24401-44
BACKGROUND DOCUMENT
RESOURCE CONSERVATION AMD RECOVERY ACT
SUBTITLE C—HAZARDOUS WASTE MANAGEMENT
Section 3004 - Standards Applicable to Owners and Operators
of Hazardous Waste Treatment, Storage., and Disposal Facilities
Parts 264 and 265, Subpart H
Financial Reauirements
Final Regulations
U.S. ENVIRONMENTAL PROTECTION AGENCY
December 31, 1980
-------
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 is 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 IB,
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 prooosal, 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 in this
Background Document.
The Background Document is in 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.
-------
CONTENTS
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 in Use of Instruments 1-125
0. 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
-------
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
-------
PART ONE. FINANCIAL ASSURANCE FOR CLOSURE AMD POST-CLOSURE CARE
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 must 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.
1-1
-------
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 retirements of the Sufapart. 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 o^ 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 in 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 it 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 wit* a 20-year pay-in period
1-2
-------
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 cost-closure care, the owner or operator could use such
mechanisms to meet the Federal requirements as long as the State mechanisms
were substantially eauivalent to EPA's mechanisms. Much of this Background
Document is 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
1-3
-------
(60 days prior to first receipt 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 build
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 is 30 years in Part 265; in
Part 264 the post-closure period is the number of years required at the
time of permitting. The reasons for the different provisions are explained
in 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 is in the nature of an enforcement action or an action
to cure a violation. A compliance procedure includes a comoliance 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,
1-4
-------
a compliance procedure is considered to be pending from the time an order
or notice of intent to terminate is issued or judicial proceedings are
begun until the Regional Administrator notifies the owner or operator in
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
soecified 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
1-5
-------
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-term care needs as well as the active
operation of hazardous waste facilities is 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 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, 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 it has been common practice to abandon or cease ooerations
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 in 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.
1-6
-------
Today, there is available a large and increasing body of knowledge
about potential health and environmental problems and how to prevent or
minimize adverse effects. Reauirements for closure and post-closure
activities are set forth in 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 in 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).
1-7
-------
In its financial assurance regulations the Agency is requiring an
owner or operator to estimate the costs 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 1s 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
1n 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 in 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,
1-8
-------
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 management involving high
cleanup costs, which should be greatly reduced in the future when the
regulatory program is 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 in 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 in 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
care.
1-9
-------
The following cases Illustrate the need for the existence of ade-
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 if site decontamination measures such as those described in the study,
Analysis of Groundwater Contamination Incident in Niagara Falls, New York,
had been undertaken in 1953, and the site had been properly monitored and
maintained, the total cost for the years from 1953 to 1978 would have been
about S3 million.2*3 In contrast, $36 million in 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 Mater 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,
1-10
-------
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 buried with and without containers, resulting in the contamination of
1-11
-------
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
in 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 in 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 in 1978 by the Texas Department of Water Resources for environ-
1-12
-------
mental violations. The facility includes: the remains of an incinerator
which burned up during a fire, acid 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 fs 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 in 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
1-13
-------
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 in develooing 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 in implementing
these programs was valuable in pointing out the strengths and weaknesses
of the various alternatives. The following is 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
1-14
-------
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 in the amount of $150 per gross ton of the largest vessel
to be self-insured or $250,000, whichever is 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 is requiring operators to assure payment to
the United States for cleanup in 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 in effect since 1971. The FMC has advised us that by far
the most 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).8
1-15
-------
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 are 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 spills," 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) in March 1979 under authority of the Surface Mining Control
1-16
-------
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 in accordance with certain performance standards.
Performance bonds as defined in 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 in value to the bond obligation. Companies r>ay establish
a self-bond if 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 is
being conducted on self-bonding; it is scheduled to be ready in 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 Mining9 and surety representatives10 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
-------
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 1n the same section.
3. Uranium M111 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 1s 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 1n the mechanism established
for assuring decommissioning. The full charge Is then paid to the govern-
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
1-18
-------
EPA's financial requirements allow surety bonds and letters of credit
and allow deposit of cash, certificates of deposit, and marketable securities
in 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 in the
permit. In lieu of a trust or surety bond, the State will accept a
1-19
-------
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
-------
bond can be differentiated into a "performance" component and into an
"environmental impairment" component.*4
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 in 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 o^ 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
-------
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. The monies can be used to clean up abandoned or
inactive sites.^
The chart lists States which have financial requirements in 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 is 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 is the most frequently used
instrument.^
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 in 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
-------
STATE REQUIREMENTS FOR FINANCIAL KKSPONS 115! I.ITY KOR CLOSIWF. AND POST-CLOSIIKK CAHK,' AWl'ST J9BO
Financial Financial
Requirements Requirements for
Types of FI.nau c f a 1
Years of
Kej'ulatory closure Plan Cost Estimates
State tor Hosure Ppst-closuce Mechanisms Experience Requirement Procedures
California
Kansas
sentucky
Louisiana
Maryland
Michigan
Minnesota
Oklahoma
Ohio
Oregon
Texas
'/ashlngton
Wisconsin
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)
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
Kscrow
Letter of Credit
Bond
1
Yes 1 Yes Bonds
Trust
1 Kscrow
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
Ye«
No
No
No
Yes
No
No
No
No
No
Yes
No
Yes
I
M
-------
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 1n 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, Levine and dviletto of Niagara Falls, New York,
on April 15, 1980, and with attorney Richard Lippes of Mori arty, Allen,
Lippes, and Hoffman of Buffalo, New York, on April 28, 1980, regarding
claims for damages.
5. "Status of State Hazardous Waste Management Programs and Sunmiary 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 in 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 in
New York, June 18, 1980.
11. Bounds, Ann, "The Financial Requirements Approach Taken in 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
-------
13. Kansas Solid Waste Management Act, amended 1979 (SB 1170).
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.
15. 1977 Wisconsin Hazardous Waste Management Act (Assembly Bill 1024).
17. Memorandum dated March 12, 1980, from Polly P. Neil! 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 Bivort, project manager. Published by Office of Solid
Waste, EPA, November 1979, report No. SW-183C, p. 264-265.
1-25
-------
III. SYNOPSIS OF REPROPOSED REQUIREMENTS
Requirements for financial assurance of closure and post-closure
care of hazardous waste facilities were reproposed on May 19, 1980 (45 FR
33260-78). The reader 1s 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
(§265.142 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 in the closure or post-closure cost estimates, and changes
in 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 if they
were In keeping with the closure or post-closure plans or were otherwise
justified. Excess funds would be refunded to the owner or operator.
1-26
-------
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 tire
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 days' notice that it was not going to renew. After
such notice the owner or operator had 30 days to establish other financial
assurance; if 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 in net worth in 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 in quarterly audited finan-
1-27
-------
dal statements containing unconsolidated balance sheets. If the company
no longer met the criteria, it had to notify EPA and establish other
financial assurance within 30 days.
Revenue test for municipalities. If the owner or operator was a muni-
cipality, it could meet the requirements by having undedicated tax revenues
amounting to 10 times the cost estimates. The municipality had to send a
letter to EPA stating that it 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 if 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
-------
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 in 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 helow 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
-------
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 reauired only for
disposal facilities). It also exempted States and the Federal Government
from the requirements of Subpart H on the grounds that these entities 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
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. Mo other exemptions were provided for.
Comments and Responses. Several types of exemptions were recommended by
commenters:
0 Financial assurance requirements should not be necessary if 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 is not justifiable in 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
-------
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-site operations were insubstantial in relation
to the closure obligations, or that the responsibilities were in
danger of not being met. The St. Louis Park case EPA used for
justifying same treatment for on-site 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 is not primarily in the hazardous waste management
business. Furthermore, "on-site" 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, 1n fact, on-site 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-site 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, acid wastes, and alkyl 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 Nockamixon, 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
-------
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 is little likelihood that they would be allowed to fail.
0 Rural electric cooperatives have had an excellent record in 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 defaults^ and other severe financial difficulties.3
Although a utility may continue to exist and provide customer service
following liquidation, this could possibly result in 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, it is 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 is under the discretion of the
Administrator of the Rural Electrification Administration (REA).4 The
1-32
-------
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 cooperatives' 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 is 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 Rulemaking on August 28, 1980 (45 FR 57676), setting
forth a number of questions for the purpose of gathering information to
assist DOT in promulgating regulations in 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 in recent years? (see Tables 1 and 2). It seems clearly possible
that municipalities, especially smaller ones, could find that they were
1-33
-------
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 Filed3
210
115
27
10
7
Hempel, George H.
and Conclude<
66%
65%
75%
95%
The Postwar Quality
P FiledC
-
56,766
89,880
211,340
195,785
of State 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.
1-34
-------
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
Units-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.
*This record of defaults is the result of a study of the municipal default
record examining a variety of sources of default data. There is 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
-------
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, 1t 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 in 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 {§265.142 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 estimate
1-36
-------
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 Is sues Rega rd1n g th e Fin a n c i a 1 A s s u ra n c e Mechanisms
In the final regulations, as in 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
1-37
-------
assurance meeting the specifications of these regulations should be
established before hazardous waste is first received for treatment,
storage, or disposal since such receipt may mark the beginning of need
for eventual closure and post-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 in 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 assurance
in 30 days, etc. The Agency reasoned that in these circumstances the situation
was clearly ascertainable 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:
1-38
-------
0 Funds should not be expended until a final judicial determination
of the issue is 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 in 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 in 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.
1-39
-------
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
in 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 equitabillty, EPA should allow all mechanisms to build
financial assurance over 20 years like the trust fund.
EPA is 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 is created.
1-40
-------
3. Allowing Use of Mechanisms, and Forms Not Specified in the Regulations.
Reproposed Regulation and Rationale. The reproposal allows only specific
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 is 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.
0 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,
1-41
-------
EPA believes It has Included those mechanisms that adequately provide
financial assurance and that are feasible. The Agency v/111 continue to
be receptive to proposals and may add to, subtract from, or alter the
currently allowed mechanisms 1n light of such suggestions and Us
experience during Implementation. Allowing proposals In place of specified
mechanisms, however, would Impose an Intolerable administrative burden
on the Agency, especially 1n light of Its 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 adeouately
assure that funds will be available In a timely manner would Inadvertently
be accepted. This would result 1n 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 1t 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, if not all, financial
Institutions. EPA believes that standard language is 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 it 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,
1-42
-------
"Improving Government Regulation." The objective will be to obtain data
in order to spot problems in 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 is explained further in Chapter II (Rationale for
Regulation) of this document. There is 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 reouirements to reflect that
need.
1-43
-------
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. §484).
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 is 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 1s 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
1-44
-------
disburse funds derived from financial assurance mechanisms 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 in the letter of credit
despite the preference of some banks not to have 1t since EPA felt it
was needed to ensure payment directly into the trust.
1-45
-------
D. Trust Funds
Generally, a trust is an arrangement in 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 ft.
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 in 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
1-46
-------
to be allowed because it was considered to be reliable, available, and
administratively manageable. Other methods for demonstrating financial
assurance were added in the reproposal in 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 comroenters said it is 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.
1-47
-------
o Trust funds are available to all owners or operators; no one is
favored because of size 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 in 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 in 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 is 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
1-48
-------
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 in 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 Mho 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
-------
oversight, and are suitable for involvement in long-term arrangements
because of their relative stability.
Comments and Responses. Comments on who should be authorized to act
as a trustee were as follows:
o EPA should allow qualified individuals to act as trustees in
order to increase availability, especially for the smaller trusts.
o Trustees should be financial institutions authorized to act as
trustees by virtue of State or Federal law, so they could fall
under the scrutiny of a regulatory authority. If the financial
institution is Federally insured and regulated, there will be an
acceptable level of safety and soundness.
o Some commenters said foreign banks should be authorized to act
as a trustee; others said they shouldn't.
o Since savings and loans will soon have Federal authority to act as
trustees, they should be authorized to act as trustees.
For the reasons of stability and oversight explained above, financial
institutions are preferable to individuals serving as trustees under
these regulations. Furthermore, it would be difficult for the Agency to
devise qualifications for individual trustees that would assure adequate
administration of these long-term trusts.
The Agency firmly believes that, in addition to the basic requirement
that the financial institution have authority to act as a trustee, the
institution's trust activities should be subject to some type of regulation
and examination. Banks and financial institutions are under the jurisdiction
of numerous Federal and State agencies, such as the Comptroller of the
Currency, Federal Reserve System, Federal Deposit Insurance Corporation (FDIC),
Federal Savings and Loan Insurance Corporation (FSLIC), Federal Home Loan
Bank Board (FHLBB), and analogous state regulatory agencies. The Agency
believes that requiring appropriate regulation and examination will
provide an acceptable level of safety and soundness regarding the
1-50
-------
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 trustees10. 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 did not include a standard trust agreement. One was set forth
in 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.
1-51
-------
Comments and Responses. Commenters suggested several changes 1n
the trust 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 is necessary to
devise a standard form in order that excessive efforts by the Agency
will not be required in 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 States**. 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
1-52
-------
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 1t 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.
1-53
-------
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 1n developing the Investment language used 1n 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 1s 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 is
one who acts 1n a capacity of trust and confidence on behalf and for the
benefit of another. The prudent man standard for trust investment is a
doctrine well established from a rule originally stated in 183012. It
calls for trustees to conduct themselves with the prudence, discretion,
and intelligence they would exercise in 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
1-54
-------
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.
1-55
-------
This Is a fairly common trust practice and, as discussed 1n the section
on suitability of trust funds, may Increase the availability of trustees
for trusts that Involve relatively small 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, in 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
paid by the owner or operator
o Various commenters said that, in managing the investments, the
trustee should be able to register them in nominee form, and
hold them 1n bearer or book-entry form; to hold some cash in
non-interest bearing accounts pending Investment or distribution;
to vote shares.
o Investment management by others, especially if 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 activites 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
1-56
-------
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 banking 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 in 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-
1-57
-------
Steagall Banking Act of 1933 (p.L. 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 is 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 in 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 fs 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
1-58
-------
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 is needed to address the extent of the trustee's liability.
o The procedure for trustee resignation and replacement should be
stated.
o It is 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, falls 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 keeo
trustee activities to a minimum, while still assuring that the purposes of
the trust fund are carried out.
1-59
-------
If the owner or operator is 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 is responsible for any errors in 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 if the trustee institution fails 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 letter13.
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 changes
1-60
-------
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
1-61
-------
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 is a discussion of the
Interpretation of the Section headings and use of grammar in the trust
agreement. The regulations also provide an example of an acknowledgment
page, which must accompany the trust agreement and may differ in 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 faclity, 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 in the
cost estimate, and changes 1n the value of the fund.
1-62
-------
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; it 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, if 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 in the estimates. Owners or operators
could pay in 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.
1-63
-------
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
is 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 in 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
1-64
-------
create or enhance a capital asset, provided that no lump-sum 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 is 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 in 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 in 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 if they are acceptable under the
provisions of the investment section. Payments to the trust should be
acceptable to the trustee, so that securities which nay be relatively
worthless or difficult to convert to cash are not used. This is a typical
trust provision.
1-65
-------
All payments and investments will not Include securities in 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
1n all valuations of the trust fund payments and assets. Market value is
the price at which an investment may be sold at free sale at a recognized
trading center.15
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 in 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 in 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-
in period should not exceed 10 years.
1-66
-------
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
cilities from no Federal hazardous waste regulation to fairly complex
1-67
-------
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 in the position
of having to consider whether to allow a poorly managed site to remain in
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 facilites also be built over
the life of the permit. New facilities, like 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 it 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
it may be counterproductive to establish an immediate pay-in requirement for
1-68
-------
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
1-69
-------
Federal regulation to fairly comprehensive regulation. As such, the Agency's
objective is that the transition be gradual, in order to avoid dislocations or
capacity problems that comprehensive regulations might otherwise cause.
The Bankruptcy Rate and Recovery of Unfunded Trust Payments
A study was undertaken to calculate an optimum pay-in period that
would minimize the costs the public will assume when the funds in an
owner's or operator's trust are insufficient for closure or post-closure,
recognizing that, in 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.
To begin the study, the annual bankruotcy rate was estimated for the
type of firms expected to use trust funds. The percentage of trust ^.ind
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 it 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 is 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
1-70
-------
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*
Length of
Trust Fund Pay-in Period (Years)
Trust Fund User
Annual
Bankruptcy Rate
1.0%
1.5%
1
0%
0%
5 10
2.5% 5.1%
3.7% 7.5%
15
6.8%
9.9%
20
7.8%
11.2%
*The exhibit is based on no recovery of funds from bankrupt firms,
and a 2% real discount rate.
1-71
-------
The 20-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, 1t 1s doubtful that the Agency could recover most of the money,
and In some instances recovery may take several years of litigation and
considerable legal resources.
The 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 thePay-inPeriod from
20 Years for Existing Facilities"
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 period from 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
1-72
-------
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 RegulationsUnder Varying
Pay-in Periods
Length of Trust Fund Pay-in Period (Years)
J_ _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 is obvious that
the impact of a decision to significantly reduce the pay-in period is
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-site 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 it was cheaper, a move to off-site disposal might
be economically impossible. In many areas of the country off-site commercial
1-73
-------
capacity for managing hazardous waste 1s Insufficient and therefore, 1n
the future disposal prices for the use of off-site services may Increase
substantially.16 The staff assumed, 1n 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 1n 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 failing 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 1n 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
1-74
-------
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 is 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 is 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 is 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
1-75
-------
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 Decisi on 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
1-76
-------
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 if it proved to be incorrect. One could adjust
the pay-in period after the RCRA regulations had been in 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 it 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 facilties. The number of waste management
facilities requiring trusts is 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 it 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.
1-77
-------
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 1s 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
1s 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 "half11 the
Induced plant closures, 1t would still want to leave the pay-In period
at 20 years. (See the discussion on Exhibit IV).
1-78
-------
Exhibits V-VI show what happens under the two scenarios.
Exhibit Y - 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 T
Contrary to Initial beliefs
the Agency discovers:
(Millions $)
"Full" Closures*
Unfunded Closure/Post-
Closure Costs for 5 Year
Pay-in 101.49
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. R7
55.30
1-79
-------
Exhibit VI - Present Value of Additional Unfunded Closure/
Post-Closure Costs Resulting from EPA's Setting a
20 Year Pay-tn Perfod That Is Corrected to 5 Yea?s
after 5 Years - SCENARIO 1
(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 in setting
a 20 year pay-in period that can be corrected is 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 in 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 it
is established.
1-80
-------
Considering this stiff penalty for being wrong in establishing a
5 year pay-in 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 position. As pointed out in the previous segment,
in the case where there is an annual bankruptcy rate of 1.5 percent and
"half" the induced plant closures for trust users, the 5 year pay-in
period is 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 in 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-in 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 it must consider allowing a poorly managed site to remain
in 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.
1-81
-------
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 exoerience,
and reconsider the pay-in period's length.
1-82
-------
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 Newand 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 it could be counterproductive to establish an
'immediate pay-in requirement for new facilities, particularly in that
existing facilities are allowed to build trusts over time. This differential
would encourage the continued use of existing facilities while discouraging
1-83
-------
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 1s 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 1n 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.
1-84
-------
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, if 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, it
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 in 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
is due. However, it 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.
1-85
-------
o A few commenters believed that 1f a trust fund is established
after the owner or operator had initially used another instrument,
the amount deposited in the trust should be paid-in over the
remaining life of the site or some other period, rather than in
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, 1t 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 in 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 1n 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.
1-86
-------
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 in the trust if, for an existing facility,
it had been established on the effective date of the Part 265 regulations
or, for a new facility, it 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 life of the facility to account for any changes in
the cost estimate or the value of the trust fund.
5. Commentson 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 list of incurred costs was presented to the
Regional Administrator and he found them in accordance with the approved
plan or otherwise justified. The reproposed requlation allowed owners
or operators to be reimbursed for closure expenses before closure was
completed, as follows: if the Regional Administrator determined that
bills for closure were in 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 in the fund allocated for closure of the facility would be
at least 20 percent of such amount before any closure bills were paid.
1-87
-------
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 in 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 reauirement, 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
-------
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 is completed, unless the
Regional Administrator directs the trustee to make further reimbursements.
EPA will not require that bids be made on closure activities, as it
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 if he so chooses.
The Agency believes the final regulations are clear in 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 is essentially the sane 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
1-89
-------
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 1n 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 1s so directed. There 1s 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.
1-90
-------
E. Surety Bonds
Reproposed Regulation and Rationale. The reproposed regulation
gave owners and operators of hazardous waste management facilities the
option to purchase surety bonds in 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 in 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 list includes almost 300 companies, and is
under continuous review. The use of Circular 570 relieves the
Agency of the burden of evaluating sureties. Certification is 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 is needed most,
i.e., when the owner or operator is in financial trouble, when
the facility is not meeting the technical requirements of the
permit, or when the date of closure is approaching.
1-91
-------
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 it could order closure
if 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
surety, 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 comments 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
eaual 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.
1-92
-------
EPA disagrees with this comment. The Agency believes that surety
bonding is a viable option. This conclusion was reached after consultation
with representatives of industry trade associations, analysis of the mechanics
of surety bonds under the conditions that will 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 is 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 is that surety bonds not only provide full indemnification
in the financial sense but also, in the case of performance bonds as
allowed under Part 264, establish a responsible party to arrange for
performance of the required work in 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 required*7. 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 in 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 is 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
1-93
-------
determined that surety 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 meet their obligations,
when they know that the surety company is 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 In their bonds for several reasons.
Surety companies are extraordinarily selective in their choice of
clients. A surety typically strives to reduce its risk exposure to
zero. It is unlikely that any but financially sound and responsible
corporations will be able to obtain these bonds for hazardous waste
disposal.18,22 jn addition, sureties have indicated that they may
1n some cases require collateral amounting to 100% of the penal sum or
even more.19 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 it 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 1n his possession at the required time sufficient
funds to perform closure. Frequently the surety finds that
1-94
-------
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
is 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.*'
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
1-95
-------
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.
* Several sureties suggested that EPA is 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 surety 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 it 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 1s required by the regulations, but could not
be guaranteed if a surety were permitted to avoid liability simply by
cancelling a bond or allowing it 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 is having difficulty complying with the technical
requirements of the permit.
1-96
-------
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 in the standby trust fund. EPA is
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.20s21
The requirement that financial assurance increase as the cost
estimates increase is also necessary for adequacy of financial assurance,
and cannot be substantively changed. This requirement is 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 it equals
the adjusted cost estimate, provided that the increase is 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 it allows for adjustment of the penal
sum within a range mutually acceptable to him and the surety.
1-97
-------
The Agency realizes that during the next several years 1t is likely
that only the sureties' favored clients may 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 regulation^. Individual forms have been written for
closure and post-closure financial guarantee bonds, which may *e 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.
1-98
-------
0 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 is conceivable that if 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 is made clear both in 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 in 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, if 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
1-99
-------
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 In 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 fails 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 fails 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 surety 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.
I-100
-------
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.
1-101
-------
F. Letters of Credit
A letter of credit is an instrument by which the credit of one party,
whose financial standing is considered more desirable than that of a second
party, is 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 is 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
I. 102
-------
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.
Commentsand 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
I. 103
-------
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 is discussed
in further detail below.
While there will be collateral requirements in some cases, in 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 collateralization. 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 is 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
I. 104
-------
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
in higher costs than the other instruments, and it is 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 in particular situations.
The underlying purpose of using letters of credit as a financial
assurance mechanism is 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 in 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.
I. 105
-------
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 is a member of the Federal Reserve System (FRS)
I. 106
-------
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. Failing 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
I. 107
-------
the credits be treated as ordinary loans, which Invites more scrutiny of
the credit, particularly as to the legal lending limit 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 any 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 nonffnancial 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
I. 108
-------
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 fn 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
-------
not allow a listing of the amounts for each facility and each
purpose if 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, in 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 1s identical to the wording
set forth in the regulations. This is necessary to avoid an additional
administrative burden that would occur if EPA staff had to examine each
letter of credit to make sure it contained all the necessary terms and
conditions.
I. 110
-------
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 it 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, it 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 is 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 in 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
is not presented in person and the funds are often deposited from one
account to another in that same institution or another institution.28
I. Ill
-------
Based on information supplied by commenters, the regulations have
been rewritten to provide that the Regional Administrator will return
the letter of credit, along with a written statement that termination 1s
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, in 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 conmenters 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 It is is sued.29 Most felt the Uniform Customs and
Practice for DocumentaryLetters 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
mail to the appropriate Regional Administrator, rather than including
I. 112
-------
this direction in 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 is 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 is 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, in 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 is drawn on, will be deposited in 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 aims. The letter of credit now requires
that the facilities and amounts for closure and/or post-closure activities
I. 113
-------
covered by the Instrument be specified. The purpose of the letter of
credit 1s set forth 1n 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 In 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:
I. 114
-------
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
-------
letter of credit would have to act in concert 1n 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 if the cost estimates decrease and the Regional Administrator
approves the reduction in writing. However, during the period of post-
closure care, the amount of the letter of credit may be reduced only if 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 is 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 in 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 in the amount of the letter of credit will
I. 116
-------
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 if 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 hank would
I. 117
-------
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 Many 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 if 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 in 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 if 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 is 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
-------
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
in 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
I. 119
-------
notice from the Regional Administrator that such assurance 1s no longer
required. These provisions win assure that letter of credit funds will
be available 1f there is a notice of nonrenewal of the Instrument or until
closure 1s completed. Expiration of the letter of credit cannot occur, in
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
in the amount of the most recent adjusted cost estimate. If the owner
or operator then follows the regulations governing trust funds he will
be 1n 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
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 mail, 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 in the
I. 120
-------
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 is 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 is pending pursuant to Section 3008.
I. 121
-------
G. Revenue Test for Municipalities
In the reproposal, municipalities, as defined in 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 entities 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
1n 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.
1-122
-------
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 dedson 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 Testand 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, unconsolidated, 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
1-123
-------
alternative test criteria were suggested.
As with the revenue test, the Agency could not complete its study
of the issues in 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.
1-124
-------
I. Variations In 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 in 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 in 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
1-125
-------
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 in 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, it 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.
1-126
-------
If an owner or operator uses only letters of credit or surety bonds,
only one standby trust fund is 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 in 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 in 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 in more than one Region.
Without this restriction, increases and decreases in 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.
1-127
-------
Combining financial assurance for closure and post-closure care in
one Instrument fs allowed for the letter of credit and the trust fund but
not for surety bonds. Unlike the other instruments, the surety bonds must,
in order to specify the conditions of the guarantees, differentiate between
what 1s 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 is otherwise incapacitated for some time before they lose the qualifi-
cations stated in the regulations. The owner or operator is required to
act under such circumstances to obtain other evidence of financial
responsibility.
I. 128
-------
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 in the Federal requirements.
If the amount of assurance or coverage from the State mechanism is
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
-------
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" mechanism, the term
has been changed to "State-required." This means that the owner or
operator may use a State mechanism 1f that 1s required by the State; 1f
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-speclfied 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 1n compliance with EPA financial requirements
to the extent that such State assurances were substantially equivalent
I. 130
-------
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 in 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
eouivalent" 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 in
this case). An escrow agent is responsible only for what is specified
I. 131
-------
fn the escrow agreement. The Agency believes 1t 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 1f 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 1s transferred from the grantor to the trustee. With an
escrow agreement legal title 1s not transferred to the escrow agent;
since the grantor retains legal title while property 1s in escrow, such
property 1s more likely to be subject to creditor's claims than property
in a trust. Some commenters said fees for escrow accounts tend to be lower
than for trusts, but other commenters said that, If 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
-------
property, and assuring that the required amount of value 1s contlnously
available.
EPA examined the prospects for using a security Interest as a
financial assurance mechanism. Since the early 1960's 1t 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 1nsurance to guarantee payment into a trust fund may be a
I. 133
-------
possible option, according to one commenter. Payments 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
its 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 entities covered by the term "municipality"
should be kept in mind -- guaranteeing the closure and post-closure obliga-
tions of municipalities may amount to a large fiscal burden in 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 durina interim status:
I. 134
-------
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 is 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 in accordance with
the closure plan. EPA should be specifically required to
notify the owner or operator if he is not condsidered to be
in compliance and state why.
I. 135
-------
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
is 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,
in view of the need, emphasized by the Congress and numerous others, to
implement a complete regulatory system as soon as possible.
I. 136
-------
References for Chapter IV
1. Damage and Threats Caused by Hazardous Material Sites. EPA Report Mo.
EPA/430/9-80/004, January 1980.
2. Several public utility bond defaults are indicated on p. 432 of Harold
G. Fraine 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 Journalof Economic History, June 1975.
4. See e.g. Sioux Valley Electric Assn. v. Butz, 367 F. Supp 686, (DCSD,
1973), affd, 504 F.2d 168 (8th Circ., 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) Jim 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
-------
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 SottHe, (2) Ed Cohen, (3) Tom
Mines, (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 Haste Generation and Commercial Hazardous Haste 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 Weintraub of International
Research & 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 FIC and
IR&T staff, July 2, 1980, contract report by Judith Weintraub of IR4T,
same date.
I. 138
-------
23. Harfield, 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 Harfield, 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. Pribble, Jr., of Northwestern
National Bank, Minneapolis, Charles W. BIsset, Vice President, Citibank,
N.A., New York, James D. McLaughlin 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. Harfield 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 in New York with (1) S. J. DiaSparra of
Irving Trust Co., New York (2) J. F. Savoia of Irving Trust Co., New
York (3) Ray P. Agostino of Citibank NA, Mew York and (4) Kathleen
Tripp of Morgan Guaranty & Trust Co., New York.
I. 139
-------
APPENDICES TO PART ONE
Analyses Related to Pay-In Period
For Trust Funds
I. 140
-------
Appendix A
BANKRUPTCY RATE BASED ON INTERMEDIATE SIZE
MANUFACTURING FIRMS
The bankruptcy rate used in 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 Ratel.
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 is 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.^ 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
V 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
-------
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 1n this group which contains only 52 percent of the firms. Their
bankruptcy rate 1s, 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 & 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
-------
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 may 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, it 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 1 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
-------
kinds of specific quantitative data are established 1n 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 1s
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 in 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) 1s 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 1s 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 o^ such firms--off-s1te hazardous waste management
firms. Such firms will be exposed first of all to a variety of technical
risks. As noted in the IR&T 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 is high enough to represent a significant
source of risk in itself. Added to this are the set of risks imposed by
RCRA regulations. It is 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, it 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
-------
Appendix C
C°MPIJTERZED
..
FUND PAY-IN PERIOD
As discussed above, 1n 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 is 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.
T. 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
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 1n 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, if 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 in 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 straiaht-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
-------
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
-------
E:\HIBT c-i
PERCENTAGE OF TOTAL TRUST FUNDS NOT COLLECTED
Real Discount Race » 2%
3&nkru3:cv Race
0.5:;
1.0
1.5
2.0
2.5
3.0
?.e.il» Discount Rate = 4*
33rs>:ru:?:cv Race
0.5?;
1.0
1.5 '
2.0
2.5
3.0
Real Discount P.a^e
5ankru3Ccv Race
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
0.02
0.0
0.0
0.0
0.0
0.0
0.0%
0.0
0.0
0.0
0.0
0.0
Lensch
_5
1.0%
2.0
3.0
3.9
4.9
5.8
1.3%
2.5
3.7
4.9
6.0
7.1
1.6%
3.1
4.6
5.9
7.2
S.5
2.02
3.3
5.5
7.1
8.5
9.9
of Trusc
10
2.1%
4.1
6.1
8.1
10.0
11.8
2.6%
5.1
7. 5
9.7
11.9
14.0
3.2%
6.2
8.9
11.5
14.0
16.3
3.9%
7.3
10.5
13.4
16.1
13.6
(Years)
15
2.9%
5.7
S.3
10.9
13.4
15.3
3.5%
6.3
9.9
12.8
15.6
18.2
4.2%
3.1
11.6
14.9
17.9
20.8
5.02
9.4
13.4
17.0
20.4
23.4
No 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
4.7%
9.0
13.0
16.6
20.0
23.1
5.5%
10.4
14.8
13.8
22.4
25.7'
1-150
-------
EXHIBIT C-2
PERCENTAGE OF TOTAL TRUST FUNDS NOT COLLECTED
Real Discount Rate = 0" No Closures
. , , _ /v % 25% Recovery
Lenath of Trust (Years)
Real Discount Rate * 2%
3ankrup:cy Ra:a
0.5"
1.0
1.5
2.0
2.5
3.0
3an^r^?c'cy Rare
0.5,"
1.0-
1.5
2.0
2.5
3.0
Real Discount Rate « 6S
0.5;;
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.
b.
0.
0.
0.
0.
0.
0.
0.
0.
0.
0*
0
0
0
0
0
OS
0
0
0
0
0
0%
0
0
0
0
0
0%
0
0
0
0
0
5
0.
1.
2.
2.
3.
4.
1.
1.
2.
3.
4.
5.
1.
1
3.
4 .
5.
6.
1.
2.
4.
5.
6.
7.
10
8%
5
2
9
7
4
0%
0
8
6
5
3
*)«/
<£.*«
3
4
A
A
3
5%
9
1
3
4
U
1.
3.
4.
6.
7.
8.
2.
3.
5.
7.
8.
10.
-»
U .
6.
8.
10.
12.
2.
5.
7 .
10.
12.
14.
62
1
6
1
5
9
OS
S
6
3
9
5
i%
6
7
6
5
2
9%
5
9
1
1
0
15
•*
^ .
4.
6.
8.
10.
11.
2.
5.
7.
9.
11.
13.
3.
6.
3.
11.
13.
15.
3.
7.
10.
12.
15.
17.
2%
2
2
2
0
8
6%
1
4
6
7
7
27,
0
7
2
5
6
~c/
/ ,.
1
1
8
3
6
20
2.
4.
7.
9.
11.
13.
3.
5.
S.
10.
13.
15.
3.
6.
9.
12.
15.
17.
4.
7.
11.
1A.
16.
19.
5%
9
2
4
5
5
0%
8
4
9
2
4
62
8
7
5
0
3
IX
8
1
1
8
3
1-151
-------
Real Discount Race
Bankruptcy Rate
0.52
1.0
1.5
2.0
.2.5
3.0
Real Discount Rate
Bankruptcy R.ate
0.52
L.O
1.5
2.0
2.5
3.0
Real. Discount: Race
3ankru?tcv Race
0.52
1.0
1.5
2.0
2.5
3.0
Real Discount Rate
Bankruptcy Rate
0.5:1
1.0
1.5
2.0
2.5
3.0
EXHIBIT C-3
PERCENTAGE OF TOTAL TRUST FUNDS NOT COLLECTED
• 0%
Length of Trust (Years)
No Closures
50% Recovery
- 9"
— f.n
I
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
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
4.5
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
8.8
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
-------
EXHIBIT C-4
PERCENTAGE OF TOTAL TRUST FUTOS NOT COLLECTED
INDUCED CLOSURES ONLY
Lensrh of Trust (Years)
1 5 10 15 20
Full Closure
Recoverv
0% 21.5% 13.IS 8.4% 4.8% 2.3%
25% 16.1 9.8 6.3. 3.6 2.1
50% 10.3 6.6 i.2 2.4 1.4
u_ i c
If Closure
Recoverv
o% 10.8% 6.6% t.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
-------
EXHIBIT C-5
PERCENTAGE OF TOTAL TRUST R-NDS ROT COLLECTED
Real Discount Rate = OS Full closures
Lensrh of Trusc (Years) Oz Recovery
Real Discount Race * 2'',
3ankru?'cv Raca
0.52
1.0
1.5
2.0
2.5
3.0
P.eai Disccur.c Race = 4;;
Bankruptcy Rats
0.5*;
1.0
1.5
2.0
2.5
3.0
Real Discount Race = 6%
sankrusccy Race
0.5;:
1.0
1.5
2.0
2.5
3.0
1
21.5:
21.5
21.5
21.5
21.5
21.5
25. 77.
26.5
26.3
26.1
25.9
25.7
32. 3X
31.8
31.3
30.3
30. 4
30.0
38 . 0%
37.1
36.3
35.6
34.9
34.3
5
14.0%
14. S
15.7
16.5
17.3
18.1
17. sr:
18.6
19.5
20.3
21.1
21.9
22. 1Z
22.9
23.7
24.4
25.2
25.9
26.7%
27.4
. 28.1
23. 7
29.4
30.0
10
10.3%
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 . 3%
22.7
2i.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
20.8
23.2
12.12
15.5
IS. 6
21.5
2i.2
26.7 .
li . 3%
IS. 5
21. S
24.9
27.7
30.3
20
6.1%
9.2
12.2
15.0
17.7
20.3
7.6%
11.1
14.5
17.6
20.5
23.3
9.3%
13.3
17.0
20.4
23.5
2.6.4
11.3%
15.7
19.7
23.3
26.6
29.6
1-154
-------
EXHIBIT C-6
PERCENTAGE OF TOTAL TRUST FUNDS .YOT COLLECTED
Real Discount Rate = 0%
Lenath of Trust (Years)
Full Closures
257. Recovery
Real Discount Rate = 2%
Sankr-jptcy Rate
0.5;,'
1.0
1.5
2.0
2.5
3.0
Real Diocour.t Race = 42
5 a rl kr u:'t •: y Rg : 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
16.1%
16.1
16.1
16.1
16.1
16.1
20.12
19.9
19.7
19.6
19.4
19.3
24.22
23.8
23.5
23.1
22.8
22.5
28.5"
27.8
27.2
26.7
26,2
25.7
5
10 . 52
11.1
11.7
12.4
13.0
13.6
13.3%
14.0
14.6
15.2
15.9
16.5
16.52
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
1.4.5
15.9
17.2
12.45
14.1
15.7
17.3
IS. 7
20.1
15.22
17.0
18.7
20.2
21.7
23.1
15
5.7%
7.7
9.6
11.5
13.2
14.9
7.32
9.5
11.7
13.7
15.6
17.4
9 . 12
11.6
13.9
16.1
18.1
20.0
11.1%
13.9
16.4
IS. 7
20.8
22.7
20
4.62
6.9
9.1
11.2
13.3
15.2
5.7%
8.3
10.8
13.2
15.4
17.5
7 . 02
10.0
12.7
15.3
17.6
19.8
8.4%
11.8
14.8
17.5
19.9
22. 2
1-155
-------
EXHIBIT C-7
PERCENTAGE OF TOTAL TRUST FUNDS NOT COLLECTED
Real Discounc Race » 0% Full Closures
Lengch of Trusc (Years) 50%
a.ar.kru?ccy Rate
0.5%
1.0
1.5
2.0
2.5
3.0
Real Discounc Race = 22
Bankrupccv Rate
0.52
1.0
1.5
2.0
2.3
3.0
aal Discount Race
cg-criigccy Raca
0.53
1.0
1.5
2.0
2.5
3.0
Real Discounc Race
3ar.k.rusccv 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
13.4%
13.3
13.1
13.0
12.9
12.9
16.2;;
15.9
15.6"
15.4
15.2
15.0
19. Or;
IS. 6
18.2
17.8
17.5
17.1
5
7.02
7.4
7.8
8.3
8.7
9.1
8.9%
9.3
9.7
10.2
10.6
11.0
11.0%
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
8.6
9.6
6.6%
7.7
8.7
9.6
10.6
11.5
8.3%
9.4
10.5
11.5
12.5
13.4
10.11
11.3
12.4
13.5
14.5
15.4
15
3.5%
5.1
6.4
7.6
3.8
9.9
4.9%
6.4
7.8
9.1
10.4
11.6
6.1%
7. 7
9.3
10.7
12.1
13.4
7.4%
9.2
10.9
12.4
13.8
15.1
20
3. OS
4.6
6.1
7.5
8.8
10.1
3.S%
5.6
7.2
8.S
10.3
11.6
4.7%
6.7
8.5
10.2
11.7
13.2
5.6*
7.8
9.8
11.6
13.3
14.8
1-156
-------
EXHIBIT C-8
PERCENTAGE OF TOTAL TRUST FUNDS NOT COLLECTED
Real Discount Rate » 0%
Length of Trust (Years)
Half Closures
0% Recovery
Real Discount Rate » 2%
Bankruptcy Rate
1.0
1.5
2.0
2.5
3.0
Real Discount Rate - 4."
5ank.ru?tcv 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
10.
10.
10.
10.
10.
10.
13.
13.
13.
13.
13.
13.
17.
17.
16.
16.
16.
15.
21.
20.
20.
19.
19.
13.
8%
8
8
8
8
8
82
7
6
4
3
2
4%
0
7
4
1
9
22
6
1.
5
1
7
5
7
8
9
10
11
12
9
10
11
12
13
14
12
13
14
15
16
17
15
16
17
15
19
20
10
.52
.4
.3
_ o
.1
.0
~?Of
• i ;.
. /
.8
.7
.7
.6
.3%
.4
N
. 5
.5
. 5
.32
.4
. 5
.6
.6
.5
6
S
10
12
13
15
3
10
12
14
16
18
10
12
15
17
19
21
1 *>
X *•
15
IS
2!)
*? 1
24
..22
_ ?
.1
.0
.8
.5
.0%
.3
.5
.6
.6
. 5
* ff
, i/»
. 7
.2.
.4
. 6
.6
.52
.u
.0
.5
.8
.9
J.5
5
8
10
13
15
17
6
9
12
13
IS
20
8
11
15
18
21
23
10
14
17
21
24
26
.3%
.0
,6
.1
.5
.8
.67.
.8
.3
. 6
> o
.8
.2%
.3
_ 2
.2
.1
.8
.0%
.1
. 7
.1
.1
.9
20
4.
7.
10.
13.
16.
19.
5.
9.
12.
16.
19.
- - •
7 .
11.
15.
IS.
21.
24.
3.
13.
17.
21.
24.
27.
7%
9
9
7
5
1
8%
4
Q
1
1
0
0%
1
0
5
7
7
4%
1
3
1
5
6
1-157
-------
£ArilBIT C-9
PERCENTAGE OF TOTAL TRVST FUSDS NOT COLLECTED
Real Discount Race » 0%
Length of Trust (Years)
Half Closures
25% Recovery
Real Discount Rate
Bankrusccy Race
0.5%
1.0
1.5
2.0
2.5
3.0
Seal Discount Rate
:cv Race
0.5%
1.0
1.5
2.0
2.5
3.0
Real Discount Rate = 6%
BankrurtcyRare
1.0
1.5
2.0
2.5
3.0
1
8. IX
8.1
8.1
8.1
8.1
S.I
10.4%
10.3
10.2
10.1
10.0
9.9
13.02
12.8
12.5
12.3
12.1
11.9
15 . 9%
15.5
15.0
14.7
14.3
14.0
5
5.62
6.3
7.0
7.7
8.3
9.0
7.3%
8.1
8.8
9.6
10.3
11.0
9.2S
10.1
10.9
11.7
12.4
13.1
11.52
12.3
13.1
13.9
14.7
15.4
10
4.7%
6.1
7.6
9.0
10.3
12.9
6.0%
7.7
9.4
10.9
12.4
13.9
~.5;.'
9.5
11.3
13.1
14.7
16.2
9.4S
11.5
13.5
15.4
17.1
18.7
15
4.0%
6.0
7.9
9.8
11.6
13.4
5.0%
7.3
9.6
11.7
13.7
15.6
6.2%
S.9
11.4
13.7
15.8
17.8
7.5%
10.6
13.3
15.8
13.1
20.2
20
3.5%
5.9
8.2
10.3
12.4
14.3
4.3%
7.1
9.6
12.0
14.3
16.4
5.3%
8.4
11.2
13.9
16.3
18.6
6.3%
9.S
13.0
15.8
13.4
20.7
1-158
-------
EXHIBIT C-10
PERCENTAGE OF TOTAL TRUST FUNDS NOT COLLECTED
Real Discount Race = OS
Bankruptcy Rate
0.5S
1.0
2.0
2.5
3.0
Real Discount Rate = 2".
San kru? tc y Rate
0.52
1.0
1.5
2.0
2.5
3.0
Real. Discount Rate = 4%
SanKTurtcv ?,ste
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
Half Closures
50% Recovery
. Length of Trust (Years)
I
5.4%
5.4
5.4
5.4
5.4
5.4
6.9%
6.3
6.8
6.7
6.7
6.6
8.7%
. 8.5
3.3
S.2
8.1
7.9
10.6%
10.3
10.0
9.3
9.3
9.3
5
3.7%
4.2
4.7
5.1
5.6
6.0
4.92
5.4
5.9
6.4
6,8
7. 3
6.2%
6.7
7 . 3
7.3
8.3
8.7
. 7.6%
8.2
3 . o
9.3
9.3
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
9.3
10.3
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 . OZ
7.0
8.9
10.5
12.1
13.5
20
2.4%
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
-------
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 Assocites plan closure models for the
leather and textile industries.
The following table shows the results of this analysis.
I. 160
-------
NUMBER OF PLANT CLOSURES IN SELECTED INDUSTRY SEGMENTS RESULTING FROM
COLLECTING TRUST FUNDS OVER DIFFERENT TIME PERIODS
Number of Closures
Number of Plants
Industry and Segment
Leather Tanning
Chrome Pulp
Vegetable Non-Chrome
Sheep
(Total Leather)
Textiles
Hosiery - Own Fabric
Yarn & 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.
-------
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 In 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-s1te generators would use trust
funds as opposed to any other financial assurance mechanism. This results
In 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 Is
probably low, but sufficient for Illustrative use 1n the "Cost of a Wrong
Decision" analysis 1n this background document.
I. 162
-------
PART II
-------
INTERIM AND GENERAL STANDARD LIABILITY REQUIREMENTS
I. INTRODUCTION
The Environmental Protection Agency is issuing final regulations on
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, Vol. 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."
-------
-2-
In addressing these issues, the Agency has tried to provide adequate
protection to hu;i)an 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 tr.ust therefore secure insurance
coverage against non-sudden incidents.
o Non-sudden coverage is required curing interim status and curing
permitted status only for land disposal facilities—surface
impoundments, landfills, and land treatment facilities; zhe
nature 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 nor.-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.
-------
-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 reauired 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-sudden insurance coverage on a case-by-case basis.
The remainder of the background document proceeds as follows. Section
II provides a rationale for the final regulations. Section III summarizes the
standards as they were originally proposed. Section IV contains a summary of
the comments received on each issue identified by the comments, the analysis
of such issues, and trie final decision taken in light of the analysis.
Key Definitions
Definitions which are necessary to an understanding of the regulation
and this document are as follows:
"occurrence" means an accident, including continuous
or repeated exposure to conditions, which results in
bodily injury or property damage which the owner or
operator neither expected nor intended to occur.
"sudden accident" means an unforeseen and unexpected
occurrence which is not continuous or repeated in
nature.
-------
-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" wean to obligations carried forward
upon closing of books of account that are economic
obligations of an enterprise and are recognized and
-------
-5-
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 wichin 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 an 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
-------
standards, applicable to owners and operators of facilities for the treatment,
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
rectuiring 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
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 Waste 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, 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.
-------
-7-
Tbe 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
-------
TL -8-
waste site damage incident is discovered, the site owner or operator ma" be
immediately 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 disdained 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
-------
IL -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 tin.e.
Most of the hazardous waste site incidents (33 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 freouent 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
-------
-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. I/ 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
ICF Incorporated, Review and Analysis of Hazardous waste Site Clean-Up
and Third-Party Damage Costs, March 14, 1980.
EPA, Preliminary Assessment of Clean-Up Costs for National Hazardous
Waste Problems, 1979.
-------
TAMI..I-; 1
SUMMARY OF EPA DAMAGE REPORTS FOR WHICH CV.EAH-UP
AND THIRD PARTY DAMAGE COST ESTIMATES COULD I3E OBTAINED
(1979 dollars)
Type of Incident
Sudden
Gradual
Cloan-Up Costs
_Co.*>t: of Damage?:*
Total Numbnr of Average Range of Cost Number of Average Range of Coot
Incidents Incidents Cost Incurred* Estimates* Incidents Cost Incurred* Estimates*
15
75
90
42
48
$277,700
1.64 million
$0,700-519,900
24,800-200 mill.
$218,000 $216,500-220,000
539,000 $11,700-3 million
I
* Upper bound of cost estimates are Level TI estimates for complete wan to 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, 1900.
-------
-12-
$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 aauatic 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 coses
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,;?/ 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.
-------
-13-
carr.ace cost, to date is S3 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 groundwater used as a source
or drinking water. I/ 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 5136,000 (1979
dollars) .
Despite the lack of significant third-party carnage cost awards in the
past, a growing number of court suits are being filed and some reauest damages
in excess of $1 oiilion. 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
waste 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.
-------
-14-
For m?ny reasons, the freouency 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
E?A personnel required by the regulations, should greatly reduce the damage.
It may be that future problems are unlikely to approach the magnitude o'f
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
-------
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, reauire sites to obtain
liability insurance. South Carolina and Illinois are currently considering
instituting insurance requirements. Four other states, California, Texas,
Wisconsin, and Maryland, reauire 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 reouirements 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:
* ICF Incorporated, Review and Analysis of Hazardous waste Site Clean-Up
and Third Party Damage Costs, March 16, 1980.
-------
rr; -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 PMC 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 worth 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 most 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/
I/ Meeting between Federal Maritime Commission staff and EPA staff on
financial responsibility requirements, November 16, 1979.
-------
IP -17-
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 croup 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 S560 million.
Since private insurance companies were unable to provide chat 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 graciual 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.
-------
-18-
3. Federal Strip Mine Regulations. The U.S. Department of the Interior
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 1961. A"
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 Feae r al ftu thor i t ies 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.
-------
-19-
probiems. FIA acted to solve these problems by setting up insurance cools 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
rsanageinent fund.
D. EPA Hazardous Waste Site _Re quire merits
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.
-------
-20-
Though insurance is sometimes 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 af forcability . 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 programs, 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
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.1480) .
-------
-21-
III. SYNOPSIS OF PREVIOUSLY PROPOSED REGOIATIOflS
The proposed regulations for permitted status hazardous waste facilities
(?K 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 ar.d £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 s~ated amount
for r.on-sudden occurrences was to be maintained for a facility or group cf
facilities. Financial responsibility could be established, through evidence of
liabilitv 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 million annual
aggregate) , exclusive of legal defense costs, for a facility or group of
facilities. Interim status facilities were restricted to a 5 percent
deductible in their insurance policy. Insurance coverage had to be obtained
from an insurer licensed or eligible to insure facilities in the jurisdiction
where any one facility was located.
IV. ANALYSIS OF COMMENTS AND RATIONALE FOR STANDflBDS
Many comments were received on the proposed regulations. These
comments, the Agency's responses, and the rationale behind the final actions
-------
It- -22-
are discussed in this section. The section is organized recording 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?
Commentsand 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 SPA 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
-------
-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 "storage"
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 rhe case of
regulated sites and therefore no need for financial
responsibility requirements for regulated sites.
o There is a financial resoonsibility problem and therefore tr.ers
is a need for financial responsibility requirements.
Section II.B. above discusses 90 incidents of damage rhat 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
-------
-24-
required.— 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.
BPA'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
_!/ ICF, Inc. Review and Analysis of Hazardous Waste Site Clean Up and Third
Party Damage costs, March 14, 1980.
-------
-25-
towards this possibility and the likely consequences of these incidents that
tr.e 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 regulared 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 rhis comment. As discussed in Section II.3., the Z?A
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 cc
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.
-------
-25-
EPA disagrees with this comment. ?hf 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 nay 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 niay 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.
-------
TL -27-
Th e Agency disagrees with this comment in regard to federal and state
facilities but agrees in so far as local facilities (rtmnicipality-ov;ned) 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 fur.ds which they use to self-insure
their liability exposure. At present, the financial zest 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 90 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
-------
-23-
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 seeois 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 reclaiaation activities until
3-andards 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 test 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.
-------
TC -29-
A financial test for "self-insurance" is currently reserved. These
corjnents are being considered and will be discussed in detail when the
self-insurance regulation is promulgated.
D. Regulatory_Strategy
Issue; Are EPA's regulatory efforts misdirected?
Comments and Responses: A few commenters oointed out the followina:
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
chough 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 E?A, 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
_lssue: Is insurance the appropriate regulatory mechanism to deal with
the financial responsibility problem?
Comments andResponses; 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.
-------
-30-
Section II. C. discusses the reasons for EPA's disagreeitient with this
coniment. As far as possible, EPA prefers to allow the private sector to
respond to the financial responsibility problem. If private sector efforts
are unsuccessful, EPA 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?
Comment s_and Responses: Many comments were received on the appropriate
amount of insurance that should be required. They are as follows:
o Amounts ari "arbitrary and capricious." No representative
settlements exist at this level ($5 million per occurrence, $10
million annual aggregate) and occurrences of this magnitude
should not occur from facilities in compliance with these
regulations. The amounts should therefore be lowered.
o Amounts should vary for facilities by the "degree and duration
of risks" presented by facilities.
o Amounts should be uniform because of the following reasons:
it is difficult to establish appropriate amounts on a
case-by-case basis;
— the amounts required are minimum amounts and some companies
will get more;
— insurance industry will adjust premiums so that they are
consistent with the degree and duration of risks.
-------
-31-
o $1 million and $2 million (annual aggregate) for coverage of
sudden incidents for interim status facilities are too low and
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 (1C 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 SI 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 ir. the absence of
actuarial data or experience with a regulated hazardous waste industry. A
very large number of comments (summarized above) were received reflecting
various commenters1 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 SPA 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.
-------
-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 reauires $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
pf 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.
-------
-It -33-
The estimated damages from non-sudden incidents to date have ranged from
511,700 - S3 million.* The damage costs incurred have averaged $539,000. The
S3 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 S3 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
reauire. Washington requires SI.2 million, Kansas reauires $200,COO per
occurrence and South Carolina requires SI million per occurrence.
The analysis indicates that insurance amounts of S5 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.
-------
-34-
The Agency has given considerable thought to the p-'oblem and has devised
an approach that will tailor the required insurance amounts to the risk
chsrcteristics 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
-------
-35-
most frequently at land disposal facilities. Most non-sudden incidents
involve slow leaching of waste into groundwater which is unlikely to occur at
above-ground storage or treatment facilities. Consequently, the Agency has
decided to reauire all facilities to carry insurance coverage for sudden
incidents but only land disposal 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 recuire 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 auice 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 the risk assessment at facilities are
as follows:
o Proximity to groundwater.
o Geological structure underlying the facility.
o Proximity to population centers.
-------
It -36-
o Degree of risk associated with the type of product handled.
o Degree of risk management and loss 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 recrjired arr.O'jnt 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 reauired will allow the i-oiementa-
tion of these liability requirements with a minimum of interpretation and
adjustment for individual facilities.
o The insurance coverage reauirement should be 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.
-------
ir -37-
given year. The 75 incidents of non-sudden damage in the files also do not
reveal 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 & firm in a given
year increases, though at a diminishing rate, with the number of facilities
owned or operated by & 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 "his r.u-.ber, would appear to be
somewhere between 20 and 40. Consequently, the Agency believes that an annual
aggregate per firm twice that of the liability lir.it per occurrence should
provide adequate coverage for sudden and non-sudden 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
-------
IT -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 thereby 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
_lss;ue: is insurance of the required type available during both interim
status and permitted status to all facilities?
Comments_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
ICP incorporated, "Availability and Cost of Third-Party Liability
Insurance for Permitted Haaardous Waste Disposal Sites," February 20,
1980.
-------
it -39-
for exclusion of 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 comraenter 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.
EFA believes that the correct procedure is tc require insurance exclusive of
defense costs.
E?A's initial proposal for non-sudder. coverage of S5 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.
-------
-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
ir. the process of offering coverage for non-sudden events. The co-pa nies are
Travelers, Howden Agencies, Kemper Group, Alexander & Alexander, Shand
.Xoriban, 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 nave 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.
Background document for the regulations proposed on May 19, 1980.
-------
JT -41-
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 will 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 te 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 ar.d some facilities in interim
status will not be able to secure coverage for ncr.-sucden incidents. EPA does
not feel, however, that this is a sufficient reascr. to exclude these
facilities from the insurance reouirements. Small facilities as well as
interim status facilities present considerable ris< of an accident. Exclusion
of s-.all 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, reauiring 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.
-------
-42-
coverage feasible. EPA estimates that the number of firms that would recuire
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, therefore, is
whether zhe 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
co-.panies and other interested parties with the requirements of the regulation
are likely to speed up the entry process of insurance companies inzo 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. E?A
intends to accept policies providing coverage for non-sudden incidents as long
I/ Background document for the regulations proposed on May 19, 1980
-------
IE -43-
as they include provisions set out in the r>guiation (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. In addition, £?«. intends to carefully
monitor the market and may specify policy requirements if it finds that
current policies carry exclusions that significantly lower the exrer.c 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. SPA does
not feel/ however, that this is a sufficient reason -o exclude -r.ese facili-
ties 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 s-.aller facilities. Exclusion of interim sta~us facilities would
provide an incentive for facilities with intentions 10 phase out their facili-
ties prior to permitted status to indulge in negligent practices during
interim status. This would leave an inxportant gap in the decree 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
-------
-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 from the insurance
industry's oversight of facilities. This insurance industry oversight will
not replace the Agency's efforts at oversight; it will simply supplement SPA's
resources in their oversight efforts.
For all these reasons, EPA is requiring small facilities ana interim
status facilities to obtain non-sudden insurance coverage. At the same tine,
SPA is taking many step to ensure insurance availability. The Agency is
considering a self-insurance regulation which may allow many firms ro
ie.-.cns-rate their financial strength as evidence of financial responsibility
in lieu of liability insurance. In addition, EPA is initially requiring only
land disposal facilities to obtain non-sudden coverage because these are zhe
facilities roost 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.
SPA's concern with the availability problem has also prompted it to
phase zhe 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 comraenter'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, SPA 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
-------
-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 data) 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 snail and firms with annual sales exceeding $10 million
classify as large, with medium-sized firms falling in between the two
amounts. This classification scheme %vas 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 S3 million were excluded since these firms would, in all
i /
probability, go off-site for their waste disposal.— The remaining firtr.s
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 thar. $4.5 millicn
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: 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.
SOURCE: EPA analysis of data provided by Dun and Bradstreet.
_!/ This conclusion was reached in the following manner. The economic impact
analysis for RCRA 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.
-------
-46-
Thus, $5 mill-'.on and $10 million in annual sales are used to divide the firas
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, ar.d other mechanisms.
o Encouragement of individual state research ar.d innovation in
assuring markets.
o Adoption of back-up federal mechanisms (see below).
EPA was concerned, as were scne conmer.ters, 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 future 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
-------
-47-
that a substantial number of insurance companies withdraw coverage in the
future, EPA may proceed with certain "back-up" options that it is currently
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 ever.ts
insured at conditions and in response to SPA's regulatory schema.
Consequently, EPA is convinced that it need not drop the insurance
requirement despite the concern tha- insurance coverage would be withdrawn in
i
o Insurance coverage would net be available for r.on-accider.-ai
injury and clairr.s.
Insurance policies typically contain exclusions and definitions wr.ich
prescribe the conditions and scope of liability coverage provided by the
policy. Terms such as "accidental" have generally accepted meanings •.-.•ir.hir.
the insurance industry, but the applicability of the term to a given
occurrence may be the subject of dispute between injxn.red parties and the
insurance company defending a policy against claims. EPA intends to -or.itor
the insurance market and see if this definition, and others, will
significantly detract from the protection available to the public. If so, SPA
will then consider specifying policy details acceptable to the Agency.
Consequently, EPA regulations remain unchanged as a result of this comment t
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
-------
JT -48-
liability requirements, which is to ensure ".hat 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 from
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 perrr.it grantee.
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. EPA 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 andAffordability ofInsurance
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.
-------
require-ents 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 snail operators will nor.
be able to afford to absorb the costs of insurance, will
consequently go bankrupt, thus greatly reducing the nation's
disposal capacity.
SPA 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 r.ore 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-
i/
surate with the degree and duration of risks preset-lea by facilities.—
Ccs-s are likely to go down in the fu-ure 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.^/
_!/ Conversations with insurance industry officials.
2_/ IGF Incorporated, Availability and cost of Third-Party Liability
Insurance for Permitted Hazardous Waste Disposal Sires, February 20.
-------
-50-
Even though costs of coverage are related to risk characteristics of
facilities and not their size, the cost per unit volune 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 not 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:
"No 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 may face insolvency or economic unviability due
to insurance costs that are not commensurate with the risk characteristics of
their facilities may 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.
-------
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 cornmonly 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 oe 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 s. 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
-------
-52-
the most 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.—
V See Interstate Commerce Commission, Form 3.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.
-------
ir -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 fig-ares.
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.
2?A 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, rr.onitor 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
_!/ 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.
-------
-54-
could cancel coverage of damage incidents before claims are ever filed. On
the other hand, EPA believes that claims-made 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-sudden release of
hazardous waste or hazardous waste constituents to the air, soil, or surface
water, curing which a claims-mace policy cennct be cancelled. EFA believes
this approach will give third parties a reasonable opportunity tc file claims,
but not erode unreasonably the basic form of the claims-r.ade policy, which
depends on limiting the exposure of an insurance company to claiir.s filed
curing 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 may 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
-------
-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, ar.d 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 r.he overall
insurance program includes liability coverage for sudden and nor.-sudcen
occurrences from hazardous waste management operations and the lir.its 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.
-------
H -56-
The Agency will accept "blanket" coverage only if a portion of that
coverage (in the amounts prescribed) is targeted specifically toward hazardous
waste occurences. As the ccmnenter has recognized, an occxirence unrelated to
hazardous waste can leave little funds to cover damages from a hazardous was~e
occurence. If EPA were to set higher insurance anounts for "blanket" coverage
to ensure sufficient funds for hazardous waste occurences, it would have to
analyze zhe potential for damages fron all other types of occurences. This
would burden the Agency viith analysis not required for ^.hese regulations. A
far be~t.er solution, che Agency feels, rs to allow "blanket." policies but
insist or. the prescribed amounts within the policy being targeted solely
towards hazardous wasce occurences.
------- |