February 04, 2016
EPA Settlement Triggers Rulemakings On New CERCLA Financial Assurance Requirements For The Mining, Petroleum, Electricity, And Chemical Industries
By Mercury Strategies

When the Comprehensive Environmental Response Compensation and Liability Act of 1980 (“CERCLA”) was passed, the U.S. Environmental Protection Agency (“EPA”) was supposed to issue rules to make sure that companies in industries most likely to be found responsible for cleaning up contaminated sites would always maintain the financial ability to pay for a remediation. Over 35 years later, EPA has yet to promulgate regulations for any industry class. That is about to change.

On January 29, 2016 the D.C. Circuit in In re Idaho Conservation League, et al., Civ. No. 14-1149 approved a settlement between the EPA and a group of environmental organizations that requires EPA to move forward with CERCLA financial assurance rulemakings for the hardrock mining industry. EPA determinations for petroleum and coal products manufacturing, electric power generation, transmission, and redistribution, and chemical manufacturing will quickly follow. This first set of administrative proceedings will set the stage for additional rulemakings on the issue. They will focus on insulating the presumptive need to address future contamination from the effects of corporate bankruptcy, insolvency, and financial restructuring. Depending on the outcome of these rulemakings, and due to their precedential impact, the cost of doing business in a variety of industries involving hazardous substances may be heading higher.

Section 108(b) of CERCLA, 42 U.S.C. § 9608(b), requires EPA to promulgate regulations requiring that “classes of facilities establish and maintain evidence of financial responsibility consistent with the degree and duration of risk associated with the production, transportation, treatment, storage, or disposal of hazardous substances.” Otherwise stated, the statue requires EPA to first identify those industries most likely to create serious risks to the environment, and then set financial security requirements for classes of participants in those industries.

A number of years before the current settlement, EPA set out the factors it would use to determine which industries would be subject to financial assurance requirements. Those factors appear in a 2009 priority notice of action addressing the hardrock mining industry. See 74 Fed. Reg. 37,213 (July 28, 2009). EPA used the same factors in its advanced notice of proposed rulemaking concerning financial assurance for the petroleum, electrical, and chemical industries. See 75 Fed. Reg. 816 (Jan. 10, 2010). However, EPA did not follow up on these early notices and environmentalists brought the above captioned case to prompt further action.

EPA has not yet specified how it will determine the nature and scope of financial assurance required once it has identified a particular industry. The framework for those matters will be the subject of the upcoming rulemakings. However, financial assurance mechanisms have long been in place under the Resource Conservation and Recovery Act (“RCRA”) for those seeking a permit to own or operate a hazardous waste transportation, storage, and disposal facility. Those mechanisms help ensure that RCRA permitted facilities are eventually closed properly. Individual states also require a showing of financial responsibility as a condition to issuing various kinds of environmental permits. Moreover, EPA has employed financial assurance requirements under CERCLA in its settlement agreements and administrative cleanup orders. EPA’s recent guidance documents in that context provide an indication of the direction EPA is likely to take in the upcoming rulemakings. See, e.g., Guidance on Financial Assurance in Superfund Settlement Agreements and Unilateral Administrative Orders, U.S. EPA OECA (April 6, 2015).

The upcoming rulemakings under Section 108(b) of CERCLA will put financial assurance requirements in place for companies which seek no permit where EPA determines there is the substantial risk of costly contamination, as opposed to the presence of any actual contamination. Although EPA has previously employed financial assurances under CERCLA where there has already been a release of hazardous substances, under those circumstances the responsible parties have been identified, and the scope and nature of the cleanup has been determined. The current rulemakings will be a different exercise. They will require EPA to identify the risk and probability of future exposure to hazardous substances, the scope and cost of potential response work based upon the severity of consequences from a release or threatened release of hazardous substances, and the prevalent corporate structure and financial strength of industry participants.

There are a variety of financial assurance mechanisms available. These include trust funds, surety bonds, standby letters of credit, insurance, parent corporate guarantees, and financial stress tests. While the various forms provide some flexibility, they generally require that a company have sufficient assets either set aside or readily available to respond to some unknown event that may or may not take place.

Due to the joint and several nature of liability under CERCLA, and the substantial costs of remediation, the capital requirements necessary to satisfy these financial assurance requirements could be high. Much will depend upon the analytical framework developed by EPA in the course of the rulemakings. Moreover, because EPA has determined that the industry classes it is focusing on first are the ones with the highest risk of exposure and potential cost, those industries likely will be subject to the most stringent requirements. Industry members, financial backers, and environmentalists would be wise to track these resurrected administrative proceedings closely.