£epa
Training Materials
A model to calculate the
BEN 2.0: economic benefit of
noncompliance
Contains Enforcement-Sensitive Material
BEN Training Materials; Updated July 2002
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Confidentiality/Enforcement Sensitive Notice
The attached training materials contain enforcement sensitive and confidential information.
They are covered by one or more of the following Federal disclosure exemptions: attorney work-
product, deliberative processes privilege, and disclosure of enforcement techniques. You may use
these materials during the course, but you may not keep them unless your State is both legally
permitted and willing to protect this document from disclosure to outside parties. (E.g.. The State
of Wisconsin's laws make it almost impossible to protect a document such as this from disclosure.)
If you are not sure about your State's law on this issue, please take this document for a review by
your State's information law specialists immediately upon your return to your office. If your
information law specialists do not feel your State can adequately protect this document, please mail
it to the following address as soon as possible:
Jonathan D. Libber (2248-A)
U.S. EPA
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Should you have any questions about this note or the EPA's concerns on disclosure, please contact
Jonathan Libber at libber.jonathan@epa.gov or 202-564-6102.
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TABLE OF CONTENTS
Page No.
SECTION I: OVERVIEW OF BEN
What Is BEN? 1-1
Civil Penalty Policy Summary 1-2
Strategic Considerations 1-3
Benefit Recapture Background 1-4
Underlying Financial Theory 1-5
"Time Value of Money" Example 1-6
"On-Time" and "Delay" Scenarios 1-7
Economic Benefit Example 1-9
SECTION II: USING THE BEN MODEL
Main Screen/Creating a Case II-1
Creating a Run II-3
Calculating and Printing Runs II-5
Advanced Features: Customizing Taxes II-7
Advanced Features: Optional Run Inputs II-9
Advanced Features: Specific Cost Estimates 11-11
Impact of Input Changes upon Economic Benefit 11-13
SECTION III: ISSUES THAT ARISE WHILE USING BEN
Civil Penalty Calculations HI-1
Settlement Negotiations UI-2
Dates, Rates, and Data IH-3
Common Violator Arguments UI-4
Characterizing Compliance Scenarios DI-6
Illegal Competitive Advantage LH-10
Trial Preparation HI-11
Rule of Thumb Benefit Calculation Model Ill-12
SECTION IV: SAMPLE PROBLEMS
Overview of Sample Problems IV-1
Delora's Unbelievable Dry-Cleaning Establishment IV-2
Kryptonite Chemical, Inc IV-5
Town of Colaville IV-8
Contains Enforcement-Sensitive Material
BEN Training Materials; Updated July 2002
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SECTION I:
OVERVIEW OF BEN
Contains Enforcement-Sensitive Material
BEN Training Materials; Updated July 2002
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WHAT IS BEN?
The BEN Model is a computer program that runs in the Windows operating environment,
version 3.1 or higher (e.g., Windows 95, 98, or NT).
BEN is easy to use, especially with its many available forms of assistance:
A context-sensitive "help" feature within the model accessed through the
"Fl" key means that assistance is always only a keystroke away.
These Training Materials provide a "hands-on tour" through the model.
The User's Manual provides a more in-depth explanation of the model.
EPA's enforcement economics helpline provides personalized help from 8:00
a.m. to 6:00 p.m. (Eastern time) at 888-ECONSPT or benabel@indecon.com.
Jonathan Libber of EPA's Office of Enforcement and Compliance Assurance
is available to answer policy and legal questions at 202-564-6102, or
libber.jonathan@epa.gov.
The BEN User's Manual provides complete installation instructions; you can obtain the
model from: www.epa.gov/oeca/datasys/dsm2.html or from the EPA helpline.
BEN calculates the economic benefit of noncompliance with pollution control requirements,
based on modem and generally accepted financial principles.
BEN can also calculate the present value of "early-compliance" supplemental environmental
projects (SEP's). (For all other SEP's, use the PROJECT model instead.)
Related models:
PROJECT calculates the present value of supplemental environmental projects, used to
mitigate a proposed civil penalty.
ABEL, INDIPAY, and MUNIPAY assess the ability to afford environmental expenditures
of corporations, individuals (including owners of partnerships and sole proprietorships), and
municipalities, respectively.
Contains Enforcement-Sensitive Material
1-1
BEN Training Materials; Updated July 2002
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CIVIL PENALTY POLICY SUMMARY
Economic benefit components:
Benefit from delayed pollution control costs.
Benefit from avoided pollution control costs.
Benefit from illegal competitive advantage.
Gravity component:
Actual or possible harm.
Importance to regulatory scheme.
Size of violator.
Adjustment factors:
Degree of willfulness and/or negligence.
Degree of cooperation/noncooperation.
History of noncompliance.
Ability to pay.
Other unique factors.
In criminal context, BEN can enhance presentation of intent argument, and for sentencing
show how violator saved money.
Illegal competitive advantage and BEN:
BEN or any computer model cannot calculate illegal competitive advantage,
leading to possible economic benefit underestimates in certain cases.
BEN asks questions for case attributes indicative of illegal competitive advantage,
providing suggestions for further research and analysis (see Section HI).
EPA developing strategy for cases that involve illegal competitive advantage.
In criminal cases, forfeiture might be more appropriate for illegal operators.
Illegal competitive advantage sources:
Gain market share from compliant competitors (e.g., win government
contract via low bid made possible by avoided compliance costs).
Establish self in market prior to government approval, "an early mover"
advantage (e.g., begin producing new chemical product without going
through TSCA PMN review in order to take advantage of a new market).
Bring extra product to market (e.g., exceed explicit output/throughput limit).
Sell prohibited products (e.g., black market), as opposed to legal products
produced in noncompliant process, for which BEN is appropriate.
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STRATEGIC CONSIDERATIONS
No statutes or regulations require EPA to calculate economic benefit of noncompliance
(except for Clean Air Act Section 120, which mandates a specific computer model similar
to BEN).
The most EPA is required to do is consider benefit in assessing penalties.
Try not to be drawn into the argument that BEN isn't "precise" enough.
In court/hearing, try to persuade trier-of-fact that this is more than just reasonable, although
all we need to show is reasonableness. (Clean Water Act (CWA) cases set helpful standard
of "reasonable approximation" which can also be applied to Clean Air Act (CAA) cases
since the same language in the Senate Report on the CWA amendments is in the Senate
report on CAA amendments. I would also argue that it should be the same with all media
since benefit calculation is the same across media.)
Can never determine economic benefit as precisely as determining the money a bank robber
stole:
Violator's financial statements have no line item for "economic benefit from
pollution control noncompliance"; but,
For almost all cases BEN's economic benefit methodology is as accurate as an
economic benefit methodology can possibly be.
However, BEN's economic benefit result is only as accurate as your inputs: remember the
GIGO mantra, "Garbage In, Garbage Out!"
Judges generally want to recapture the benefit, and therefore may feel a greater obligation to
be more precise, demanding greater precision from the enforcement agency.
State judges may tend to give EPA greater deference than do Federal judges.
Contains Enforcement-Sensitive Material
1-3 BEN Training Materials; Updated July 2002
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BENEFIT RECAPTURE BACKGROUND
Objective is to cancel economic gains from delayed compliance; hence, minimum penalty
is amount of economic gain plus a nontrivial gravity component.
Impact of BEN on penalty numbers:
33 percent of all dollars assessed from 1975 to 1985 were assessed in 1985, the first
year of BEN use.
66 percent of all dollars assessed from 1975 to 1987 were assessed in 1985 to 1987,
the first three years of BEN use.
Average total annual penalties for 1975 to 1984 were $6 million per year; for
1985-1991, average was $37 million per year.
1994 set a new record of over $100 million of penalties collected.
1999 total was $ 166.7 million in penalties (total would have been even higher but for
the fact that it was mitigated to some extent by $236.8 million in SEP's).
2000 total was $75.3 million; 2001 total was $125.4 million.
State use assistance available from EPA helpline (888-ECONSPT):
GAO pushing for the States to recapture.
Laidlaw case indicates that judges will examine how States treat benefit recapture in
deciding whether State enforcement action is effective. (Both the District Court
judge and Justice Ginsberg focused on benefit.)
Under EPA Supplemental Environmental Projects Policy (4/10/98), violator may agree to
perform SEP in return for favorable penalty consideration, but even with SEP, penalty must
equal or exceed the greater of: a) economic benefit plus 10 percent of gravity, or b) 25
percent of gravity.
PROJECT model typically used to calculate after-tax net present value (i.e., SEP's "true"
cost to violator), but use BEN for an "early-compliance" SEP (i.e., compliance with other
regulation earlier than is required):
First, run BEN using date of early compliance as "noncompliance date" and date of
required compliance as "compliance date"
Then, BEN's economic benefit of noncompliance as of the penalty payment date will
actually be the SEP value.
Contains Enforcement-Sensitive Material 1-4 BEN Training Materials; Updated July 2002
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UNDERLYING FINANCIAL THEORY
A violator that delays installation of pollution control equipment saves money, thus gaining
an economic advantage over other regulated entities (e.g., companies, municipalities) who
comply on time; these savings can come from:
Delaying purchase of equipment;
Avoiding annually recurring costs of operating and maintaining equipment over
period of noncompliance; and,
On less frequent occasions, avoiding purchase of equipment altogether.
When violator delays spending money on pollution control, it can use the money it saves for
other, revenue-producing activities and thereby gain an economic benefit.
If a complying firm spends $1,000,000 to comply, the "opportunity cost" of that
million dollars is based on what it could earn if it plowed that money back into the
company.
If the complying firm's cost of money is 10%, then the opportunity cost of that
money is also 10%.
Personal finance example: checking account earns 0.5% rate of return, mutual fund
yields an average of 9%. Opportunity cost of money not saved is based on the
anticipated rate of return on mutual fund, not checking account's 0.5%.
Enforcement agency's goal is to recover at least any economic benefit that violator may have
accrued as a result of delayed pollution control, thus removing economic advantage that
violator gained vis-a-vis competitors who complied on time.
Key financial concept in BEN is "time value of money."
A dollar today is worth more than a dollar one year from now, because of alternative
investment possibilities.
Time value of money is quantified by "discounting" or "compounding" compliance-
related after-tax "cash flows" from different years to "net present value" (NPV) as
of some common date.
This allows comparison of cash flows from different years on same basis.
Contains Enforcement-Sensitive Material 1-5 BEN Training Materials; Updated July 2002
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"TIME VALUE OF MONEY" EXAMPLE
Assuming a discount rate of 10 percent, $1.00 one year from now has a net present value
(NPV) of $0.91; $1.00 five years from now has a NPV of $0.62:
Time Value of Money
10% Discount Rate
P resent
Next Year
Five Years From Present
With a discount rate of 15 percent, respective results are $0.87 and $0.50:
Time Value of Money
15% Discount Rate
$1 20 -i
Present Next Year Five Years From Present
Contains Enforcement-Sensitive Material 1-6 BEN Training Materials; Updated July 2002
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"ON-TIME" AND "DELAY" SCENARIOS
Before we can discount or compound any cash flows, we must determine "on-time" and
"delay" scenarios, i.e., what actions and associated costs were necessary for on-time
compliance, and for delayed compliance.
Economic benefit is difference between net present values (NPVs) of the two scenarios.
Fundamental definition of economic benefit difference between NPVs of on-time and
delay scenarios is same regardless of whether economic benefit is from delayed/avoided
pollution control expenditures (i.e., BEN's calculations) or from illegal competitive
advantage (i.e., expert using even more complex calculations).
Compliance scenarios can sometimes be complex and require many customized calculations:
/I/95
/1/96
0?
/1/97
s-TIME SCENARIO
/1/98
"lie S250
lermit
/1/95
¦lire
>3,000
onsultant
/1/96
5aySlmto
quipment
/endor
E
/1/97
>250k for
ystem upgrade
o meet new regu
ELAY SCENA
/1/98
attons
RIO
/1/99
/I/00
/I/01
-lie S100
xtension
equest
i 100k extra
evenue from
loncompliance
-lire
>5,000
onsultant
5ay S300k
n pollution
harges
3ay SI 3m to
quipment
/endor
Here the violator should have started taking actions for compliance in 1995, but did not start
taking any actions (and hence incurring any costs) until a year later, in 1996.
But because of the violator's delay, required actions for delay scenario are very different
(perhaps because of new regulations) than for on-time scenario (as opposed to differing
merely by inflation).
Therefore, such scenarios are probably not amendable to a BEN analysis. More customized
calculations are necessary.
Fortunately, although you should be aware that such complex situations exist and require
expert assistance most scenarios are far more simple and hence amenable to BEN .. .
Contains Enforcement-Sensitive Material 1-7 BEN Training Materials; Updated July 2002
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"ON-TIME" AND "DELAY" SCENARIOS (continued)
Here is one such simple example:
/1/95
/1/96
or
/1/97
M-TIME SCENARIO
/1/98
;
>lm non-
epreciable
xpenditure
/I/95
/1/96
D
/1/97
ELAY SCENARIO
/1/98 1/1/99 1/1/00 1/1/01
SI lm non-
depreciable
expenditure
Violator should have spent $1 million in 1995, but did not comply until 2000 (when inflation
increased the cost of compliance slightly to $1.1 million).
Such simple scenarios are amenable to BEN.
The following pages provide a graphical illustration of the calculations BEN performs to
calculate the economic benefit of noncompliance in such a case.
Contains Enforcement-Sensitive Material 1-8 BEN Training Materials; Updated July 2002
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ECONOMIC BENEFIT EXAMPLE
ABC company should have made a one-time, nondepreciable expenditure of $1.0 million
(after-tax) in January of Year "0," but did not actually incur the expenditure until January of
Year "5," and will not pay a penalty until January of Year "7." What is the economic benefit
that ABC gained?
To answer this, we need to compare what should have happened for on-time compliance with
what actually happened for delayed compliance.
First step is to adjust for inflation:
Cost of complying on-time (in January of Year 0) is $1 million (assuming cost
estimate is already expressed in Year 0 dollars).
Cost of complying late (in January of Year 5) is approximately $1.1 million.
Increase is calculated from an assumed inflation rate of 2%, or alternatively from cost
index values (i.e., $1 million divided by January of Year 0 cost index value, then
multiplied by January of Year 5 value).
The calculation is therefore:
$X x (l+LnflRate)A#ofYrs $X / CostEstimateDatelndex x TargetDatelndex
$1,000,000 x (1,02)A5 $1,000,000 / 230 x 253 (Year 0 & Year 5 values, resp.)
$1,000,000 x 1.10 $1,000,000 x 1.10
$1,100,000 $1,100,000
$1,200,000
$1,000,000 --
$800,000 --
S600.000 --
$400,000 --
$200,000
Year
Contains Enforcement-Sensitive Material 1-9 BEN Training Materials; Updated July 2002
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ECONOMIC BENEFIT EXAMPLE (continued)
Inflation hence increases nominal cost of complying late. If inflation were the only factor,
complying on-time would make more sense for violator, since it would be less expensive
than complying late. Instead, we also need to account for violator's time value of money,
and therefore adjust the separate costs from on-time and delay scenarios to a common present
value, as of a common date (i.e., January of Year 0 noncompliance date).
On-time scenario cost of SI million is already expressed at January of Year 0 but we need
to discount delay scenario cost of $1.1 million back to January of Year 0 (from January of
Year 5). With a 9.5% rate, the present value of delay scenario is only $700,000.
The calculation is therefore: $X I (1 + DiscountRate) A NumberOfYears
$1,100,000/ 1.095 A 5
$1,100,000/ 1.57 = $700,000
Thus in order to pay for $1.1 million in compliance costs in Year 5, the violator need set
aside only $700,000 in Year 0.
Economic benefit at January of Year 0 is the difference between on-time and delay scenario
present values: $1,000,000 minus $700,000, which equals $300,000.
(letter designations correspond to BEN output labels)
Year
Contains Enforcement-Sensitive Material I-10 BEN Training Materials; Updated July 2002
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ECONOMIC BENEFIT EXAMPLE (continued)
However, we need to calculate economic benefit as of when violator will pay a penalty,
which is January of Year 7 (not Year 0).
Using the same 9.5% rate, we compound the initial economic benefit of S300,000 forward
from Year 0 to Year 7, to arrive at a final economic benefit of $567,000.
The calculation is therefore:
$X x (1+DiscountRate) A NumberOfYears
5300,000 x 1.095A7
$300,000 x 1.89= $567,000
(teller designations correspond to BEN output labels)
Year
Contains Enforcement-Sensitive Material I-11 BEN Training Materials; Updated July 2002
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SECTION II:
USING THE BEN MODEL
Contains Enforcement-Sensitive Material
BEN Training Materials; Updated July 2002
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MAIN SCREEN/CREATING A CASE
When you first open BEN the main screen appears, which is where you create cases and runs.
Tab and enter keys will move you sequentially through the input areas, but you can also use
your mouse to input data in any order.
From here you can also access file, window, and help pull-down menus, which allow you to
open, close, create, save, or exit files (which are saved as "*.ben"), as well as modify your
printer setup (just as in most Windows applications). The window menu allows you to
shift between multiple open BEN cases. For help use the help menu, or press F1 anytime.
The first three inputs on the case screen are case name, analyst name, and office/agency.
These appear on the bottom of result printouts but do not affect the economic benefit
calculation. Case name and analyst name can be any length and include any characters.
Case name can be name of violator or anything else relevant to case.
Choose office/agency (formerly EPA region) from pull-down menu that lists all ten
regions, EPA headquarters and "other," or type in own entry.
Analyst name is usually person performing the analysis or enter "For Settlement
Purposes Only".
Tax-related inputs are violator's entity, state, and possibly customized tax rates, which
together determine tax rates BEN applies to violator's cash flows.
Select "Not-For-Profit" for governmental jurisdiction or charity, "C-Corporation" for
company that files tax form 1120 or 1120-A (which includes virtually all publicly
traded companies), or "For-Profit Other than C-Corporation" for all other types of
companies (i.e., S-Corporations, partnerships, sole proprietorships).
From pull-down menu select state in which violator conducts its business (which is
not necessarily its state of incorporation), or AVG (for an average of all states), or
BEN (to replicate the DOS version of BEN's standard values, similar to AVG).
If you have a compelling reason, customize the tax rate by pressing [Customize
Taxes] button. BEN will then automatically check the "Taxes Have Been
Customized" box.
[Competitive Advantage] button opens a window with several questions. Checking boxes
will not affect economic benefit result, but BEN will alert you to possible additional gain
from illegal competitive advantage. (Once you finish this screen, click [OK], not [Cancel].)
Penalty payment date is when penalty will be paid. (See Section HI for guidance.)
Only once you have entered all required case inputs (including competitive advantage
questions) can you create runs.
Contains Enforcement-Sensitive Material II-1 BEN Training Materials; Updated July 2002
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File Window Help
mmsm
rCase
Case Name:
|Example Case
Region
| Region 1
Analyst:
"3
J Analyst
T axes -
p E ntity
C Not-For-Profit
(* C-Corporation
C For-Profit Other than C-Corporation
State:
MA
Customize T axes
r~ Taxes Have Been Customized
Competitive Advantage
Penalty Payment Date: OI-Jan-1999
Runs
New Run:
Add
Existing Runs:
Test Run 2--CD 1/1/98
Enter/Edit
Calculate
Copy
Remove
l~" Did violator's noncompliance allow it to begin production or sales sooner than it should?
P Did violator sell prohibited products?
r- Are compliance costs a significant percentage of total production costs?
f~ Does violator sell products that can develop "brand loyalty" or high switching costs?
I- Has violator developed or sold new products or services while in noncompliance?
I- Could violator have complied cost-effectively by reducing output/throughput?
OK | Cancel |
Contains Enforcement-Sensitive Material
0-2 BEN Training Materials; Updated July 2002
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CREATING A RUN
You can add, copy, calculate, and remove runs on the right-hand side of screen.
Each case can contain multiple runs.
Run names can be in any format and do not affect results.
To add a run, enter run name under "New Run:" and press [Add].
To enter or edit data for a run, select its name and press [Enter/Edit],
To calculate a run, select its name and press [Calculate].
To copy a run, select its name and press [Copy].
To remove a run (permanently!), select its name and press [Remove].
Cost estimates can include but do not require dollar signs and commas. Decimals are
acceptable but BEN will round amount to nearest dollar.
Each cost estimate needs an estimate date that includes year, month, and day. BEN will
accept most date formats. If you do not have an exact date, enter a reasonable estimate.
Capital investments include all depreciable outlays (i.e., assets that wear out over time).
Examples include stack scrubbers, monitoring wells, wastewater treatment systems.
Include all installation and design costs.
One-time nondepreciable expenditures occur once and do not depreciate.
Examples include land purchases, designing training program, consulting studies.
BEN assumes these expenditures are tax deductible. For land purchases, be sure to
change this assumption on the Options screen.
Annually recurring costs are periodic actions necessary for compliance, typically for
operation and maintenance of capital equipment.
Examples include labor, utilities, materials, rent, annual property taxes on equipment.
Can be negative when compliance saves violator money (e.g., new system is more
efficient than old and decreases expenditures on energy or labor).
Exclude expenses like capital recovery, interest payments, or depreciation.
Include only incremental costs necessary for compliance.
Noncompliance date is when violator first failed to comply with regulations. Compliance
date is when violator reached compliance, or whenever you expect violator to reach
compliance in future. (See Section HI for guidance.) If you later specify that all compliance
costs are avoided (as opposed to merely delayed), you still must enter a compliance date
(even though it then has no impact upon result).
Contains Enforcement-Sensitive Material II-3 BEN Training Materials; Updated July 2002
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- Compliance Components
Capital Investment:
One-Time, Nondepreciable Expenditure:
Annually Recurring:
Cost E stimate E stimate D ate
$1,000,000
01 -Jan-1992
$100,000
01\Jan-1992
$10,000
-Dates
Noncompliance:
01 Jan-1992
Compliance: 01 -J an-1997
OK
ttct
~ZJ
UUnHUIIMLU I UftUsl I
r* Taxes Have Been Customized
Competitive Advantage
Penalty Payment Date: 01 -Jan-1999
01 Jan-1992
Options
Cancel
Enter/Edit
Calculate
Copy
Remove
Contains Enforcement-Sensitive Material II-4 BEN Training Materials; Updated July 2002
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CALCULATING AND PRINTING RUNS
Enter all inputs before attempting to calculate results.
To perform calculation, select existing run from list on main screen and press [Calculate],
BEN will perform calculation and present its results on new screen.
You can also calculate multiple runs simultaneously: select any combination of runs (using
the control-click or shift-click actions with keyboard and mouse), then press [Calculate].
BEN will summarize your inputs and also note if you customized tax rates or
discount/compound rate.
If you checked off any questions about competitive advantage, a message will appear in the
results that violator may have received additional economic benefit from illegal competitive
advantage.
Use scroll bar to view inputs that do not fit on the screen.
[Done] button returns you to main screen.
You can also print your results from this screen.
[Summary] button prints information from results screen (i.e., economic benefit
result and summary of your inputs).
[Detail] button prints summary plus additional information that does not appear on
screen: possible sources of illegal competitive advantage (if relevant), discount/
compound rate calculation (unless you customized the rate), specific cost estimate
(unless you overrode BEN's calculation), and up to four pages of detailed cash flow
calculations.
In case you have trouble printing your results (e.g., page orientation or paper type),
try modifying printer setup, accessible under file pull-down menu on main screen.
Contains Enforcement-Sensitive Material II-5 BEN Training Materials; Updated July 2002
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E£amp!ei£ase^1i^
Run Name =
Test Run
~
PresentValues as of Noncompliance Date (NCD).
01 -Jan-1992
A) On-Time Capital & One-Time Costs
$946,734
B) Delay Capital & One-Time Costs
$619,159
C) Avoided Annually Recurring Costs
$23,889
D) Initial Economic Benefit (A-B+C)
$351,463
E) Final Econ. Ben. at Penalty Payment Date,
01-Jan-1999
$698,461
G-Corporat>on w/MA tax rates
-
Discount/Compound Rate
10 3%
Discount/Compound Rate Calculated By
BEN
Compliance Date
01 -Jan-1997
Caoital Investment'
Cost Estimate
$1,000,000
Cost Estimate Date
01-Jan-1992
Cost Index for Inflation
PCI
# of Replacement Cycles, Useful Life
1,15
Projected Rate for Future Inflation
N/A
One-Time. Nondepreciable Expenditure'
~
Print
Summary
Detail
Done
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ADVANCED FEATURES: CUSTOMIZING TAXES
Do not customize taxes unless you have a compelling reason to do so. To customize tax
rates press [Customize Taxes] button on main screen.
BEN uses marginal tax rates (i.e., tax rates on last dollar of income) rather than average tax
rates, since the economic benefit calculation is analyzing incremental cash flows necessary
for compliance. BEN assumes violator is subject to highest income tax rate.
For example, assume first $100 of income taxed at 10% rate, and next $100 at 20%. Average
tax rate may be 15%, but for economic benefit the relevant factor is 20% marginal tax rate.
Not-for-profits have a zero-percent tax rate.
BEN uses state-specific tax rates together with federal tax rates to calculate a combined tax
rate. State taxes must be adjusted to reflect their deductibility from federal taxes, using the
following formula:
Combined = Federal + (State x (1 - Federal))
You can customize only the combined tax rate result, not the preliminary inputs (i.e., federal
or state tax rate).
Enter tax rates as decimals, not as percentages. BEN will then automatically display them
as percentages.
If you customize the tax rate BEN will automatically check the "Taxes Have Been
Customized" box on the case screen. It will also note the customization in result printouts.
If you later change a violator's tax status or state, you will lose any tax customization.
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II-7 BEN Training Materials; Updated July 2002
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Combined = Federal + (State * (1 Federal])
Federal
MA
Combined
1987
34. OX
9.5X
40.30X
1988
34. OX
9.5X
40.30X
1989
34 OX
9 5X
40 30X
1990
34 0X
9 5X
40 30X
1991
34.0%
9.5X
40.30X
1992
34. OX
9 5X
40.30X
1993
35 OX
9.5X
41.20X
1994
35. OX
9.5X
41.20X
1995
35. OX
9.5X
41.20X
1996
35. OX
9.5X
41.20X
~
Note: Changing entity or state on the previous
screen will result in loss of tax customization.
OK
Cancel
F" Taxes Have Been Customized
iuns-
ew Run;
Add
xisting Runs:
SES9I
[Test Run 2--CD 1/1/98
Enter/Edit
Calculate
Copy
Remove
Competitive Advantage
Penalty Payment Date:
01xlan-1999
Contains Enforcement-Sensitive Material II-8 BEN Training Materials; Updated July 2002
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ADVANCED FEATURES: OPTIONAL RUN INPUTS
Although you must input compliance cost data and certain dates, BEN provides certain
economic variables and data. You can accept BEN's standard values, or override them with
your own data if you have a reasonable basis for such a decision.
Discount/
Compound
Rate
(see section V for
example of Discount/
Compound Rate
calculation)
BEN discounts and compounds all cash flows at the cost of capital, averaged
over the time period from noncompliance date to compliance or penalty
payment date, whichever is later.
For a company, BEN calculates a typical weighted-average cost of capital
(WACC), which represents the cost of a company's debt and equity weighted
by the value of financing source. A company must on average earn a return
necessary to repay its debt holders (e.g., banks, bondholders) and satisfy its
equity owners (e.g., partners, stock holders). While companies often earn in
excess of WACC, companies that do not on average earn at least their WACC
will not survive (i.e., lenders will not receive principal and/or interest
. payments; owners will be dissatisfied with their returns). The WACC
represents the return a company can earn on monies not invested in pollution
control, or, viewed alternatively, represents the avoided costs of financing
pollution control investments.
For a not-for-profit, BEN uses the average municipality's cost of debt, based
on interest rates for general obligation bonds.
Cost Index
for Inflation
To adjust cash flows for inflation, BEN applies the Chemical Engineering
magazine Plant Cost Index (PCI) month-by-month historical values (which
measure cost changes for plant equipment), but also provides optional
alternative cost indices (with descriptions in the help system).
Number of
Replacement
Cycles
In addition to the economic benefit from initially delaying pollution control
equipment, BEN calculates additional economic benefit from delaying future
replacement cycles, assuming one cycle. (You can specify as many as five,
but additional cycles usually have little to almost no impact.)
Useful Life of
Capital Equipment
BEN assumes the violator will have to replace pollution control equipment
every 15 years different types of equipment may merit other useful lives.
Projected Rate for
Future Inflation
BEN adjusts any future replacement cycles beyond the first one with a
forecast for the PCI.
Delayed vs. Avoided
BEN assumes that the capital investment and one-time nondepreciable exp.
are delayed not avoided uncheck this box to change that assumption
Nondepreciable Exp.
Tax-Deductibihty
BEN assumes that one-time nondepreciable expenditures are tax deductible,
but you should override this assumption for land purchases.
Contains Enforcement-Sensitive Material II-9 BEN Training Materials; Updated July 2002
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10.3%
Discount/Compound Rate:
[- Capital Investment
Cost Index for Inflation: | PCI
Number of Replacement Cycles:
Useful Life of Capital Equipment:
Projected Rate for Future Inflation:
17 Delayed, Not Avoided
1
15
MX
zl
¦ One-Time, Nondepreciable Expenditure-
Cost Index for Inflation: PCI
W Tax Deductible
J7 Delayed, Not Avoided
3
-Annual Costs -
Cost I ndex for. I nflation: PCI
3
OK I Specific Cost Estimates J Cancel
Contains Enforcement-Sensitive Material 13-10 BEN Training Materials; Updated July 2002
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ADVANCED FEATURES: SPECIFIC COST ESTIMATES
This screen allows you to view BEN's inflation adjustments, which calculate specific cost
estimates for certain dates, extrapolating from the original single cost estimate that BEN
requires for each compliance component. The screen also allows you to override BEN's
calculations for the specific cost estimates, but do so only for compelling reasons.
All data except for specific cost estimates are "grayed out", since BEN allows to you override
only final estimates, not intermediate calculations. Changing your inputs on prior screens,
however, will have an impact on "grayed-out" data unless you click [OK] on this screen,
which will lock in your inputs on prior screens. Clicking [OK] on this screen will also
visually erase all other data when you return to this screen in the future (since BEN does not
know whether your final estimate still matches up with its intermediate calculations).
Reasons for modifying BEN's calculations can include the following, but be prepared to
document your actions and rationale.
You have separate cost estimates for the noncompliance and compliance dates. This
could reflect several scenarios:
violator obtained cost estimate at noncompliance date, even though it did not
comply until later;
technological change between non-compliance and compliance dates implies
that different compliance measures were available at the two dates; or,
regulatory change over time mandated different compliance measures at the
noncompliance vs. compliance dates.
Under such scenarios, use most recent data for original capital cost estimate so that
it reflects delay compliance scenario (ensuring that any future capital equipment
replacement cycles are calculated correctly). Then, override the specific cost
estimate in the first column (i.e., on-time scenario compliance start) with the correct
estimate.
You have inflation data that is more appropriate than BEN's. Although BEN offers
many other alternative cost indices in addition to its default Plant Cost Index,
occasionally some other inflation adjustment may be necessary. If so, override
whichever specific cost estimates you believe are inaccurate.
Contains Enforcement-Sensitive Material II-11 BEN Training Materials; Updated July 2002
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-Capital In vestment -
Original Cost Estimate:
Compliance Start
On-Time Delay
Replacement Cycle Start
On-Time Delay
OKIan-1992
01 -Jan-199.'
01 -Jan-2007
01-Jan-2012
Vi 000.000
'5.1 000 000
¦J.1 000,000
SI 000,000
Cost Index Value as of (A): 1359 500
x
359 500
x
359 500
Cost Index Value as of (B): 1359 500
Specific Cost Estimate:
300
442.833
359 500
X
481 77G
$1,000,000
$1,066,203
$1,231,803
$1,340,127
-One-Time, Nondepreciable Expenditure
Original Cost Estimate:
JIOOOOO
$100,000
Cost Index Value as of (A): 1353 500
X
359.500
x
Cost Index Value as of (B): 359 500
300
S pecific Cost E stimate: $100,000
$106,620
(A) - Original Cost Estimate Date
(B) -- Specific Cost Estimate Date
OK
Cancel
xi
/ «\ Warning: Saving this screen will prevent any further changes to this run on prior screens.
J' ' Continue?
Yes
No
Cancel
Contains Enforcement-Sensitive Material II-12 BEN Training Materials; Updated July 2002
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IMPACT OF INPUT CHANGES UPON ECONOMIC BENEFIT
Input Item
Direction
of Change
Impact on
Economic
Benefit
Marginal Tax Rate
increase
decrease
Penalty Payment Date
later
increase
Cost Estimates
increase
increase
Noncompliance Date
later
decrease
Compliance Date
later
increase
Discount/Compound Rate
increase
increase
Number of Replacement Cycles
increase
increase
Useful Life of Capital Equipment
increase
decrease
Project Rate for Future Inflation
increase
varies
Cost Index for Inflation
PCI to other index
varies
Tax-Deductibility of One-Time,
Nondepreciable Expenditure
tax deductible to
not tax deductible
increase
Contains Enforcement-Sensitive Material 33-13 BEN Training Materials; Updated July 2002
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SECTION III:
ISSUES THAT ARISE WHILE USING BEN
Contains Enforcement-Sensitive Material
BEN Training Materials; Updated July 2002
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CIVIL PENALTY CALCULATIONS
Two components for most penalties; see Policy on Civil Penalties (2/16/84, General
Enforcement Policy Compendium P.T. 1-1 and P.T. 1-2).
Economic benefit of noncompliance: apply BEN model (as per Guidance for
Calculating the Economic Benefit of Noncompliance for a Civil Penalty Assessment,
11/05/84, PT. 1-5.)
Gravity, reflecting seriousness of the violation (consult applicable medium-specific
penalty policy).
Gravity adjusted for: history of violation, cooperation/noncooperation, negligence/
willfulness, and ability to pay. (Ability to pay analysis may also apply to economic
benefit portion; see Guidance on Determining a Violator's Ability to Pay a Civil
Penalty, 12/16/86, PT. 2-1.)
Add economic benefit and adjusted gravity to yield initial penalty target figure.
Absolute bottom line is economic benefit component plus some nontrivial gravity
component, unless reasons to settle below this amount are compelling (.Policy on Civil
Penalties, supra).
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SETTLEMENT NEGOTIATIONS
General Strategy for Settlement Negotiations (may not apply to unilateral orders): develop
several penalty calculations not arbitrary ones, but instead each with its own rationale.
(But for federal facilities, may want to file before negotiating.)
But first and foremost, never apologize for your penalty figures:
A request made with diffidence and timidity is easily denied because the petitioner himself
seems to doubt its fitness. Samuel Johnson
Statutory Maximum (e.g.. S250.000 ) and Adjusted Penalty Ce.g.. S245.000')
Include statutory maximum injudicial complaint (e.g., 10 days x $25,000).
For EPA administrative cases, complaint should contain already-adjusted penalty
figure (e.g, $245,000), but you still need to calculate statutory maximum to ensure
your penalty calculation does not exceed this amount.
Tactic for administrative cases: calculate penalty number for complaint using very
aggressive assumptions, resolving all doubts against violator. (Katzen Brothers
requires that all penalty factors be addressed.)
Counteroffer#! (e.g.. SI 82.000): Applies penalty policy very aggressively against violator,
but falls well short of statutory maximum; should contain maximum BEN figure.
Counter Offer # 2 (e.g.. S163.000'): Applies penalty policy less aggressively against violator;
may have a lower BEN figure (e.g., based on a shorter period of violation).
Negotiation Bottom Line (e.g.. S122.000)
Represents what the litigation team feels the case is worth; unless the team is convinced its
numbers are wrong, the government will not settle below this number.
Penalty Policy Bottom Line ("e.g.. SI 11.0001
Agency's penalty policy is never to settle below economic benefit of noncompliance;
litigation team in some cases can reduce penalty below Negotiation Bottom Line, but they
cannot reduce it below economic benefit unless highly compelling reasons are present.
Flow of Negotiations: As you move from aggressive assumptions to less aggressive posture
on each penalty issue, obtain something in return, unless other side convinces you that your
assumptions are incorrect (e.g., compromise on penalty in return for better compliance
schedule or agreements to institute environmental auditing program).
Common misconception is that BEN is totally objective and not a subject for negotiation:
financial theory behind the model's methodology is not negotiable, but sometimes certain
data inputs may be negotiable. (See following page.)
Contains Enforcement-Sensitive Material III-2 BEN Training Materials; Updated July 2002
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DATES, RATES, AND DATA
Period of violation (i.e., time between noncompliance and compliance dates) is major issue:
as interval increases, economic benefit increases.
In practice, period of violation often not clear; if evidentiary problems, use sensitivity
analysis (i.e., multiple runs) to see impact of different assumptions.
When violator not yet in compliance, must estimate a future date; tell violator your
assumption and avoid "unpleasant surprises."
Be pessimistic: Things always take longer than they take. Yogi Bera;
far easier to lower penalty for violator who beats schedule than increase it for one
that fails to meet schedule (i.e., don't get caught in "close and bump" situation).
Might want to use date from proposed consent decree.
Further compliance delays will increase BEN; faster schedules reduce BEN.
Similarly, as penalty payment date extends further into future, economic benefit increases.
Tell violator BEN's penalty payment date, and that if date actually later, BEN will
be higher (and vice versa).
For trial/hearing, make sure judge understands that benefit keeps increasing until
penalty is paid: since decision usually made many months after trial/hearing, might
want to run BEN with various future penalty payment dates to illustrate this.
Again, far easier to reduce a penalty for violator that agrees to pay earlier than to raise it for
one that pays later than you assumed. Also, inform violator that economic benefit will no
longer continue to be compounded forward if penalty amount is escrowed.
BEN's discount/compound rate based upon a typical violator's cost of capital (WACC for
companies; municipal bond interest rate for not-for-profits); basis not open to negotiation,
but violator may argue for rate tailored to itself, industry, or specific division.
Involve a financial analyst or contact EPA helpline (888-ECONSPT) if violator raises
an issue about calculation for discount/ compound rate (i.e., cost of capital).
Might want to warn violator that case-specific cost of capital could result in higher
discount/compound rate, which will increase economic benefit.
For cost estimates, aim high as negotiation ploy; common data sources include:
Discovery for evidence of violator's actions: daily logs, consultant's reports,
discharge monitoring reports (DMRs), model interrogatories, request for production.
Administrative subpoena.
Ask engineering experts, both in-house, and contractors, or even similar regulatee.
Clean Air manual at http://www.epa.gov/ttn/catc/products.html.
Some standardized UST costs available on EPA website.
RCRA compliance costs at http://es.epa.gov/oeca/ore/rcra/cmp/120097.pdf.
Contains Enforcement-Sensitive Material
m-3
BEN Training Materials; Updated July 2002
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COMMON VIOLATOR ARGUMENTS
1. Cost of roof on new treatment building should be excluded since roof is not needed to
operate treatment system.
In virtually all cases, BEN should include the cost of the roof unless the violator can
conclusively prove that the treatment system would operate just as effectively and efficiently
without the roof (all else being equal) and that the roof is not a customary part of such
treatment systems. A violator can almost never support this claim, since it must essentially
argue that installing a roof was a waste of money (serving no sensible business purpose).
2. Cost of painting walls and landscaping treatment building should be excluded since they are
unnecessary for compliance.
While such items may not be directly necessary to achieve compliance, if these items are
normally part of such projects, then BEN should include their costs. Such expenditures often
provide intangible and tangible benefits, such as improving the appearance of the facility,
reducing erosion and dust, preserving the building, and creating a more attractive
environment for employees, visitors, and customers. Presumably these expenditures would
have been necessary for on-time compliance, and hence the violator benefitted by delaying
them.
3. Cost of an extra (backup) pump should be excluded, since it is unlikely ever to be used.
While the pump may never be used, if reasonable engineering practice would include an
extra pump (or any other backup systems), then BEN should include its cost. Given that the
violator did (or will) purchase the extra pump, the burden is on the violator to show that it
is unnecessary to achieve and consistently maintain compliance. Further, even if the cost of
the extra pump were subtracted from the capital investment, annual operation and
maintenance costs might need to be increased to reflect the greater importance of maintaining
the existing pumps.
4. Cost of building second floor above treatment plant should be excluded since it is used
exclusively for purposes unrelated to compliance.
If the second floor does not support the pollution control system, then the incremental cost
of building the second floor may be subtracted from the capital investment.
Contains Enforcement-Sensitive Material HI-4 BEN Training Materials; Updated July 2002
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COMMON VIOLATOR ARGUMENTS (continued)
5. Cost of building tertian' treatment system should be excluded since only primary and
secondary treatment systems were necessary to remedy violations.
If the tertiary treatment system really was unnecessary to prevent the violations alleged in the
complaint, but rather is necessary for achieving compliance with future standards, then
subtract its cost from the capital investment. Recall that the capital investment should reflect
the pollution control system that was necessary to remedy the violations at the time and under
the conditions alleged in the complaint. The violator, however, must convince EPA that the
additional cost is truly unrelated to remedying the violations alleged in the complaint.
6. No additional labor is necessary to operate new pollution control system, since existing
employees operating old system will operate it.
If the existing employees were operating an old pollution control system replaced by the new
system, then this claim may be correct. Presumably the total labor costs associated with the
old pollution control system (replaced by the new system) are less than or equal to the labor
costs for the new system. If the new system is more efficient to operate, even less labor may.
be required. Your entry for annually recurring costs should reflect this and can even be
negative.
7. Labor costs for new system are really zero because we are reassigning workers from another
part of plant; thus, since we are not hiring additional workers to run system, we have no
incremental labor costs.
This claim is not correct since the employees who will operate the new system are not
coming from the old pollution control system that is being replaced. Rather, they are coming
from another part of the facility and the facility will be deprived of the productive work these
employees were doing. If the violator had complied on-time, it would have had to shift these
employees to pollution control and given up the work these employees otherwise would have
done somewhere else (e.g., the production line) during the period of noncompliance. This
is the concept of opportunity cost: the cost of resources for a particular use is measured by
the benefit lost in forfeiting their best alternative use.
Contains Enforcement-Sensitive Material EEI-5 BEN Training Materials; Updated July 2002
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CHARACTERIZING COMPLIANCE SCENARIOS
Under all of the following compliance scenarios, $1 million in capital equipment is required,
but the BEN inputs may vary significantly.
1. Starting Over: Violator Spends $100,000 on System that Does Not Work.
The violator should have spent $1,000,000 to install a satisfactory system, but instead spent
SI 00,000 on-time for a system that did not work. If the system did not result in compliance,
it is questionable that the system's expenditures were in fact intended for genuine
compliance. Unless some other factor is present, the correct entry for the capital investment
should be $1,000,000.
The enforcement team might find that the violator had some reasonable basis or justification
for selecting the inexpensive technology. If the violator went to a reputable firm, the firm
recommended the system that failed, and the violator's reliance on the recommendation was
reasonable, then you should offset the economic benefit by the after-tax present value of the
unsuccessful expenditure. You could use BEN to calculate this offset, although remember
that this is a case-specific judgement for the litigation team.
2. The Little System that Couldn't: System "Works, " But Is Too Small.
The violator spent 5100,000 on-time for a system that was too small to solve the pollution
problem, but the existing system can be incorporated into the final, fully sized system. The
Agency should subtract from the total required investment the $100,000 already spent; the
BEN capital investment input would be $900,000. The reason for this treatment is that the
violator gained a benefit on only the $900,000 that it did not spend, not the $100,000 it did
spend.
3. Letter Makes Better?: Same as Scenario 2, But Violator Has Letter from Government
Official Approving System.
While the violator has a reason for being out of compliance, it still had the benefit of using
the $900,000 for other purposes while it was in violation. Thus, BEN's capital investment
is still $900,000. BEN is "no-fault" in nature. Regardless of how good the violator's excuse
is, it still had the use of the $900,000 over the period of the violation. The only difference
between this and scenario 2 is the existence of an arguable approval by the regulatory agency,
but this is a legal distinction, not an economic one, possibly affecting the gravity component
of the penalty, but not the economic benefit component.
Contains Enforcement-Sensitive Material III-6 BEN Training Materials; Updated July 2002
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CHARACTERIZING COMPLIANCE SCENARIOS (continued)
4. Three Easy Pieces: Violator Complies in Stages.
The violator put part of the pollution system into operation (with actual though partial
pollution reduction) one year after the noncompliance date at a cost of $200,000. One year
later (and two years after the noncompliance date), the violator will put a second piece of the
system costing $300,000 into operation (which will result in additional pollution reduction).
Three years later the entire system will be in operation, and the final piece will cost
$500,000.
If on-time compliance could have been achieved in one stage instead of three, create three
separate BEN runs, each with the same noncompliance date:
$200,000 capital investment, and a one-year period of noncompliance;
$300,000 capital investment, and a two-year period of noncompliance;
$500,000 capital investment, and a three-year period of noncompliance.
As the violator paid for each component, it was no longer delaying the purchase of that
equipment. Add the results from the three runs to determine the total economic benefit.
HYPOTHETICAL COMPLYING FIRM'S TIMELINE
(nol adjusted for inflation)
7/1/%
7/1/97
7/1/98
BEN's noncompliance date
7/1/99
Decision
to comply
on-time
Expenditures
for SI,000,000
NONCOMPLYING FIRM'S ACTUAL TIMELINE
7/1/96
7/1/97
7/1/98
BEN's compliance dates for.
Run 1 Run 2-
7/1/99
7/1/00
7/1/01
Run 3
7/1/02
Decision
to comply
in delayed
fashion
Expenditures
for Part A
$200,000
Expenditures
for Part B
$300,000
Expenditures
for Part C
$500,000
Contains Enforcement-Sensitive Material EtI-7 BEN Training Materials; Updated July 2002
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CHARACTERIZING COMPLIANCE SCENARIOS (continued)
5. It Ain't Over Till the Last Component Sings:
System is Operational at Conclusion of Series of Expenditures.
This is similar to scenario 4 (where the violator purchased and installed the various system
components over three years), except that here the system is put into operation only after all
of its components are installed, instead of sequentially.
If on-time compliance would have been accomplished the same way as delayed compliance,
in three separate stages (see timeline below), create one BEN run with a capital investment
of $1,000,000 and a three-year noncompliance period. For both on-time and delayed
compliance, three years are necessary to comply, and therefore if the violator had complied
on time it would have needed to start three years before the compliance date.
HYPOTHETICAL COMPLYING FIRM S TIMELINE
(not adjusted for inflation)
7/1/96
7/1/97
7/1/98
BEN's noncompliance date
7/1/99
Decision
to comply
on-time
Expenditures
for Part A
S200.000
Expenditures
for Part B
S300.000
Expenditures
for Part C
S500.000
Svstcm on-line
NONCOMPLYING FIRM'S ACTUAL TIMELINE
7/1/96
7/1/97
7/1/98
7/1/99
7/1/00
7/1/01
BEN's compliance date
7/1/02
Decision
to comply
in delayed
fashion
Expenditures
for Part A
S200.000
Expenditures
for Part B
$300,000
Expenditures
for Part C
S500.000
Svstem on-line
Note that BEN's calculation here is based on the simplifying assumption that all the money
was spent on a single date, i.e., the day compliance was achieved. Instead, you could create
three separate BEN runs, with different noncompliance and compliance dates (yet hence the
same-length noncompliance period). This approach will yield a slightly higher BEN result,
although the additional complexity may not be worth the additional accuracy (especially if
the noncompliance period is long relative to the period over which the actual expenditures
were incurred).
Contains Enforcement-Sensitive Material ffi-8 BEN Training Materials; Updated July 2002
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CHARACTERIZING COMPLIANCE SCENARIOS (continued)
6. The "Lessor" of Two Evils: Pollution Control Equipment Will Be Leased, Not Purchased.
The violator is actually leasing the equipment it needs to comply for SI25,000 per year.
Rather than entering the $1,000,000 as a capital cost, you should enter a zero for capital
investment and $125,000 as an annually recurring cost.
7. "True" Confessions: Compliance is "Cheaper" than Noncompliance.
The violator comes into compliance late and finds that it has been saving money since it
installed the new technology. This may occur because the compliant technology allows the
violator to recover materials and/or reduce operation and maintenance costs. BEN produces
a negative result, seemingly confirming that the violator would have been better off had it
complied on-time.
Other factors may have caused the violator to delay compliance, or perhaps the violator was
unaware not only of the potential cost savings from compliance but also the status of its
noncompliance.
Be wary of such negative economic benefit results! For example, the violator might have felt
that the new processes and technology needed to comply would have adversely affected its
product quality. In that case, the violator probably realized an economic benefit from not
having its product quality adversely affected by the compliant technology. This constitutes
illegal competitive advantage, and typically requires additional research into the alternative
compliance scenarios and their financial impacts.
Even if the economic benefit really is negative, the enforcement team should carefully
consider the appropriate gravity component of the penalty, since the violations might still be
serious, despite the lack of economic gain to the violator.
Contains Enforcement-Sensitive Material HI-9 BEN Training Materials; Updated July 2002
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ILLEGAL COMPETITIVE ADVANTAGE
Although BEN does not calculate the economic benefit from illegal competitive advantage,
it does ask certain questions concerning its possible presence.
Below are the questions that BEN asks, along with the responses that appear in BEN's results
if you answer affirmatively.
1. Did noncompliance create a cost advantage that allowed market share gain?
Detailed examination is necessary, first of supposed cost advantage and causation, and then
of actual financial impact.
2. Did violator sell prohibited products/services that no additional costs could have made
legal?
Determine after-tax profit from illegal sales.
3. Did noncompliance allow start of production/sales earlier than under hypothetical
compliance?
Examine net after-tax cash flows realized from earlier-than-permissible production/sales.
4. Would permit have affected operations so significantly as to alter gross revenues?
Examine net after-tax cash flow impact from modifications to operations.
5. Did compliance *require* a reduction in throughput/output?
Determine after-tax profit from incremental production.
If you answer affirmatively to any of these questions, further research and analysis is
necessary to determine the full extent of the violator's economic benefit.
You might wish to consult U.S. EPA's guidance on illegal competitive advantage, or contact
EPA's enforcement economics support helpline, at 888-ECONSPT (326-6778).
Contains Enforcement-Sensitive Material HI-10 BEN Training Materials; Updated July 2002
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TRIAL PREPARATION
Expert Witness whether in-house employee or outside consultant presents analysis of
benefit, with calculations using whatever analytical tool expert thinks is appropriate (e.g.,
BEN, computer spreadsheets, calculator).
Many cases may involve complex compliance scenarios for which customized
computer spreadsheets more flexible than BEN are necessary, other cases may
involve very simple calculations that can be presented in an even more streamlined
format than BEN, while some cases may be perfectly amenable to BEN.
If BEN model is used to calculate economic benefit, person who ran BEN should be
the testifying expert if and only if that person can explain it to judge and handle
cross-examination.
Focus trial preparation on key differences between defendant's analysis and
enforcement agency's.
While you are still in negotiation, obtain necessary documents to support benefit
analysis at trial if you wait until after settlement fails to begin discovery, then ycu
will probably not have enough time to obtain documents you need.
Attorney who is handling the expert witness must understand the underlying financial
theory:
Judges need to see that you truly understand the finance issues, and can tell
when all you are doing is merely asking scripted questions and receiving
scripted answers.
You need to able to rehabilitate your expert if defendant's counsel shakes his
or her testimony.
You need to effectively cross examine the opposing expert witness, many of
whom are vulnerable.
Consider using the rule of thumb approach, presented at the end of this section, if the
benefit component is very small (under $10,000) and the other side does not have an
expert witness.
Contains Enforcement-Sensitive Material III-11 BEN Training Materials; Updated July 2002
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RULE OF THUMB BENEFIT CALCULATION MODEL
Only use this when the following criteria are met:
Violator is not using an expert witness.
The benefit is relatively small (probably under $10,000 or if the benefit represents
only 10% of the entire penalty).
Advantages
You can have anyone present the calculation as long as they can explain it clearly.
Remember that reasonable "approximations will suffice" in Clean Water Act cases,
and perhaps others.
Presents the trier of fact with a fairly simple calculation, and should conserve trial
time and enforcement resources.
Presents a conservative calculation of benefit as it understates benefit (in comparison
with BEN) in almost all typical cases.
Rule of Thumb has actually been around since 1984 (contained in Framework
document).
Contains Enforcement-Sensitive Material HI-12 BEN Training Materials; Updated July 2002
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2/22/01 Draft: Predecisional and En forcement Sensitive, not Subject to FOIA Release
Explanation of Rule of Thumb Calculation
EPA established the economic benefit recapture requirement in its Policy on Civil Penalties
and the accompanying document, A Framework for Statute-Specific Approaches to Penalty
Assessments. These 1984 policies were codified in the General Enforcement Policy Compendium
as P.T. 1-1 and P.T. 1-2, respectively. On pages 7-8, the Framework document presents a simple
formula for calculating the economic benefit from delayed expenditures, and on page 9, the
Framework document presents a simple formula for calculating the benefit from avoided
expenditures. Both of these formulae are contained in the Rule of Thumb Economic Benefit
Spreadsheet. A sample analysis using that Spreadsheet is attached. The following presents some
guidance in using the Spreadsheet.
Operation of the Rule of Thumb Spreadsheet
All you will need to use this Spreadsheet are the costs avoided and/or delayed, the amount
of time the entity was in violation, and the combined Federal and State tax rate from the State where
the violating facility is located. This information is available from the BEN model, but if for some
reason that information is unavailable, the user can use 39.5% as the tax rate as it is an average of
all combined Federal and State tax rates. The tax rate needs to be entered as a decimal (e.g. 39.5%
would be entered as 0.395).
Advantages of the Rule of Thumb Spreadsheet
The Spreadsheet approach has several advantages over using the BEN model. First its
simplicity allows our enforcement personnel without finance backgrounds to present a benefit
calculation in a hearing. The BEN model is somewhat complex and beyond the expertise of most
enforcement professionals to explain from the witness stand. The Spreadsheet, in contrast, could
be explained by almost all of our enforcement professionals. While this approach is not nearly as
accurate as the BEN model or the approaches we normally use at trial or hearing, it is adequate as
the standard for Clean Water Act cases for the calculation of economic benefit is a "reasonable
approximation". That standard should eventually be adopted in other media as there is no difference
between the calculation of benefit in a Clean Water Act case and a case involving TSCA, RCRA,
CAA, etc. The Rule of Thumb Spreadsheet also presents the trier of fact with a simple calculation
and should reduce hearing time and conserve litigation resources.
Contains Enforcement-Sensitive Material
m-13
BEN Training Materials; Updated July 2002
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Limitations
The Spreadsheet has some limitations. The first is, as mentioned above, it is not nearly as
accurate as the BEN model or the other approaches we normally use at trial or hearing. Because of
that, you should not use it if the respondent is using an expert witness to oppose the benefit
calculation. Although we only have to come forward with a reasonable approximation of benefit,
the Spreadsheet will probably not compare favorably with a sophisticated analysis. As a practical
matter, you should also not use the Spreadsheet if the benefit component is significant (i.e. over
SI 0,000). For a small benefit calculation, the inaccuracies are de minimis, but as the size of the
benefit increases, the inaccuracies become more significant and will substantially understate the
economic savings from noncompliance.
Comparison with BEN
The Rule of Thumb Spreadsheet will yield more conservative calculation of economic benefit
in the vast majority of cases because of the following factors:
The delayed cost calculation assumes a 5% time value of money (i.e., the discount
rate). This is nearly half of the typical discount rate in the BEN model.
The avoided cost calculation makes no adjustment for the time value of money. This
is just a straight calculation of the after-tax value of the avoided expenditures. No
attempt is made to include the benefit the violator derived from internally reinvesting
that money even at the delayed-expenditure calculation's meager 5% rate.
Some aspects of the Spreadsheet that are less conservative than the BEN model, but their
combined impact does not fully mitigate the impact of the conservative assumptions discussed
above. Just for the record those aspects are:
No adjustment is made for inflation. Inflation usually reduces economic benefit
because it makes complying late more expensive than complying on time. (I.e., the
equipment in 2001 costs more than if it had been purchased on time in 1996.)
No adjustment is made in the delayed cost calculation for taxes. Since the equipment
is depreciable, and the one-time nondepreciable expenditures are usually tax
deductible, the Spreadsheet's cost figures are higher than BEN would use. If a firm
can depreciate and/or deduct its pollution control expenditures, it can reduce the cost
of compliance, and the economic benefit from delaying compliance will be
consequently lower. The higher the firm's tax rate, the lower the economic benefit.
But for the typical delayed cost calculation, the Spreadsheet will usually be 40-50% less than
BEN. For the typical avoided cost calculation, the Spreadsheet will usually be about 15-25% less.
Contains Enforcement-Sensitive Material HI-14 BEN Training Materials; Updated July 2002
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Rule of Thumb Economic Benefit Spreadsheet
Benefit from Delayed Expenditures
Cost 5% Gain Years of NC Total
10000 500 5 2500
Benefit from Avoided Expenditures
Cost Tax Rate After Tax Cost Years of N/C Total
1000 0.405 595 5 2975
Grand Total
5475
Contains Enforcement-Sensitive Material ID-15 BEN Training Materials; Updated July 2002
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SECTION IV:
SAMPLE PROBLEMS
Contains Enforcement-Sensitive Material
BEN Training Materials; Updated July 2002
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OVERVIEW OF SAMPLE PROBLEMS
This section contains three sample problems (labeled A, B, and C).
For each sample problem, the first page provides you with a scenario and several
assignments.
The second page (on the backside of each first page) shows you the results in the form of
BEN's summary printouts for the different runs corresponding to all of that scenario's
assignments.
The third page then provides a brief explanation of the results, as well as helpful notes.
When you start a sample problem, you should first create a new file for the case (i.e., using
the "Control-N" keystroke, or choosing "New" from the file pull-down menu, just as in any
standard Windows application).
Then, for each new assignment, create a new run. You can either start a run from scratch by
typing in its name in the space under the "New Run" heading on the main screen, or by
selecting a run for a prior assignment and clicking [Copy],
If your results are off by only a small amount, some of your dates may differ slightly from
the solutions. (If you entered your dates using a nontraditional format, be sure that BEN has
interpreted your dates in the manner you intended.) The sample problems require you to
make reasonable assumptions about dates, because you may have to make similar decisions
in real cases. Be sure the violator understands the assumptions you make, and that any
changes may alter the economic benefit.
Contains Enforcement-Sensitive Material IV-1 BEN Training Materials; Updated July 2002
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BEN SAMPLE PROBLEM A: Delora's Unbelievable Dry-Cleaning Establishment
Scenario
Upon Delora Downey's birth, her father Dudley founded Delora's Unbelievable Dry-
Cleaning Establishment (DUDE), an S-Corporation, in her honor. When Dudley built DUDE, dry
cleaners did not have to meet any air emission requirements, but the VOC emissions from the dry
cleaning process became a problem as the metropolis of Vapid Valley CA continued its exponential
growth. Vapid Valley was subject to weather inversions, particularly in the winter, which intensified
air pollution problems. Unfortunately, as a result of a tragic martinizing accident in 1999, Dudley
died, leaving the business in the hands of his daughter Delora.
DUDE needed to come into compliance with EPA's new air emission standards by January
1, 2000, and by then Delora a shrewd yet corrupt businessperson had installed $50,000 worth
of equipment ostensibly for this purpose. Later that month, EPA's inspection of DUDE revealed
Clean Air Act violations. The $50,000 equipment that Delora said she had installed for compliance
seemed to have no impact upon emissions, and appeared to have been installed for other reasons.
In the ensuing negotiations, Delora agreed to comply by May 31, 2000.
Believing that EPA investigators were out of her hair, instead of investing in pollution control
equipment Delora daringly purchased state-of-the-art dry-cleaning equipment and spot-removing
devices, which more than doubled her business. During a 2001 inspection, EPA discovered Delora's
dastardly deed, and immediately began an enforcement action.
Succumbing to EPA pressure, Delora finally installed and had the required equipment
operating on August 8, 2001, spending three quarters of a million dollars on the equipment. Starting
at the same time, she also began to incur approximately $60,000 per year in operating and
maintenance expenses. The final compliance design incorporated none of Delora's older, original
"emission control" equipment. Because of Delora's negligent and defiant actions, EPA has decided
that Delora must pay a penalty. An administrative hearing was held on January 28, 2003.
Assignments
1. Calculate the economic benefit that DUDE gained as a result of noncompliance. (Assume
a penalty payment date six months after the scheduled hearing.)
2. Delora's dorky brother Darren, her accountant and lawyer, cites a document on the
equipment's associated expenses and expected life to argue that the useful life entry should
be 20 years, not BEN's 15-year standard value. Calculate the revised economic benefit.
3. Did DUDE gain any additional economic benefit through illegal competitive advantage?
Contains Enforcement-Sensitive Material IV-2 BEN Training Materials; Updated July 2002
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Run Name =
Run 1
Run 2: 20yr
Present Values as of Noncompliance Date (NCD),
01-Jan-2000
0l-Jan-2000
A) On-Time Capita! & One-Time Costs
$619,413
5572,673
B) Delay Capital & One-Time Costs
S539.90S
5499,165
C) Avoided Annually Recurring Costs
S47.998
S47.998
D) Initial Economic Benefit (A-B+C)
SI 27,503
SI 21,505
E) Final Econ. Ben. at Penalty Payment Date,
28-Jul-2003
SI 83,926
5175,274
Ec. ben. from illegal competitive advantage
may also be present: see detailed printouts.
For-Profit (not C-Corp ) w/ CA tax rates
Discount/Compound Rate
10.8%
10.8%
Discount/Compound Rate Calculated By.
BEN
BEN
Compliance Date
08-Aug-2001
08-Aug-2001
Capital Investment-
Cost Estimate
5750,000
S750,000
Cost Estimate Date
08-Aug-200!
08-Aug-2001
Cost Index for Inflation
PCI
PCI
H of Replacement Cycles; Useful Life
1; 15
1; 20
Projected Rate for Future Inflation
N/A
N/A
One-Time, Nondepreciable Expenditure.
Cost Estimate
SO
SO
Cost Estimate Date
N/A
N/A
Cost Index for Inflation
N/A
N/A
Tax Deductible?
N/A
N/A
Annually Recurring Costs:
Cost Estimate
S60,000
560,000
Cost Estimate Date
OS-Aug-2001
08-Aug-2001
Cost Index for Inflation
PCI
PCI
User-Customized Specific Cost Estimates
N/A
N/A
On-Time Compliance Capital Investment
Delay Compliance Capital Investment
On-Time Compliance Replacement Capital
Delay Compliance Replacement Capital
On-Time Compliance Nondepreciable
Delay Compliance Nondepreciable
Contains Enforcement-Sensitive Material IV-3 BEN Training Materials; Updated July 2002
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BEN SAMPLE PROBLEM A: Delora's Unbelievable Dry-Cleaning Establishment
Solutions
1. DUDE's calculated economic benefit of noncompliance with the Clean Air Act requirements
is $183,926. You should not give Delora credit for her initial "pollution control"
expenditure of $50,000, because it appears unrelated to compliance.
2. The new economic benefit is $175,274 assuming a useful life of the pollution control
equipment equal to 20 years. A longer useful life reduces the economic benefit, all other
assumptions held constant.
3. Conditions for illegal competitive advantage might conceivably exist, since Delora managed
to double her business while in noncompliance. Then again, even had Delora complied, she
probably could have purchased the state-of-the-art devices anyway, and still doubled her
business. All Delora need demonstrate is that state-of-the-art devices do not interfere with
pollution control compliance. The doubling of her business does illustrate the handsome
rate of return on alternatives to investing in pollution control equipment and thus
underscores the need to apply a company's WACC to its cash flows in economic benefit
calculations, reflecting the opportunity cost of alternative investments.
Notes
For the case inputs, change the default "C-Corporation" to "For-Profit Other than (In-
corporation." The penalty payment date is normally subject to your judgment (see Section HI), but
this assignment has you assume six months after the scheduled hearing.
The $750,000 is for equipment, and any such equipment that wears out over time is a capital
investment. (You would want to follow up with Delora to verify that the $750,000 estimate includes
all installation and design costs.) We can accept BEN's default assumption of a future replacement
cycle, because we can anticipate that when it wears out, Delora will have to replace it. The $60,000
for operation and maintenance of the equipment is an annually recurring cost.
The noncompliance date is January 1, 2000, since the new air emission standards took effect
then, and an EPA inspection later that same month discovered the noncompliance. In many cases,
however, actual inspections might not have found the violations until even years after the regulations
first took effect. If so, an aggressive initial assumption for the noncompliance date might be when
the regulations first took effect, but be aware of evidentiary concerns.
The correct compliance date is August 8,2001. If you thought May 31, 2000, was the correct
date, the scenario states that Delora only "agreed" to comply by that date. She did not actually
comply until August of the following year. (Although this "missed" compliance date is not relevant
to economic benefit, it may have an impact on gravity.)
Contains Enforcement-Sensitive Material IV-4 BEN Training Materials; Updated July 2002
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BEN SAMPLE PROBLEM B: Kryptonite Chemical, Inc.
Scenario
Kryptonite Chemical, Inc., a publicly traded company and producer of chemical deterrents
located in Metropolis NY, dumped 300 barrels of hazardous waste in the forest behind the plant.
Majority shareholder and manager, Lex Luthor, thus avoided the huge expense charged by licensed
waste disposal firms. In turn, Luthor planned to invest this savings in research and development for
his new "Legion of Doom" product line.
Clark Kent, a member of the local environmental society called "Unknown Writers Insulted
by Messy Pollution" (U-WIMP), uncovered Luthor's offense. U-WIMP reported Luthor's violation
to EPA. Upon inspection, EPA determined that Kryptonite violated the Resource Conservation and
Recovery Act because it improperly disposed of the barrels.
After meeting with Luthor's lawyer, Snidely Whiplash, you determine that the improper
disposal occurred in the middle of January of 2001. Your waste disposal consultant, Dr. David
Banner, estimates that it would have cost Kryptonite $1,'000 per barrel to transport and dispose of
the waste properly back in January 2001. (Fortunately, no hazardous waste has leaked from the
barrels.) Luthor agrees to comply by the beginning of December 2002, and to make the penalty
payment one month later.
Assignments
1. Calculate the economic benefit that Kryptonite Chemical, Inc. gained as a result of delaying
proper disposal of the barrels.
2. The Kryptonite employee who dumped the waste in the forest, Joe Lackey, informs you that
he dumped only half of the hazardous waste barrels in January of 2002, and the other half a
year earlier. Once you have arranged with the FBI for Joe to enter the Witness Protection
Program, calculate the revised economic benefit.
3. During another round of settlement negotiations, Luthor's consultant, Bill Owerly, informs
you that Kryptonite has recently filed for Chapter 11 bankruptcy protection. Mr. Owerly
argues that Kryptonite therefore no longer has gained any economic benefit. Do you agree?
4. Luthor is so upset at your response to Owerly's argument that he not only terminates his
contract with Owerly, but also vows never to comply. Calculate the revised economic
benefit.
Contains Enforcement-Sensitive Material IV-5 BEN Training Materials; Updated July 2002
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Run Name =
Run 1
Run 2a: 2000
Run 2b: 2001
Run 4a: 2000
Run 4b: 2001
Present Values as of Noncompliance Date (NCD),
15-Jan-2001
15-Jan-2000
15-Jan-2001
15-Jan-2000
15-Jan-2001
A) On-Time Capital & One-Time Costs
5177,300
SS7,168
588,650
S87,168
588,650
B) Delay Capital & One-Time Costs
5150,805
S67,973
S75,403
so
SO
C) Avoided Annually Recurring Costs
SO
SO
SO
SO
SO
D) Initial Economic Benefit (A-B+C)
S26.495
S19,196
S13,247
SS7,16S
$88,650
E) Final Econ. Ben. at Penalty Payment Date,
01-Jan-2003
532,456
526,086
516,228
5118,455
$108,597
C-Corporalion w/ NY lax rales
Discount/Compound Rate
10 9%
10.9%
10 9%
10.9%
10 9%
Discount/Compound Rate Calculated By:
BEN
BEN
BEN
BEN
BEN
Compliance Date
01-Dec-2002
01-Dec-2002
01-Dec-2002
01-Dec-2002
01-Dec-2002
Capital Investment
Cost Estimate
so
SO
SO
SO
SO
Cost Estimate Date
N/A
N/A
N/A
N/A
N/A
Cost Index for Inflation
N/A
N/A
N/A
N/A
N/A
# of Replacement Cycles, Useful Life
N/A; N/A
N/A; N/A
N/A, N/A
N/A; N/A
N/A; N/A
Projected Rate for Future Inflation
N/A
N/A
N/A
N/A
N/A
One-Time, Nondepreciable Expenditure:
avoided
avoided
Cost Estimate
S300,000
SI 50,000
SI 50,000
SI 50,000
5150,000
Cost Estimate Date
15-Jan-200I
15-Jan-2001
15-Jan-2001
15-Jan-2001
15-Jan-200I
Cost Index for Inflation
PCI
PCI
PCI
PCI
PCI
Tax Deductible''
Y
Y
Y
Y
Y
Annually Recurring Costs'
Cost Estimate
SO
50
50
SO
SO
Cost Estimate Date
N/A
N/A
N/A
N/A
N/A
Cost Index for Inflation
N/A
N/A
N/A
N/A
N/A
User-Customized Specific Cost Estimates:
N/A
N/A
N/A
N/A
N/A
On-Time Compliance Capital Investment
Delay Compliance Capital Investment
On-Time Compliance Replacement Capital
Delay Compliance Replacement Capital
On-Time Compliance Nondepreciable
Delay Compliance Nondepreciable
Contains Enforcement-Sensitive Material IV-6 BEN Training Materials; Updated July 2002
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BEN SAMPLE PROBLEM B: Kryptonite Chemical, Inc.
Solutions
1. Kryptonite Chemical, Inc. 's economic benefit is $32,456.
2. The new economic benefit result is $42,314, representing the sum of two separate BEN runs
for the two separate waste dumping violations: the economic benefit from the waste dumped
in January 2000 is $26,086 and for January 2001 is $16,228.
3. The proceedings have no effect on economic benefit, but do raise an ability-to-pay issue.
4. The economic benefit is now a significantly higher $227,052 ($118,455 + $108,597), since
the disposal costs would be avoided, instead of merely delayed.
Notes
Although the actual noncompliant actions lasted at most only two months January 2000
and January 2001 we tell BEN that the noncompliant condition lasted until the proper disposal,
since the compliance costs were delayed until December 2002. While BEN's use of "noncompliance
date" and "compliance date" is usually in sync with legal dates, in this case it is not. Remember, the
key is to determine what the violator saved, which in this case is based on delaying the cleanup.
All the costs are one-time nondepreciable expenditures. The violator is not buying any
equipment. Nor are these costs annually recurring: if the violator performs the disposal correctly,
the violator will never have to incur the expenditures again. They are tax deductible (typically only
land is not deductible), regardless of the violator's reprehensible delay in spending them. Remember
that the BEN model seeks only to measure the gain to the violator, hence the calculations are no-fault
in nature and amoral. If a cost is legally tax deductible according to the IRS, then we must consider
it so (e.g., the Exxon Valdez oil spill cleanup was 100-percent deductible).
In situations with significant differences in violation periods, such as the second assignment,
you must separate the costs into different runs. Here half the barrels were dumped in January 2000
and half in January 2001. The other dates remain the same. The total economic benefit is the sum
of the two runs. The second run is less than the first because the violator had the use of the money
one year less than in the first set of barrels.
The fourth assignment also requires two runs, but on the options screen you need to uncheck
the "Delayed, Not Avoided" box for the one-time nondepreciable expenditure. This reflects the fact
that Kryptonite is now avoiding the costs of disposal entirely, rather than delaying them. Although
BEN still requires a compliance date, it has no impact upon the result.
Contains Enforcement-Sensitive Material IV-7 BEN Training Materials; Updated July 2002
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BEN SAMPLE PROBLEM C: Town of Colaville
Scenario
Colaville is a small town whose primary employer is a local soft drink producer, Crazy Cola,
Inc. Colaville's only water source is the Caffeine River. In February of 2001, Howard Cunningham
and his family moved to Colaville to open a new hardware store. Howard, one of the very few
Colaville residents not employed by the cola plant, did not receive the benefits of free cola that his
undercompensated peers did. Thus, the Cunninghams drank tap water.
They quickly discovered that the tap water was discolored and tasted unusual. Colaville's
small population had become so reliant on Crazy Cola for their drinking needs that they neglected
to notice any defects in the town's drinking water. Upon investigation, EPA officials found that
Colaville was in violation of Safe Drinking Water Act requirements dating back to at least March
1,2000.
An engineering firm, Potsie Technologies, estimated in an August 8, 2001 report that the
necessary water treatment plant will cost $2 million. Additionally, it reports that annual costs to
maintain the equipment will be SI85,000.
After many long, drawn-out meetings with the Colaville Town Council (and a case of the
"shakes" from drinking too much Crazy Cola), you agree that Colaville can comply by the beginning
of March 2004, with the penalty due a year earlier.
Assignments
1. Calculate the economic benefit that Colaville gained from its noncompliance.
2. After reviewing your preliminary analysis, Potsie points out that BEN's default Plant Cost
Index (PCI) might not be an accurate measure of inflationary trends for the large structures
necessary for the treatment plant. Instead he suggests the Building Cost Index (BCI),
although for the annually recurring costs he concedes the PCI still might be the most
appropriate index. Calculate the revised economic benefit.
3. The Colaville Town Council, upon consultation with a productivity consultant, Dr. Arthur
Fonzarelli, learns that the residents of Colaville have become inefficient workers as a result
of widespread insomnia. He reasons that this problem has resulted from the Colaville
residents' massive intakes of caffeine associated with Crazy Cola. Dr. Fonzarelli notes that
upon the availability of safe drinking water, the workforce will consume much less caffeine
and provide more efficient labor. This increase in productivity will reduce the treatment
plant's projected annual O&M costs by $25,000 (relative to the Potsie Technologies report).
Calculate the revised economic benefit.
Contains Enforcement-Sensitive Material IV-8 BEN Training Materials; Updated July 2002
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Run Name =
Run 1
Run 2: BCI
Run 2: O&M;
Present Values as of Noncompliance Date (NCD),
01-Mar-2000
01-Mar-2000
01-Mar-2000
A) On-Time Capital & One-Time Costs
S3,144,745
S3,199,195
S3,199,195
B) Delay Capital & One-Time Costs
S2,756,761
S2,848,876
S2,848.876
C) Avoided Annually Recurring Costs
5677,622
S677.622
S586,051
D) Initial Economic Benefit (A-B+C)
SI,065,605
SI,027,940
S936,370
E) Final Econ. Ben. at Penalty Payment Date,
01-Mar-2003
51,237,099
51,193,373
51,087,065
Not-For-Profil, which pays no taxes
Discount/Compound Rate
5.3%
5.3%
5.3%
Discount/Compound Rate Calculated By.
BEN
BEN
BEN
Compliance Date
01-Mar-2004
01-Mar-2004
01-Mar-2004
Capital Investment1
Cost Estimate
52,000,000
$2,000,000
52,000,000
Cost Estimate Date
08-Aug-2000
08-Aug-2001
08-Aug-2001
Cost Index for Inflation
PCI
BCI
BCI
# of Replacement Cycles, Useful Life
1, 15
1; 15
l; 15
Projected Rate for Future Inflation
N/A
N/A
N/A
One-Time, Nondepreciable Expenditure.
Cost Estimate
SO
SO
SO
Cost Estimate Date
N/A
N/A
N/A
Cost Index for Inflation
N/A
N/A
N/A
Tax Deductible'7
N/A
N/A
N/A
Annually Recurring Costs
Cost Estimate
S185,000
SI 85,000
SI 60,000
Cost Estimate Date
08-Aug-2001
08-Aug-2001
08-Aug-2001
Cost Index for Inflation
PCI
PCI
PCI
User-Customized Specific Cost Estimates:
N/A
N/A
N/A
On-Time Compliance Capital Investment
Delay Compliance Capital Investment
On-Time Compliance Replacement Capital
Delay Compliance Replacement Capital
On-Time Compliance Nondepreciable
Delay Compliance Nondepreciable
Contains Enforcement-Sensitive Material IV-9 BEN Training Materials; Updated July 2002
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BEN SAMPLE PROBLEM C: Town of Colaville
Solutions
1. Colaville gained an economic benefit of $1,237,099from noncompliance.
2. Using the Building Cost Index (instead of the default Plant Cost Index) for the capital
investment, Colaville's economic benefit is $1,193,373.
3. Taking into account the reduction of annually recurring costs by $25,000 (and keeping the
Building Cost Index for the capital investment), Colaville's economic benefit is $1,087,065.
Notes
Make sure you have specified the "not-for-profit" status, although the state does not matter
(since the tax rate will be zero regardless of the state location).
The $2 million is a capital investment as it will eventually wear out. And since it will be
replaced, you can accept BEN's default of a future replacement cycle.
The operation and maintenance cost is annually recurring.
For the third assignment, be sure to subtract the incremental savings in annually recurring
costs from the original entry in the first assignment (i.e., subtract $25,000 from $185,000). You
could even enter a negative number if the new equipment allowed the violator to spend less on
annually recurring costs than before.
Contains Enforcement-Sensitive Material
IV-10
BEN Training Materials; Updated July 2002
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