EPA Should Update Its Enforcement-Related Economic Tools and Civil Penalty Policies

Most people have never heard of EPA’s “BEN,” “ABEL,” and “PROJECT” models and really don’t care to know anything about them. But if your company is accused of violating environmental requirements, you might want to have a crash course on how EPA calculates environmental civil penalties or at least an updated manual that you can consult prior to entering into penalty negotiations with EPA.

However, during the last eight years, EPA has not updated any of its statute-specific civil penalty policies, some of which go back to 1984 and others were modified no more recently than in 1995. During the subsequent years, EPA issued policy pronouncements that modified aspects of these pre-existing statute-specific policies. The various documents are not codified in one place, so it is easy for the regulated community and outside counsel to be unaware of the existence individual policy statements.

Similarly, since various dates early in this decade, EPA has not issued an update of the “user manuals” that were intended to explain various aspects of BEN, ABEL, and PROJECT -- the key economic models that EPA uses in determining civil penalty settlement amounts. However, since that time, EPA has modified some major aspects of BEN (e.g., how the so-called “equipment replacement cycle” is calculated) and should now explain these changes to the general public so that their reasonableness may be assessed. EPA should also now be in a good position to clarify the appropriate tax treatment for Superfund cleanup expenditures in ABEL’s ability-to-pay calculations, which was left murky in the April 2003 version of the ABEL User’s Manual. The absence of updated manuals creates the potential for unnecessary confusion, disagreements, and conflict.

Issuing updated manuals and statute-specific civil penalty policies will probably not be an early, high priority for the new political leadership of EPA. However, BEN, ABEL, PROJECT, and EPA’s statute-specific civil penalty policies will probably be used much more often during the next four years than they were during the past eight. Hopefully, the new Administration will recognize the value of updating the documents identified above, thereby making EPA’s enforcement program more transparent and easier for the regulated community to work with and to understand. Doing so may also reduce the potential contentiousness that might otherwise result from a reinvigorated enforcement program during the foreseeable future.

Decision Analysis to Estimate Cleanup Value Under FASB 141-R

The following is excerpted from an article titled, "Accounting Changes For Contingent Losses: An Environmental Perspective" by J.D. Kern and Marc Faecher of TRC Companies, Inc. that appears in the October 2008 issue of The Metropolitan Corporate Counsel:

There is much recent controversy over the proposed changes to Financial Accounting Standards Board (FASB) 5 (Accounting for Contingent Losses) and FASB 141-R (Business Combinations [such as M&A transactions and asset sales]) that has resulted in a battle, pitting companies that must report financial results versus their shareholders, potential investors and stakeholders. The controversy surrounds a proposed increase in disclosure requirements in the context of litigation and how transparent financial reporting may adversely impact the outcome of that litigation. Nowhere is evidence of this struggle better highlighted than in the reporting of environmental liabilities that are often variable, difficult to quantify and subject to varying interpretation.

Of particular interest is FASB 141-R (Accounting Rules for Mergers and Acquisitions) that is already promulgated and becomes effective as part of GAAP for contingent (e.g., environmental) liabilities on November 15, 2008. This standard replaces the "probable and reasonably estimable" criteria under FAS 5 with more stringent standards that require fair value recognition of all contingencies that "more likely than not" give rise to a liability as of the date of the business combination transaction. In simplest terms, this change in GAAP is likely to result in more recognized liabilities and higher estimates/values than ever before. The following recognition and valuation criteria under FASB 141-R as contrasted to FASB 5/AICPA SOP 96-1 follow below:

Valuation Criteria
FASB 5/AICPA SOP 96-1 (Lower Cleanup Values Reported): Cleanup obligations were typically valued at "best estimate" - the one amount within a range that is better than any other (See "most likely value" in ASTM 2137). However, when no amount within range is better than any other, FIN 14 allows the use of a minimum amount, thus creating a "loophole" for companies to underaccrue. Cutting the other direction (towards larger accruals), time value of money discounting is not allowed unless timing and amount of payment are "fixed and determinable."

Compared To:

FASB 141-R (Higher Cleanup Values Reported): Cleanup obligations are to be reported at "market-based" fair value. FASB 157 provides details on the fair value methodology. In general, the most reliable estimate of fair value is measured by the value that a third party would place on the assumption of the cleanup obligation in an arms-length transaction. The lowest acceptable level of fair value measurement is that derived from an expected value analysis (probabilistic methodology using decision tree analysis and Monte Carlo Simulation) that considers better and worst cases in addition to the most likely case to establish a more realistic value for the cleanup obligation and in essence assigns a probability-weighted value based on a range of values. This valuation methodology considers all "life-cycle" costs to mitigate a cleanup obligation such as: overhead, vendor profit and market risk premium.

The recognition and valuation requirements of FASB 141-R are going to result in new and more extensive due diligence requirements, development of new valuation models and practices, training of due diligence teams and valuation experts.

Read the full article here.

Introduction

The Seneca Economics and Environmental Management Network is a network of independent consultants who share an interest in solving environmentally-related challenges. Each of us has spent between fifteen and thirty years working on relevant issues, including time spent as employees of or consultants to various federal agencies, including the U.S. Environmental Protection Agency, the Department of Defense, and the Department of Justice.

Each also has been an effective provider of consulting and expert witness services to private sector clients, including major law firms and corporations. Given our strong analytic backgrounds and the breadth of our combined experience, we believe our network provides a cost-effective way of locating expertise that is not readily available in an existing consulting firm.

We work as individuals and are available to work together in subgroups or with other highly qualified consultants on specific engagements. Our expertise covers many substantive areas.

We have started this blog as a forum for discussion - welcome!