA's authority to

promulgate "necessary or desirable"  standards  under Section  3004(b) is

qualified by  the last paragraph of Section 3004:


              "Ko private entity shall be  precluded by reason
           of criteria established under paragraph (b)  from  the
           onwership  or operation  of facilities  providing
           hazardous  waste treatment,  storage, or disposal
           services where such entity  can  provide assurances of
           financial  responsibility and continuity of  operation
           consistent with the degree  and  duration of  risks
           associated with the treatment,  storage,  or  disposal
           of specified hazardous waste."


Consequently, facilities that  nay face insolvency or economic unviability due

to insurance  costs that are not commensurate with the  risk characteristics of

their facilities nay  request variances  in  the form  of an adjusted  level of

required coverage.  EPA expects, however,  that very  few facilities will be

able to justify a level of coverage less than that required  by  these

regulations.   This  burden of such demonstrations will lie with  the owner or

operator seeking the  variance.

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                                      -51-
      I.  other issues
           o  Do not specify the size of deductible;  this  should be left to
              the insurer and the insured.

           o  Allow companies to use financial test to show their ability to
              carry deductibles in excess of 5 percent,

           o  Allow flexible deductible but make it binding on the. insurance
              companies to pay "first dollar."
      In its proposed regulations, EPA specified a deductible  ceiling in order

to ensure that companies would not carry a larger deductible than would be

commensurate with their financial strength.  Vet, EPA wanted to  allow a

deductible since it is a commonly used device to reduce insurance costs and to

ensure better loss control.  Even though the 5 percent deductible might be

adequate for most facilities, EPA realizes that it might r>e cost-effective for

some firms to carry higher deductibles without detracting from their ability

to meet their financial obligations for third party liability,

      EPA considered allowing companies to use a financial test  to  show their

ability to carry deductibles in excess of 5 percent.  This would allow many

large firms to carry more appropriate deductibles.  This suggestion has an

important defect.  The use of a financial test to approve a particular

deductible size places on EPA the burden of reviewing the financial strength

of each company.  The Agency prefers to leave this case-by-case  review to the

insurance companies.

      EPA believes that the most workable approach is to allow a flexible

deductible but require the insurance companies to honor the deductible

payments and then, in turn, collect the necessary funds from the insured.

Through this mechanism, the insured will have complete flexibility  to select

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                                      -52-
the roost cost -effective policy  and  the  insurance  industry will have an

incentive to counteract any tendency  of the  insured to  carry  a deductible that

is too large.  Consequently,  the  Agency is requiring  that each policy be

amended by attachment of a  Hazardous  Waste FAcility Liability Endorsement

certificate of  insurance (EPA Form  8700-22)  which will  hold the insurer liable

for first dollar payments,  but  allow  the insurer  and  the insured the

flexibility to  settle on an appropriate deductible between themselves.  This

approach parallels that used by the Interstate Commerce Commission for motor

carrier liability.—

           o Do not restrict the choice of  insurers  to ones  "licensed or
             eligible to insure."

      EPA feels that it would be  self-defeating not to  ensure the financial

strength of the insurers in a regulation so  heavily dependent on the insurer's

ability to meet claims.   The standard lines  insurance companies are licensed

by the states in which they are domiciled.   These companies normally provide a

broad market for the traditional  risks  and constitute the majority of the

insurance industry.   The states have  different licensing procedures but they

all scrutinize  in  varying detail  the  financial strength of these companies.

In addition, every state (but one)  has  a fund that is used to meet the

obligations of  a licensed company that  may go bankrupt. —
_!/    See Interstate Commerce Commission, Form B.M.C. 90, Endorsement for
      Motor Carrier Policies of Insurance for Automobile Bodily Injury and
      Property Damage Liability Under Section 215 of the interstate Commerce
      Act.

2/    Conversation with an official from the National Association of Insurance
      Commissioners.

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                                       -53-
       Surplus lines companies,  though regulated, are unlicensed companies.— ^

 The degree of regulation differs markedly between states and is minimal in

 some.—   Many states were contacted in order  to get information on past

 insolvencies of surplus lines companies.   State officials indicated that some

 surplus lines companies had become insolvent  but they were unable to provide

 specific figures.

       Captive insurance companies, if domiciled in the U.S., are licensed.—

 However, such companies set up offshore are not subject to U.S. jurisdiction

 or regulations.  EPA, therefore,  has no way of assessing the financial

 strength of offshore insurers.

       EPA has carefully weighed the  benefits  of restricting acceptable

 insurers to the standard lines  carriers,  but  is convinced that to do so would

 markedly restrict the market and,  in many cases, may make insurance

 unavailable.   The Agency,  therefore  is  not currently placing any restrictions

 on the choice of insurers,   it  will,  however, monitor the insurance markets

 and restrict  the choice of insurers  if  subsequently it seems desirable.

            o   Claims-made policies could  be cancelled by the insurer before
               third parties have time to  submit claims; therefore, EPA should
               only permit occurrence-based policies.

       EPA agrees that the cancellation  provisions in claims-made policies are

 a  cause for concern.   Damages to persons  and  property for non-sudden accidents

 could  manifest themselves slowly and over many years, as a result, insurers
I/    Surplus  lines  companies  cover risks for which there is no market
~~     available  through  the  standard lines companies.

2/    Conversation with  officials from state insurance departments.

3/    Captive  insurance  companies are wholly owned by a non-insurance
      organization and their primary purpose is to insure or reinsure the
      risks of the parent  organization and its subsidiaries.

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                                       -54-
 could cancel coverage of damage incidents before  claims  are  ever  filed.   On




 the other hand, EPA believes that claims-trade policies will  represent  a




 substantial part of the market for non-sudden coverage,  especially  in  the




 early years of the program.  EPA believes that by restricting  acceptable




 policies to the occurrence-based forms, it would greatly limit the •




 availability of coverage for non-sudden accidents and hence  jeopardize the




 success of the liability requirement.




      EPA's solution to the cancellation problem is to provide a period of  120




 days after a fire,  explosion, or any unplanned sudden or  non-sudcen  release of




 hazardous waste or  hazardous waste constituents to the air,  soil, or surface




 water, during which a claims-r.ade  policy cannot be cancelled.   EPA believes




 this approach will  give third parties a reasonable opportunity to file claims,




 but not erode unreasonably  the basic form of the claims-made policy, which




 depends on limiting the exposure of an insurance company  to claims filed




 during a specified  interval of time.






           o  Allow use of  state requirements in lieu of  federal requirements.






      The Agency  agrees with this  comment where equivalency of  requirements




 can be shown.   There would  be no problem in  states that receive authorization




 to operate a hazardous  waste regulatory program in lieu of the  federal




 program, since  only the  state's  requirements would apply.  Some states,




 however, may not  seek or obtain  federal authorization,  and, for others,




 authorization nay be delayed.  In  such  states the  owners  and operators would




be subject to federal hazardous waste regulations  and also to any state




hazardous waste regulations that are  in effect.  To  avoid causing unnecessary

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