Perspectives on EPA Treatment of Ability-to-Pay Cases

In my blog of April 10, 2009, I stated that my article "Perspectives on the U.S. Environmental Protection Agency's Treatment of Ability-to-Pay Cases" would soon be available through the Seneca Economics and Environmental Management website (www.seneca-environmental.com). The article, which was published in the April 2009 issue of Environmental Liability, Enforcement & Penalties Reporter, a monthly publication of Argent Communications Group, can now be viewed by simply clicking on the title of this blog.

The article is reproduced on the Seneca website with the specific permission of Argent Communications Group for this purpose only. It therefore should not be copied or duplicated for any reason.

Although the article focuses primarily on issues arising in the context of the use of EPA's ABEL and MUNIPAY models, in recent months, I worked on multiple cases involving the use of EPA's INDIPAY model. As a result, I have developed insights into how EPA treats individuals' ability-to-pay claims through the use of INDIPAY.

Needless to say, I have specific concerns about the structure, assumptions, and use of the ABEL, MUNIPAY, and INDIPAY models by EPA's litigation teams. Simply put, in addition to each of these models having specific flaws, each model is essentially a static model that projects future cash flows on the basis of historic cash flows. What is really needed is a dynamic analysis that shows the levels of free cash flows that are likely to be generated in the future, particularly given the changes in a company, municipality, or individual's circumstances.

EPA tends to use these models for its own purpose, which is to show that most corporations, municipalities, and individuals can afford to pay environmental penalties and/or to make contributions to CERLCA cleanup costs, rather than to dispassionately determine whether doing so would fundamentally damage or harm the private or municipal entity or the individual making the claim. Although it is logical for EPA to place the burden of proof on the entity or individual claiming the ability-to-pay problem, more even-handed conclusions would probably be reached if the decision-making was performed by an impartial third party, such as an EPA administrative law judge (ALJ) or a U.S. District Court.

Few ability-to-pay cases ever get adjudicated by EPA ALJs. And when they are brought before an EPA ALJ, most defendants making an ability-to-pay defense are too resource-constrained to pay for the expert witness support that they truly need to convince a judge. Without the defendant putting on expert testimony to support its financial claims, defendants in ability-to-pay cases operate at a significant disadvantage because EPA does not face similar financial constraints in this context. EPA tends to hire outside financial "experts" to support its contentions and interpretations of modeling results.

What should an ability-to-pay claimant do to avoid this trap?
- Seek needed expert assistance well ahead of any trial date.
- Obtain enough expert assistance to determine whether the defendant has a plausible case to make or whether it simply has an aversion to paying civil penalties and/or cleanup costs.
- When the defendant has a legitimate ability-to-pay argument, it should try to negotiate a realistic settlement with EPA.
- Whether the defendant is in a judicial or an administrative case, the party should not proceed to trial unless it believes it can provide enough analytical support to convince an impartial arbiter of legitimacy of its claims about the financial situation it faces now and in the immediate future. Proceeding to court without a reasonable likelihood of winning is poor strategy.