Financial Assurance Mechanisms for Corporate Owners and Operators
of Municipal Solid Waste Landfill Facilities
[Federal Register: April 10, 1998 (Volume 63, Number 69)]
[Rules and Regulations]
[Page 17706-17731]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ap98-14]
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ENVIRONMENTAL PROTECTION AGENCY
40 CFR Part 258
[FRL-5994-7]
RIN 2050-AD77
Financial Assurance Mechanisms for Corporate Owners and Operators
of Municipal Solid Waste Landfill Facilities
AGENCY: Environmental Protection Agency.
ACTION: Final rule.
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SUMMARY: The Environmental Protection Agency is amending the financial
assurance regulations under the Resource Conservation and Recovery Act
(RCRA) for owners and operators of municipal solid waste landfills.
Today's rule increases the flexibility available to owners and
operators by adding two mechanisms to those currently available: a
financial test for use by private owners and operators, and a corporate
guarantee that allows companies to guarantee the costs for another
owner or operator.
EFFECTIVE DATE: This regulation is effective April 10, 1998. This rule
provides regulatory relief by establishing additional, less costly
mechanisms for owners and operators to comply with existing financial
assurance requirements.
ADDRESSES: Supporting materials are available for viewing in the RCRA
Information Center (RIC), located at Crystal Gateway I, First Floor,
1235 Jefferson Davis Highway, Arlington, VA. The Docket Identification
Number is F-98-FTMF-FFFFF. The RIC is open from 9 a.m. to 4 p.m.,
Monday through Friday, excluding federal holidays. To review docket
materials during these hours, it is recommended that the public make an
appointment by calling 703 603-9230. The public may copy a maximum of
100 pages from any regulatory docket at no charge. Additional copies
cost $0.15/page. The docket index and some supporting materials are
available electronically. See the SUPPLEMENTARY INFORMATION section for
information on accessing them.
FOR FURTHER INFORMATION CONTACT: For general information, contact the
RCRA Hotline at 800 424-9346 or TDD 800 553-7672 (hearing impaired). In
the Washington, DC, metropolitan area, call the RCRA Hotline at 703
412-9810 or TDD 703 412-3323. You may also contact Dale Ruhter at 703
308-8192, or by electronic mail at ruhter.dale@epamail.epa.gov.
SUPPLEMENTARY INFORMATION:
Regulated entities
Entities potentially regulated by this action are private owners or
operators of municipal solid waste landfills. Regulated categories and
entities include:
------------------------------------------------------------------------
Examples of regulated
Category entities
------------------------------------------------------------------------
Industry.................................. Privately owned municipal
solid waste landfill
facilities.
Privately operated municipal
solid waste landfill
facilities.
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This table is not intended to be exhaustive, but rather provides a
guide for readers regarding entities likely to be regulated by this
action. This table lists the types of entities that EPA is now aware
could potentially be regulated by this action. Other types of entities
not listed in the table could also be regulated. To determine whether
your company is regulated by this action, you should carefully examine
the
[[Page 17707]]
applicability criteria in Secs. 258.1 and 258.70 of title 40 of the
Code of Federal Regulations. If you have questions regarding the
applicability of this action to a particular entity, consult the person
listed in the preceding FOR FURTHER INFORMATION CONTACT section.
The docket index and the following supporting materials are
available on the Internet: Comment Response Document for Financial Test
and Corporate Guarantee for Private Owners or Operators of Municipal
Solid Waste Landfill Facilities, October 12, 1994 Proposed Rule;
Description of Data Used in the Analysis of Subtitles C and D Financial
Tests; Analysis of Subtitle D Financial Tests in Response to Public
Comments; memorandum entitled Bond Ratings and Investment Grade Status;
memorandum entitled Updated Closure and Post Closure Cost Estimates for
Subtitle C; Issue Paper, Relevant Factors to Consider in a Financial
Test; Issue Paper, Recent Consolidation and Acquisitions Within the
Solid Waste Industry; Issue Paper, Issues Relating to the Bond Rating
Alternative of the Corporate Financial Test; Issue Paper, Accounting
Issues Affecting the Corporate Financial Test; Issue Paper, Domestic
Assets Requirement; Issue Paper, Reporting Timeframes; Issue Paper,
Effects of the Financial Test on the Surety Industry; Issue Paper,
Market Effects of the Financial Test; Issue Paper, Assessment of
Financial Assurance Risk of Subtitles C and D Corporate Financial Test
and Third-Party Financial Assurance Mechanisms; Issue Paper,
Performance of the Financial Test as a Predictor of Bankruptcy; Issue
Paper, Assessment of First Party Trust Funds; Issue Paper, Assessment
of Trust Fund/Surety Combination.
Follow these instructions to access the information electronically:
WWW: http://www.epa.gov/osw
FTP: ftp.epa/gov
Login: anonymous
Password: your Internet address
Files are located in /pub/OSWER.
Preamble Outline
I. Authority
II. Background
III. Summary of the Rule
A. Corporate Financial Test (Sec. 258.74(e))
1. Financial Component (Sec. 258.74(e)(1))
a. Minimum Tangible Net Worth
b. Bond Rating
c. Financial Ratios
d. Domestic Assets Requirement
2. Recordkeeping and Reporting Requirements (Sec. 258.74(e)(2))
a. Chief Financial Officer (CFO) Letter
b. Accountant's Opinion
c. Special Report From the Independent Certified Public
Accountant
d. Placement of Financial Test Documentation and Annual Updates
in the Operating Record
e. Alternate Financial Assurance
f. Current Financial Test Documentation
B. Corporate Guarantee (Sec. 258.74(g))
C. Calculation of Obligations
D. Combining the Financial Test and Corporate Guarantee With
Other Mechanisms
E. Use of Alternative Mechanisms After the Effective Date
IV. National Solid Wastes Management Association (NSWMA) Petition
A. Discussion of the Petition
B. The Meridian Test
V. State Program Approval
VI. Response to Comments and Summary of Issues
A. Minimum Tangible Net Worth
1. Minimum Tangible Net Worth Requirement Is Too Low
2. The $10 Million Net Worth Requirement Is Too Restrictive
a. The Size of Closure Obligations
b. Recognition of Closure Obligations
c. Accuracy of the Test at Lower Net Worth Levels
d. Public Costs of Lower Net Worth Levels
3. Allow Firms To Include Closure and Post Closure Funds as Part
of Net Worth
4. The Net Worth Requirement Reduces the Market for Sureties
5. Tangible Net Worth Does Not Have To Be Liquid
6. MSWLFs Should Have a Lower Minimum Net Worth Requirement Than
Subtitle C Facilities
7. EPA's Proposed Net Worth Requirement Was Not the Best
Investigated
8. The Tangible Net Worth Requirement Is Appropriate
B. Bond Ratings
C. Financial Ratios
D. Domestic Assets
E. Recordkeeping and Reporting Requirements
1. Qualified Accountant's Opinion
2. Special Report From the Independent Certified Public
Accountant
F. Annual Updates
G. Current Financial Test Documentation
H. Corporate Guarantee
I. Impacts on Third Party Financial Assurance Providers
J. General Support of and Opposition to the Financial Test
K. First Party Trust
L. Comments on the Notice of Data Availability
VII. Miscellaneous
A. Executive Order 12866
B. Unfunded Mandates Reform Act
C. Regulatory Flexibility Act
D. Submission to Congress and the General Accounting Office
E. Paperwork Reduction Act
F. Environmental Justice
G. National Technology Transfer and Advancement Act
I. Authority
These amendments to Title 40, part 258, of the Code of Federal
Regulations are promulgated under the authority of sections 1003(a),
1008, 2002(a), 4004, 4005(c), and 4010(c) of the Resource Conservation
and Recovery Act (RCRA), as amended, 42 U.S.C. 6902(a), 6907, 6912(a),
6944, 6945(c), and 6949a(c).
II. Background
The Agency proposed revised criteria for municipal solid waste
landfills (MSWLFs), including financial assurance requirements, on
August 30, 1988 (see 53 FR 33314). The purpose of the financial
assurance requirements is to assure that adequate funds will be readily
available to cover the costs of closure, post-closure care, and, when
necessary, corrective action associated with MSWLFs.
In the August 30, 1988 proposal, rather than proposing specific
financial assurance mechanisms, the Agency proposed a financial
assurance performance standard. The Agency solicited public comment on
this performance standard approach and, at the same time, requested
comment on whether the Agency should develop financial test mechanisms
for use by local governments and corporations. In response to comments
on the August 1988 proposal, the Agency added several specific
financial mechanisms to the financial assurance performance standard in
promulgating 40 CFR 258.74 as part of the October 9, 1991 final rule on
MSWLF criteria (56 FR 50978). That provision allows approved States to
use any State-approved mechanism that meets that performance standard
and thereby gives approved states considerable flexibility in
determining appropriate financial mechanisms.
Commenters on the August 30, 1988 proposal also supported the
development of financial tests for local governments and for
corporations to demonstrate that they meet the financial assurance
performance standard, without the need to produce a third-party
instrument to assure that the obligations associated with their
landfill will be met. (For a description of the third-party instruments
available to MSWLF owners and operators, see 56 FR 50978.) The Agency
agreed with commenters and, in the October 9, 1991 preamble, announced
its intention to develop both a local government and corporate
financial test in advance of the effective date of the financial
assurance provisions.
On April 7, 1995, the Agency delayed the date by which MSWLFs must
comply with the financial assurance requirements of the MSWLF criteria
until April 9, 1997 (see 60 FR 17649) (remote, very small landfills as
defined at 40 CFR 258.1(f)(1) must comply by October 9, 1997). See 40
CFR 258.70(b). EPA extended the compliance date to
[[Page 17708]]
provide additional time to promulgate financial tests for local
governments and for corporations before the financial assurance
provisions would take effect. The Agency proposed a local government
financial test and a corporate financial test on December 27, 1993 (see
58 FR 68353) and October 12, 1994 (see 59 FR 51523), respectively. The
proposed corporate financial test rule notice also included proposed
amendments to the domestic asset requirements of the RCRA Subtitle C
hazardous waste financial assurance rules. Promulgating these proposed
changes to the Subtitle C rule, after considering and addressing public
comments, will be part of an upcoming rulemaking on the Subtitle C
financial assurance rules.
As part of the corporate test for MSWLFs rulemaking, on September
27, 1996 (61 FR 50787) EPA published a Notice of Data Availability for
a document that had been inadvertently omitted from the rulemaking
docket for part of the public comment period. This Notice provided a 30
day comment period on the missing document.
On November 27, 1996, EPA promulgated a final local government
financial test rule for MSWLFs (61 FR 60328). That rule increases the
flexibility of the financial assurance requirements in four important
ways. First, it provides local governments owning or operating a MSWLF
with the option of demonstrating financial assurance through a
financial test. Second, it allows local governments to use the
financial test to provide a guarantee for financial assurance for the
owner or operator of a MSWLF. Third, the rule allows a State Director
to waive the financial assurance requirements for up to twelve months
until April 9, 1998 if the Director finds that an owner or operator
cannot practically comply by April 9, 1997. Fourth, a State Director
can allow the discounting of closure, post-closure, and corrective
action costs for MSWLFs under certain conditions.
The flexibility to extend the effective date and to allow
discounting are available to both locally and privately owned and
operated MSWLFs under the November 27, 1996 final rule. In today's
notice, EPA is taking final action on the corporate financial test and
guarantee for MSWLFs under RCRA Subtitle D, that were proposed October
12, 1994. This notice extends to private owners and operators the
flexibility that local governments have as a result of the November 27,
1996 final rulemaking notice.
III. Summary of the Rule
A. Corporate Financial Test (Sec. 258.74(e))
Today's rule allows private owners or operators of MSWLFs that meet
certain financial and recordkeeping and reporting requirements to use a
financial test to demonstrate financial assurance for MSWLF closure,
post-closure care and corrective action costs up to a calculated limit.
(Costs over the limit must be assured through a third-party mechanism
such as a surety bond or trust fund, or, in approved States, through
other appropriate mechanisms the State determines to meet the
performance standard at existing Sec. 258.74(l)). The financial test
allows a company to avoid incurring the expenses associated with the
existing financial assurance requirements which provide for
demonstrating financial assurance through the use of third-party
financial instruments, such as a trust fund, letter of credit, surety
bond, or insurance policy. With the financial test, private owners or
operators must demonstrate that they are capable of meeting their
financial obligations at their MSWLFs through ``self insurance.'' The
following sections discuss the requirements of the financial test in
greater detail.
1. Financial Component (Sec. 258.74(e)(1))
The financial component is designed to measure viability of the
owner or operator, based on its current financial condition. To satisfy
the financial component, a firm must: (1) have a minimum tangible net
worth of $10 million plus the costs it seeks to assure (e.g., closure,
post-closure care, or corrective action costs); (2) satisfy a bond
rating requirement or pass one of two financial ratios; and (3) meet a
domestic asset requirement.
a. Minimum Tangible Net Worth. In Sec. 258.74(e)(1)(ii)(A), the
Agency is requiring firms using the financial test to have a tangible
net worth at least equal to the sum of the costs they seek to assure
through a financial test plus $10 million. Tangible net worth means the
tangible assets that remain after deducting liabilities. Tangible
assets do not include intangibles such as goodwill or rights to patents
and royalties.
The Agency is also providing an exception to the minimum net worth
requirement in Sec. 258.74(e)(1)(ii)(B). In this exception, a State
Director may allow a firm that has already recognized all of its
environmental obligations on its financial statements to utilize the
financial test so long as it has a minimum tangible net worth of $10
million and meets all of the remaining requirements of the financial
test. The exception in Sec. 258.74(e)(1)(ii)(B) acknowledges that the
recognition of environmental obligations as liabilities in financial
statements has become more widespread. As explained more fully in the
Response to Comments and Summary of Issues (see section VI below), EPA
does not want to place a firm that has fully recognized these
obligations as liabilities at a disadvantage in its ability to use the
test.
Under Sec. 258.74(e)(3), the costs an owner or operator seeks to
assure must be equal to the current cost estimates for closure, post-
closure care, and corrective action or the sum of such costs to be
covered, and any other environmental obligations assured by a financial
test. The owner or operator must include cost estimates required for
municipal solid waste management facilities under this part, as well as
cost estimates required for the following environmental obligations, if
it assures them through a financial test: obligations associated with
underground injection control (UIC) facilities under 40 CFR 144.62,
petroleum underground storage tank facilities under 40 CFR part 280,
polychlorinated biphenyl (PCB) storage facilities under 40 CFR part
761, and hazardous waste treatment, storage, and disposal facilities
(TSDFs) under 40 CFR parts 264 and 265.
The Agency is requiring this minimum tangible net worth requirement
to ensure that the costs of closure, post-closure care, and/or
corrective action do not force a firm into bankruptcy. The minimum net
worth is intended to help ensure that firms relying on the financial
test have viable net worth to cover potential costs. EPA received
several comments on the $10 million in net worth requirement which had
also been part of the proposal. For the reasons discussed more fully in
the Response to Comments and Summary of Issues section below, the
Agency has retained this requirement in the final rule. The Agency
believes that this minimum net worth should be required as an initial
screen for corporations in demonstrating financial responsibility for
the very large costs of closure, post-closure care, and corrective
action. This requirement in addition to other financial criteria
comprise the financial test adopted in this final rule.
b. Bond Rating. The Agency is promulgating regulations allowing
firms that meet the minimum net worth requirement to satisfy the second
requirement of the financial test in one of two ways.
Under Sec. 258.74(e)(1)(i)(A), a firm can satisfy the financial
component if its
[[Page 17709]]
senior unsecured bond rating is investment grade, that is, Aaa, Aa, A
or Baa, as issued by Moody's, or AAA, AA, A, or BBB, as issued by
Standard & Poor's. The Agency is promulgating this option because it
believes that a firm's bond rating incorporates an evaluation of a
firm's financial management practices. Bond ratings reflect the expert
opinion of bond rating services, which are organizations that have
established credibility in the financial community for their
assessments of firm financial conditions. An analysis of bond ratings
showed that bond ratings have been a good indicator of firm defaults,
and that few firms with investment grade ratings have in fact gone
bankrupt.
Including a bond rating option in this financial test is consistent
with other Agency programs. For example, the regulations governing
TSDFs under 40 CFR parts 264 and 265, petroleum underground storage
tanks under 40 CFR part 280, UIC facilities under 40 CFR part 144, and
PCB commercial storage facilities under 40 CFR part 761 all consider
bond ratings as part of their financial tests. The local government
financial test for owners and operators of MSWLFs under 40 CFR part
258, which was promulgated on November 27, 1996 (61 FR 60328), also
allows a bond rating option.
In the local government test, EPA restricted the use of bond
ratings to bonds which were not insured or collateralized. Insured
bonds are increasingly popular for municipal issues and reflect the
rating of the insurer, and not of the issuing municipality. Insured
bonds are used less frequently for corporations. Similarly, a
collateralized bond can receive a rating that is not indicative of the
overall strength of the firm that issues it, but rather of the
collateral backing it. In fact, a firm under financial distress may
only be successful in issuing a bond if it pledges assets to back it.
In this final rule, EPA is likewise adopting a regulation that
effectively disallows the use of ratings based on collateralized bonds.
For the reasons described above, because bond ratings incorporate
an evaluation of a firm's financial management practices, reflect the
credible expert opinion of bond rating services and have been shown to
be a good indicator of defaults, EPA proposed to include a bond rating
option in the corporate financial test for MSWLFs. EPA proposed to
implement the bond rating option using the rating for the last bond
issued. (This is consistent with the current Subtitle C financial test
and the revisions proposed on July 1, 1991 (56 FR 30201)). The reason
for choosing the rating on the most recently issued bond was because
the Agency considered this to be the most accurate indication of the
firm's financial status. Under the assumption that the most recently
issued bond would have had the most current analysis of its
characteristics, EPA considered this the best indicator of the firm's
ability to fulfill its financial obligations.
A commenter on the proposed corporate test for MSWLFs noted that
the rating on a firm's senior debt was the best indicator of the firm's
financial health. EPA reviewed its proposed position in response to the
comment and found that bond ratings for corporations are continually
being reviewed. Thus, there are more accurate indicators of a firm's
financial health than the most recently issued bond. By using the
rating on the firm's senior unsecured debt rather than on the most
recent issue, EPA is ensuring that firms that use the bond rating
alternative will not be qualifying on the basis of a secured
obligation.
EPA recognizes that the use of a senior unsecured debt rating in
this rule is potentially inconsistent with the financial test bond
rating alternative in the hazardous waste financial assurance
regulations in 40 CFR Part 264, Subpart H. EPA considers the arguments
for adopting the use of the rating on senior unsecured debt to have
considerable merit and is similarly considering adopting it as part of
the revisions to the RCRA hazardous waste financial assurance
requirements (proposed 56 FR 30201).
c. Financial Ratios. To provide the regulated community with
additional flexibility in meeting the financial test, the Agency
proposed to also allow financial test ratios that it is promulgating at
Sec. 258.74(e)(1)(i)(B)-(C) as an alternative to the bond rating. In
order to satisfy the ratio requirement, a firm must have either:
<bullet> a debt-to-equity ratio of less than 1.5 based on the
ratio of total liabilities to net worth. This ratio indicates the
degree to which a firm is leveraged, and financed through borrowing; or
<bullet> a profitability ratio of greater than 0.10 based on the
ratio of the sum of net income plus depreciation, depletion, and
amortization, minus $10 million, to total liabilities. This ratio
indicates cash flow from operations relative to the firm's total
liabilities.
EPA is adopting these financial test ratios in
Sec. 258.74(e)(1)(i)(B)-(C) of today's rule. The Agency selected these
two specific financial ratios with their associated thresholds based on
their ability to differentiate between viable and bankrupt firms. The
Agency's analysis demonstrated that debt-to-equity ratios (e.g., total
liabilities/net worth) and profitability ratios (e.g. (cash flow minus
$10 million)/total liabilities) are particularly good discriminators of
financial health. The Agency selected as thresholds for these ratios
values that, together with the other financial test criteria, minimized
the costs associated with demonstrating financial responsibility. A
more detailed discussion of this analysis can be found in the
Background Document developed in support of the proposal, and the
report entitled ``Analysis of Subtitle D Financial Tests in Response to
Public Comment,'' which was developed to further assess the results of
the Background Document in light of public comments. Both documents are
available in the public docket for this rulemaking.
d. Domestic Assets Requirement. In Sec. 258.74(e)(1)(iii), the
Agency is promulgating a requirement that it had earlier proposed that
all firms using the financial test have assets in the United States at
least equal to the costs they seek to assure through a financial test.
(See paragraph a. of this section, ``Minimum Tangible Net Worth,'' for
more discussion on assured costs.) The domestic asset requirement is
intended to ensure that the Agency has access to funds in the event of
bankruptcy. Without this requirement, the Agency could experience
substantial difficulty in accessing funds of bankrupt firms that have
their assets outside of the United States. The Response to Comments and
Summary of Issues section below discusses this requirement in more
detail.
2. Recordkeeping and Reporting Requirements (Sec. 258.74(e)(2))
The rule requires that after a firm has determined that it is
eligible to use this corporate financial test, it must document its use
of the test by placing three items (discussed below) in the facility
operating record. These requirements will help ensure that the self-
implementing aspect of the test requirements have been met. In the case
of closure and post-closure care, these items must be placed in the
operating record prior to the initial receipt of waste or upon the
effective date of the financial assurance requirements (see existing 40
CFR 258.70) whichever is later, or no later than 120 days after the
corrective action remedy has been selected. This language is consistent
with the language in the proposal, and in the other mechanisms
allowable under 40 CFR 258.74. For example, the language for letters of
credit in existing
[[Page 17710]]
258.74(c)(1) states ``The letter of credit must be effective before the
initial receipt of waste or before the effective date of this section *
* * whichever is later, in the case of closure or post-closure care,
or no later than 120 days after the corrective action remedy has been
selected in accordance with the requirements of Sec. 258.58.''
EPA seeks to make clear that the deadline provision in today's rule
allows the use of the financial test by an owner or operator of an
existing facility for whom the financial responsibility requirements
have already become effective. An owner or operator may change
mechanisms for providing financial assurance. The regulations require
that an owner or operator provide financial assurance without
interruption. See, for example, 40 CFR 258.71(b), 258.72(b) and
258.73(c). However, qualifying owners or operators may choose from the
mechanisms in Sec. 258.74(a) through (j), and may substitute one
mechanism for another in meeting financial assurance requirements
(assuming all such mechanisms are available under the Federally-
approved State program). For further information on this point, please
see section III.E., below, Use of Alternative Mechanisms After the
Effective Date.
The specific recordkeeping and reporting requirements are
summarized below. Owners and operators must update these items
annually, and must notify the State Director and obtain alternative
financial assurance if the firm is no longer able to pass the financial
test.
a. Chief Financial Officer (CFO) letter. Under Sec. 258.74(e)(2)(i)
of today's rule, the owner or operator must submit a letter from the
firm's CFO. The letter must demonstrate that the firm has complied with
the criteria of the test. Specifically, the letter must list all cost
estimates covered by a financial test and provide evidence
demonstrating that the firm satisfies the financial criteria of the
test including: (1) The bond rating or financial ratios, (2) the
tangible net worth requirement, and (3) the domestic asset requirement.
The proposed regulatory language for the CFO's letter was inconsistent
with the proposed regulatory language in Sec. 258.74(e)(1) regarding
the financial test. The regulatory language inadvertently omitting a
cross-reference to the domestic asset requirement. The preamble to the
proposed rule clearly provides that the CFO letter would document that
the firm satisfies all the criteria of the financial test including the
domestic asset requirement. 59 FR 51525. The final language clarifies
that the letter must provide evidence that the owner or operator meets
all of the requirements of Sec. 258.74(e)(1)(i), (ii), and (iii).
b. Accountant's Opinion. Under Sec. 258.74(e)(2)(i)(B), the Agency
requires an owner or operator to place in the facility's operating
record the opinion from the independent certified public accountant of
the firm's financial statements for the latest completed fiscal year.
EPA expects that the documentation of the independent accountant's
opinion will include the audited financial statements. An unqualified
opinion (i.e., a ``clean opinion'') from the accountant demonstrates
that the firm has prepared its financial statements in accordance with
generally accepted accounting principles. Generally, an adverse
opinion, disclaimer of opinion, or any qualification in the opinion
would automatically disqualify the owner or operator from using the
corporate financial test. The one potential exception is that the State
Director of an approved State may evaluate qualified opinions on a
case-by-case basis, and accept such opinions if the matters which form
the basis for the qualified opinion are insufficient to warrant
disallowance of the test.
c. Special Report From the Independent Certified Public Accountant.
Under Sec. 258.74(e)(2)(i)(C), the third item to be placed in the
operating record is a special report of the independent certified
public accountant upon examination of the chief financial officer's
letter. In this report, the accountant would confirm that the data used
in the CFO letter to pass the financial ratio test were appropriately
derived from the audited, year-end financial statements or any other
audited financial statements filed with the SEC. This report would not
be required if the CFO uses financial test figures directly from the
audited year end financial statements, or any other audited financial
statements filed with the SEC. However, this report is required if the
CFO letter uses data that are derived from and are not identical to the
data in the audited annual financial statements or other audited
financial statements filed with the Securities and Exchange Commission
(SEC).
EPA has partially revised the proposed CPA's report in light of
public comments. The proposal had included a requirement that the CPA
provide negative assurance that ``no matters came to his attention
which caused him to believe that the data in the chief financial
officer's letter should be adjusted.'' 51 FR 51535. This proposed
requirement is inconsistent with current American Institute of
Certified Public Accountants standards which direct auditors not to use
the types of language included in the proposed regulations. Instead the
new language specifies that the independent certified public accountant
should report on the findings from an agreed upon procedures
engagement. Additionally, the language in today's rule clarifies that
the accountant's report is about information used to calculate the
financial ratios. Information that is not a part of the audited
financial statements, such as the company's bond rating, is not subject
to this requirement.
For example, in computing the financial ratios in
Sec. 258.74(e)(1)(i)(B) or (C) owners and operators are required to
recognize total liabilities, including those associated with ``post-
retirement benefits other than pensions (OPEB).'' The Financial
Accounting Standards Board (FASB) allows the use of two different
methods when accounting for these liabilities in annual financial
statements. FASB 106 allows employers the option of accounting for OPEB
obligations in one year (immediate recognition) or over a consecutive
number of years (delayed recognition). Since both the immediate and
delayed recognition methods are allowed by FASB 106, EPA does not
require owners and operators that are demonstrating they meet the
requirements of the financial test to use the same accounting method
for OPEB obligations that is used for annual SEC submission purposes.
For example, the owner or operator may use the immediate recognition
method in the financial statement prepared for the SEC, but the delayed
recognition method in computing liabilities for the purpose of
demonstrating RCRA financial assurance.
As reflected in today's rule, EPA does not believe a separate CPA
statement is needed where the CFO simply takes figures directly from an
audited financial statement. This is a straight forward process. On the
other hand, where the CFO ``derives'' the figures--for example, by
using different accounting procedures to determine OPEB liabilities--
the process may require a high level of financial expertise. In these
cases, EPA believes review by an independent auditor is appropriate.
Consistent with the policy to confirm the accuracy of the
information from the audited financial statement where it is not
readily discernible, Sec. 258.74(e)(2)(i)(D) of today's rule also
includes a requirement for a report from the independent certified
public
[[Page 17711]]
accountant when an owner or operator proposes to meet the tangible net
worth requirement on the basis of having recognized all of the
environmental obligations covered by a financial test as liabilities in
the audited financial statements. This requirement is necessary to
ensure that these liabilities have in fact been recognized since this
would be difficult for the State Director to ascertain. There is also a
requirement that the report ensure that at least $10 million in
tangible net worth remains after any guarantees have been extended.
d. Placement of Financial Test Documentation and Annual Updates in
the Operating Record. Section 258.74(e)(2)(ii) of today's rule requires
firms to place the financial test documentation items specified in
Sec. 258.74(e)(2) in the operating record and notify the State Director
that these items are there. Because the financial condition of firms
can change over time, under Sec. 258.74(e)(2)(iii), firms are required
to update annually all financial test documentation, including each of
the items described above, within 90 days of the close of the firm's
fiscal year. The State Director is, however, allowed to extend this
time by up to 45 days for an owner or operator who can demonstrate that
90 days is insufficient time to acquire audited financial statements.
This could occur in the case of a privately held firm which does not
receive audited financial reports as early as publicly held firms.
Under Sec. 258.74(e)(2)(iv), the owner or operator is not required to
submit the items specified in Sec. 258.74(e)(2) when he substitutes
alternate financial assurance as specified in this section that is not
subject to these recordkeeping and reporting requirements; or is
released from the requirements of this section in accordance with
Sec. 258.71(b), Sec. 258.72(b), or Sec. 258.73(b).
e. Alternate Financial Assurance. Under Sec. 258.74(e)(2)(v), if a
firm can no longer meet the terms of the financial test, the owner or
operator must notify the State Director and obtain alternative
financial assurance within 120 days of the close of the firm's fiscal
year. The alternative financial assurance selected by the owner or
operator would have to meet the terms of this section and the required
submissions for that assurance would have to be placed in the
facility's operating record. The owner or operator would have to notify
the State Director within 120 days of the close of the fiscal year that
he no longer meets the criteria of the financial test and that
alternate financial assurance has been obtained.
f. Current Financial Test Documentation. Under
Sec. 258.74(e)(2)(vi), the Director of an approved State may, based on
a reasonable belief that the owner or operator no longer meets the
requirements of paragraph (e)(1) of this section, require the owner or
operator to provide current financial test documentation. Although the
Agency anticipates this provision will not be used often, it can be
important in situations where the financial condition of the owner or
operator comes into question. The State Director should have the
flexibility to require the owner or operator to provide current
financial test documents if information arises that raises questions
about the financial conditions of the owner or operator. For example,
an owner or operator may be forced into financial distress by a large,
well-publicized liability judgment. In such cases and other appropriate
situations, the State Director should be able to investigate the
owner's or operator's change in financial condition, and require the
owner or operator to demonstrate that it still meets the financial
test.
B. Corporate Guarantee (Sec. 258.74(g))
As in the proposal, this rule allows owners and operators to comply
with financial responsibility requirements for MSWLFs using a guarantee
provided by another private firm (the guarantor). The language of the
final rule includes clarifications of some of the deadlines in the
proposal. Under such a guarantee, the guarantor promises to pay for or
carry out closure, post-closure care, or corrective action activities
on behalf of the owner or operator of a MSWLF if the owner or operator
fails to do so. Guarantees, like other third-party mechanisms, such as
letters of credit or surety bonds, ensure that a third party is
obligated to cover the costs of closure, post-closure care, or
corrective action in the event that the owner or operator goes bankrupt
or fails to conduct the required activities. At the same time, a
guarantee is an attractive compliance option for owners and operators
because guarantees are generally much less expensive than other third-
party mechanisms.
Section 258.74(g)(1) of the rule allows three types of qualified
guarantors: (1) The parent corporation or principal shareholder of the
owner or operator (i.e., a corporate parent or grandparent), (2) a firm
whose parent company is also the parent company of the owner or
operator (a corporate sibling), and (3) other related and non-related
firms with a ``substantial business relationship'' with the owner or
operator (including subsidiaries of the owner or operator). Guarantors
also must meet the conditions of the corporate financial test.
To comply with the requirements of the corporate guarantee, the
owner or operator must place in the facility operating record a
certified copy of the guarantee contract and copies of all of the
financial test documentation that is required of the guarantor as
specified in the corporate financial test requirements. Pursuant to
Sec. 258.74(g)(3), the terms of the guarantee contract must specify
that, if the owner or operator fails to perform closure, post-closure
care, or corrective action in accordance with the requirements of part
258, the guarantor will either: (1) Carry out those activities or pay
the costs of having them conducted by a third party (performance
guarantee), or (2) fund a trust to pay the costs of the activities
(payment guarantee). The required documentation must be placed in the
operating record, in the case of closure and post-closure care, prior
to the initial receipt of waste or before the effective date of the
financial assurance requirements (see existing Sec. 258.70), whichever
is later, or in the case of corrective action, no later than 120 days
following selection of a corrective action remedy. (See
Sec. 258.74(g)(2).) The financial test documentation from the guarantor
must be updated annually, in accordance with the requirements of the
corporate financial test.
The documentation required of the guarantor is the same as that
required of a corporate financial test user with either one or two
additional requirements depending upon the relationship of the
guarantor to the owner or operator. First, for all users of the
guarantee, the letter from the guarantor's chief financial officer must
describe the value received in consideration of the guarantee. Second,
in cases where the guarantor is not a corporate parent, grandparent, or
sibling, the letter from the chief financial officer also must address
the ``substantial business relationship'' that exists between the owner
or operator and the guarantor. In particular, if the guarantor is a
firm with ``a substantial business relationship,'' the letter must
describe the relationship and the consideration received from the owner
or operator in exchange for the guarantee, which are necessary to
ensure that the contract is valid and enforceable.
For purposes of its hazardous waste financial assurance
regulations, EPA has defined ``substantial business relationship'' in
40 CFR 264.141(h) as ``the extent of a business relationship necessary
under applicable State law to make a guarantee contract issued
[[Page 17712]]
incident to that relationship valid and enforceable.'' However, as
noted in the preamble to that regulation, ``No single legal definition
exists of what constitutes a business relationship between two firms
that would justify upholding a guarantee between them. Furthermore,
such a determination would depend upon the application of the laws of
the States of the involved parties.'' (53 FR 33942). The responsibility
for demonstrating that the guarantee contract is valid and enforceable
rests with the guarantor. (See Sec. 258.74(g)(1)).
This regulation requires that guarantors agree to remain bound
under this guarantee for so long as the owner or operator must comply
with the applicable financial assurance requirements of Subpart G of
part 258, except that guarantors may initiate cancellation of the
guarantee by sending notice to the State Director and to the owner or
operator. The rule provides that such cancellation cannot become
effective earlier than 120 days after receipt of such notice by both
the State Director and the owner or operator. (See
Sec. 258.74(g)(3)(ii).)
If notice of cancellation is given, the regulations require the
owner or operator to, within 90 days following receipt of the
cancellation notice by the owner or operator and the State Director,
obtain alternate financial assurance, place evidence of that alternate
financial assurance in the facility operating record, and notify the
State Director. If the owner or operator fails to provide alternate
financial assurance within the 90-day period, the guarantor must
provide that alternate assurance within 120 days of the notice of
cancellation, place evidence of the alternate assurance in the facility
operating record, and notify the State Director. (See
Sec. 258.74(g)(3)(iii).)
Under Sec. 258.74(g)(4), if the corporate guarantor no longer meets
the requirements of the financial test, the owner or operator must,
within 90 days, obtain alternative assurance, place evidence of the
alternate assurance in the facility operating record, and notify the
State Director. If the owner or operator fails to provide alternate
financial assurance within the 90-day period, the guarantor must
provide that alternate assurance within the next 30 days, place
evidence of the alternate assurance in the facility operating record,
and notify the State Director. These requirements are designed to avoid
potential lapses in financial assurance.
C. Calculation of Obligations
EPA currently allows financial tests as mechanisms to demonstrate
financial assurance for environmental obligations under several
programs. These include hazardous waste treatment, storage, and
disposal facilities under 40 CFR parts 264 and 265, petroleum
underground storage tanks under 40 CFR part 280, UIC Class I hazardous
waste injection wells under 40 CFR part 144, and PCB commercial storage
facilities under 40 CFR part 761. Requiring that the owner or operator
include all of the costs it is assuring through a financial test when
it calculates its obligations prevents an owner or operator from using
the same assets to assure different obligations under different
programs. The Agency believes this is vital to assure the effectiveness
of the financial test and assure that assets are available for all of
the environmental obligations covered by the test. Thus, consistent
with Agency policy, Sec. 258.74(e)(3) of today's rule requires a firm
using a financial test for its MSWLF obligations also to include those
costs covered by a financial test under other Agency programs when it
calculates assured costs.
D. Combining the Financial Test and Corporate Guarantee With Other
Mechanisms
When EPA promulgated the financial test and guarantee for municipal
owners and operators of municipal solid waste landfills (61 FR 60328,
November 27, 1996), EPA inadvertently omitted the provisions allowing
private owners and operators to use the financial test and corporate
guarantee in combination with other mechanisms in 40 CFR 258.74(k).
Thus, EPA is clarifying in today's rule that an owner or operator may
use the financial test or guarantee and another payment mechanism at a
single facility, thereby realizing greater flexibility and cost savings
from this regulation. EPA is promulgating a change to 258.74(k) that
allows the use of the financial test and corporate guarantee with the
other mechanisms. In promulgating this change to add the omitted cross-
references, EPA is repeating the entire paragraph solely for the
convenience of the reader.
E. Use of Alternative Mechanisms After the Effective Date
Consistent with the other existing financial assurance mechanisms
at 40 CFR 258.74, the language of today's regulations includes a
requirement that the financial test or guarantee must be effective
before the initial receipt of waste or before the effective date of the
basic requirement that owners or operators of MSWLF units have
financial assurance, whichever is later, in the case of closure or
post-closure care. See Sec. 258.74(e)(2)(ii) and Sec. 258.74(g)(2). The
effective date of the financial assurance requirement for owners or
operators of MSWLF units is established under existing 40 CFR 258.70.
For most, but not all, MSWLFs the effective date is April 9, 1997. The
provisions establishing the compliance deadlines are to ensure that an
existing MSWLF has financial assurance mechanisms in place by the
effective date of the regulations and that a new MSWLF has the
mechanisms in place by the first receipt of waste. In the case of
corrective action, today's regulations for the financial test and
guarantee, like the existing regulations for the other mechanisms,
provides that the mechanism has to be in place no later than 120 days
after the corrective action remedy has been selected in accordance with
the requirements of 40 CFR 258.58. See Sec. 258.74(e)(2)(ii) and
Sec. 258.74(g)(2).
The requirement that financial assurance be in place by a specific
deadline does not in any way preclude an owner or operator from
subsequently switching to another eligible mechanism. The operative
requirement is for an owner or operator of an MSWLF unit to have an
eligible financial assurance mechanism in place by the specific
compliance deadlines that ensures that the funds necessary to meet the
costs of closure, post-closure care, and corrective action will be
available whenever they are needed, and to provide such coverage
continuously until the owner or operator is released from financial
assurance requirements. See existing 40 CFR 258.71(b), 258.72(b), and
258.73(c). An owner or operator in compliance with the financial
assurance requirement using one eligible mechanism may switch to
another eligible mechanism so long as the relevant requirements are
met.
The Agency's regulations expressly allow an owner or operator to
substitute one mechanism for another in this manner. The regulations
establishing specific Federal mechanisms (40 CFR 258.74(a)-(h)) each
allow the termination of a financial assurance mechanism when a
substitute mechanism has been established (or, of course, if the owner
or operator is no longer subject to the requirement to have financial
assurance). Today's rules establish a similar substitution provision
for the financial test and the guarantee. See Sec. 258.74(e)(2)(iv) and
Sec. 258.74(g)(5). Thus, the Federal regulations would allow an owner
or
[[Page 17713]]
operator complying with the financial assurance requirements through,
for example, a letter of credit mechanism to switch to a financial test
or vice versa, assuming the owner or operator qualifies for the
mechanisms and the mechanisms are available under the approved State
program. In this way, the Federal regulations give owners and operators
of MSWLF units broad flexibility in the mechanisms used to satisfy the
financial assurance requirement.
In switching mechanisms, the owner or operator would be subject to
the applicable requirements of the new mechanism. For example, each of
the Federal mechanisms contains a specific requirement to provide
notice to the State Director, to maintain particular documentation,
and/or satisfy other requirements. For an owner or operator of an MSWLF
unit to meet the operative requirement that it have an eligible
financial assurance mechanism in place by the specific compliance
deadlines that ensures that the funds necessary to meet the costs of
closure, post-closure care, and corrective action will be available
whenever they are needed, then the owner or operator must comply with
all of the relevant requirements upon switching mechanisms and may not
allow lapses in financial assurance compliance. Additionally, owners
and operators should be aware that a State may have more stringent
requirements in place and may not allow all of the mechanisms provided
for under the Federal rules.
IV. National Solid Wastes Management Association (NSWMA) Petition
A. Discussion of the Petition
On February 16, 1990, NSWMA submitted a rulemaking petition to the
Agency requesting that EPA revise various financial assurance
requirements. The Agency noted in the preamble to the proposal of this
rule (59 FR 51523) that it had addressed many of the concerns raised in
the petition in a July 1, 1991 proposed rule (56 FR 30201) and a
September 16, 1992 final rule (57 FR 42832). Among the changes in the
September 16, 1992 final rule was the adoption of provisions allowing
for guarantees by non-parent firms for Subtitle C closure and post-
closure care financial responsibility requirements. This request had
been part of the NSWMA petition. In adopting similar provisions in this
rulemaking, EPA is extending this flexibility to private owners and
operators of MSWLFs. Local governments already have the flexibility to
provide guarantees for MSWLFs under 40 CFR 258.74(h). See 61 FR 60328.
In addition, when EPA promulgated the final rule on the local
government financial test for MSWLFs, it established regulations (40
CFR 258.75) giving State Directors the discretion to allow the
discounting of MSWLF costs (61 FR 60328). As noted in the Background
Section of today's preamble, this discretion applies to both municipal
and private owners and operators of MSWLFs. Discounting of costs was
another issue in the petition. While today's final rule addresses the
use of a financial test and guarantee for financial assurance for MSWLF
closure, post-closure care, and, as necessary, corrective action costs,
and one more issue (an alternative financial test) raised in this
petition, it does not represent the full Agency response to NSWMA's
petition. The Agency continues to examine the concerns raised in the
NSWMA petition.
B. The Meridian Test
As part of its rulemaking petition, NSWMA submitted an analysis
performed by Meridian Corporation which proposed an alternative to
EPA's current Subtitle C financial test. In the docket to the proposal
for today's rule, EPA included a copy of an analysis performed for EPA
that evaluated the test in comparison with the one that EPA proposed to
amend the current Subtitle C test. EPA also on September 27, 1996
published a Notice of Data Availability (61 FR 50787) providing
additional opportunity to comment on this analysis. A summary of the
comments EPA received on this notice and the Agency's response appear
in the Response to Comments and Summary of Issues section of this
preamble.
In evaluating public comments for the Subtitle D rule adopted
today, EPA further examined the Meridian Test using the cost estimates
and financial information which it had developed to assess other
alternative tests. See Analysis of Subtitle D Financial Tests in
Response to Public Comments, which is available in the public docket.
This analysis allowed EPA to assess the Meridian Test along with
several other potential tests on a consistent basis using updated
information, and to determine whether the Meridian Test would be better
than the financial test EPA had proposed for private owners and
operators of MSWLFs.
The analysis showed that the Meridian Test would have public costs
approximately 2.36 to 3.45 times larger than those of the test that EPA
proposed and is issuing in final form in this rulemaking. (The range in
estimates result from varying specifications of the net worth
requirements and interpretations of how firms are accounting for
financial responsibility requirements in their financial statements.)
As discussed in the preamble to the proposed amendments to the
financial test for Subtitle C owners and operators (56 FR 30201 at page
30210), selection of a test that results in lower public costs is
consistent with the Agency's position that it is equitable to make the
party that creates the environmental obligation pay for it.
In its petition, NSWMA noted that the current Subtitle C financial
test is less available to some firms to cover large obligations than
other alternative tests. In the Analysis of Subtitle D Financial Tests
in Response to Public Comments, EPA found that the use of the financial
test being adopted in this rulemaking will allow private MSWLF owners
and operators to cover 71.67% of their obligations. Further, EPA's
analysis estimates that the private cost of the Meridian Test could
range from 42.1% to 122% of the private cost of EPA's test. Again, this
range depends upon the net worth specification and interpretations of
how firms are accounting for financial responsibility requirements in
their financial statements. However, in all the permutations analyzed,
the sums of the public and private costs for the Meridian Test are
higher than for the test being promulgated in this rule. This provides
an additional basis for rejecting the Meridian Test beyond EPA's
concern with its higher public cost. EPA believes that this analysis
further substantiates its decision not to establish a financial test
for private owners or operators of MSWLFs based upon the Meridian Test,
and that the Agency has adopted a test for MSWLF obligations that
reasonably addresses the concerns in the NSWMA petition about a test
that would be more available than the Subtitle C financial test.
V. State Program Approval
Section 4005(c) of RCRA provides that each State adopt and
implement a ``permit program or other system of prior approval and
conditions'' adequate to assure that each facility that may receive
household hazardous waste will comply with the revised MSWLF criteria.
EPA is to ``determine whether each State has developed an adequate
program'' pursuant to section 4005(c).
The Agency has procedures for reviewing revised applications for
State program adequacy determinations should a State revise its permit
program in light of today's final rules. A State
[[Page 17714]]
that receives permit program approval prior to the promulgation of
today's rule and later elects to adopt the financial test and guarantee
mechanisms should work with its respective Regional EPA office as it
proceeds to make changes to its permit program.
As stated above, today's proposal would amend part 258 by adding
options for corporations to use when demonstrating financial assurance
for the costs of closure, post-closure care, and clean-up of known
releases. EPA generally encourages States to adopt the additional
flexibility for financial assurance mechanisms reflected in these final
rules. EPA believes that these mechanisms will result in significant
cost savings for owners and operators subject to financial assurance
requirements. At the same time, EPA believes the financial assurance
mechanisms adopted today effectively delineate eligible owners and
operators who have a low probability of business failure from owners
and operators that are unable to meet their obligations. By restricting
the financial test and guarantee to viable firms, the mechanisms in
these final rule avoid undue public costs.
However, States may choose to regulate more stringently than the
minimum federal requirements in Part 258. Thus, States may decline to
adopt options under this final rule that they deem undesirable. States
that have previously adopted Federally-approved financial assurance
requirements without this financial test and guarantee are not required
to take any action and may elect to retain only their current options.
Further, such States may choose to establish their own financial
assurance programs so long as they meet the minimum financial assurance
requirements in the Federal performance criteria detailed in the
October 9, 1991 final rule. (See existing Sec. 258.74(i))
The criteria that the financial mechanism would need to meet are
the following: (1) Ensure that the amount of funds assured is
sufficient to cover the costs of closure, post-closure care, and
corrective action for known releases when needed; (2) ensure that funds
will be available in a timely fashion when needed; (3) guarantee the
availability of the required amount of coverage from the effective date
of the requirements under 40 CFR 258, Subpart G, or prior to the
initial receipt of waste, whichever is later, in the case of closure
and post-closure care, and no later than 120 days after the corrective
action remedy has been selected in accordance with the requirements of
Sec. 258.58, until the owner or operator is released from financial
assurance requirements under Secs. 258.71, 258.72 and 258.73; and (4)
be legally valid, binding, and enforceable under State and Federal law.
See generally 40 CFR 258.74(l).
As a result, while the Agency has developed financial tests that
are designed to meet these performance criteria (the financial test
promulgated in this Federal Register and the financial test promulgated
November 27, 1996 (61 FR 60328)), approved States could develop their
own financial tests that could be used by owners and operators of
MSWLFs within those States for demonstrating financial responsibility
so long as those tests are determined to have met the performance
criteria.
Similarly, States initially seeking approval for the financial
assurance portion of their MSWLF program would have flexibility in
adopting Federally-promulgated standards. The State can simply adopt
the Federal standard or could adopt a mechanism that meets the Federal
performance criteria described above. In the latter case, the mechanism
could be used by owners or operators for demonstrating financial
responsibility for their MSWLF obligations in that State.
Owners and operators who can use the options in today's rule under
Federally-approved State programs would be required to maintain
appropriate documentation of the mechanism in the facility's operating
record. They would not be required by Federal rules to submit that
documentation to the State, but only to notify the State Director that
the required items have been placed in the operating record. However,
the Federal rules establish several minimum recordkeeping and reporting
requirements. For example, owners and operators using the financial
test or guarantee would also be required to update all required
financial test information on an annual basis, and retain this
information in their operating records. In addition, an owner or
operator (or guarantor) that becomes unable to meet the financial test
criteria would be required to notify the State Director and establish
alternate financial assurance within specified deadlines. Finally, in
order to cancel a guarantee, the guarantor would have to notify both
the State Director and the owner or operator at least 120 days prior to
cancellation.
However, EPA cautions owners and operators that wish to use the
options in the Federal program that they should examine the options
available under State law. If the State's rules do not include the
option that the owner or operator wishes to use, the owner or operator
would run the risk of being out of compliance with State law.
In unapproved States, if State law did not preclude the use of
options established today (either because it did not include any
financial assurance requirements, included only a general requirement
that left the choice of mechanism to the discretion of the owner or
operator, or included mechanisms like those promulgated today), an
owner or operator would be able to use the corporate test or guarantee
described in today's rule to satisfy both State and Federal law.
The Agency believes that most Tribes have an accounting structure
similar or identical to those of most local governments. Tribes should
be eligible to use the local government financial test to demonstrate
financial responsibility for their obligations under the MSWLF criteria
to the extent that they meet the provisions of that test. However, the
Agency recognizes that there may be Tribes and local government units
that use an accounting system similar or identical to those of most
corporations. Those Tribes and local government units would be eligible
to use the corporate financial test established today to demonstrate
financial responsibility for their MSWLF obligations to the extent that
they meet the relevant requirements.
VI. Response to Comments and Summary of Issues
EPA has endeavored to provide ample opportunity to comment on its
October 12, 1994 proposed rule. EPA held a 60-day public comment period
on its proposed rule. 59 FR 51523. On September 27, 1996, EPA also
published a Notice of Data Availability for a document inadvertently
omitted from the docket, and provided additional opportunity to comment
on the information. 61 FR 50787.
EPA received thirty comments (twenty-eight on the original proposal
and two on the supplemental notice of data availability) on the
proposed rule with the largest number of comments from insurance
companies and sureties. The States of Texas, Nebraska, Michigan, and
California also commented along with several corporations and
associations. EPA has considered and responded to all significant
comments in adopting its final rule. The Docket contains a compilation
of the comments and EPA's responses. See ``Comment Response Document
for Financial Test and Corporate Guarantee for Private Owners or
Operators of Municipal Solid Waste
[[Page 17715]]
Landfill Facilities, October 12, 1994 Proposed Rule.''
Many of the comments raised issues that were outgrowths of topics
that had been dealt with in the original proposal, but that benefitted
from additional scrutiny in light of public comment. In performing this
analysis EPA studied particular topics in additional depth and prepared
issue papers on these topics which were used in responding to the
public comments. For example, several commenters questioned the
appropriateness of the $10 million tangible net worth requirement in
the financial test. The proposal had included this requirement, and the
analysis of public and private costs had examined the financial
information for firms with more than $10 million in net worth. To
assess the potential impact of changing this requirement, EPA assembled
financial information from Dun and Bradstreet on additional owners and
operators of MSWLFs, i.e. those with both more and less than $10
million in net worth. EPA then applied the same methodology it had used
in support of the proposal to determine the public and private costs of
alternative specifications of the financial test (including an
alternative test that had been developed by Meridian Research
Incorporated for the National Solid Wastes Management Association). The
results of this analysis appear in the docket in a report entitled
``Analysis of Subtitle D Financial Tests in Response to Public
Comments.''
The next sections summarize the major comments and the Agency's
response.
A. Minimum Tangible Net Worth
Several commenters raised a variety of issues with the requirement
in the proposed rule that firms have a minimum tangible net worth of
$10 million plus the amount of obligations being covered by the
financial test. One commenter suggested that the requirement was too
little, particularly in the case of firms owning multiple landfills.
Some comments agreed with its reasonableness. Others characterized the
requirement as overly strict because it limited the availability of the
test to larger firms.
In evaluating comments on the impact of the net worth requirement,
EPA acquired updated financial information on the MSWLF industry. This
information allowed EPA to examine further the net worth requirements,
and determine whether the financial ratios were appropriate. The
additional analysis included firms with net worth lower than $10
million. This analysis relied upon financial information which EPA
acquired from Dun and Bradstreet, bond ratings from Standard and Poor's
and Moody's, and EPA cost estimates which had supported the proposal
analysis, and on which EPA had received no comments. A full description
of the data base and the analysis appears in the memoranda entitled
``Description of Data Used in the Analysis of Subtitles C and D
Financial Tests,'' and ``Analysis of Subtitle D Financial Tests in
Response to Public Comments'' which are available in the public docket
for this rulemaking.
As examined further below, EPA received comments that the proposed
minimum net worth requirement creates a competitive disadvantage for
and affects smaller firms. EPA emphasizes that today's rule does not
impose new regulatory requirments on any firm but would allow owners
and operators of MSWLFs additional flexibility in meeting the existing
financial assurance requirements. The existing financial assurance
requirements are to ensure that owners and operators of MSWLF units
will have the funds available to meet the costs of closure, post-
closure care, and corrective action whenever they are needed. The
existing regulations meet that objective by establishing a number of
third-party mechanisms, as well as performance criteria for additional
State-approved mechanisms, that could be used by owners or operators in
meeting the financial assurance requirement. Today's rulemaking adds a
financial test and a corporate guarantee as two additional, less costly
mechanisms that could be used by eligible private owners or operators
of MSWLFs to demonstrate financial responsibility under the existing
regulatory requirements. Entities able to use these mechanisms would be
allowed to demonstrate financial responsibility without incurring the
costs of obtaining a third-party mechanism.
No small or large entity will be required to use the alternative
mechanisms promulgated today. Further, as noted, States are not
required to make these mechanisms available under their programs.
However, all entities in States that allow these new mechanisms and
that choose to make use of, and meet the relevant criteria for, the
financial test or guarantee established by this rule will benefit from
the savings that these alternative mechanisms offer. While presumably
both small or large entities will choose to use one of the new
mechanisms only if it is in their interest to do so, requirements apply
to any firm ultimately seeking to use one of the alternative
mechanisms. EPA has endeavored to reasonably minimize the requirements
associated with the mechanisms and thereby promote private cost savings
while at the same time limiting the public costs.
As noted above, the basic purpose of the financial assurance
program is to ensure that corporate owners and operators of MSWLF units
are financially able to meet their obligations for closure, post-
closure care, and corrective action. The existing financial assurance
requirements apply to all such owners and operators, regardless of
their size, in view of the potential harm and public costs that can
result if an owner or operator is unable to meet its responsibility for
closure, post-closure care, and corrective action at a MSWLF unit.
Today's rule adds a financial test that allows a less costly means of
providing financial assurance to entities financially capable of
covering the costs themselves, through self-insurance, or relying on a
guarantor that meets the financial test. The basis for the financial
test is necessarily tied to the financial capability of the MSWLF or
guarantor. Later in the discussions of the public comments sections
entitled Tangible Net Worth Does Not Have to Be Liquid and Bond Rating,
EPA also examined the question of whether the financial test would
create an uneven playing field and did not find that the savings
potentially available from this rule would be sufficient to create a
significant competitive advantage.
After examining the minimum net worth requirement in light of the
public comments on the proposal, EPA concluded that the increase in
public costs under a financial test that did not include this
requirement would not justify the anticipated reduction in private
costs. As noted in the section entitled Public Costs of Lower Net Worth
Levels, there is an equity issue involving higher public costs. Higher
public costs mean that costs that should have been borne by the owner
or operator (and customers) of a landfill that goes bankrupt are
unfairly transferred to society in general. Because of this fairness
issue and other factors discussed below, EPA determined that it was
appropriate to retain this component of the financial test even though
the test EPA is establishing has a higher calculated sum of public and
private costs than would have been the case had EPA selected this test
with a lower minimum tangible net worth requirement. The test EPA is
establishing has lower public costs and provides substantial private
savings. Of course, if contradictory new information
[[Page 17716]]
is presented to EPA in the future, EPA will further examine this issue.
Further, EPA's existing rules for financial assurance under 40 CFR
part 258, subpart G provide States with broad flexibility to fashion
financial assurance mechanisms so long as the mechanisms meet the
performance criteria at 40 CFR 258.74(l). Thus, in implementing the
existing regulations, States can make specific judgments about
additional flexibility in meeting the financial assurance requirements.
Such judgments are more difficult in a general national rulemaking,
where broader delineations must be made. Indeed, EPA encourages States
to make reasoned judgments in implementing the performance criteria in
the existing rules, including providing flexibility for firms in
circumstances that States determine to reasonably balance the public
and private cost of financial assurance. However, in this national
rulemaking, EPA was faced with the choice of allowing eligible firms
the potential regulatory flexibility of a financial test or foregoing
the regulatory flexibility of a financial test altogether because it
may not benefit all firms in the MSWLF industry. Faced with that
choice, EPA determined it was reasonable to provide the regulatory
flexibility for qualifying firms.
1. Minimum Tangible Net Worth Requirement Is Too Low
Comment: The minimum tangible net worth requirement is inadequate
for firms with multiple facilities.
Response: The concern that the net worth minimum is inadequate for
firms with multiple facilities overlooks the interrelationships between
the net worth requirement and the other components of the test. For a
firm to use the financial test, it can only assure an amount that is up
to $10 million less than its net worth, unless it has already
recognized all of its environmental obligations as liabilities. Firms
with multiple landfills will have high levels of assets which must be
matched by the sum of their liabilities and net worth. It is an axiom
of accounting that assets minus liabilities equals net worth. An
example will illustrate why a firm with more landfills and a
correspondingly higher level of assets will also have a higher level of
net worth than the $10 million minimum. Suppose a firm had multiple
landfills such that it had $200 million in assets. For it to meet the
liability to net worth (leverage) ratio of 1.5 under the financial test
adopted in today's rule, it would have liabilities of less than $120
million and a net worth of at least $80 million which is substantially
in excess of the $10 million minimum.
If, on the other hand, the hypothetical firm with $200 million in
assets attempted to pass the financial test with only $20 million in
net worth and $180 million in liabilities through the profitability
ratio alternative of the test, it would have to show substantial
profitability to succeed. In the profitability ratio alternative of the
test, the ratio of the sum of net income plus depreciation, depletion,
and amortization, minus $10 million, to total liabilities must be
greater than 0.10. With $180 million in liabilities, the hypothetical
firm would have to have a cash flow (the sum of net income plus
depreciation, depletion, and amortization) of more than $28 million,
even after paying interest on a substantial debt. This amounts to over
140% of net worth, and would be difficult to achieve. Furthermore, the
additive requirement restricts the amount that could be covered through
the financial test. For firms that have not recognized all of their
environmental obligations as liabilities, the additive requirement
restricts the amount that can be covered to $10 million less than their
net worth. In this particular example, the firm would be able to cover
$10 million in environmental obligations which is much less than the
$28 million in net income plus depreciation, depletion and amortization
necessary to utilize the profitability ratio under the test. Like the
leverage ratio, the profitability ratio of the test favors firms with
relatively low debt ratios, and correspondingly high net worth ratios.
Additional information on this point appears in Issue Paper, Recent
Consolidation and Acquisitions in the Solid Waste Industry, which is
available in the public docket.
Bond rating agencies also favor firms with relatively low debt
levels, and tend to grant more favorable ratings to firms with large
net worth. Thus, under the bond rating alternative as well as the
financial ratio alternatives, firms with several operations and large
assets would have to have substantially more than the $10 million
minimum net worth to utilize the financial test. For example, EPA's
analysis estimated that the two largest firms expected to be able to
use the financial test have MSWLF financial assurance obligations which
are approximately $1.7 and $1.4 billion, respectively. Their
corresponding net worth are $5.3 and $2.8 billion, figures
substantially higher than the $10 million minimum net worth
requirement.
The additive requirement (tangible net worth of $10 million plus
the amount being assured), limits the amount of environmental
obligations that a firm can assure when it has passed the financial
test. For the firms in EPA's analysis with the third and fourth largest
number of landfills, EPA's estimate of their closure and post closure
financial assurance obligations exceeds their net worth. The additive
requirement means that these firms may need to provide a third party
instrument for some of their obligations.
2. The $10 Million Net Worth Requirement Is Too Restrictive
Comment: Several commenters objected to the $10 million in tangible
net worth requirement as being overly strict and restricting the test
to larger firms.
Response: In analyzing these comments EPA considered several
factors including the value of the obligations that could potentially
be assured by the test, how these obligations are reflected in the
firms' financial statements, the accuracy of the financial test at
lower net worth levels, and the increase in costs that could be borne
by the public if a firm that uses the financial test would go bankrupt
and be unable to fulfill its obligations. Based upon analyses of these
factors, EPA has decided to retain the $10 million in net worth
requirement for the test being promulgated today.
a. The Size of Closure Obligations. The net worth of a firm equals
the value of its assets minus the value of its liabilities. As provided
in 40 CFR 264.141, ``liabilities'' mean ``probable future sacrifices of
economic benefits arising from present obligations to transfer assets
or provide services to other entities in the future as a result of past
transactions or events.'' EPA estimated in the analysis supporting the
proposal that closure and post-closure obligations for MSWLFs range
from $5.1 million (for a landfill with less than 275 tons per day) to
$24 million for a landfill of more than 1125 tons per day. EPA received
no public comments on the accuracy of these estimates, and so in the
additional analysis supporting this notice merely updated them for
inflation so that they would be in 1995 dollars like the financial
information on the firms. This led to estimates ranging from $5.5
million to $26.1 million. (See the memorandum entitled ``Analysis of
Subtitle D Financial Tests in Response to Public Comments.'') These
costs represent substantial liabilities that are largely paid at the
end of the landfill's life when there would be no revenue from tipping
fees. Therefore it is
[[Page 17717]]
important to ensure that adequate provisions have been made for their
recognition and payment.
These estimates can represent several multiples of a firm's
liabilities (and net worth). These cost estimates combined with the
financial information on firms with less than $10 million in net worth
show that firms with relatively small net worth can accrue relatively
large liabilities for closure and post-closure obligations. Under such
a circumstance a firm that would have to undertake closure would be
forced into bankruptcy (negative net worth) by closure.
b. Recognition of Closure Obligations. The financial analysis of
firms with net worth between $1 million and $10 million show that these
environmental obligations may not be universally recognized. When EPA
examined the liabilities, net worth and estimated financial assurance
amounts for forty firms with net worth between $1 and $10 million, it
found that many of these firms had estimated financial assurance
obligations that exceeded their net worth (thirty-seven) and their
reported liabilities (thirty-five). In the instances of firms with
financial assurance obligations that exceed their liabilities, this
strongly implies that they are not recognizing these obligations as
liabilities, particularly because liabilities also include money owed
to creditors such as banks. This inconsistent reporting of landfill
closure obligations has been reported by the Financial Accounting
Standards Board (See, for example, pages 1 and 2 Exposure Draft,
Proposed Statement of Financial Accounting Standards, Accounting for
Certain Liabilities Related to Closure or Removal of Long-Lived Assets,
No. 158-B, February 7, 1996, Financial Accounting Standards Board).
Firms that do not recognize their closure and post-closure care
obligations as liabilities also may be overstating their ability to
pass a financial test if they had to recognize their environmental
obligations as liabilities. This arises because both financial test
ratios utilize liabilities as a factor and require that the ratio meet
a particular threshold (e.g. total liabilities divided by net worth
must be less than 1.5). A higher amount of recorded liabilities for the
same net worth or cash flow can make it more difficult for a firm to
qualify for the financial test.
EPA is interested in having more uniformity in the reporting of
financial assurance obligations. EPA is concerned that the absence of a
minimum net worth requirement may have the undesirable effect of
favoring firms that do not record their environmental obligations as
liabilities. The provision of the rule that requires a firm to have at
least $10 million in tangible net worth over the amount of
environmental obligations being covered ensures that firms that have
not recognized their obligations as liabilities will still have
adequate net worth to fulfill their obligations.
If a firm has already recognized all of its environmental
obligations as liabilities, it could demonstrate less ability to cover
them through the financial test than if it had not recognized them as
liabilities. EPA received comments that the additive requirement would
have an impact on small owners or operators and effectively required a
higher coverage ratio for them. To address these concerns, and to
assist smaller owners or operators who have already recognized their
environmental obligations as liabilities, EPA is establishing a special
provision. Under this provision, a firm that has recognized all of its
MSWLF closure, post closure care, or corrective action liabilities
under 40 CFR 258.71, 258.72 and 285.73, obligations associated with UIC
facilities under 40 CFR 144.62, petroleum underground storage tank
facilities under 40 CFR part 280, PCB storage facilities under 40 CFR
part 761, and hazardous waste treatment, storage, and disposal
facilities under 40 CFR parts 264 and 265 can utilize the financial
test if it meets the other requirements of the test, receives the
approval of the State Director, and still maintains a tangible net
worth of at least $10 million plus the amount of any guarantees it has
undertaken that have not been recognized as liabilities. See
Sec. 258.74(e)(1)(ii)(B). This addition of any guarantees is necessary
because EPA does not expect that a guarantee extended by a corporation
will appear on that company's financial statement until it is drawn
upon and is recorded as a liability. The Agency believes that the
additional flexibility allowed by this provision creates an incentives
for owners or operators to fully recognize their environmental
obligations in their audited financial statements.
For an owner or operator to qualify for this alternative, it will
be necessary for the letter from the chief financial officer to include
a report from the independent certified public accountant verifying
that all of the environmental obligations covered by a financial test
have been recognized as liabilities on the audited financial
statements, how these obligations have been measured and reporteed, and
that the net worth of the firm is at least $10 million plus the amount
of any guarantees provided. See Sec. 258.74(e)(2)(i)(D).
EPA recognizes that its treatment in this rule of environmental
obligations that have already been recognized as liabilities differs
from the treatment in the hazardous waste financial test in 40 CFR
264.151(f) and in the proposed amendments to those rules (56 FR 30201,
July 1, 1991). In the current hazardous waste rules and the proposed
amendments, closure and post closure care obligations which have
already been recognized as liabilities can be deducted from the
liabilities and added back to net worth for purposes of calculating the
financial test. This adjustment provision was incorporated into the
regulations ``in order not to penalize those firms that do include
these costs in their liabilities'' (47 FR 15037, April 7, 1982). The
proposal for today's rule did not include a similar adjustment
provision, nor did the Agency receive comments suggesting incorporating
such a provision. The proposal was consistent with the research in the
Background Document which found a high availability of the test without
incorporating an adjustment of liabilities or net worth as allowed by
the current Subtitle C regulations. This finding was supported in the
analysis associated with the public comments which found that the
financial test would be available to cover approximately 72% of
obligations even in the absence of the adjustment.
EPA does not have information on the extent to which companies have
recognized all of their environmental obligations as liabilities.
However, in its analysis of alternative tests, EPA examined a test
designated as Test 58-10 that required the same bond ratings and
financial ratios as the final rule, but would allow a firm with at
least $10 million in tangible net worth that passed the requirements to
cover any amount of environmental obligation with the financial test.
Conceptually, the results from this test provide an upper bound
estimate of approximately 82% for the maximum percent of obligations
that could be covered with the adjustment if allowed by the State
Director.
EPA believes that substantial progress has been made since the
issuance of the 1982 hazardous waste financial assurance regulations in
the recognition of environmental obligations as liabilities. Further,
the rationale for allowing this adjustment was based upon fairness to
firms who had recognized these obligations as liabilities, rather than
a belief by EPA that these obligations should not be treated as
liabilities. The Agency
[[Page 17718]]
continues to consider environmental obligations for closure, post-
closure care, and corrective action as meeting the definition of
liabilities as ``probable future sacrifices of economic benefits
arising from present obligations to transfer assets or provide services
to other entities in the future as a result of past transactions or
events.'' (40 CFR 264.141(f)) As more firms recognize these obligations
as liabilities, the basis for granting an adjustment to the liability
and net worth measures in financial statements because of fairness has
diminished, while their recognition as liabilities has become more
accepted in the financial community. Thus, there is less of a need to
allow an adjustment of liabilities and net worth in the calculation of
the financial ratios.
This final rule allows those firms who have already recognized all
of their environmental obligations as liabilities in their financial
statements and who pass the financial test to assure for a potentially
higher amount of obligations than would otherwise be allowed. EPA
believes that this approach has preserved fairness while maintaining
the notion of these environmental obligations as liabilities, and
reduced the administrative burden of adjusting figures on the balance
sheets. EPA will continue to assess the utility of the adjustment
provision proposed for 264.151(f), and may determine that it is
appropriate to promulgate a final Subtitle C financial test regulation
that would take a similar approach to that used in this regulation.
c. Accuracy of the Test at Lower Net Worth Levels. EPA also
examined whether its financial test would operate as well for firms
with less than $10 million in net worth. Practically, no financial test
can perfectly discriminate between firms that should be allowed to use
the financial test and, therefore, not have to pay the cost of a third
party mechanism, and firms that will go bankrupt and so should have to
use a third party instrument. As a test becomes less stringent so that
it becomes more available (such as by reducing the net worth
requirement), it carries a higher risk that firms will qualify for the
test that will enter bankruptcy. The worse the test is at screening out
firms that will enter bankruptcy, the higher its misprediction rate.
Moreover, since a test will not be perfect at screening out firms that
will enter bankruptcy, a test that allows more obligations to be
covered with a financial test will have a higher dollar amount of
misprediction. EPA's analysis assessed the misprediction of the various
tests and the attendant public costs. These public costs are the costs
to the public sector of paying for financial assurance obligations for
firms that pass the test but later go bankrupt without funding their
obligations. This analysis revealed that the financial test had a 66%
higher misprediction rate (1.067%) when applied to firms with less than
$10 million in net worth than to firms with more than $10 million
(0.644% to 0.233%) (See Issue Paper, Relevant Risk Factors to Consider
in a Financial Test, which is available in the public docket). This
means that without the $10 million net worth requirement, the test
would not be as good at screening out firms that will enter bankruptcy
at the lower net worth levels.
d. Public Costs of Lower Net Worth Levels. The higher misprediction
rate for the test with a lower net worth requirement leads to higher
public costs. Since these public costs are the costs to the public
sector of paying for financial assurance obligations for firms that
pass the test and later go bankrupt without fulfilling their
obligations, an increase in public costs represents a departure from
the Agency's ``polluters pay'' philosophy. Higher public costs in this
instance would mean that costs that should have been borne by the owner
or operator (or the landfill's customers) were transferred to society
in general. This means that the customers of landfills that do not go
bankrupt unfairly subsidize the customers of landfills that did not
provide the funds for proper closure and post-closure care. This
subsidy is through government expenditures for closure and post-closure
care of the bankrupt landfills. EPA estimates that reducing the minimum
net worth requirement for the financial test from $10 million to $1
million would increase the public cost of the financial test from $11.7
million to $13.2 million annually. This would have represented a 13%
increase in public costs. In light of the substantial closure costs
involved compared to the net worth of firms with less than $10 million
in net worth, the reduced ability of the test to screen out firms that
will go bankrupt, and the increased public cost of reducing the net
worth requirement, EPA has declined to change this requirement.
However, as discussed above, in light of concerns about impacts on
smaller owners and operators, EPA has established a provision that
would allow firms that have recognized all of their environmental
obligations as liabilities additional flexibility in meeting the
minimum net worth requirement, subject to the approval of the State
Director.
3. Allow Firms to Include Closure and Post Closure Funds as Part of Net
Worth
Comment: One company suggested that EPA allow any funded liability
such as Closure/Post-Closure Trust Funds to be added to tangible net
worth when calculating the size requirement.
Response: The financial test provides a mechanism that companies
may use to demonstrate financial responsibility for closure, post-
closure and, if necessary, corrective action obligations. The
obligations covered by the financial test are those for which the
company has not already provided financial assurance through a third
party mechanism. Under the commenter's suggestion, funds in a trust for
closure costs not covered by the financial test would be added to
tangible net worth. EPA has historically deferred judgments on
accounting matters to generally accepted accounting principles (See,
for example, 40 CFR 264.141(f)). In this instance as well, EPA defers
to the application of generally accepted accounting principles to
determine the assets, liabilities and resultant net worth of the
company. If the application of generally accepted accounting principles
determines that the trust funds are assets of the company, then they
can be counted against the tangible net worth to the extent allowed by
the recognition of the company's liabilities.
Furthermore, the information on firms' financial statements which
EPA used to assess the financial tests for the proposed and this
rulemaking were based upon the application of generally accepted
accounting principles. EPA used the information based upon generally
accepted accounting principles to determine the public and private
costs of the financial test. EPA does not have information on how a
test would operate based upon some other system of financial
measurement. Therefore EPA has declined to specify particular additions
to net worth for purposes of the financial test, but would interpret
the tangible net worth requirement to be determined consistent with
generally accepted accounting principles.
4. The Net Worth Requirement Reduces the Market for Sureties
Comment: Other commenters objected to the net worth requirement as
unnecessary because it would allow the financially stronger companies
with greater net worth to utilize the financial test and thereby remove
these companies from the market for sureties and other third party
instruments.
Response: The financial test allows those companies with the lowest
[[Page 17719]]
probability of failure, and hence the least need for a third party
financial responsibility instrument, to self insure. EPA estimates that
the closure and post-closure obligations for private owners and
operators total approximately $6.4 billion. The cost for private owners
or operators to obtain third party mechanisms, such as letters of
credit or surety bonds, to assure these obligations is estimated at
approximately $123 million. With today's rule, EPA estimates that the
private cost of third party mechanisms would be $45.6 million for
obligations that cannot be covered by the financial test. This will
provide savings to owners and operators of MSWLFs of approximately $77
million annually.
The effect of this rule may be to reduce the market for certain
types of third party financial responsibility instruments, but it does
not eliminate the market which would still total approximately $45.6
million annually. This rule does not eliminate any of the third party
instruments as options for a firm to use to comply with the
regulations. In addition to sureties, the allowable instruments include
trust funds, irrevocable standby letters of credit, insurance, or
state-approved mechanisms. Therefore, even if sureties or insurers were
to decide not to provide financial assurance (an outcome which EPA does
not expect), owners or operators would still have mechanisms available
for demonstrating financial assurance. EPA notes that the types of
instruments available for demonstrating financial assurance for MSWLFs
are similar to those for Subtitle C facilities, and other financial
responsibility programs which help to sustain this market. It is EPA's
experience that sureties provide financial assurance mechanisms for
Subtitle C facilities, even though many Subtitle C facilities are able
to utilize the financial test.
EPA also examined whether the availability of the financial test
would cause some form of adverse selection whereby only ``bad risk''
firms would form the market for third party instruments and these ``bad
risk'' firms would be unable to obtain a third party guarantee. EPA's
financial test maximizes the availability of the test to strong firms
while minimizing the number of firms allowed to use the test that later
go bankrupt without covering their environmental obligations. Since no
test can perfectly discriminate between financially viable firms and
nonviable firms, a number of viable, financially sound firms will be
unable to use the test. The financial test is a conservative predictor
of long term viability and therefore a particular firm's inability to
cover all or some of its obligations using the financial test does not
necessarily mean that it poses an unreasonable risk for third-party
guarantors of financial responsibility such as the insurance or surety
industry.
Even though a firm does not pass the financial test, it remains a
viable candidate for third party instruments. While such firms are not
candidates for EPA's financial test, banks provide direct lending to
these types of firms. Banks, for example, have the flexibility to
require collateral or charge a higher interest rate to control their
risk. A surety company also has ways to control its risk such as filing
with a state a rating plan that decreases its rates for firms that meet
certain financial strength requirements and charges higher rates to
higher risk firms. For additional information on these points, please
see the Issue Paper in the docket entitled Effects of the Financial
Test on the Surety Industry.
5. Tangible Net Worth Does Not Have To Be Liquid
Comment: One commenter on the net worth requirement objected to the
selection of tangible net worth because there was not a requirement
that the assets had to be liquid, it can fluctuate dramatically so that
a firm could qualify and then not qualify for the financial test, and
it would create an uneven playing field with smaller owners and
operators being unable to utilize the financial test.
Response: The proposed financial test did not include a requirement
that owners or operators maintain a certain amount of liquid assets in
addition to the other requirements such as minimum tangible net worth.
The proposal relied upon two financial ratios, a leverage ratio of less
than 1.5 based on the ratio of total liabilities to net worth, and a
profitability ratio of greater than 0.10 based on the ratio of the sum
of net income plus depreciation, depletion, and amortization, minus $10
million, to total liabilities. The leverage ratio and profitability
ratios are highly effective in discriminating between viable and
bankrupt firms, but liquidity ratios which measure firms' liquid assets
are not as effective in discriminating between viable and bankrupt
firms. In fact, liquidity ratios can be misleading as firms in
financial distress often liquidate fixed assets to generate cash to
continue operations. (For more information on these points, please see
Chapter 4 of the Background Document, Revisions to the Subtitle C
Financial Tests for Closure, Post-Closure Care and Liability Coverage,
which was prepared in support of the July 1, 1991 proposed changes to
the Subtitle C financial test 56 FR 30201).
While the market valuation of a corporation's stock can vary
significantly, its net worth is a much more stable measure. Since net
worth reflects the accounting value of the corporation's assets minus
its liabilities, it will not have the volatility associated with the
value of the company's stock that varies with the stock market's
expectations of future dividends and interest rates. While it is
possible that a firm could have a tangible net worth value close to the
$10 million threshold, it seems unlikely that many would have a value
close to this requirement and have losses and profits that would
alternately bring them above or below the threshold. Also, the
requirement for at least $10 million in net worth is reasonable in
light of the substantial ($5.5 million for a 275 ton per day MSWLF to
$26 million for a 1125 ton per day MSWLF) closure and post-closure
costs for a MSWLF (See ``Analysis of Subtitle D Financial Tests in
Response to Public Comments''), and other factors analyzed above.
Further, the use of the financial test does not create a
significant competitive advantage. The cost of providing financial
assurance through an alternative third party mechanism such as a letter
of credit is approximately $1.35 to $0.94 per ton for 375 to 1500 ton
per day landfills. This is not a large enough price difference to
change substantially the competitive structure in many markets. Other
factors are more important to competition within the industry. For
example, transportation costs for transfer facilities can amount to
$4.30 per ton, and an additional $4.30 to $7.50 per ton for every 100
miles for rail and truck hauling respectively. (For further information
please see Issue Paper, Market Effects of the Financial Test.) Further,
the alternative of maintaining the status quo would withhold greater
flexibility for financially viable firms. EPA believes it is reasonable
to extend regulatory flexibility to firms expected to be viable.
6. MSWLFs Should Have a Lower Minimum Net Worth Requirement Than
Subtitle C Facilities
Comment: One commenter suggested that since MSWLFs pose less risk
than hazardous waste activities, that the use of the same $10 million
threshold for entry into the industry is much more appropriate for
Subtitle C than for firms operating only in the MSWLF industry, and
that EPA should choose a lower threshold for the municipal solid waste
sector.
[[Page 17720]]
Response: This comment confuses the criteria for the financial
test, which is one of the mechanisms for demonstrating financial
responsibility, with EPA's broader requirement that companies
demonstrate financial responsibility. For municipal solid waste
landfills, EPA has long established financial assurance requirements at
40 CFR 258.71 for closure, 258.72 for post-closure care, and 258.73 for
corrective action. These provisions already made a distinction between
the financial responsibility requirements for MSWLFs and those for
hazardous waste operations. Under 40 CFR 264.147 and 265.147 hazardous
waste operations must maintain liability coverage for accidental
occurrences, while EPA has deferred a corresponding requirement for
MSWLFs (56 FR 51105). The fundamental requirements to maintain
financial responsibility are not the subject of this rulemaking.
Rather, this rule provides additional flexibility for private owners
and operators to meet the financial responsibility requirements.
The demonstration of financial assurance can be through several
mechanisms, including a financial test. There is no net worth
requirement for firms to enter either the hazardous or municipal waste
industry. The $10 million in net worth is only to qualify for the use
of the financial test.
7. EPA's Proposed Net Worth Requirement Was Not the Best Investigated
Comment: Two commenters preferred a test with a net worth
requirement at least equal to the amount being assured to EPA's
proposal of at least $10 million plus the amount being assured. They
noted that the two tests had the same public and private costs, and
argued that this meant that the test EPA proposed was therefore not
preferable to the other.
Response: The preamble to the proposed MSWLF financial test
includes calculated private and public costs for three candidate tests
which incorporate the same leverage and cash flow ratios or bond rating
requirements, but differ in the amount of obligations that could be
covered through the financial test. Test 562, which is the test that
EPA proposed, allows a firm to cover obligation up to $10 million less
than its net worth (i.e. the test requires a net worth at least $10
million greater than the amount being assured). Test 130 allows a firm
with at least $10 million in net worth to cover obligations up to the
amount of its net worth. Test 58 allows a firm with $10 million in net
worth to cover any amount of obligations. Based upon the commenters'
suggestion that EPA's proposal had wrongly rejected Test 130 in favor
of Test 562, EPA reviewed all three tests using updated financial
information from Dun and Bradstreet, Moody's and Standard & Poor's.
This analysis appears in the docket under the title ``Analysis of
Subtitle D Financial Tests in Response to Public Comments.''
Under the proposed test (identified as number 562-10 in the
report), an owner or operator who meets the other test criteria can
assure obligations as long as the firm's tangible net worth is at least
$10 million larger than the obligation. This test has a private cost of
$45.6 million and a public cost of $11.7 million for a total cost of
$57.3 million. The private cost of the test represents the cost for
owners or operators to provide a third party instrument (e.g. letter of
credit) to demonstrate financial responsibility under the existing
financial assurance requirements. The public costs represent the costs
to the public sector of paying for financial assurance obligations
(e.g. closure or post-closure costs) for firms that pass the test but
later go bankrupt without funding their obligations. The cost figures
for this and the other tests analyzed differ from the costs in the
preamble to the proposal largely because the analysis performed in
response to public comments included firms with less than $10 million
in net worth. Therefore the private cost figures include not only the
cost of securing a third party instrument for firms with more than $10
million in net worth, but also for firms with less than $10 million in
net worth.
Under Test 130-10 the owner or operator with at least $10 million
in net worth and meeting the other criteria of the test can assure
obligations up to the net worth of the firm. For this test the private
cost is lower at $43.2 million because a larger value of obligations
can be assured. However, the public cost is higher than for Test 562 at
$12.2 million for a total cost of $55.4 million.
Under Test 58-10 the owner or operator who passes the other
criteria of the test could assure any amount of obligations so long as
the company has a tangible net worth of at least $10 million. This test
has a private cost of $32.9 million and a public cost of $14.1 million
for a total cost of $46.9 million.
These cost estimates demonstrate that there are differences between
Test 562, Test 130 and Test 58. Most notably, Test 562 has the lowest
public costs of the three tests. EPA is concerned that allowing a
company to assure environmental obligations up to the amount of its net
worth, or any amount of obligations, could mean that these obligations
could, of themselves, cause a firm's bankruptcy and so in the final
rule adopted a regulation based upon the criteria in Test 562. However,
the commenter's suggestion that EPA re-examine the relative merits of
the tests led EPA to re-consider the appropriateness of Test 562 for
firms that fully recognize environmental obligations as liabilities in
financial statements. The provisions of today's rule which allow a firm
that has recognized all of its environmental obligations as liabilities
to assure them as long as it has at least $10 million in net worth
(plus the amount of any guarantees not recognized on its financial
statements) and meets the other criteria of the financial test means
that these provisions with these important qualifications, are
conceptually similar to the requirements of Test 58. As such these
companies can assure a higher level of obligations than they could
under Test 130. Therefore EPA believes that this provision potentially
provides a larger amount of regulatory relief than the adoption of Test
130 since Test 58 has a lower private cost.
8. The Tangible Net Worth Requirement Is Appropriate
In addition to comments objecting to the proposed tangible net
worth requirement, EPA also received comments supporting it. These
comments came from the Texas Natural Resources Conservation Commission,
and Browning-Ferris Industries. In addition, the State of Nebraska
commented that they had no objection to the proposed financial test.
B. Bond Ratings
Comment: One commenter suggested that the proposed financial test
accept ratings by Duff & Phelps, and Fitch in addition to bond ratings
by Moody's, and Standard & Poor's.
Response: Both Standard & Poor's, and Moody's publish information
on how often bonds with various ratings have defaulted. This
information confirms that bonds with investment grade ratings from
these rating agencies have low default rates. The default rate
information allows EPA to determine the risk associated with accepting
particular bond ratings and to compare the default rates of bonds with
various ratings given by the rating agencies. While Duff & Phelps and
Fitch also provide bond ratings, they do not publish information on
default rates by bond rating and so EPA is unable to assess the default
rate for bonds rated by Duff & Phelps and Fitch. When EPA
[[Page 17721]]
promulgated the financial test for Subtitle C facilities on April 7,
1982 (47 FR 15036), it limited the use of bond ratings to the services
that could provide information on the performance of their bond ratings
over time. Today's rule is consistent with that policy.
Long after the close of the public comment period and as this rule
was undergoing Agency review, EPA received information from Fitch
Investor Services about default rates. EPA has requested additional and
clarifying information about Fitch's default rates to help it evaluate
this issue. EPA decided not to delay the promulgation of this rule
while it is reviewing this issue. Instead, EPA consider this
information and other information it obtains on the accuracy of bond
ratings by services other than Standard & Poor's, and Moody's in the
forthcoming promulgation of changes to the Subtitle C financial test. A
copy of the information from Fitch and EPA's follow-up correspondence
is available in the public docket for the rulemaking proposing
revisions to the Subtitle C financial test. (56 FR 30201)
Comment: While supporting the use of bond ratings, one commenter
noted that the proposed rule and preamble make no distinction relative
to the seniority of the debt.
Response: The commenter correctly noted that the only qualification
on the bond to be rated was that it be the most recent. As noted above,
an analysis of bond ratings showed that bond ratings have been a good
indicator of firm defaults. Part of the basis of the bond ratings is
the assurances for timely repayment for the bond. A bond which is
collateralized or insured will, in general, carry a higher rating than
otherwise.
The bond rating in the financial test is an indicator of the
certainty that environmental obligations being assured will be
fulfilled. A bond may be of investment grade only because it is
collateralized or insured. Because the financial test does not require
establishment of collateral or a third party assurance, allowing a
rating on an insured or collateralized bond could easily overestimate
the certainty of the fulfillment of environmental obligations which are
not collateralized or otherwise guaranteed. Since an investment rating
on the most recent bond would not require a firm to pass any of the
financial ratios, a firm using, for example, the investment rating on a
bond that it had been forced to collateralize, would inappropriately
pass the financial test.
Therefore, in light of this public comment, EPA has decided to base
the bond rating alternative of the financial test on the rating of the
firm's senior debt. This rating is readily available, regularly
monitored by the rating agency, and avoids the issues of whether a
particular bond has been collateralized or insured. Because the rating
of the firm's senior debt reflects the rating agency's judgement of the
overall financial management of the firm, it is a better indication of
the financial health of the firm.
Comment: One commenter noted that bond ratings while an indicator
of an owner/operator's financial standing, do not guarantee that funds
will be available for closure and post closure care. As evidenced by
recent events involving highly rated entities, bond ratings are not
infallible, and often times can fluctuate rapidly.
Response: While not infallible, bond ratings are excellent
predictors of whether bonds will be repaid with more highly rated bonds
having lower default rates than bonds with lower ratings. Overall, the
annual assurance risk for investment grade bonds is 0.126% for Moody's
and 0.175% for Standard and Poor's. (See Issue Paper, Issues Relating
to the Bond Rating Alternative of the Corporate Financial Test in the
public docket.)
Because bond rating organizations regularly re-evaluate the
financial soundness of the firms, bond ratings change with the
financial circumstances of the firm. These changes in ratings are
widely available through financial news sources and the Internet and so
would be available to a State more quickly than the update based upon
annual financial statements. EPA considers this re-evaluation of the
firm's financial outlook another advantage of the bond rating
alternative which, combined with the low default rate on investment
grade bonds, supports the use of bond ratings in the financial test.
Thus, EPA believes that bond ratings together with the other elements
of the financial test are sound reliable predictors of an owner or
operator's financial viability.
Rating agencies can revise the ratings of bonds up or down for
several reasons which will be of interest to investors because of the
effect on the price of the bonds. (Higher grade bonds demand a higher
price than lower rated bonds.) In this process, rating agencies
frequently will place an issue on a ``watch list'' to signify that its
rating may change. However, most of these changes will be within a
ratings category (e.g. A to A-) or from one investment grade rating to
another (BBB to A) and be inconsequential for purposes of the financial
test. Studies from rating agencies demonstrate that the vast majority
of entities with investment grade ratings retain them. For example,
Standard & Poor's reports that from 1981 to 1996 an average of 93.87%
of entities with investments grade ratings at the beginning of the year
had an investment grade rating at the end of the year. (See Table 9 of
``Ratings Performance 1996, Stability and Transition,'' Standard &
Poor's, February 1997.) These data, and similar results from Moody's
(See Exhibit 6 of ``Moody's Rating Migration and Credit Quality
Correlation, 1920-1996,'' Moody's, July 1997), do not substantiate the
commenter's claim that ratings often times can fluctuate rapidly.
(These studies do, however, provide additional substantiation for EPA's
use of the rating on the firm's senior unsecured debt as it is these
ratings that form the basis for default rate studies by Standard &
Poor's, and Moody's.) For the financial test, a change in rating only
matters if it moves a firm from investment grade to speculative. The
test does not distinguish between investment grade ratings. Therefore,
while bond ratings do fluctuate, the minor fluctuations will not often
affect a firm's ability to use the financial test.
Comment: The bond rating alternative would be of advantage to only
three firms in the industry. This is a further anticompetitive
advantage for large firms. The proposed rules create a significant
competitive advantage for larger firms and will lead to less
competition and higher prices.
Response: The use of bond ratings provides a financial test that is
highly reliable as shown by the low default rate on investment grade
bonds. In addition to the bond rating alternative, EPA has allowed the
use of financial ratios which also are accurate predictors of the
financial viability of a firm. These two mechanisms provide additional
flexibility for firms subject to the financial responsibility
requirements which already provide several mechanisms by which a
company can demonstrate financial assurance.
While the commenter notes that only three firms in the industry
would meet the bond rating alternative, this appears to be an
incomplete picture. EPA obtained bond ratings from Standard & Poor's,
and Moody's for firms in the MSWLF industry. At the time of this data
gathering, EPA was able to obtain ratings for nine firms (with their
ratings in the parentheses): Allied Waste Industries, Inc. (BB-, B2);
Browning-Ferris Industries (A, Aa2); Laidlaw, Inc. (BBB+, Baa2); Mid-
American Waste Systems (Ca1); Norcal Waste Systems, Inc. (BB-, B3);
Sanifill, Inc. (BB+); United Waste Systems, Inc. (BB+); USA
[[Page 17722]]
Waste Services, Inc. (BBB-), and WMX Technologies (A+, A1). Four of
these firms had investment grade ratings and so could have qualified to
use the financial test if they met the other qualifications, and four
others had BB ratings, just below investment grade. If the financial
situation for the four firms with BB ratings were to improve such that
the rating agencies were to upgrade their ratings, they would also have
been eligible to utilize the financial test. Were EPA not to adopt the
bond rating alternative, this compliance option would be foreclosed to
potentially more than the three firms suggested by the commenter.
EPA notes that some of these firms no longer exist independently,
or have decided to sell their operations to other firms. For example,
Allied Waste Industries has acquired the solid waste operations of
Laidlaw, and USA Waste Services has acquired the operations of Mid-
American Waste Systems, Sanifill, and United Waste Systems. These sales
have occurred between the time that EPA gathered this information and
the publication of this rule. This consolidation has occurred in the
absence of a corporate financial test, and indicates that factors
beyond this rule are influencing the number of competitors in the
industry. As the ownership patterns for municipal solid waste companies
has changed substantially in the past, it is difficult to predict
future directions. Eliminating the regulatory option of a bond rating
alternative could preclude a future company from being able to utilize
the financial test even if the analyses by bond rating agencies would
show the company to be a good credit risk. Conversely, because bond
ratings have been excellent predictors of bankruptcy, eliminating the
bond rating alternative would deny to State Directors an effective test
of companies' financial health. In response to this and other similar
comments, the Agency further examined whether the financial test would
change the relative competitiveness of large versus small operations.
(See Issue Paper, Market Effects of the Financial Test). The principal
findings of that investigation were that even if a large landfill were
to use a third-party financial assurance mechanism rather than the
financial test, it would still face lower costs per ton than a smaller
landfill. Further, for both small or large landfills third-party
financial assurance costs constitute only two to three percent of total
costs.
Also, in the context of a host of other factors affecting tipping
fees, including location, fixed costs, and pricing strategies,
financial assurance costs are not likely to play a key role in
competition within the MSWLF industry. In particular, costs to
transport waste to a larger facility may more than offset potentially
lower tipping fees that the larger landfill might charge as a result of
using the financial test to demonstrate financial assurance. Therefore,
EPA does not believe that the financial assurance test will be a
significant factor in influencing the competitive nature of the
industry.
C. Financial Ratios
Comment: One commenter agreed with the use of bond ratings but
disagreed with the use of a financial test involving only a single
ratio. The commenter instead recommended at least three ratios to
determine a firm's changes in cash flow, revenues and expenditures, and
equity. The commenter stated that the use of three ratios would also be
consistent with the three ratios required in the local government test
and other Agency programs.
Response: EPA's financial test adopted in today's rulemaking action
includes two alternative ratios that consider either the ratio of total
liabilities to net worth (Sec. 258.74(e)(1)(i)(B)), or the ratio of net
income plus depreciation, depletion, and amortization, minus $10
million, to total liabilities (Sec. 258.74(e)(1)(i)(C)). The analysis
supporting the proposal indicated that the two alternative ratios do
very well at allowing firms to qualify for the test while
distinguishing between firms which will and will not go bankrupt. (This
information can be found in Section VI of the preamble to the proposed
rule (59 FR 51523)). Additional analyses, conducted in response to this
and other comments confirmed these findings as shown by Exhibit 6 of
the Analysis of Subtitle D Financial Tests in Response to Public
Comments. This exhibit shows the high availability of the test (71.67%
of obligations) and its low public cost ($11.7 million). By comparison,
the current Subtitle C test, which uses three ratios, has a much lower
availability (24.44% of obligations). While the analysis of the current
Subtitle C test shows a low public cost of $4.3 million, this happens
because of its low availability rather than because it is a better
predictor of bankruptcy than the test being adopted today. A comparison
of the misprediction of a test (M(f)) divided by its availability
(A(f)) shows that the test EPA selected (Test 562-10) has a better
ratio (0.362) than the current Subtitle C test (0.380). These ratios
can also be taken from a single year's financial information.
To design a test as recommended by this commenter would involve a
substantial degree of complexity, and with the variables cited (changes
in cash flow, and revenue and expenditures) could also lack reliability
and have a degree of redundancy. For example, measuring changes in cash
flow could discriminate against a firm which previously had an
exceptionally profitable year, but had only normal profitability in the
most recent year. This occurs because the change in cash flow would be
negative, even though the profitability was still acceptable.
Measurements of changes in revenues and expenditures will incorporate
much of the information in changes in cash flow and so may yield little
additional information. Further, the variables that the commenter
suggests do not directly include measures of debt which EPA's research
found are crucial in the prediction of bankruptcy.
While the current Subtitle C financial test incorporates three
ratios, they involve different measures than suggested by the
commenter. Moreover, EPA has proposed changes to the Subtitle C test
(56 FR 30201) involving the same ratios, and the same number of ratios,
used in this test for corporate owners and operators of MSWLFs.
Consistency with the current Subtitle C financial test is not a
sufficient reason to include another test when the test being
promulgated here has shown that it does a very good job of
distinguishing between firms that will remain viable and those that
could go bankrupt. Furthermore, while the commenter noted that EPA's
proposed local government financial test incorporated three ratios, the
final test has two ratios (61 FR 60328).
Comment: The profitability ratio incorporates a $10 million
subtraction from net cash flow in the comparison with liabilities. One
commenter recommended that the numerator instead subtract the lesser of
$10 million or a percentage of the costs being assured.
Response: In light of public comments on its proposal, EPA has
examined several alternative specifications of the financial tests. The
results of these examinations appear in the report entitled ``Analysis
of Subtitle D Financial Tests in Response to Public Comments'' that is
included in the public docket of this rulemaking. The alternative
specifications included fractional specifications (e.g. 0.66 times the
financial assurance amount and identified as Test 94-10) of the amount
of the liabilities compared with cash flow, a lower decrement from cash
flow (e.g. Cash flow--$5 million and
[[Page 17723]]
identified as Test 544-10), no decrement from cash flow (Test 76-10)
and different ratio requirements (e.g. 0.05 rather than 0.1 and
identified as Test 127-10). None of these alternative specifications
were as good overall at minimizing both the public and private costs as
the tests that EPA had included in its proposed rule. Therefore, EPA is
promulgating the same cash flow requirement in this rule as that
proposed.
D. Domestic Assets
Comment: Several commenters supported the proposed domestic asset
requirement, but others recommended alternatives such as a six times
multiple, or assets in the United States equal to the minimum size
requirement, or domestic assets equal to 50% to 90% of total assets.
Response: EPA has decided to promulgate the domestic asset
requirement as proposed. While commenters offered alternative
approaches for a domestic asset requirement, many of these were based
upon the use of a number from, for instance, EPA's current Subtitle C
financial test (e.g. the six times multiple which EPA proposed to
change in the October 12, 1994 notice for this rulemaking, see 59 FR
51527), or a separate component of the proposal (e.g. the minimum
tangible net worth) with little basis for adoption as part of the
domestic asset requirement. These approaches would have the effect of
potentially reducing the availability of the financial test, and
thereby increasing private costs, without a demonstration of how they
would make the test less available to firms which would enter
bankruptcy, and thereby decrease the public costs. The information that
the commenters provided did not demonstrate that requiring more
domestic assets would lead to a reduced risk of bankruptcy, which is
already a small probability. Both firms that only have domestic assets
and firms that also have foreign assets must meet the same ratios or
bond ratings to qualify for the test. The effect of a more stringent
domestic asset requirement would have limited the amount of obligations
that a firm qualifying for the financial test can cover. This would
potentially have increased the private cost of the test, but not have
made the test a better predictor of bankruptcy. Only in the unlikely
event of a bankruptcy would this more stringent requirement have had an
impact by having reduced the amount of costs covered. EPA believes that
requiring domestic assets equal to the amount assured represents a
balanced approach.
Comment: One commenter noted that none of the domestic assets had
to be liquid and recommended that EPA should require that some or all
of the domestic assets should be liquid and readily accessible.
Response: While liquid assets are more readily accessible than
fixed assets, EPA is not establishing a requirement that a certain
amount of domestic assets be liquid. During the normal course of
business, firms can be expected to maintain a portion of assets in
liquid form. However, liquidity can be a misleading predictor of
bankruptcy. This arises because firms that are under financial distress
tend to liquidate assets and thus appear more liquid as they move to
bankruptcy. Further, if the underlying concern is that a foreign firm
would withdraw from the US market and declare bankruptcy, a requirement
for liquid assets, which can be readily transferred, would prove to be
an ineffectual deterrent.
E. Recordkeeping and Reporting Requirements
Comment: One State noted that its program does not follow the self-
implementing requirement of the test which allows the owner or operator
to maintain the documentation as part of the operating record, but
instead requires the submission of the original financial assurance
documents.
Response: In developing its regulations for MSWLFs, EPA has adopted
a self-implementing approach. However, EPA recognizes that some States
may have different programs. This rule does not preclude a State from
having more stringent requirements than EPA.
1. Qualified Accountant's Opinions
Comment: Some commenters suggested that the final rule disallow the
use of the financial test automatically if there was a qualification to
the accountant's opinion. These comments were based upon a concern that
allowing the use of a qualified opinion without specifying the basis
for that allowance could lead to inconsistent application by states or
that states would have insufficient resources to consider these
opinions. Others recommended that the rule provide narrower definitions
of what would constitute something other than a clean opinion.
Response: The proposal and final rule provide that to be eligible
to use the financial test, the owner or operator's financial statements
must generally receive an unqualified opinion. However, the rule also
allows the State Director the discretion of allowing a firm on a case-
by-case basis to use the financial test if it has received a qualified
opinion. The final rule provides that an adverse opinion, disclaimer of
opinion, or other qualified opinion will be cause for disallowance. See
Sec. 258.74(e)(2)(i)(B). However, this provision of the rule further
provides that the Director may evaluate qualified opinions on a case-
by-case basis and allow use of the financial test in cases where the
Director determines that the matters which form the basis for the
qualification are insufficient to warrant a disallowance of the test.
Part III of this preamble also explains that an unqualified opinion
(i.e. a ``clean opinion'') from the accountant demonstrates that the
firm has prepared its financial statements in accordance with generally
accepted accounting principles. The Agency believes that, consistent
with these standards, this is an appropriate area for a State Director
to exercise judgment and does not see a need at this time to provide
further national guidance on how to consider submissions which do not
have unqualified opinions. A state that determines that reviewing
financial statements that have received a qualified opinion would
constitute an unreasonable resource burden would not have to adopt that
provision of the rule. However, EPA will consider providing additional
guidance if state implementation issues or other circumstances so
warrant.
2. Special Report From the Independent Certified Public Accountant
Comment: The American Institute of Certified Public Accountants
(AICPA) recommended that the regulations provide for a CPA to perform
an agreed-upon procedures engagement in accordance with standards
issued by AICPA to report his or her findings. This would replace the
review level or examination level procedure called for in the proposal.
Response: Under the regulations the owner or operator does not need
to provide a report from the CPA if the Chief Financial Officer uses
financial test figures directly from the annual financial statements or
any other audited financial statements or data provided to the
Securities and Exchange Commission. In these cases, EPA does not see a
need for a special report from the CPA.
Under EPA's proposed regulations, if the owner or operator used
financial test data that were different from the audited financial
statements or not taken directly from SEC filings, then the owner or
operator had to provide a special report from the independent
[[Page 17724]]
certified public accountant stating that ``In connection with that
examination, no matters came to his attention which caused him to
believe that the data in the chief financial officer's letter should be
adjusted.'' 59 FR 51535. EPA agrees with the comment from AICPA that
the special report required by the proposed rule was an inappropriate
type of engagement.
In performing audits and other types of work, CPAs must follow
certain professional standards. The AICPA's Statement on Auditing
Standards no longer permits independent auditors to express negative
assurance (i.e. ``No matter came to his attention which caused him to
believe that the specified data should be adjusted.''). The current
AICPA standards require the auditor to present the results of
procedures performed in the form of findings, and explicitly disallow
issuing ``negative assurance.'' Thus, the proposed regulatory language
would have precluded an owner or operator who wanted to use adjusted
data in the financial test from having that option.
If the owner or operator uses financial test figures that are not
taken directly from the audited financial statements or SEC filings,
then the owner or operator should include a report from the independent
certified public accountant that is based upon an agreed-upon
procedures engagement performed in accordance with AICPA standards. In
an agreed-upon procedures engagement an accountant is engaged by a
client to issue a report of findings based upon specific procedures
performed on specific items of a financial statement. The final
regulations require the report to describe the procedures performed in
comparing the data in the chief financial officer's letter derived from
the independently audited, year-end financial statements for the latest
fiscal year with the amounts in such financial statements, the findings
of that comparison, and the reasons for any differences. See
258.74(e)(2)(i)(C).
F. Annual Updates
Comment: Commenters suggested allowing a minimum of 120 days for
privately held firms (as opposed to publicly traded firms) to update
their financial information because they are not considered major
accounts and so frequently have their audits performed after publicly
held firms.
Response: To address this comment, in the final rule, EPA has given
State Directors the discretion to allow firms that can demonstrate that
they cannot meet the annual requirement to acquire audited financial
statements within 90 days of the close of the fiscal year up to an
additional 45 days to demonstrate that they qualify. EPA believes that
this can be particularly valuable to smaller firms that are not
publicly traded and so may not have their audited financial statements
prepared as quickly as larger firms.
G. Current Financial Test Documentation
Comment: Some commenters objected to the provision in
258.74(e)(2)(vi) that allows the State Director to request current
financial test documentation when there is a reasonable belief that the
owner or operator no longer meets the requirement of 258.74(e)(2).
Response: The Agency continues to believe that to promote and
verify compliance it is important that State Directors may request
additional information based upon a reasonable belief that the owner or
operator may no longer meet the requirements of the financial test. As
noted above and in the preamble to the proposed rule, the State
Director may wish to request additional information in the event of a
large liability judgment. Another example could be the reported
downgrading of a firm's bonds so that the firm could no longer qualify
by virtue of the bond rating alternative. While both of these
occurrences can be appropriate circumstances for such a request, EPA
does not consider this an exhaustive list. The final rule continues to
use the criteria of ``reasonable belief.''
Comment: One commenter asserts that this requirement should be
deleted as it is not in the Subtitle C rules, and Subtitle D facilities
present less of a threat to human health and the environment.
Response: In fact, this requirement appears in the Subtitle C
financial test regulations promulgated April 7, 1982 (47 FR 15032)
(See, for example, existing 40 CFR 264.143(f)(7)). It is important in
both the financial tests for the hazardous and the municipal waste
programs that the State Director have the ability to ensure that firms
qualifying for the financial test continue to demonstrate financial
viability.
Comment: One comment suggested that EPA allow the use of internal
financial statements based upon the most recently unaudited quarterly
financial statements to respond to a request by the State Director for
additional information.
Response: Section 258.74(e)(2)(vi) of the proposed rule would have
required the owner operator ``to provide current financial test
documentation as specified in paragraph (e)(2) of this section.'' This
may have been interpreted as merely the transmission to the State
Director of the types of documentation required to be maintained in the
facility's operating record. EPA agrees with the commenter that the
types of documentation may differ depending upon the nature of the
State Director's concern. The final rule modifies this requirement to
clarify that the State Director may require the documentation in
paragraph (e)(2) or additional information. This is consistent with the
general purpose of the requirement, to ensure the State Director can
obtain the information necessary to verify whether the firm still meets
the financial test. 59 FR 51526. This leaves to the State Director the
discretion to require the appropriate level of information, as
warranted by the circumstances.
H. Corporate Guarantee
Comment: Some commenters agreed with allowing the use of a
corporate guarantee, while others objected to its inclusion as a
mechanism because of concerns about the ability of States to implement
such a regulation.
Response: The Agency continues to believe that a corporate
guarantee, like other third party mechanisms such as letters of credit
or surety bonds, can ensure that a third party is obligated to cover
the costs of closure, post-closure care, or corrective action in the
event that the owner or operator goes bankrupt or fails to conduct the
required activities. States concerned with implementation of a
corporate guarantee could decline to adopt this mechanism. Conversely,
if a state chooses to revise its permit program in response to today's
rule, the state should work with the respective EPA regional office as
it proceeds to make these changes.
Comment: One State recommended not allowing the use of a corporate
guarantee based upon a substantial business relationship because it
would require a decision by the State's Attorney General on its ability
to enforce against a guarantor.
Response: While the final rule allows the use of a guarantee by a
firm with a substantial business relationship, States do not have to
adopt this provision if, for example, a state believes it creates
undesirable administrative or enforcement burdens. EPA notes that its
regulations in the hazardous waste program already allow the use of a
corporate guarantee by a firm with ``a substantial business
relationship'' in demonstrating financial assurance in, for example, 40
CFR 264.143(f)(10) or 40 CFR 265.147(g). (See also 40 CFR 264.141(h)
for a definition of ``substantial business relationship.'') EPA expects
that the number of owners
[[Page 17725]]
or operators who would qualify to use this provision in the MSWLF
criteria will be substantially smaller than for coverage in the
Subtitle C program if for no other reason than the number of firms that
could need a guarantee is less than the number of Subtitle C firms.
Comment: Another commenter suggested that limiting the use to firms
with a substantial business relationship was too restrictive.
Response: Broadening the availability of the corporate guarantee to
firms which do not have a substantial business relationship could
affect the validity and enforceability of the guarantee. The scope of
the corporate guarantee is the same as in the Subtitle C regulations
that allow it for closure and post closure care liabilities (57 FR
42832). This rule was an extension to closure and post closure care
liabilities of an earlier rulemaking allowing the guarantee for
liability coverage by firms with a substantial business interest (53 FR
33938). In the preamble to the regulation establishing this mechanism
for Subtitle C liability (53 FR 33942), EPA addressed whether a broader
availability would be appropriate. The Agency determined that a
substantial business relationship was necessary to ensure that the
guarantee would be a valid and enforceable contract. ``EPA sought to
ensure that a valid and enforceable contract was created. To this end,
the Agency is requiring these firms to demonstrate a substantial
business relationship with the owner or operator to ensure that the
guarantee is a valid contract.'' As EPA noted in the preamble, ``A
guarantee contract, by itself would be inadequate to demonstrate a
substantial business relationship between two parties. However, an
existing contract to supply goods or services, separate from the
guarantee contract, could supply evidence of such a relationship. An
example of such a relationship might be a contract for hazardous waste
disposal between a generator and a disposal facility.'' The commenter
provided no information on how to ensure that a guarantee between firms
that do not have a substantial business relationship would be valid and
enforceable, and therefore the Agency has insufficient basis for
expanding the types of firms which can offer guarantees. To ensure the
enforceability of the guarantee, EPA has retained the requirement that
the guarantor have a substantial business relationship with the owner
or operator.
Comment: One commenter suggested that the rule require a guarantor
to provide alternate financial assurance 30 days after the guarantor
discovers that it no longer meets the terms of the financial test. This
would limit the exposure to only 30 days versus possibly a year or
longer under the current proposed requirement.
Response: Under the commenter's suggestion, a guarantor would have
thirty days once it discovers that it no longer meets the financial
test to provide an alternative mechanism. Under the proposed
regulation, the owner or operator must provide financial assurance
within 90 days of the close of the guarantor's fiscal year if the
guarantor no longer passes the financial test. If a guarantor no longer
met the requirements of the financial test by, for example, losing an
investment grade bond rating, the language in the proposal could have
delayed when the owner or operator, or the guarantor, would have had to
provide an alternative mechanism. In the rulemaking for the financial
test for local governments who own or operate MSWLFs (61 FR 60328), the
Agency faced similar issues. Today's rule adopts language consistent
with the guarantee provision in the local government rule to reduce
this potential delay. EPA has made this adjustment by essentially
removing the words ``following the close of the guarantor's fiscal
year'' in the proposal language. This clarifies that if a guarantor no
longer meets the criteria of the financial test in the middle of a
fiscal year, it would only have a total of 120 days to correct the
problem. In the case of a guarantor whose year-end financial statement
shows that the firm no longer meets the criteria of the financial test,
the owner or operator would have 90 days from the close of the
guarantor's fiscal year to obtain an alternative mechanism, and if the
owner or operator does not obtain an alternative, then the guarantor
must provide an alternative mechanism within the next 30 days.
However, while the commenter suggested a 30 day deadline for the
guarantor to secure an alternative instrument, EPA believes that this
is an overly aggressive deadline to establish as a general rule. Thus,
EPA has retained the requirement that the owner or operator secure an
instrument within 90 days, and if the owner or operator fails to do so,
then the guarantor must secure an alternative instrument within 120
days. The 90 day deadline is consistent with the reporting deadlines of
the rule for firms using the financial test mechanism, and the overall
120 day deadline for the guarantor is consistent with the 120 day
deadline for an owner or operator who has failed the financial test to
obtain an alternative mechanism.
I. Impacts on Third Party Financial Assurance Providers
Comment: Several commenters felt that by allowing the financial
test, EPA would create a situation where the best risks would use the
financial test and the highest risk owners or operators would be left
to third party instruments. Sureties and insurance companies would be
uninterested in making a market for the highest risks.
Response: The financial test will allow firms with the least chance
of bankruptcy to utilize the test rather than purchase third party
mechanisms. However, with this flexibility EPA expects that there will
still be a demand for third party instruments such as can be provided
by insurers and sureties. Further, in addition to the financial test
and guarantee, and sureties and insurance, the financial assurance
regulations allow firms to demonstrate financial responsibility with
trust funds, letters of credit, and other state-approved mechanisms
meeting the performance criteria. Thus, even if sureties or insurers
were no longer to provide a mechanism, firms that could not qualify for
the financial test would still have mechanisms available to provide
financial assurance.
With the exception of the state-approved mechanisms, the RCRA
Subtitle D mechanisms are substantially the same as those that are
available for owners and operators of RCRA Subtitle C treatment,
storage and disposal facilities. In Subtitle C, a financial test has
been available since 1982, and firms demonstrate financial assurance
with the full range of mechanisms including surety bonds and insurance.
EPA believes that sureties and insurers will evaluate the market for
their products and, as demand warrants, will continue to provide
mechanisms, as they have in Subtitle C.
J. General Support of and Opposition to the Financial Test
Comments: States and others expressed both general support of and
opposition to the financial test. One State noted that a financial test
does not provide a State or EPA access to funds to complete closure,
post-closure, or corrective action should the financially responsible
corporation refuse to take the needed action. The recourse for the
State or EPA would be a lengthy and costly lawsuit.
Response: While the commenter notes a circumstance in the financial
responsibility test where the owner or operator has the financial
wherewithal to comply but does not, this circumstance does not
distinguish itself
[[Page 17726]]
from others where EPA or a State must undertake enforcement to obtain
compliance. The likelihood of a financially sound firm nevertheless
being reluctant to fulfill its obligations is not affected by today's
final rule.
Third party mechanisms do, however, provide easier access to funds
to fulfill financial obligations. A State may, therefore, decide that
it has facilities with poor compliance histories that do not make them
a good candidate for the financial test in order to eliminate potential
delays in obtaining closure, post-closure or corrective action.
Similarly, States may decide to forego altogether adoption of the
financial tests.
K. First Party Trust
Comment: As an alternative to a financial test and guarantee, one
commenter suggested allowing facility owners to establish funds under
their administration and management which would be regulated by a State
agency which would establish rules for deposits as a trust fund. Once
closure was complete, the funds would revert to the owner.
Response: The current financial responsibility standards allow
owners and operators to establish financial responsibility through a
trust fund managed by a third party. Under the commenter's plan, the
facility would maintain control over the funds so the protections
inherent in having a third party manage the funds would be lost. This
plan would also require States to regulate these funds and ensure their
safety. Since the funds remain under the control of the owner or
operator, there could be concern for their safety unless the firm was
in excellent financial condition. The mechanism to ensure this
excellent financial condition could look substantially like a financial
test so it is unclear what has been gained over EPA's approach of
directly allowing a financial test. EPA does not consider this approach
superior to its current system of allowing trust funds and a financial
test and corporate guarantee.
L. Comments on the Notice of Data Availability
EPA received two comments on the September 27, 1996 Notice of Data
Availability (61 FR 50787) providing additional opportunity to comment
on EPA's analysis of the Meridian Corporation's alternate financial
test: one from a private operator of MSWLFs, and one from a State
regulatory agency.
Comment: The private operator who commented on EPA's analysis of
the Meridian Report did not believe that each state should determine
which mechanism(s) and the terms of the mechanism that an owner or
operator should be able to use, but that the owner or operator should
be allowed to use one or any combination of the following historically
approved mechanisms: standby trust agreement, surety bond, letter of
credit, insurance, or the financial test and corporate guarantees for
closure, post closure, and/or corrective action.
Response: The Subtitle D program is intended to be a state
implemented program. The Agency has therefore left it to the states to
determine what financial mechanism they will allow and specific details
regarding those mechanisms. Indeed, a Congressional objective of RCRA
is to establish a joint state and Federal partnership in administering
the law. RCRA 6902(a)(7). Further, Sec. 3009 of RCRA explicitly allows
a State to establish requirements more stringent than the federal
requirements. Accordingly, EPA believes it would be inappropriate for
policy and legal reasons to preempt disparate state requirements for
MSWLFs. At the same time, EPA has developed sound national regulations
that it encourages states to adopt that help to promote national
uniformity.
Comment: The State regulatory agency was not in support of the
Meridian Test and generally supported the evaluation performed by ICF
Incorporated for EPA. The commenter also expressed concerns about the
following aspects of the Meridian Test. The commenter did not agree
with capping the period for which financial assurance would be
provided, assuming a three percent real interest rate when preparing
cost estimates because closure estimates are usually underfunded,
amending the requirements for financial assurance requirements for
contingent events to allow combined coverage within and across
programs, and amending the requirements for closure and post-closure
care by allowing owners or operators of multiple facilities to
demonstrate financial assurance for less than the total costs of all
facilities.
Response: EPA's regulations do not allow for capping the period for
which financial assurance would be provided for MSWLFs. EPA's MSWLF
regulations at 40 CFR 258.71(a)(1) require that closure cost estimate
must equal the cost of closing the largest area of all MSWLF units ever
requiring a final cover at any time during the active life when the
extent and manner of its operation would make closure the most
expensive. 40 CFR 258.72(a) requires that post-closure cost estimates
include annual and periodic costs over the entire post-closure care
period, and 40 CFR 258.73(a) requires that the corrective action cost
estimate account for the total cost of the corrective action activities
for the entire corrective action period.
EPA agrees that estimates of environmental obligations can be
underestimated and that discounting could exacerbate the attendant
problems of insufficient funds being available. In the previously
issued regulations allowing discounting, EPA requires that the State
Director determine that cost estimates are complete and accurate and
the owner or operator must submit a statement from a Registered
Professional Engineer so stating. 61 FR 60339 (codified at 40 CFR
258.75(a). This requirement is designed to ensure that the cost
estimates are not underestimated.
EPA agrees with the commenter that amending the requirements for
contingent events is an irrelevant issue here because EPA has deferred
any requirement for liability coverage as part of the MSWLF criteria.
Today's regulation requires that an owner or operator using the
financial test to demonstrate financial assurance must have a tangible
net worth that is greater than the sum of current closure, post-closure
care, corrective action cost estimates, and any other environmental
obligations covered by a financial test plus $10 million. The rules do,
however, provide that if an owner or operator has already recognized
the value of these obligations as liabilities on its financial
statements, then the State Director may allow the firm to use the
financial test if it meets the other criteria and has at least $10
million in net worth plus the amount of any guarantees extended by the
firm that have not been recognized as liabilities on the financial
statements. Thus, EPA's final rule requires that a firm must account
for the value of all obligations covered by a financial test or
guarantee.
VII. Miscellaneous
The discussion below addresses Executive Order 12866 (interagency
regulatory review), the Unfunded Mandates Reform Act, the Regulatory
Flexibility Act, the Small Business Regulatory Enforcement Fairness
Act, the Paperwork Reduction Act, and Executive Order 12898
(Environmental Justice).
A. Executive Order 12866
Under Executive Order 12866, the Agency must determine whether a
regulatory action is ``significant'' and, therefore, subject to Office
of Management and Budget (OMB) review
[[Page 17727]]
and other requirements of the Executive Order. The Order defines
``significant regulatory action'' as one that may:
(1) Have an annual effect on the economy of $100 million or more or
adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local, or tribal governments or
communities;
(2) Create a serious inconsistency or otherwise interfere with an
action taken or planned by another agency;
(3) Materially alter the budgetary impact of entitlements, grants,
user fees, or loan programs or the rights and obligations of recipients
thereof; or
(4) Raise novel legal or policy issues arising out of legal
mandates, the President's priorities, or the principles set forth in
the Executive Order.
Even though this rule provides owners and operators of MSWLFs with
regulatory relief in meeting the existing requirements for financial
assurance, EPA has submitted this rule to OMB for review because it
raises important policy issues. The text of the draft final rule
submitted to OMB, accompanying documents, and changes made in response
to OMB suggestions or recommendations are in the public docket listed
at the beginning of this notice.
EPA has evaluated the economic impact of the final rule. The Agency
estimates that today's rule will save approximately $65.8 million
annually. This figure is higher than the estimate for the proposed rule
because it reflects additional analysis EPA performed in response to
public comments, using updated financial and cost information. As
explained above in the discussion of public comments, EPA's analysis
for this final rule includes the costs for firms with less than $10
million in net worth. The underlying analysis, which followed the same
methodology as the analysis supporting the proposed rule, can be found
in the public docket for today's rule.
More specifically, EPA relied on updated (1995) financial
information from Dun and Bradstreet on the firms in the MSWLF industry,
bond rating information from Standard & Poor's, and Moody's, and
augmented information on the financial characteristics of firms that
entered bankruptcy. The economic impact analysis for this final rule
estimated the availability of the financial test to firms in the MSWLF
industry. If a firm was unable to cover any portion of its obligations,
the analysis estimated the cost of the third party instruments that
would be necessary. This inability to use the financial test could
arise if, for example, the firm did not meet the ratio or bond rating
requirements, or if its obligations were more than allowable under the
tangible net worth requirement. The cost of the third party instruments
was labeled the private cost of the test. It is the existing financial
assurance requirements for owners and operators of MSWLFs under 40 CFR
part 258 subpart G that imposes such costs, not the financial test
being promulgated today.
As examined earlier in the notice, no financial test can perfectly
discriminate between firms that should be allowed to use the financial
test and therefore not have to pay the cost of a third party mechanism,
and firms that will go bankrupt and so should have to use a third party
instrument. Since a test will not be perfect at screening out firms
that will enter bankruptcy, such costs are borne by the public. These
public costs are the costs to the public sector of paying for financial
assurance obligations, such a closure or post-closure costs, for firms
that pass the test but later go bankrupt without funding their
obligations. EPA analyzed the public costs associated with today's
rulemaking. EPA's analysis assessed the misprediction of the various
tests and the attendant public costs. As noted earlier in the notice,
another relevant factor in designing a reasonable financial test is who
should bear the costs, or how they should be reasonably allocated. In
other words, there are public policy issues in deciding whether
financial assurance costs should be borne by the owners or operators of
MSWLFs (and their customers), or the public generally.
To calculate the cost savings of today's rule, EPA first estimated
the cost for private owners or operators of MSWLFs of obtaining third
party mechanisms (e.g., letters of credit) to assure their MSWLF
obligations which the Agency estimates total approximately $7 billion
for closure and post-closure obligations. EPA estimates that the cost
of such financial assurance instruments under the existing financial
assurance requirements would total $123.0 million annually. (See
``Analysis of Subtitle D Financial Tests in Response to Public
Comments'' in the docket to this rule.)
There are a few potential adjustments to those costs. To the extent
that owners or operators are able to use alternative mechanisms such as
captive insurance that could be less expensive, this estimate of the
cost of financial responsibility in the absence of this rule would be
somewhat overstated. Also, on November 27, 1996 (61 FR 60328) EPA
promulgated 40 CFR 258.75 that provided State Directors with the
authority to allow the discounting of closure, post-closure and
corrective action costs. EPA did not estimate the potential cost
savings from that provision at that time, and does not have information
regarding the extent to which State Directors have provided this
allowance. However, to the extent that State Directors have provided
that allowance to privately owned or operated MSWLFs, this allowance
could lead to a relatively small overstatement of the savings
associated with this rule. For more information on the changes in costs
potentially associated with discounting, please see ``Analysis of
Subtitle D Financial Tests in Response to Public Comments'' in the
docket.
As described earlier, in the analysis for this rule EPA has
evaluated the private and public costs and savings associated with a
number of regulatory alternatives. The regulatory alternative adopted
in today's final rule is estimated to result in an annual savings of
approximately $65.8 million or more, which puts it at the forefront in
cost savings among the regulatory alternatives. Under the alternative
adopted in today's final rule, an owner or operator could assure
obligations so long as the firm's tangible net worth is at least $10
million larger than the obligation. This test had a private cost of
$45.6 million annually and a public cost of $11.7 million annually for
a total annual cost of $57.3 million. Subtracting the total cost from
the cost of the existing requirement without a test ($123.0 million)
gives a savings of $65.8 million annually.
Further, as noted earlier, EPA was concerned that this alternative
could discriminate against firms which had already recognized all of
their environmental obligations as liabilities on their audited
financial statements. Therefore, EPA has given to State Directors the
ability to allow firms that have their environmental obligations fully
reflected in their liabilities on their audited financial statements to
cover these obligations so long as they have a net worth of at least
$10 million plus the amount of any guarantees that do not appear on
their financial statements. The maximum annual savings from this rule
as a result of this allowance are estimated to total $ 73.1 million, or
$7.3 million more than $65.8 million.
The document entitled ``Analysis of Subtitle D Financial Tests in
Response to Public Comments,'' contains additional information on the
estimated cost savings of this rule, and is available in the public
docket for this rulemaking.
[[Page 17728]]
B. Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub.
L. 104-4, establishes requirements for Federal agencies to assess the
effects of certain regulatory actions on state, local, and tribal
governments and the private sector. Under section 202 of the UMRA, EPA
generally must prepare a written statement, including a cost-benefit
analysis, for proposed and final rules with ``Federal mandates'' that
may result in expenditures to state, local, and tribal governments, in
the aggregate, or to the private sector, of $100 million or more in any
one year. Before promulgating a final rule for which a written
statement is needed, section 205 of the UMRA generally requires EPA to
identify and consider a reasonable number of regulatory alternatives
and adopt the least costly, most cost-effective or least burdensome
alternative that achieves the objectives of the rule. The provisions of
section 205 do not apply when they are inconsistent with applicable
law. Moreover, section 205 allows EPA to adopt an alternative other
than the least costly, most cost-effective or least burdensome
alternative if the Administrator publishes with the final rule an
explanation why that alternative was not adopted. Before EPA
establishes any regulatory requirements that may significantly or
uniquely affect small governments, including tribal governments, it
must have developed under section 203 of the UMRA a small government
agency plan. The plan must provide for notifying potentially affected
small governments, enabling officials of affected small governments to
have meaningful and timely input in the development of EPA regulatory
proposals with significant Federal intergovernmental mandates, and
informing, educating, and advising small governments on compliance with
the regulatory requirements. Section 204 of UMRA requires each agency
to develop ``an effective process to permit elected officers of state,
local, and tribal governments . . . to provide meaningful and timely
input'' in the development of regulatory proposals containing a
significant Federal intergovernmental mandate.
Today's rule is not subject to the requirements of sections 202,
203, 204, and 205 of the UMRA. EPA has determined that this rule does
not contain a Federal mandate that may result in expenditures of $100
million or more for state, local, and tribal governments, in the
aggregate, or the private sector in any one year. On the contrary, as
described above, the Agency estimates that today's rule will save $65.8
million annually by allowing the use of a financial test or a corporate
guarantee to demonstrate financial responsibility for environmental
obligations without incurring the costs of obtaining a third-party
mechanism. Further, as discussed previously in the notice, neither
State nor local governments are subject to the requirements under this
rule, but state governments have considerable flexibility in deciding
how to implement the regulatory relief provided in this rule.
C. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
provides that, whenever an agency is required to publish a general
notice of rulemaking for a proposal, the agency must prepare an initial
regulatory flexibility analysis for the proposal unless the head of the
agency certifies that the rule will not, if promulgated, have a
significant economic impact on a substantial number of small entities
(section 605(b)). The EPA certified that the October 12, 1994 proposal
for today's rule would not have a significant economic impact on a
substantial number of small entities. 59 FR 51534. Accordingly, the
Agency did not prepare an initial regulatory flexibility analysis for
the proposed rule.
EPA has not received any adverse public comments on its decision
under the RFA to certify the proposed rule and declining to prepare an
initial regulatory flexibility analysis for the proposed rule. As
discussed above, EPA did receive public comments that the tangible net
worth requirement under the financial test is unnecessary and has an
anticompetitive effect on small firms in the MSWLF industry, but these
comments did not raise questions regarding the RFA certification. In
the discussion of public comments, above, and in the ``Response to
Public Comments'' document accompanying this rulemaking, EPA addresses
the concerns about the proposed minimum net worth requirement. The
discussion of public comments in section VI.A. above regarding the
minimum tangible net worth requirement and other aspects of the
preamble help explain EPA's decision here to also certify that the
final rule will not have a significant adverse impact on a substantial
number of small entities.
For the following reasons, EPA concludes that certification is
still proper. As noted above, the RFA requires a regulatory flexibility
analysis unless the rule ``will not have, if promulgated, a significant
economic impact on a substantial number of small entities.'' RFA
section 605(b). For purposes of the RFA, the ``impact'' of concern is
the impact the rule at issue will have on the small entities that will
have to comply with the rule. The stated purpose of the RFA, its
requirements for regulatory flexibility analyses, its legislative
history, the amendments made by the Small Business Regulatory
Enforcement Fairness Act of 1996 (SBREFA) (Pub. L. 104-121), and case
law all make clear that an agency must assess the impact of a rule on
small entities to the extent that small entities will be subject to the
requirements of the rule. Thus, the RFA is appropriately interpreted to
require a regulatory flexibility analysis only for rules imposing
requirements on small entities. See RFA Secs. 603 (b) & (c), and
604(a); Mid-Tex Electric Co-op., Inc. v. FERC, 773 F.2d 327, 340-43
(D.C. Cir. 1985) (holding the RFA does not require agencies to examine
the economic impact on small entities that are not directly regulated
by the rule or subject to the regulatory requirements of the rule);
United Distribution Companies v. FERC, 88 F.3d 1105 (D.C. Cir. 1996),
cert. denied, Associated Gas Distributors v. FERC, 117 S.Ct. 1723
(1997) (same).
As discussed in greater detail in section VI.A. above and other
sections of this preamble, today's rule does not impose new regulatory
requirements on any firms, including small entities. Rather, the rule
provides additional flexibility for owners or operators of MSWLF units
in meeting the existing financial assurance requirements established
under 40 CFR part 258, subpart G.
The comments discussed in section VI.A. do not relate to compliance
burdens imposed on firms subject to the rule, but rather to secondary
competitive effects that the commenters believe may result from a
minimum net worth requirement. These are not the kinds of effects that
a regulatory flexibility analysis is intended to address. Therefore,
after considering public comments and other relevant information, EPA
continues to believe that this deregulatory final rule will not have a
significant economic impact on a substantial number of small entities.
Accordingly, the Agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities,
and EPA has not prepared a final regulatory flexibility analysis for
this rule.
D. Submission to Congress and the General Accounting Office
Under 5 U.S.C. 801(a)(1)(A) as added by the Small Business
Regulatory Enforcement Fairness Act of 1996, EPA
[[Page 17729]]
submitted a report containing this rule and other required information
to the U.S. Senate, the U.S. House of Representatives, and the
Comptroller General of the General Accounting Office prior to
publication of the rule in today's Federal Register. This rule is not a
``major rule'' as defined by 5 U.S.C. 804(2).
E. Paperwork Reduction Act
OMB approved the information collection requirements of the MSWLF
criteria, including financial assurance criteria, under the provisions
of the Paperwork Reduction Act, 44 U.S.C. 3501, et seq., and assigned
OMB control number 2050-0122. The burden estimate for the financial
assurance provisions included the burden associated with obtaining and
maintaining any one of the allowable financial assurance instruments,
including a financial test.
F. Environmental Justice
Executive Order 12898 requires that each Federal agency make
achieving environmental justice part of its mission by identifying and
addressing, as appropriate, disproportionately high and adverse human
health or environmental effects of its programs, policies, and
activities on minorities and low-income populations. This regulation
provides additional mechanisms by which firms can demonstrate financial
assurance for their MSWLF closure, post-closure, and if necessary,
corrective action obligations. It is not expected to have any impact on
minorities or low-income populations.
G. National Technology Transfer and Advancement Act
Under section 12(d) of the National Technology Transfer and
Advancement Act (``NTTAA''), the Agency is required to use voluntary
consensus standards in its regulatory activities unless to do so would
be inconsistent with applicable law or otherwise impractical. Voluntary
consensus standards are technical standards (e.g., materials
specifications, test methods, sampling procedures, business practice,
etc.) which are developed or adopted by voluntary consensus standard
bodies. Where available and potentially applicable voluntary consensus
standards are not used by EPA, the Act requires the Agency to provide
Congress, through the Office of Management and Budget, an explanation
of the reasons for not using such standards. EPA identified no
potentially applicable voluntary consensus standards for today's final
rule.
List of Subjects in 40 CFR Part 258
Environmental protection, Closure, Corrective action, Financial
assurance, Reporting and recordkeeping requirements, Waste treatment
and disposal, Water pollution control.
Dated: April 3, 1998.
Carol M. Browner,
Administrator.
For the reasons set forth in the preamble, title 40, Chapter I of
the Code of Federal Regulations is amended as follows:
PART 258--CRITERIA FOR MUNICIPAL SOLID WASTE LANDFILLS
1. The authority citation for part 258 is revised to read as
follows:
Authority: 33 U.S.C. 1345(d) and (e); 42 U.S.C. 6902(a), 6907,
6912(a), 6944, 6945(c) and 6949a(c).
2. Section 258.74 is amended by revising paragraphs (e), (g), and
(k) to read as follows:
Sec. 258.74 Allowable mechanisms.
* * * * *
(e) Corporate financial test. An owner or operator that satisfies
the requirements of this paragraph (e) may demonstrate financial
assurance up to the amount specified in this paragraph (e):
(1) Financial component. (i) The owner or operator must satisfy one
of the following three conditions:
(A) A current rating for its senior unsubordinated debt of AAA, AA,
A, or BBB as issued by Standard and Poor's or Aaa, Aa, A or Baa as
issued by Moody's; or
(B) A ratio of less than 1.5 comparing total liabilities to net
worth; or
(C) A ratio of greater than 0.10 comparing the sum of net income
plus depreciation, depletion and amortization, minus $10 million, to
total liabilities.
(ii) The tangible net worth of the owner or operator must be
greater than: (A) The sum of the current closure, post-closure care,
corrective action cost estimates and any other environmental
obligations, including guarantees, covered by a financial test plus $10
million except as provided in paragraph (e)(1)(ii)(B) of this section.
(B) $10 million in net worth plus the amount of any guarantees that
have not been recognized as liabilities on the financial statements
provided all of the current closure, post-closure care, and corrective
action costs and any other environmental obligations covered by a
financial test are recognized as liabilities on the owner's or
operator's audited financial statements, and subject to the approval of
the State Director.
(iii) The owner or operator must have assets located in the United
States amounting to at least the sum of current closure, post-closure
care, corrective action cost estimates and any other environmental
obligations covered by a financial test as described in paragraph
(e)(3) of this section.
(2) Recordkeeping and reporting requirements. (i) The owner or
operator must place the following items into the facility's operating
record:
(A) A letter signed by the owner's or operator's chief financial
officer that:
(1) Lists all the current cost estimates covered by a financial
test, including, but not limited to, cost estimates required for
municipal solid waste management facilities under this part 258, cost
estimates required for UIC facilities under 40 CFR part 144, if
applicable, cost estimates required for petroleum underground storage
tank facilities under 40 CFR part 280, if applicable, cost estimates
required for PCB storage facilities under 40 CFR part 761, if
applicable, and cost estimates required for hazardous waste treatment,
storage, and disposal facilities under 40 CFR parts 264 and 265, if
applicable; and
(2) Provides evidence demonstrating that the firm meets the
conditions of either paragraph (e)(1)(i)(A) or (e)(1)(i)(B) or
(e)(1)(i)(C) of this section and paragraphs (e)(1)(ii) and (e)(1)(iii)
of this section.
(B) A copy of the independent certified public accountant's
unqualified opinion of the owner's or operator's financial statements
for the latest completed fiscal year. To be eligible to use the
financial test, the owner's or operator's financial statements must
receive an unqualified opinion from the independent certified public
accountant. An adverse opinion, disclaimer of opinion, or other
qualified opinion will be cause for disallowance, with the potential
exception for qualified opinions provided in the next sentence. The
Director of an approved State may evaluate qualified opinions on a
case-by-case basis and allow use of the financial test in cases where
the Director deems that the matters which form the basis for the
qualification are insufficient to warrant disallowance of the test. If
the Director of an approved State does not allow use of the test, the
owner or operator must provide alternate financial assurance that meets
the requirements of this section.
(C) If the chief financial officer's letter providing evidence of
financial assurance includes financial data showing that owner or
operator satisfies
[[Page 17730]]
paragraph (e)(1)(i)(B) or (e)(1)(i)(C) of this section that are
different from data in the audited financial statements referred to in
paragraph (e)(2)(i)(B) of this section or any other audited financial
statement or data filed with the SEC, then a special report from the
owner's or operator's independent certified public accountant to the
owner or operator is required. The special report shall be based upon
an agreed upon procedures engagement in accordance with professional
auditing standards and shall describe the procedures performed in
comparing the data in the chief financial officer's letter derived from
the independently audited, year-end financial statements for the latest
fiscal year with the amounts in such financial statements, the findings
of that comparison, and the reasons for any differences.
(D) If the chief financial officer's letter provides a
demonstration that the firm has assured for environmental obligations
as provided in paragraph (e)(1)(ii)(B) of this section, then the letter
shall include a report from the independent certified public accountant
that verifies that all of the environmental obligations covered by a
financial test have been recognized as liabilities on the audited
financial statements, how these obligations have been measured and
reported, and that the tangible net worth of the firm is at least $10
million plus the amount of any guarantees provided.
(ii) An owner or operator must place the items specified in
paragraph (e)(2)(i) of this section in the operating record and notify
the State Director that these items have been placed in the operating
record before the initial receipt of waste or before the effective date
of the requirements of this section (April 9, 1997 or October 9, 1997
for MSWLF units meeting the conditions of Sec. 258.1(f)(1)), whichever
is later in the case of closure, and post-closure care, or no later
than 120 days after the corrective action remedy has been selected in
accordance with the requirements of Sec. 258.58.
(iii) After the initial placement of items specified in paragraph
(e)(2)(i) of this section in the operating record, the owner or
operator must annually update the information and place updated
information in the operating record within 90 days following the close
of the owner or operator's fiscal year. The Director of a State may
provide up to an additional 45 days for an owner or operator who can
demonstrate that 90 days is insufficient time to acquire audited
financial statements. The updated information must consist of all items
specified in paragraph (e)(2)(i) of this section.
(iv) The owner or operator is no longer required to submit the
items specified in this paragraph (e)(2) or comply with the
requirements of this paragraph (e) when:
(A) He substitutes alternate financial assurance as specified in
this section that is not subject to these recordkeeping and reporting
requirements; or
(B) He is released from the requirements of this section in
accordance with Sec. 258.71(b), Sec. 258.72(b), or Sec. 258.73(b).
(v) If the owner or operator no longer meets the requirements of
paragraph (e)(1) of this section, the owner or operator must, within
120 days following the close of the owner or operator's fiscal year,
obtain alternative financial assurance that meets the requirements of
this section, place the required submissions for that assurance in the
operating record, and notify the State Director that the owner or
operator no longer meets the criteria of the financial test and that
alternate assurance has been obtained.
(vi) The Director of an approved State may, based on a reasonable
belief that the owner or operator may no longer meet the requirements
of paragraph (e)(1) of this section, require at any time the owner or
operator to provide reports of its financial condition in addition to
or including current financial test documentation as specified in
paragraph (e)(2) of this section. If the Director of an approved State
finds that the owner or operator no longer meets the requirements of
paragraph (e)(1) of this section, the owner or operator must provide
alternate financial assurance that meets the requirements of this
section.
(3) Calculation of costs to be assured. When calculating the
current cost estimates for closure, post-closure care, corrective
action, or the sum of the combination of such costs to be covered, and
any other environmental obligations assured by a financial test
referred to in this paragraph (e), the owner or operator must include
cost estimates required for municipal solid waste management facilities
under this part, as well as cost estimates required for the following
environmental obligations, if it assures them through a financial test:
obligations associated with UIC facilities under 40 CFR part 144,
petroleum underground storage tank facilities under 40 CFR part 280,
PCB storage facilities under 40 CFR part 761, and hazardous waste
treatment, storage, and disposal facilities under 40 CFR parts 264 and
265.
* * * * *
(g) Corporate Guarantee. (1) An owner or operator may meet the
requirements of this section by obtaining a written guarantee. The
guarantor must be the direct or higher-tier parent corporation of the
owner or operator, a firm whose parent corporation is also the parent
corporation of the owner or operator, or a firm with a ``substantial
business relationship'' with the owner or operator. The guarantor must
meet the requirements for owners or operators in paragraph (e) of this
section and must comply with the terms of the guarantee. A certified
copy of the guarantee must be placed in the facility's operating record
along with copies of the letter from the guarantor's chief financial
officer and accountants' opinions. If the guarantor's parent
corporation is also the parent corporation of the owner or operator,
the letter from the guarantor's chief financial officer must describe
the value received in consideration of the guarantee. If the guarantor
is a firm with a ``substantial business relationship'' with the owner
or operator, this letter must describe this ``substantial business
relationship'' and the value received in consideration of the
guarantee.
(2) The guarantee must be effective and all required submissions
placed in the operating record before the initial receipt of waste or
before the effective date of the requirements of this section (April 9,
1997 or October 9, 1997 for MSWLF units meeting the conditions of
Sec. 258.1(f)(1), whichever is later, in the case of closure and post-
closure care, or in the case of corrective action no later than 120
days after the corrective action remedy has been selected in accordance
with the requirements of Sec. 258.58.
(3) The terms of the guarantee must provide that:
(i) If the owner or operator fails to perform closure, post-closure
care, and/or corrective action of a facility covered by the guarantee,
the guarantor will:
(A) Perform, or pay a third party to perform, closure, post-closure
care, and/or corrective action as required (performance guarantee); or
(B) Establish a fully funded trust fund as specified in paragraph
(a) of this section in the name of the owner or operator (payment
guarantee).
(ii) The guarantee will remain in force for as long as the owner or
operator must comply with the applicable financial assurance
requirements of this Subpart unless the guarantor sends prior notice of
cancellation by certified mail to the owner or operator and to the
State Director. Cancellation may not occur,
[[Page 17731]]
however, during the 120 days beginning on the date of receipt of the
notice of cancellation by both the owner or operator and the State
Director, as evidenced by the return receipts.
(iii) If notice of cancellation is given, the owner or operator
must, within 90 days following receipt of the cancellation notice by
the owner or operator and the State Director, obtain alternate
financial assurance, place evidence of that alternate financial
assurance in the facility operating record, and notify the State
Director. If the owner or operator fails to provide alternate financial
assurance within the 90-day period, the guarantor must provide that
alternate assurance within 120 days of the cancellation notice, obtain
alternative assurance, place evidence of the alternate assurance in the
facility operating record, and notify the State Director.
(4) If a corporate guarantor no longer meets the requirements of
paragraph (e)(1) of this section, the owner or operator must, within 90
days, obtain alternative assurance, place evidence of the alternate
assurance in the facility operating record, and notify the State
Director. If the owner or operator fails to provide alternate financial
assurance within the 90-day period, the guarantor must provide that
alternate assurance within the next 30 days.
(5) The owner or operator is no longer required to meet the
requirements of this paragraph (g) when:
(i) The owner or operator substitutes alternate financial assurance
as specified in this section; or
(ii) The owner or operator is released from the requirements of
this section in accordance with Sec. 258.71(b), Sec. 258.72(b), or
Sec. 258.73(b).
* * * * *
(k) Use of multiple mechanisms. An owner or operator may
demonstrate financial assurance for closure, post-closure, and
corrective action, as required by Secs. 258.71, 258.72, and 258.73 by
establishing more than one mechanism per facility, except that
mechanisms guaranteeing performance rather than payment, may not be
combined with other instruments. The mechanisms must be as specified in
paragraphs (a), (b), (c), (d), (e), (f), (g), (h), (i), and (j) of this
section, except that financial assurance for an amount at least equal
to the current cost estimate for closure, post-closure care, and/or
corrective action may be provided by a combination of mechanisms rather
than a single mechanism.
* * * * *
[FR Doc. 98-9558 Filed 4-9-98; 8:45 am]
BILLING CODE 6560-50-P
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