Calculation of the Economic Benefit of Noncompliance in EPA's Civil Penalty Enforcement Cases

Note: EPA no longer updates this information, but it may be useful as a reference or resource.

[Federal Register: August 26, 2005 (Volume 70, Number 165)]
[Notices]
[Page 50326-50345]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26au05-88]

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ENVIRONMENTAL PROTECTION AGENCY
[FRL-7960-3]

Calculation of the Economic Benefit of Noncompliance in EPA's
Civil Penalty Enforcement Cases

AGENCY: Environmental Protection Agency (EPA).
ACTION: Notice of final action and response to comment.

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SUMMARY: In a Federal Register notice issued on October 9, 1996, the
Environmental Protection Agency (``EPA'') requested comment on how it
calculates the economic benefit that regulated entities obtain as a
result of violating environmental requirements. EPA makes this
calculation as a part of establishing an appropriate penalty for
settlement purposes. The Agency's policy is that any civil penalty
should at least recapture the economic benefit the violator has
obtained through its unlawful actions. Because enforcement staff
typically use the BEN (short for benefit) computer model to perform the
economic benefit calculations, the Agency requested comments on the BEN
model as well as the larger benefit recapture issues. In a subsequent
Federal Register notice issued on June 18, 1999, EPA responded to the
comments on the October 1996 Federal Register notice; provided advance
notice of the changes EPA proposed to make to its benefit recapture
approach and the BEN computer model; and requested a second round of
comment of those proposed changes. This notice responds to the comments
on the June 1999 notice and contains the changes EPA will implement in
its benefit recapture program.

ADDRESSES: The Agency has dedicated a page of its website to the
computers models the enforcement program uses to addresses benefit
recapture as well as ability to pay claims and the evaluation of the
costs of supplemental environmental projects (SEP's). The web address
for those models is:
http://www.epa.gov/compliance/civil/econmodels/index.html.

FOR FURTHER INFORMATION CONTACT: For further information, contact
Jonathan Libber, Office of Civil Enforcement, Special Litigation and
Projects Division, at (202) 564-6102, or through electronic

[[Page 50327]]

mail at libber.jonathan@epa.gov. Government users (Federal, State, or
local) can also obtain assistance with the model through the Agency's
toll-free enforcement economics helpline at (888) ECONSPT or through
electronic mail at benabel@indecon.com.

SUPPLEMENTARY INFORMATION: In EPA's October 1996 Federal Register
notice, the Agency was considering changes in three areas: (1) Broad
economic benefit recapture issues; (2) the BEN computer model's
calculation methodology; and (3) improving the BEN model's user-
friendliness. In regard to the broad economic benefit recapture issues,
the Agency sought out any legitimate alternatives to BEN, but found
none. In addition, EPA solicited comments on the best way to determine
the economic benefit from the violator's illegal competitive advantage.
The comments confirmed our initial thoughts that a model to handle such
calculations was infeasible. The Agency has instead developed a draft
conceptual framework document for such cases, and has initiated a peer
review process by its Science Advisory Board to examine this type of
benefit.
With regard to the BEN model's calculation methodology, the Agency
is making eight sets of changes that should improve the model's
precision and function. Although the combined effect of these changes
will affect individual cases differently, the overall impact across all
EPA's enforcement cases should be insignificant. The two most
significant changes involve tailoring the discount/compound rate to the
case and using a more precise inflation adjustment. The new BEN model
tailors the discount rate to the period of violation through the
present, which the prior version of the model was incapable of doing.
The new BEN model also adjusts for inflation based on actual historical
month-by-month inflation data, whereas the prior version simply applied
one single average rate for both past inflation and projected
inflation. All of these changes reflect the Agency's consideration of
both rounds of public comments, as well as an academic peer review that
the Agency completed in January of 2004. These reviews should be
available by within the next few months on the Agency's computer models
web page (see ADDRESSES section above). Electronic copies of the BEN
computer model (which includes a comprehensive help system) can be
downloaded from that same site.
The major change in improving the BEN model's user-friendliness is
that EPA has moved the model from the old DOS operating system to the
Windows environment. This should address those concerns that the model
was cumbersome. We have also established a helpline to assist
enforcement personnel from Federal, State and local governments in
their use of the model.
This notice is organized as follows:

I. Background
A. Overview
B. EPA Policy and Guidance on Recapturing the Economic Benefit
of Noncompliance
1. Policy Background
2. BEN Calculates the Economic Benefit From Delayed and Avoided
Pollution Control Expenditures
3. Current Model Usage and Applicability
C. How a Firm Obtains an Economic Benefit From Delaying and/or
Avoiding Compliance Costs
1. The Economic Benefit Components that the BEN Model Measures
2. BEN and Cash Flow Analysis
II.Final Changes
A. Broad Economic Benefit Recapture Issues
1. Alternatives to BEN
2. Illegal Competitive Advantage
B. The BEN Model's Calculation Methodology
1. Depreciation Method
2. Tax Rates
3. Differences in On-Time and Delay Scenarios
4. Capital Equipment Replacement
5. Inflation Treatment
6. Discount/Compound Rate
7. Discounting/Compounding Methodology
8. Investment Tax Credit and Low-Interest Financing
C. Improving the BEN Model's User-friendliness
1. Is BEN Too Complex to Operate?
2. Is the Information BEN Needs Difficult or Expensive to Obtain?
D. Procedural Issues Regarding the Public Comment Process
III. Response to Comments
A. Broad Economic Benefit Recapture Issues
1. Alternatives to BEN
2. Illegal Competitive Advantage
3. Other Broad Economic Benefit Recapture Issues
B. The BEN Model's Calculation Methodology
1. Discounting/Compounding
2. Inflation Adjustments
3. Other Technical Aspects
C. Improving the BEN Model's User-Friendliness
1. Is BEN Too Complex to Operate?
2. Is the Information BEN Needs Difficult or Expensive to Obtain?
3. Other Issues Affecting Use of BEN
D. Procedural Issues Regarding the Public Comment Process

I. Background

A. Overview

One of EPA's most important responsibilities is to ensure that
regulated entities comply with Federal environmental laws. These laws--
and their implementing regulations--set minimum standards for
protecting human health and achieving environmental protection and for
achieving environmental protection goals, such as clean air and clean
water. EPA upholds these laws through vigorous enforcement actions that
seek to correct the violations and appropriately penalize violators.
A cornerstone of the EPA's civil penalty program is at least
recapturing the economic benefit that a violator may have gained from
illegal activity. Economic benefit recapture helps level the economic
playing field by preventing violators from obtaining an unfair
financial advantage over their competitors who make the necessary
expenditures for environmental compliance. Penalties also serve as
incentives to protect the environment and public health by encouraging
prompt compliance with environmental requirements and the adoption of
pollution prevention and recycling practices. Finally, appropriate
penalties help deter future violations by both the penalized entity and
by similarly situated regulatees.
EPA has promulgated a generic civil penalty policy, as well as
specific penalty policies tailored to suit the needs of particular
regulatory programs. For example, one civil penalty policy specifically
addresses violations of the Clean Water Act. The civil penalties that
EPA seeks usually embody two components: gravity and economic benefit.
The gravity component reflects the seriousness of the violation and is
generally determined through the application of the appropriate EPA
civil penalty policy.
The economic benefit component, on the other hand, focuses on the
violator's economic gain from noncompliance, i.e., the extent to which
the violator is financially better off because of its noncompliance.
This economic benefit can accrue to the violator in three basic ways:
(1) Delaying necessary pollution control expenditures; (2) avoiding
necessary pollution control expenditures; and/or (3) obtaining an
illegal competitive advantage. The term ``illegal competitive
advantage'' is a broad catch-all category for economic benefit that
goes beyond that derived from the mere delay and/or avoidance of
pollution control expenditures. For example, the violator might have
sold a product that is entirely illegal (and could not have been
produced legally by incurring any pollution control expenditures).
The Agency designed the BEN computer model in 1984 to calculate the
economic benefit from these first two

[[Page 50328]]

types of economic gain for settlement purposes. BEN may not be
appropriate for all cases, and EPA's regional offices may use
alternative approaches that produce reasonably accurate benefit
calculations. For example, the pattern of necessary pollution control
expenditures might be so complicated that a customized spreadsheet
computation would be more appropriate than BEN. Alternatively, the
pattern of expenditures might be so simple that a mere table in a word
processing document would suffice. Nevertheless, the Agency believes
that in the vast majority of cases BEN is by far the best approach
available for calculating economic benefit derived from delayed and/or
avoided costs.
The Agency does not have a computer model for calculating the
benefit gained from an illegal competitive advantage. EPA considers
such gains on a case-by-case basis.

B. EPA Policy and Guidance on Recapturing the Economic Benefit of
Noncompliance

Since the BEN computer model's development in 1984, EPA staff have
used BEN extensively in generating penalty figures for settlement
purposes. These figures reflect the economic benefit a violator derived
from delaying and/or avoiding compliance with environmental statutes.
1. Policy Background
Calculating a violator's economic benefit using the BEN computer
model is usually the first step in developing a civil settlement
penalty figure under the Agency's Policy on Civil Penalties (PT.1-1)
February 16, 1984, and A Framework for Statute-Specific Approaches to
Penalty Assessments (PT.1-2) February 16, 1984. The Agency developed
the BEN computer model to assist in fulfilling one of the main goals of
the Policy on Civil Penalties: to recover, at a minimum, the economic
benefit derived from noncompliance.
The BEN computer model is a tool that is primarily intended to be
used in calculating economic benefit for purposes of developing a
settlement penalty. In presenting economic benefit testimony at a
judicial trial or in an administrative hearing, the Agency relies on an
expert in financial economics to provide an independent analysis of the
economic benefit the violator obtained from its violations, reflecting
the expert's own analytical approach as applied to the particular facts
of that case. Use of an expert in a trial or hearing allows the parties
the opportunity to examine more closely the analysis applied to the
facts at issue, since a computer model itself cannot be deposed or
cross-examined.\1\
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\1\ EPA designed the BEN model as a flexible tool primarily for
use in settlement negotiations; it is not used, nor was it ever
intended to function, as a rule. An expert witness testifying for
the government may use the new Windows version of BEN as
appropriate, but the responsibility to determine the economic
benefit--as well as explain and defend the results--still resides
with the expert. That expert may choose to use whatever analytical
tool (e.g., customized computer spreadsheets, the BEN model, or even
a calculator) deemed appropriate for the particular calculations
necessary in the case.
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2. BEN Calculates the Economic Benefit From Delayed and Avoided
Pollution Control Expenditures
The BEN model calculates the economic benefit from delaying and/or
avoiding required environmental expenditures. Delayed costs can include
capital investments in pollution control equipment, remediation of
environmental damages (e.g., removing unpermitted fill material and
restoring wetlands), or one-time expenditures required to comply with
environmental regulations (e.g., establishing a reporting system, or
purchasing land on which to site a wastewater treatment facility).
Avoided costs typically include operation and maintenance costs and/or
other annually recurring costs (e.g., off-site disposal of fluids from
injection wells), but can occasionally include capital investments or
one-time expenditures. BEN does not calculate the economic benefit that
takes the form of illegal competitive advantage. For example, the BEN
model is not the appropriate method for calculating the economic
benefit derived from selling DDT on the black market to U.S. pesticide
applicators.
3. Current Model Usage and Applicability
The BEN model can be used in all cases that have delayed and/or
avoided compliance costs. (The only exception is Clean Air Act Section
120 enforcement actions, which require the application of a specific
computer model.) EPA designed BEN to be easy to use for people with
little or no background in economics, financial analysis, or computers,
although it is also useful for those with such backgrounds. Because the
program contains standard default values for many of the variables
needed to calculate the economic benefit, BEN can be run with only a
small number of required inputs from the user. The program also allows
the user to replace those standard values with case-specific
information. The table below lists the inputs to the BEN model, both
the required inputs and also those inputs with standard default values
that may be modified.
The BEN model can calculate economic benefit for many types of
organizations: corporations, partnerships, sole proprietorships, not-
for-profit organizations, federal facilities, and municipalities. BEN
customizes its standard values to the entity type, as well as other
aspects of the case. The BEN inputs listed in the table are discussed
in detail in the model's help system.
Inputs for BEN
Required Inputs:

--Descriptive Information (case name, office/agency, analyst name)
--Entity Type and State
--Competitive Advantage Questionnaire
--Penalty Payment Date
--Capital Investment (cost estimate and estimate date)
--One-Time Nondepreciable Expenditure (cost estimate and estimate date)
--Annually Recurring Costs (cost estimate and estimate date)
--Date of Initial Noncompliance
--Date of Compliance

Inputs with Standard Default Values that May be Modified:

--Year-Specific Marginal Income Tax Rates
--Discount/Compound Rate
--Cost Index for Inflation (specified separately by compliance cost
component)
--Consideration of Future Capital Replacement
--Useful Life of Capital Equipment
--Delayed v. Avoided (specified separately for capital and one-time
nondepreciable)
--Tax Deductibility (of one-time nondepreciable expenditure)
--Specific Cost Estimates (for on-time and delay scenarios)

C. How a Firm Obtains an Economic Benefit From Delaying and/or Avoiding
Compliance Costs

An organization's compliance with environmental regulations usually
entails a commitment of financial resources, both initially (in the
form of a capital investment or one-time expenditure) and over time (in
the form of continuing, annually recurring costs). These expenditures
should result in better protection of public health or environmental
quality, but they are unlikely to yield any direct economic benefit
(i.e., net gain) to the organization. (Otherwise, and with the
assumption of some measure of foresight, the organization should have
already committed the financial

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resources, even in the absence of such environmental regulations.) If
these financial resources are not used for compliance, then they
presumably are invested in projects with an expected financial return
to the organization. This concept of alternative investment--that is,
the amount the violator would normally expect to make by investing in
something other than pollution control--is the basis for calculating
the economic benefit of noncompliance.
In implementing EPA's penalty policies, the Agency invokes its
authority to assess penalties to remove or neutralize the economic
incentive to violate environmental regulations. In the absence of
enforcement and appropriate penalties, an organization's narrowly
construed economic interest would usually dictate delaying the
commitment of funds for compliance with environmental regulations and
avoiding certain associated costs, such as operation and maintenance
expenses.
1. The Economic Benefit Components That the BEN Model Measures
A violator may gain an economic benefit from either delaying and/or
avoiding compliance costs. By delaying compliance, the violator can
earn a return on the funds that should have been committed to the
capital investment or one-time expenditure required for pollution
control compliance. In other words, violators have the opportunity to
invest their funds in projects other than those required to comply with
environmental regulations. These other investments are expected to
generate a financial return, as opposed to the required pollution
control investments that typically generate no direct financial return
for a company. Thus, by delaying compliance, the violator's economic
benefit is the difference between investing in pollution control and
investing in other projects.
A violator can also gain an economic benefit from avoiding
pollution control costs. Avoided costs typically include the
continuing, annually recurring costs that a violator would have
incurred had it complied with environmental regulations on time (e.g.,
the costs of labor, raw materials, energy, lease payments and any other
expenditures directly associated with the operation and maintenance of
pollution control equipment). Annual costs are thereby avoided
entirely, as opposed to capital investments and one-time expenditures
that are usually only delayed.\2\ Thus, the violator's economic benefit
from avoided costs is the sum of the total avoided annual costs plus
the return that could be expected on the funds that were used for
projects other than pollution control.
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\2\ Even capital investments and one-time expenditures may be
avoided on occasion. The typical situation where this happens is
when a violator shuts down a particular operation rather than
install required pollution control equipment.
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2. BEN and Cash Flow Analysis
The BEN model calculates economic benefit by focusing on the effect
that delayed and/or avoided pollution control costs have on an entity's
cash flows. Cash flow analysis is a standard and widely accepted
technique for evaluating costs and investments. In essence, cash flow
calculations focus on the real, ``out-of-pocket'' cash effects
resulting from an expenditure.\3\ Three important factors that enter
into BEN's cash flow analysis are inflation, taxation, and the time
value of money.
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\3\ Thus, noncash ``paper'' expenses, such as depreciation, are
considered only to the extent that they affect cash flow.
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a. Inflation
BEN first requires users to enter a single cost estimate for the
capital investment and another single cost estimate for the one-time
nondepreciable expenditure. Then, to adjust for inflation, BEN
extrapolates from this single cost estimate to create separate
estimates for the hypothetical cost of complying on-time and the actual
cost of complying in a delayed fashion. Similarly, BEN extrapolates
from the user's annually recurring cost estimate to a complete set of
cost estimates for every year during the noncompliance period. (The BEN
model's help system provides a more detailed discussion of these
inflation adjustments.) These adjusted cost estimates form the basis
for the on-time and delay scenarios: The actions and associated costs
that would have been necessary for hypothetical on-time compliance, and
the actions and associated costs that were necessary for the actual
delayed compliance.
b. Taxation
The BEN model computes economic benefit on an after-tax basis,
since environmental expenditures can reduce income tax liability.\4\
Depreciation (from capital investments), one-time expenditures, and
annual costs all effectively reduce taxable income and thereby reduce
income tax payments. To account for these tax effects, BEN calculates
the economic benefit using after-tax cash flows for the on-time
compliance and delayed compliance scenarios.
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\4\ The term environmental expenditures refers to firms'
compliance costs and does not include the payment of civil
penalties. Civil penalties are in almost all cases not deductible.
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c. Time Value of Money
A third factor relates to the timing of the cash flows, because
cash flows occurring in different years are not directly comparable.
The fundamental financial concept of the time value of money is based
on the principle that a dollar today is worth more than a dollar a year
from now, since today's dollar can be invested immediately to earn a
return over the coming year. (Alternatively, a dollar last year is
worth more than a dollar today because investment opportunities existed
for last year's dollar.) Therefore, the earlier a cost (or benefit) is
incurred, the greater its economic impact.
BEN accounts for the time value of money by adjusting all estimated
cash flows to their present value equivalents. BEN first discounts back
to the initial noncompliance date all cash flows from the on-time and
delay scenarios. The initial economic benefit as of this date is simply
the difference in the present values of these two scenarios. Finally,
BEN compounds the initial economic benefit forward from the
noncompliance date to the penalty payment date.
To adjust the cash flows for both discounting and compounding, BEN
uses a discount or compound rate (depending on the direction of the
adjustment) that reflects the time value of money. The selection of the
appropriate rate, and the structure of the discounting and compounding
methodology, is a significant issue in the BEN model and will be
addressed later in this notice. (The model's help system provides a
more detailed discussion of the discounting and compounding that BEN
performs for its present value adjustments.)

II. Final Changes

In its October 9, 1996, Federal Register notice, the Agency sought
comment on three categories of issues: (1) Broad economic benefit
recapture questions, (2) the BEN model's calculation methodology and
assumptions, and (3) the model's user-friendliness. The June 18, 1999,
notice provided responses to these comments, as well as advance notice
of EPA's proposed changes to the BEN model. The June 1999 notice also
invited a second round of public comments, especially on EPA's proposed
changes. EPA also conducted a peer review by academic experts in
financial economics during the spring of 2003 on the draft proposed
changes to the model. This peer review of the model changes was

[[Page 50330]]

specifically requested by the United States Senate.\5\
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\5\ Senate Report No. 106-410 (2000) at page 81.
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The first area in which we invited comment covered some fundamental
questions that the benefit recapture approach has raised. Is there an
alternative to the BEN model that would be both easier to use and at
least as accurate in calculating the economic benefit of delayed and/or
avoided pollution control expenditures? How should EPA evaluate the
economic benefit that companies receive as a result of any illegal
competitive advantage stemming from noncompliance?
Second, we invited comment on the BEN model's calculation
methodology. While the Agency is confident that the BEN model's overall
approach is theoretically sound, we welcomed constructive and
documented comment on alternative methodologies. In particular, EPA has
been aware of substantial differences of opinion with respect to
inflation adjustments and discounting/compounding. EPA requested
comment on the BEN model's calculation methodology, or any other aspect
of the model's assumptions or methodology.
Third, we requested comment on the model's user-friendliness. The
Agency had heard concerns that the model is too difficult to use,
particularly regarding the necessary data acquisition. Because EPA had
never been presented with any concrete evidence in support of these
assertions, the Agency wanted either to substantiate the problems and
address them or to put these issues to rest.
In the following sections, we address the final changes that EPA is
making in each of the areas on which we requested comment. Note that
final changes incorporate EPA's consideration not only of the public
comments but also of the previously mentioned academic peer review that
EPA completed in January of 2004.

A. Broad Economic Benefit Recapture Issues

1. Alternatives to BEN
a. Background
EPA requested comment on whether anyone had an approach that would
be simpler and at least as accurate as BEN in calculating the economic
benefit from delayed and/or avoided pollution control expenditures. EPA
designed the BEN model to calculate the economic benefit of
noncompliance in settlement of the vast majority of its civil penalty
enforcement cases. Although BEN has served this purpose effectively,
the Agency recognizes that it should be improved or even replaced if a
better alternative exists or could be developed easily. This concern is
particularly relevant because an increasing number of State and local
government enforcement personnel use the BEN model regularly. Any
alternative approach must meet EPA's policy objective of ensuring that
violators are put on an even financial footing with those regulated
entities that comply on time. Alternatives must also be reasonably
accurate, simple to use, and readily understandable to the vast
majority of the BEN model's users--Federal, State and local government
enforcement officials who usually have limited knowledge of financial
economics.
b. Final Changes
Many commenters expressed various criticisms on different aspects
of the BEN model. But these criticisms focused on suggestions for
improving BEN. No commenter proposed an alternative approach to a
stand-alone computer model that performs net present value
calculations. Therefore, the Agency will continue its use of BEN,
although it will also implement significant revisions (see following
sections).
On a related topic, two commenters questioned the entire benefit
recapture framework. Although one comment along these lines was
somewhat unclear, the other comment presented a comprehensive approach
for basing penalties on the lesser of economic benefit or social cost
(i.e., environmental damages). Under this proposal, if a violator
gained a significant economic benefit from its violations but caused
only trivial environmental damage (as monetized through some
unspecified economic methodology), then the penalty would be
commensurately trivial. The Agency finds this approach entirely
unacceptable in the context of enforcing regulatory requirements for
individual violators. The appropriate context for considering social
costs is in the process of formulating proposed regulations. Penalties
based on social costs (when less than economic benefit) would provide
an implicit yet clear incentive to violate the law if a company
anticipated that its economic benefit would exceed the consequent
measurable environmental damage. Further, such an approach would be
fundamentally unfair to those firms that resisted the temptation to
violate the law. In addition, quantifying environmental damages in a
monetary measure is an exceedingly difficult analytical problem. Even
if this fundamentally different approach was theoretically sound, it
would be infeasible for the vast majority of enforcement cases.
2. Illegal Competitive Advantage
a. Background
Since the issuance of EPA's Policy on Civil Penalties in 1984, the
Agency has maintained that any given penalty should be structured to
recover--at a minimum--the economic benefit a violator has enjoyed as a
result of its noncompliance. That 1984 policy recognized that the
benefit would be based on delayed costs, avoided costs and illegal
competitive advantage. In addition to this economic benefit component,
EPA assesses a gravity component that reflects the seriousness of the
violation. This gravity component is designed to ensure that the
penalty puts the violator in a worse position than those in the
regulated community who complied with the law. The economic benefit
component of EPA's civil penalty policy focuses specifically on
identifying and recovering the gain to a violator in order to remove
any economic incentive to violate environmental regulations.
The BEN model calculates the economic benefit from delaying and/or
avoiding required environmental expenditures. The economic benefit that
arises from situations other than the delay and/or avoidance of
pollution control expenditures is broadly termed ``illegal competitive
advantage,'' which BEN is incapable of measuring. The essential
distinction between these two types of economic benefit is that in the
illegal competitive advantage situation, the violator's noncompliant
actions have allowed (or will allow) it to attain a level of revenues
that would have been unattainable had it always been in compliance. In
delayed and avoided costs situations, the implicit assumption is that
the revenues from a noncompliant and compliant state are identical.
Consequently, BEN focuses exclusively on a violator's pollution control
costs and does not require any data on the violator's revenues.
In either type of situation (BEN-type economic benefit or illegal
competitive advantage), the fundamental definition of economic benefit
is still the same: The economic benefit is the difference in the net
present values of the compliant/on-time and noncompliant/delay
scenarios (i.e., the actions and cash flows--both historical and
possibly also future--associated with the hypothetical compliance, and
the actual noncompliance). But in the cases

[[Page 50331]]

amenable to BEN, the violator's revenues from the compliant and
noncompliant states simply cancel each other out, allowing BEN to
measure economic benefit through a calculation involving only the costs
that would have differed had the violator been in compliance. Illegal
competitive advantage encompasses all situations in which the revenues
do not cancel out each other. Since the revenues were higher in the
noncompliant state than they would have been in a compliant state, more
detailed research and analysis is necessary, going beyond the scope of
the BEN model.
The BEN model's widespread application is made possible by its
simplifying assumption regarding revenues, obviating the need for a
detailed examination of a violator's business records or competitive
market situation. But in some cases, this assumption is not valid.\6\
In such cases, the violator would not have been able to generate a
given level of revenues were it not for its noncompliance. In those
cases, EPA's policy is to seek to recapture the economic benefit based
on the violator's illegal competitive advantage.
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\6\ The Agency suspects that this relationship may be reversed
for cases involving wetlands. Although the evidence is largely
anecdotal, most wetlands cases encompass violations that allowed a
violator to engage in operations that would not have been feasible
but for the violation. Therefore, in evaluating wetlands cases, the
Agency will be particularly sensitive to the possible presence of
illegal competitive advantage.
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b. Final Changes
The Agency received many comments on illegal competitive advantage.
The first round of comments focused mainly on the feasibility of
developing a stand-alone computer model analogous to BEN (or an add-on
module to BEN) that could easily and reliably determine the economic
benefit from the widely varying examples of illegal competitive
advantage. The broad consensus was that no such model was feasible, and
the Agency agrees. Without BEN's simplifying assumption that the
violator's revenues from the on-time and delay scenarios cancel out
each other, no ``one-size-fits-all'' computer model can analyze the
range of likely situations.
The second round of comments the Agency received on illegal
competitive advantage mainly focused on the June 1999 notice's proposed
questions for BEN's module and the illegal competitive advantage
examples. But since the ICA concept is currently under review by EPA's
Science Advisory Board (SAB), OECA will not put any ICA questions in
the revised BEN model.
After careful review of the comments, and in light of the fact that
the SAB is currently reviewing the ICA issues, EPA has decided against
publishing at this time any formal guidance delineating detailed
analytical steps. While EPA remains committed to recapturing economic
benefit based on illegal competitive advantage, if appropriate,
quantifying illegal competitive advantage requires a careful
examination of the facts of the particular case, and EPA believes it is
premature to try to establish formal guidance in light of these case-
specific issues. Similarly, the Agency does not envision providing a
specific formula for calculating a benefit component in such cases.
In summary, EPA will continue to seek the recovery of illegal
competitive advantage in cases where the BEN model is incapable of
fully assessing the extent to which a violator is financially better
off as a result of its noncompliance. The proper evaluation of illegal
competitive advantage will involve verifying that the use of the BEN
model alone is inappropriate to the case-specific facts, and then
formulating an analytical approach that captures the extent of the
violator's gain.

B. The BEN Model's Calculation Methodology

Over the years, BEN has received occasional criticism for alleged
flaws in its calculation methodology, particularly regarding the
model's inflation adjustments and discounting/compounding. The Agency
requested substantive comments on how the BEN model handles these two
issues. In addition, EPA invited comment on all aspects of BEN's
calculation methodology. The Agency also asked commenters to address
whether their proposed changes would add any complexity to the computer
model and, if so, why the benefit of the change justified the added
complexity.
1. Depreciation Method
a. Background
The BEN model calculates depreciation for capital investments,
since the tax deduction for accounting depreciation charges provides a
real after-tax positive cash flow to businesses.\7\ BEN used to
calculate depreciation using a five-year straight-line methodology for
capital investments made before January 1, 1987, and a seven-year
Modified Accelerated Cost Recovery System for capital investments made
after January 1, 1987. These assumptions represent the most rapid
depreciation periods available for typical pollution control
investments, thereby producing the positive depreciation cash flow
effects as early as possible. These particular depreciation methods
generally result in a conservative economic benefit calculation (i.e.,
lower than would otherwise be calculated) because they minimize out-of-
pocket costs to the violator. Therefore, BEN is often producing
economic benefit figures that are very conservative.\8\
---------------------------------------------------------------------------

\7\ The IRS does not allow companies to write off completely a
capital investment in the year of purchase. Companies must spread
the expense of the investment over several years using the
appropriate depreciation schedule.
\8\ The IRS requires that many types of pollution control
equipment be depreciated over a longer period than assumed in the
BEN model. Were EPA to tailor the depreciation to account for that
longer period, the result would be a higher economic benefit calculation.
---------------------------------------------------------------------------

For capital equipment that has a very short useful life, the
selection of alternative depreciation schedules might be available and
also more beneficial to a business. In unusual cases where the violator
can demonstrate that an alternative depreciation schedule would be both
available and beneficial, more detailed calculations by a financial
analyst in lieu of the BEN model may be necessary.
b. Final Changes
EPA received no comments on its proposal in the June 1999 notice
that although a revised BEN model could conceivably allow alternative
depreciation schedules, the drawbacks of the added complexity and
potential user confusion might outweigh the gains from addressing a
rare circumstance. Nevertheless, EPA has devised a relatively simple
means for BEN to apply shorter depreciation schedules when the user
enters a capital equipment useful life less than 10 years (as opposed
to the default 15 years).
The specification of shorter depreciation schedules will ensure
that BEN does not overestimate economic benefit in the relatively rare
cases that involve such short-lived capital equipment. Once the shorter
useful life has been specified, the alternative depreciation schedule
will not require any additional input from the user. BEN will also
include a provision to account for legislation that allows for
depreciation bonuses over certain periods. This provision will key off
the previously required noncompliance and compliance dates, and it
therefore will

[[Page 50332]]

not require any additional input from the user.
2. Tax Rates
a. Background
The DOS versions of BEN that were issued after 1993 used to apply
three marginal tax rates: a rate for 1986 and before, one for 1987
through 1992, and one for 1993 and beyond. Users could accept the
standard values--which incorporate national averages of State tax
rates--or modify the inputs to reflect specific State values.\9\
---------------------------------------------------------------------------

\9\ Tax rate modification can also reflect a business whose low
net income entails a tax bracket other than the assumed highest
bracket. Note that BEN's assumption of the highest marginal tax rate
produces a lower economic benefit calculation than assuming a lower
tax rate because a higher tax rate decreases the compliance costs'
after-tax value. Since the model employs an after-tax cost in its
analysis, the lower the tax, the higher the BEN result.
---------------------------------------------------------------------------

b. Final Changes
EPA did not receive any objections to the June 1999 notice's
proposal that the revised BEN model will require the user to enter the
violator's State of operation, then automatically reference an internal
database of State tax rates and perform the necessary calculations for
the violator's combined Federal and State tax rate.\10\ BEN will
calculate the tax rate for each separate year of noncompliance, to
allow for annual changes in the relevant State tax rate (even when the
Federal rate remains constant). Users will have the additional option
of entering year-by-year combined Federal and State rates in a
spreadsheet-like format.\11\
---------------------------------------------------------------------------

\10\ The model will also offer the option of the national
average of all the State tax rates for cases where the State in
which the violator pays taxes is unclear.
\11\ This option would allow users to account for, among other
situations, a company whose profitability (and hence tax bracket)
was highly variable over different years. (As noted before, BEN's
assumption of the highest marginal tax rate throughout the
noncompliance period results in a lower economic benefit estimate
than would be produced by a more precise calculation of the
violator-specific marginal tax rate.)
---------------------------------------------------------------------------

Although these options may sound complex, the only data required of
the user will be the violator's State. The other screens for additional
data entry and modification will appear only to those users who
selected such advanced options.
3. Differences in On-Time and Delay Scenarios
a. Background
The BEN model's baseline assumption is that the violator would have
used the same technology and approach in the hypothetical on-time
compliance as it did in the actual delayed compliance scenario. The
only allowed differences are in the two scenarios' exact costs of
compliance, which BEN adjusts for automatically in its inflation
treatment. But technological, legal, or other relevant changes between
the on-time and delay scenarios can conceivably alter the components of
the compliance scenarios, increasing or decreasing the compliance costs
by a rate other than general price inflation. Where the delay case
costs are substantially less than the on-time case costs (e.g., a
technological breakthrough in control equipment), BEN will understate
the benefit. Where the delay costs are substantially higher (e.g.,
regulations become more stringent, but with ``grandfather'' clauses for
already-compliant firms) BEN will overstate the benefit.
Where, in the unusual case, the on-time and delay compliance
scenarios are significantly different, BEN's baseline assumption of two
identical scenarios is inappropriate.\12\ More sophisticated
calculations are necessary.\13\
---------------------------------------------------------------------------

\12\ The inexperienced user will become aware that a more
sophisticated analysis is needed because there are two sets of cost
figures, but only one place to put them. The more experienced user
will just go directly to the ``Specific Cost Estimates'' option
during data entry.
\13\ A similar problem arises when no technologically feasible
method of compliance is available. If the only possible compliance
method that the Agency would have allowed is to cease all
production, then this falls under the category of illegal
competitive advantage, which by definition is beyond the scope of
the BEN model.
---------------------------------------------------------------------------

b. Final Changes
EPA received only one minor objection to the June 1999 notice's
proposal that the revised BEN model allow users to enter separate on-
time and delayed compliance costs. Although the standard operation of
the revised model will still entail only a single compliance scenario,
the new screens for additional data entry/modification of separate on-
time vs. delay scenarios will be available to those users who select
such advanced options. The availability of more advanced options will
also enhance the model's ability to account for atypical situations
such as valid pre-compliance expenditures and credits for salvaged
capital equipment, thus decreasing the need for off-line calculations.
4. Capital Equipment Replacement
a. Background
One of the three components of compliance costs BEN analyzes is the
capital investment, which represents depreciable pollution control
equipment. As the name implies, depreciable equipment wears out with
usage and the passage of time. BEN used to ask the user if the violator
will need to replace the equipment at some point in the future. If the
user specified that the investment in capital equipment is recurring,
then the user could accept the standard value of 15 years for the
useful life of the capital equipment, or enter another value.
If the capital equipment does need to be replaced in the future,
then the violator is financially better off from its delayed compliance
in two distinct yet related ways: the violator has received a benefit
in the past from delaying the initial purchase of the capital
equipment, and will receive a benefit in the future from delaying the
replacement of the capital equipment when that initial purchase wears
out. For example, if a steel mill delays installation of a $1,000,000
baghouse for 5 years, it first obtains a benefit from delaying the
purchase of that baghouse for 5 years. But when that baghouse needs to
be replaced 15 years later, the violator's second baghouse is purchased
5 years later than it should have because the initial purchase lasted
five years later than if it had complied on time.
b. Final Changes
Some commenters characterized any consideration of future
replacement cycles as ``speculative,'' as these cycles have yet to
occur in the typical case (because the noncompliance period is almost
always shorter than the capital equipment's useful life). EPA agrees
only to the extent that BEN does make an assumption about the future,
but this assumption is essentially a baseline one: BEN assumes that
future pollution control requirements will be neither more stringent
nor more lax than current requirements, and that the cost of the
replacement equipment will increase by no more and no less than the
projected rate of inflation. Therefore, the Agency will retain the BEN
model's default consideration of capital equipment replacement.
Some commenters argued that BEN should not offer infinitely
recurring replacement cycles. The Agency notes that although modeling
infinite cycles might at first seem excessive, all future costs are
``discounted'' back to their present values (see following sections for
an explanation of discounting). Thus, the first replacement cycle
typically has a relatively small impact on the benefit calculation.\14\
The impact

[[Page 50333]]

of later replacement cycles is almost negligible.
---------------------------------------------------------------------------

\14\ If the initial capital investment is $1 million and the
equipment lasts for 15 years, then the first replacement cycle is
still $1 million (assuming, for now, the lack of any intervening
inflation). But since it is purchased 15 years later, the $1 million
is discounted to a present value at, for example, 10 percent, over
15 years. The first replacement cycle would only increase the
benefit component by about 30%. The second replacement cycle is
purchased 30 years later. Thus, the $1 million piece of equipment is
discounted at the same 10 percent over 30 years. The economic
benefit from the delay of that second replacement cycle would only
increase the benefit component by about 7%.
---------------------------------------------------------------------------

Some commenters, as well as academic peer reviewers, favored the
approach of a finite number of replacement cycles (which the Agency
initially proposed to adopt). But one peer reviewer pointed out that
this approach runs into problems when the noncompliance period is very
long, especially when it approximates the useful life of the capital
equipment. For example, assume a 10-year compliance delay, coupled with
a 10-year useful life. If BEN were to use one replacement cycle, the
on-time scenario would include two capital equipment installations,
covering the years 1 through 20. The delay scenario would also include
two capital equipment installations, but run from years 11 through 30.
BEN would implicitly be stating that the violator would need to have
functional equipment in place for years 21 through 30 (i.e., the delay
scenario's replacement cycle), but that a company complying on-time
need not do so (i.e., since the cash flow analysis for the on-time
scenario runs out only to the year 20).
Therefore, the revised BEN model will adopt this peer reviewer's
solution by implementing the concept of economic depreciation, which
essentially calculates the lease value of pollution control equipment.
In other words, instead of modeling the on-time replacement capital
investment and the subsequent depreciation tax shields, and comparing
that to delayed replacement, the calculation models leasing the
equipment over the period when the on-time equipment would have
required replacement yet the delay equipment is still functional. The
avoided lease cost, therefore, serves as a reasonable approximation of
the economic benefit from the delayed replacement equipment
installation, and also allows the two scenarios to the modeled out to
the same end point. Furthermore, projections far into the future are no
longer necessary, as the imputed lease cost is calculated only for the
interim period when the on-time equipment would have required
replacement yet the delay equipment is still functional.
This approach will add a few new cells on one of the pages in the
BEN detailed printouts, yet allow the elimination of another entire
page of calculations. It will also simplify the previous 0-5
replacement cycles optional input to a simple ``yes/no'' choice for the
consideration of future capital replacement (with the default set to
``yes''). The previously included optional input for the future
inflation rate (which applied only to replacement cycles in addition to
the first one) will be eliminated.
5. Inflation Treatment
a. Background
The first step in the economic benefit calculation is to determine
the compliance costs--for both the on-time and delay scenarios--as of
the year in which they were actually incurred (or should have been
incurred). Therefore, BEN adjusts the compliance costs from the date
they were estimated to the date the costs will be incurred to account
for the effects of inflation.
To adjust for inflation, BEN previously used a standard-value rate
calculated from the prior ten years of inflation data from the Plant
Cost Index (PCI) in the magazine Chemical Engineering. (The PCI is
generally the cost index most relevant to the types of costs typically
associated with pollution control technology.) This simple inflation
rate adjusted the initial compliance cost estimates. BEN applied this
simple inflation rate to the compliance cost figures in order to
determine what compliance would have cost at the noncompliance date.
Then BEN applied the same simple inflation rate to determine what the
costs actually were (or will be) at the compliance date. Finally, the
model used the same rate to go well into the future to determine what
those costs will be for the capital equipment replacement cycles.
b. Final Changes
Despite the Agency's specific request for comment on BEN's
inflation adjustment, we received almost none. The issues that the few
commenters did raise were:
(1) The use of a single inflation rate for both actual and
projected inflation,
(2) The basis for the actual inflation rate, and
(3) The basis for the projected inflation rate.
For actual historical inflation, the revised BEN model will adjust
each cash flow automatically from the date of the cost estimate to the
date on which it is incurred by referencing a look-up table of cost
index values.\15\ The default cost index will be the PCI. This
particular index may not be perfectly appropriate for every single
case, but we have yet to encounter any other cost index that would form
a better basis for a standard value, nor did any commenters submit any
specific nominations for a more suitable index.
---------------------------------------------------------------------------

\15\ The model will not apply an explicit inflation rate,
although an annualized rate could be imputed from the model's data.
For example, suppose a $200 cost estimate from 1991 must be adjusted
for inflation to the same day in 1992. The 1991 cost index value is
100, whereas the 1992 index value is 103. The calculation the model
performs is $200 x 103 / 100 = $206 (i.e., multiplying the original
cost estimate by the ratio of the cost index values from the date on
which the cost is actually incurred, and the date on which the
estimate is made). The index change from 1991 to 1992 does represent
an annual inflation rate of three percent (i.e., 103 / 100 = 1.03 -
1 = 0.03), although the model would not directly apply this rate.
The calculation that uses the ratio of the index values is both more
precise and more simple than calculating multiple annual inflation
rates over different periods for historical costs.
---------------------------------------------------------------------------

The revised BEN model will also allow the user to override the PCI
and instead specify different cost indices for different compliance
components. The table below describes the alternative cost indices.

------------------------------------------------------------------------
Typical
Abbr Full name Description applications
------------------------------------------------------------------------
2.5%...... 2.5-percent constant inflation rate Sensitivity tests;
model testing.
CCI....... Construction Cost Constructions General
Index. costs; based on construction
1.128 tons costs, especially
Portland cement, where labor costs
1,088 bd. ft. 2x4 are a high
lumber, 200 hrs. proportion of
common labor. total costs;
often used for
municipal
wastewater
projects.
ECI....... Employment Cost Employment costs... One-time
Index. nondepreciable
expenditures or
annual costs that
are mainly labor
GDP....... Gross Domestic Economy-wide A very broad,
Product price measure of price economy-wide
deflator. changes. measure of
inflation is
desired.
PCI....... Plant Cost Index... Plant equipment and Standard value.
labor costs.

[[Page 50334]]

PPI....... Producer Price Representative General costs for
Index. producer costs. producers, not
tied to
industrial
process
equipment.
------------------------------------------------------------------------

The user may also override BEN's inflation adjustments for the
capital investment and one-time nondepreciable expenditure, and instead
enter separate estimates for these compliance costs as of the
noncompliance date and compliance date. This customized data entry
could represent another alternative cost index, case-specific inflation
assumptions, or entirely different actions for on-time and delayed
compliance (as discussed in a previous section). For projected future
inflation, the model will project all the cost indices forward in time
at publically available, consensus-oriented forecasted rates.
The standard operation of the model will still entail absolutely no
input whatsoever from the user who is satisfied with BEN's default
values. The other screens for additional data entry and modification
will appear only to those users who selected more advanced options.
6. Discount/Compound Rate
a. Background
Once the compliance cost estimates are adjusted for inflation and
then for taxation, the BEN model must adjust these after-tax cash flows
to a common present value as of the date of noncompliance. The
difference between the two present values (of the on-time and delay
scenarios) is the initial economic benefit as of the noncompliance
date. BEN then compounds this initial economic benefit forward from the
noncompliance date to the penalty payment date to determine the final
economic benefit. A single rate adjusts all present values both
backward and forward in time.\16\ This section addresses only the
calculation of BEN's standard value for this single discount rate,
which was previously based upon a ten-year after-tax weighted average
cost of capital (WACC), with the inputs representing averages across
all industries.\17\
---------------------------------------------------------------------------

\16\ The Agency received many comments on the use of a single
rate as opposed to two different rates. The notice addresses this
issue in section II. B. 8, Discounting/Compounding Methodology.
\17\ The discount rate standard value for not-for-profits is
based upon municipal bond yields, averaged across the four
investment-quality ratings of Aaa, Aa, A, and Baa. The only comment
EPA received on the not-for-profit discount rate was a suggestion
that municipal economic benefit be calculated using a discount rate
for private entities that perform similar functions (e.g., on a
municipal Clean Water Act case, the discount rate would be the
average WACC for privately owned wastewater treatment plants).
However, because the Agency is trying to calculate the economic
benefit that the municipality and its residents or rate payers have
actually gained, the Agency prefers to use an estimation of the
municipal government's opportunity cost of financing projects, which
is equal to the interest rate on the municipality's bonds. This debt
rate--which forms the basis for the BEN model's not-for-profit
standard value discount rate--will almost always be substantially
lower than the private-sector-equivalent cost of capital. The
discount rate for Federal facilities is based upon the yields from
five-year U.S. Treasury notes.
---------------------------------------------------------------------------

The WACC is the average of the cost of debt and the cost of equity,
weighted by the portions of debt and equity out of total financing. The
WACC is first calculated for each year, and then the prior version of
BEN averaged these annual values over the most recent ten-year period.
The (after-tax) cost of debt is the average return on corporate bonds
averaged across all industries, and then multiplied by one minus the
highest marginal corporate tax rate (Federal combined with an average
of all States). The cost of equity is based upon the widely used
Capital Asset Pricing Model (CAPM), and is equal to a risk-free rate
component plus the expected equity risk premium (i.e., the average since
1926 of each year's excess stock market return over the risk-free rate).
b. Final Changes
Based on the June 1999 notice's proposal and the lack of any
objections, the revised BEN model will tailor the standard value
discount rate to the period from the noncompliance date to the penalty
payment date.\18\ The standard value will reference a look-up table,
averaging the annual values over the relevant years. Each individual
annual calculation will be similar to the standard value's previous
methodology.\19\
---------------------------------------------------------------------------

\18\ Although the following discussion focuses on the for-profit
discount rate, the tailoring of the discount rate to the relevant
time period would also apply to not-for-profit entities.
\19\ The revised BEN model will implement two relatively minor
changes to the previous model's annual WACC calculation. First, the
previous practice of applying the most recent figure for the
expected equity risk premium to all prior years' calculations will
be replaced with the figure that was actually available at the time
for that specific year's calculation.
The second change is altering the horizon for the equity risk
premium. The standard value previously combined the long-term
Treasury security rate with the long-horizon equity risk premium,
the latter being equal to the average of each year's stock market
return minus the corresponding-maturity risk-free rate. Because the
WACC calculation combines the equity risk premium with the risk-free
rate of the same maturity that is used initially to calculate the
premium, the issue of which horizon premium to use is largely moot.
(The expected deviations of the resulting WACC will thereby be both
small and nonsystematic.) The new calculation will switch to the
intermediate-horizon risk premium (and the corresponding risk-free
rate) as a simple compromise between the long-horizon and short-horizon.
---------------------------------------------------------------------------

The model will also perform additional customizing in a similar
automated fashion. Since BEN will have an input for the violator's
State--thereby customizing the tax rate for compliance costs--that same
customized tax rate will determine the after-tax debt cost component of
the WACC. The model will even select the individual tax rate if the
company is not organized as a C-corporation (as profits and losses from
S-corporations, partnerships, and sole proprietorships flow through to
the owners' individual tax returns).
The standard operation of the model will still entail absolutely no
input whatsoever from the user who is satisfied with BEN's derived WACC
for the discount/compound rate. Another screen to override BEN's
derived rate will appear only to those users who selected such advanced
options.
7. Discounting/Compounding Methodology
a. Background
As stated in the previous section, once the compliance cost
estimates are adjusted for inflation, and then for taxation, the BEN
model must adjust these after-tax cash flows to a common present value
as of the noncompliance date. The difference between the two present
values (of the on-time and delay scenarios) is the initial economic
benefit as of the noncompliance date. BEN then compounds this initial
economic benefit forward from the noncompliance date to the penalty
payment date in order to determine the final economic benefit. BEN uses
a single rate to adjust all present values both backward and forward in
time. Because BEN uses the same rate for going both backward and
forward, this calculation is computationally equivalent to bringing all
cash flows--both past and future--directly to the penalty payment date
at the WACC rate.
The comments fell into three categories. Some thought the WACC rate
was too high and especially that the

[[Page 50335]]

compounding part of the calculation should be based on a risk-free
rate. Some agreed with EPA's approach. Others commented that EPA's
discount/compound rate was too low and should instead be based on
financing pollution control investments with 100% equity.
The first group of commenters claimed that BEN's use of a WACC-
based rate in all parts of the benefit calculation yielded
inappropriately high economic benefit calculations. They posited that
future cash flows represent uncertainty and risk, while past cash flows
are known, certain, and riskless. Thus, they generally agreed that
discounting future cash flows should be done with a WACC-based rate or
some other risk-based rate, but felt that compounding past cash flows
forward should be done with a riskless rate. They cited selected
academic literature from economic and financial analysis of commercial
damages in torts cases, proposing two alternative methodologies:
? (A) Use BEN's initial figure for the economic benefit as
of the noncompliance date (i.e., bring all cash flows, irrespective of
when they occur, back to the noncompliance date at a rate reflecting
risk), but then bring this intermediate economic benefit figure forward
to the penalty payment date at a risk-free rate.
? (B) From the perspective of the penalty payment date,
bring all future cash flows back in time at a rate reflecting risk
(e.g., the WACC) and bring all past cash flows forward in time at a
risk-free rate (e.g., the after-tax return on short-term U.S. Treasury
securities).

Both of these methodologies produce significantly lower economic
benefit estimates than the BEN model. A range for the magnitude of the
typical differences is difficult to provide because of the many
different types of cases. But while alternative A will generally
produce significantly lower benefit analyses than EPA's BEN approach,
alternative B is so extreme that it will often produce negative
economic benefit estimates for the capital investment portion of the
compliance scenario.
The second group of commenters agreed that the WACC was appropriate
for discounting all future costs back to the noncompliance date, and
then compounding the initial economic benefit forward to the penalty
payment date.\20\ The third group commented that BEN's use of the WACC
is incorrect and leads to economic benefit estimates that are too low.
These commenters instead favored a company's higher cost of equity
capital, rather than the weighted average of the relatively higher-cost
equity capital and the relatively lower-cost debt capital. Their
rationale was that excess returns flow to a company's equity holders,
not to a mixture of its debt and equity owners.
---------------------------------------------------------------------------

\20\ One commenter agreed with compounding the initial benefit
forward at the WACC rate, but only to the compliance date, after
which a lower compounding rate would be appropriate. His rationale
was that a company then must set aside specific funds to pay a
penalty; therefore, the economic benefit estimate should be
compounded either at the actual interest rate on an escrow account
or at the company's debt rate (which reflects its risk of going out
of business, resulting in an inability to pay a penalty). Even if
EPA took this approach, it would make no difference in the
calculation where compliance had not yet been achieved at the time
of settlement or trial.
---------------------------------------------------------------------------

b. Final Changes
Regarding the first group of commenters, although both the
conceptual bases and results of their two risk-free rate methodologies
contradict each other, they share one similar rationale: Cash flows
that have yet to occur in the future are uncertain and risky, whereas
cash flows that have occurred in the past are certain and riskless.
These methodologies, therefore, apply to future cash flows a rate that
includes a risk premium (e.g., a company's WACC or some other risk-
adjusted rate) and apply to past cash flows a risk-free rate (e.g., the
return on short-term Treasury securities). As discussed below, the
Agency believes that even if this approach were justified in the
context of calculating damages owed to plaintiffs in certain types of
tort cases, it is entirely inappropriate in economic benefit
calculations for enforcement actions. The goal in the tort damages
approach is to make the plaintiff whole by compensating him for his
losses. The fundamentally different goal in enforcement actions is to
deter future violations by both this particular violator and other
potential future violators.
By contrast, the third group of commenters advocate the use of an
equity-based discount rate. This approach is more reasonable than the
risk-free rate alternatives, although the Agency still believes that
using the WACC throughout all aspects of the calculation is the most
reasonable and hence preferable approach.
(i) Risk-Free Rate Forward: Theoretical Issues
The goal in a tort action is to make the plaintiff ``whole.'' The
settlement or court determination ultimately should place the plaintiff
in the same financial position as if the wrong had not occurred. The
first step in such a case is to calculate the necessary compensation at
the time of the actual wrong. The next step is to adjust the
compensation calculated at the time of the actual wrong to the time at
which such compensation is to be made. Certain authors writing about
tort damages have advocated bringing such compensation forward at a
risk-free rate.\21\ Otherwise, the plaintiff would be ``having-its-
cake-and-eating-it-too'': The initial compensation has essentially been
invested at the time of the actual wrong at a rate reflecting risk
taking, yet the plaintiff is now granted the compensation which grew at
that rate, without ever bearing the accompanying risk. (In contrast,
the regular investor would have made the investment and then had to
stand by nervously as the investment's value either grew or fell). This
was the reasoning behind some of the commenters in the first group
advocating that BEN employ such a risk-free rate approach.
---------------------------------------------------------------------------

\21\ No consensus exists, however, and many other authors have
advocated other approaches. Judges in tort cases have arrived at
rulings that mandate many different rates, with many different
values and rationales.
---------------------------------------------------------------------------

While the appropriate focus in a tort damage action is on
compensating the victim (i.e., plaintiff), this is not appropriate in
an enforcement action. The enforcement agency is not suing for damages
it has suffered. The goal is not to make the plaintiff whole (i.e., to
restore to it the amount by which it was damaged). The goal of the
economic portion of a civil penalty is to return the defendant to the
position it would have been in had it complied, and thus disgorge from
it the amount it wrongfully gained. If civil penalties, comprising the
economic benefit and gravity components, effectively allow the violator
to gain an economic advantage from its violations, other companies will
see an advantage in similar noncompliance. This is a fundamentally
different perspective from a tort case, and demands a fundamentally
different view of adjusting cash flows to a present value.
The appropriate discount rate for economic benefit calculations is
a company's opportunity cost of capital, reflecting the financing costs
for pollution control investments or the value of investment
opportunities foregone because of pollution control purchases. The
opportunity cost of capital is the incremental expected rate of return
a company must earn to pay back its lenders (i.e., bond holders) and
owners (i.e., stockholders), which is the weighted-average cost of capital.

[[Page 50336]]

The risk-free rate methodologies use short-term U.S. Treasury bill
rates that are unrelated to a company's opportunity cost of capital.
Only the Treasury of the United States of America is able to borrow at
the U.S. Treasury bill rate.\22\ Companies lack the advantage of such
low financing rates. To finance additional projects, they must either
issue debt at higher interest rates, and/or issue equity, which
requires returns of even higher rates.
---------------------------------------------------------------------------

\22\ This is a very favorable rate, because of the U.S.
Treasury's over two-century default-free record, its ability to
create money, and also the State tax-free status of its debt instruments.
---------------------------------------------------------------------------

Applying the risk-free rate to a company's cash flows presumes an
unattainably low borrowing rate and an insufficient return on
investments. (With the exception of mutual funds, a company whose main
business was investing in T-bills would not be in business for very
long.) The true opportunity cost of capital for a company far exceeds
the T-bill rate. The risk-free rate will therefore systematically
understate the economic benefit of pollution control noncompliance.
Penalties based solely on economic benefit calculated with a T-bill
rate would allow a defendant to retain a potentially substantial gain.
Because of the precedent of this retained gain, other regulated
companies might see an economic advantage in similar noncompliance, and
the penalties based on a risk-free rate approach will fail to deter
potential violators.
(ii) Risk-Free Rate Forward: Practical Implications
Not only are the theoretical underpinnings of the risk-free rate
forward methodologies flawed, but their practical implications are also
troubling. Specifically, the use of the risk-free rate fails to achieve
the overriding goal of economic benefit recapture: To make the violator
financially indifferent between compliance and noncompliance, which in
turn constitutes a critically important element of deterrence.\23\ An
example helps to illustrate this point.
---------------------------------------------------------------------------

\23\ Because benefit recapture by itself merely makes the
violator indifferent between compliance and noncompliance, only a
total penalty amount that exceeds the economic benefit (by
incorporating a gravity component) can achieve actual deterrence.
Therefore, a civil penalty should always be at least equal to the
economic benefit calculation plus some non-trivial gravity component.
---------------------------------------------------------------------------

Suppose a company is deciding whether to purchase pollution control
equipment this year (e.g., 2000), or to wait until the same month in
the next year (e.g., 2001). The company is not necessarily
contemplating a willful violation of the law--perhaps the law's
interpretation is unclear, and the company would like to know the
financial consequences of not purchasing the equipment, and then later
being found to be in noncompliance. The company, therefore, wants to
know how much better or worse off it will be by delaying the purchase
one year.
The company performs three sets of economic benefit calculations.
First, it calculates the economic benefit as of the present time (e.g.,
June 2000). This lets the company know how much better off it will be
by delaying the purchase (e.g., until June 2001), in the absence of any
penalty. Second, it calculates the economic benefit as of one year
later (i.e., June 2001, when it would otherwise purchase the equipment,
and also pay any penalty), and then discounts the calculated economic
benefit back to the present (i.e., June 2000). This lets the company
know the present value of any economic benefit based penalty that is
calculated and paid the following year in 2001. Third, it subtracts the
second result from the first result to determine the net amount by
which it is better or worse off (i.e., the economic benefit of its
noncompliance, minus the present discounted value of the economic-
benefit-based penalty it can expect to pay in 2001).
The first economic benefit calculation yields the same result
regardless of which economic benefit methodology is used, because all
the cash flows occur in the future.\24\ In this example, the only
compliance measure is a one-time--i.e., no replacement cycles--capital
investment of $10 million.\25\ The company calculates that it is
financially better off now in 2000 by $519,767 from a projected one-
year compliance delay.
---------------------------------------------------------------------------

\24\ The results might be slightly different depending on what
``risk-adjusted rate'' the risk-free rate forward methodologies use
for the future cash flows in their calculations. Different
practitioners have used different ``risk-adjusted rates'' in
different cases, including the same WACC-based discount rate that
the BEN model uses. Therefore, for the purposes of the examples that
follow, we assume that the alternative methodologies also use the
WACC for future cash flows. If, instead, they were to use a
different rate, the exact figures for the results would be slightly
different, but the overall implications would remain the same.
\25\ Other inputs include a 40-percent tax rate, 1.8-percent
inflation rate, and 10-percent WACC.
---------------------------------------------------------------------------

The company also needs to know how much better off it will be on
net should the enforcement agency assess a penalty in 2001 equal to the
calculated economic benefit from its delayed compliance. Assuming that
the agency uses BEN, the economic benefit is brought forward one year
by an estimate of the company's WACC (in this case 10 percent), so the
economic-benefit-based portion of the penalty the company will pay is
$571,744.\26\ But because the company will pay the penalty a year in
the future, it must discount that amount back to the present. If it
discounts the penalty at the same rate that BEN used to compound the
penalty forward to the penalty payment date, the present discounted
value of the future penalty will always be equal to the economic
benefit the company calculates for itself (in this case, $519,767). The
company can therefore expect to have any economic benefit disgorged
from itself, which makes the company financially indifferent between
compliance and noncompliance. The column in the exhibit below labeled
``BEN'' summarizes these calculations.
---------------------------------------------------------------------------

\26\ Because the time between the noncompliance date and the
penalty payment is only one year, the compounding takes the form of
simply multiplying the initial economic benefit by the sum of one
plus the discount/compound rate (i.e., $519,767x(1 +
0.10)=$571,744).

--------------------------------------------------------------------------------------------------
Economic benefit BEN Alternative A Alternative B
--------------------------------------------------------------------------------------------------
1. Penalty Payment Date of 6/1/2000............... $519,767 $519,767 $519,767
2a. Penalty Payment Date of 6/1/2001.............. 571,744 533,281 (147,798)
2b. Result 2a discounted back to 6/1/2000......... 519,767 484,801 0
3. Net Result (i.e., 1-2b)........................ 0 48,480 519,767
--------------------------------------------------------------------------------------------------

Perhaps, however, the enforcement agency uses one of the
alternative methodologies. Under alternative A, as described in Section
II B(8)(a), above, the initial economic benefit as of the noncompliance
date is calculated with BEN, but is then compounded forward at the
after-tax risk-free rate. In this case, compounding the initial
economic benefit forward from 2000 to 2001 at an illustrative risk-free
rate of 2.6 percent yields $533,281. The company

[[Page 50337]]

discounts this future penalty back to the present (i.e., 2000) at its
WACC, and arrives at $484,801.\27\ Because this is less than the
current economic benefit of $519,767, the company realizes a net gain
of $48,480. This approach fails to make the company indifferent between
compliance and noncompliance and, in the absence of any additional
gravity-based penalty components, the company will have an incentive to
delay compliance.
---------------------------------------------------------------------------

\27\ Even if the company were to discount the future penalty
back at a rate lower than its WACC, this rate would still exceed the
risk-free rate that alternative A uses to compound the economic
benefit forward, and therefore the discounted future penalty would
still exceed the currently calculated economic benefit.
---------------------------------------------------------------------------

If the enforcement agency instead uses alternative B, as described
in Section II B(8)(a), the economic benefit as expected to be
calculated a year from now in 2001 is a negative $147,798.\28\ The
company realizes that an enforcement agency using this approach will
conclude a year from now in 2001 that no economic benefit has been
gained, and therefore the economic benefit-based portion of the penalty
will be zero. But the company currently calculates its economic benefit
in 2000 to be a positive $519,767. At the time of initial noncompliance
in 2000, the company concludes that delaying the equipment purchase
will result in an economic gain, but that it will never have to pay any
economic-benefit-based portion of the penalty. Once again, a risk-free
approach fails to make the company indifferent between compliance and
noncompliance and, therefore, in the absence of any additional gravity-
based penalty components, the company will have a significant incentive
to delay compliance.
---------------------------------------------------------------------------

\28\ A negative economic benefit result for the capital
investment portion of compliance is typical for alternative B. In
many recent cases, the violators' witnesses implementing this
approach have arrived at negative economic benefit results for
delayed capital investments, despite the fact that no changes
occurred in technological or legal requirements over time between
the dates of noncompliance and compliance. (In other words, the
negative economic benefit result was derived from on-time and delay
scenarios involving the same piece of capital equipment, with the
passage of time affecting only inflationary adjustments for the cost
estimate.) Applying the combination of an extremely low risk-free
rate for past cash flows and a higher risk-adjusted rate for future
cash flows to delayed capital investments (with their past cash
outflows for the actual investment and their future cash inflows for
depreciation tax shields) can produce aberrant results that defy
common sense. These perverse negative economic benefit estimates do
not reflect any real economic losses because of the expenditure
delay. Furthermore, even if the parameters in this example were
different, the economic benefit--although perhaps positive--would
still be much smaller than even under alternative A, and would
similarly fail to make the company indifferent between compliance
and noncompliance.
---------------------------------------------------------------------------

(iii) Equity Rate Approach
By contrast, an approach that employs a company's equity rate
focuses solely on the company's equity owners, as opposed to its other
stakeholders (who hold the company's debt). Because the company's cost
of equity capital will always exceed or at least be equal to a
company's WACC, the economic benefit estimate--with all other
assumptions held constant--will be higher or at least the same.\29\
While the Agency believes that a reasonable argument supports the use
of equity, we nevertheless prefer the WACC, because it better
represents firms' total capital structures and their own typical
business decision-making practices.
---------------------------------------------------------------------------

\29\ The WACC will equal the equity cost of capital if the
company has no long-term debt. Note also that an economic benefit
calculation using the equity rate should first net out any cash
flows attributable to debt financing, as the focus in such a
calculation is on the returns to the company's equity holders only.
---------------------------------------------------------------------------

(iv) Final Change: Use WACC, Except for a Possible Early Penalty Payment
For the above reasons, the Agency believes that the current basic
discounting methodology is appropriate and should not be changed,
except a minor modification in certain contexts. The United States may
consider allowing the violator to escrow funds for the economic benefit
portion of the penalty demand (whether at the compliance date or at any
other time). Then, when EPA runs the BEN model, it will use the date
the funds were escrowed as the penalty payment date. The violator would
have to furnish proof that it established the escrow account, as well
as placed on the account appropriate restrictions (e.g., all accrued
interest would go to the Agency).\30\ This modification, when applied
to certain cases, may reduce some of the deviation in results between
the competing discounting methodologies. BEN will incorporate this
guidance into its help system.
---------------------------------------------------------------------------

\30\ Should the escrowed amount exceed the benefit component,
then the interest on the amount that exceeded the economic benefit
component would accrue to the violator.
---------------------------------------------------------------------------

8. Investment Tax Credit and Low-Interest Financing
a. Background
Economic benefit calculations for cases with noncompliance dates
prior to the mid-1980s must account for two important tax-code effects:
The investment tax credit (ITC) and low-interest financing (LIF).
Prior to 1986, the Federal government allowed companies an ITC on
capital investments.\31\ The ITC effectively reduced the after-tax cost
of a capital investment. Complicated and changing rules governed the
depreciation basis for a capital investment with an associated ITC.
---------------------------------------------------------------------------

\31\ Note that this and other tax-related adjustments are
irrelevant for municipalities, federal facilities, and other not-
for-profit entities because their marginal tax rate is equal to zero.
---------------------------------------------------------------------------

Early versions of BEN used to account for the ITC that was
available on projects completed before January 1, 1986, but did not do
so for the transition years of 1986 and 1987. The transitional rules
allowed companies to obtain an ITC for projects completed after
December 31, 1985, if the project met one of three criteria regarding
the level of planning and construction that had occurred by that
date.\32\ Because the allowance of the ITC in these years was far from
automatic (although still possible), BEN warned the user about this
issue for noncompliance dates between January 1, 1986, and June 30,
1987. If further research and analysis showed that the granting of an
ITC was likely in a particular case, then a financial analyst could
adjust the BEN result through an ``off-line'' calculation.
---------------------------------------------------------------------------

\32\ The criteria are: ``1. It is constructed, reconstructed, or
acquired under a written contract binding on December 31, 1985; 2.
it is constructed or reconstructed by the taxpayer, construction was
begun by December 31, 1985, and the lesser of $1 million or five
percent of the cost was incurred or committed by December 31, 1985;
or 3. it is an equipped building or plant facility, construction was
begun by December 31, 1985, under a written specific plan, and more
than one-half of its cost was incurred or committed by December 31,
1985.'' (Commerce Clearing House, Inc., Explanation of Tax Reform
Act of 1986, page 328.)
---------------------------------------------------------------------------

Prior to 1987, LIF was available for a business's investment in
pollution control. A much earlier version of the BEN model included a
variable that accounted for LIF. The 1993 version of BEN removed this
variable because it was relevant only for cases with noncompliance
dates before 1987. Once this variable was removed, BEN would then issue
a warning to the user about LIF for noncompliance dates before January
1, 1987. If further research and analysis showed that LIF was probably
available in a particular case, then a financial analyst could adjust
the BEN result through an off-line calculation.
b. Final Changes
A few commenters suggested that EPA could revise the BEN model to
allow an option for ITCs during the 1986-87 transition years, as well
as to account for LIF in years prior to 1987. These revisions would,
however, add considerable complexity to the model.

[[Page 50338]]

Furthermore, the Agency did not receive any comments documenting recent
instances in which an off-line calculation was necessary to account for
ITCs or LIF. This is not surprising EPA Headquarters had received only
one call in response to the older BEN model's previous warning about
LIF. Furthermore, the already low likelihood of the need to account for
ITCs or LIF continues to decline with the passage of time, as EPA is
not likely to see many enforcement actions now in the mid-2000s for
violations that began in the early to mid-1980s.
The June 1999 notice's proposal on this issue `` that the revised
BEN model not accept noncompliance dates before July 1, 1987 `` did not
receive any objections from commenters. This cut-off date will ensure
that BEN's omission of ITCs and LIF is not leading to incorrect
economic benefit estimates. EPA will provide assistance in performing
the necessary calculations for cases that involve noncompliance dates
before July 1, 1987.

C. Improving the BEN Model's User-friendliness

EPA understands that some users find the BEN model difficult to
use. While that has not been EPA's experience, the Agency expressed
interest in learning of any difficulties users encountered when running
the model. The Agency particularly requested suggestions for realistic
alternatives that would preserve the model's degree of precision.
1. Is BEN Too Complex To Operate?
a. Background
EPA invited comments on whether any aspect of BEN's operation or
user's documentation is too complex. Although the Agency designed BEN
to be straightforward and easy to use, we welcomed any suggestions to
make the model easier to use without compromising BEN's degree of
precision.
b. Final Changes
Many commenters thought that although the old BEN model was
generally easy to use, certain aspects of the prior version's operation
were cumbersome. The Agency agrees, given the model's origins as a
mainframe computer application and then its prolonged existence in the
DOS operating environment. Because essentially all computer users are
now long accustomed to the WindowsTM operating environment,
the Agency has decided that the revised BEN model will continue to run
in Windows (version 95 or higher). This makes basic data entry and
benefit calculations much easier to perform, as well as allowing the
addition of various advanced features without burdening the user with
additional complexity.
EPA has also established a toll-free helpline for Federal, State,
and local government enforcement staff who need additional assistance
in using the BEN model. The helpline provides Federal, State, and local
environmental enforcement agencies with advice regarding financial
issues that impact enforcement cases. The main types of inquiries EPA
is addressing with this helpline are:
? The calculation of a violator's economic benefit from noncompliance;
? The evaluation of a violator's claim that it cannot afford
to comply, clean up, or pay a civil penalty, and the application of the
three computer models--ABEL, INDIPAY, and MUNIPAY \33\--that address
these issues; and
---------------------------------------------------------------------------

\33\ ABEL, INDIPAY and MUNIPAY evaluate inability to pay claims
from for-profit entities, individuals and municipalities, respectively.
---------------------------------------------------------------------------

? The calculation of the actual costs of a supplemental
environmental project, and the application of the computer model--
PROJECT \34\--that addresses this issue.
---------------------------------------------------------------------------

\34\ As most supplemental environmental projects (SEP's) are
completed long after the cases are settled, any stated SEP cost is
usually far above the ``real'' cost to the violator. Therefore,
PROJECT calculates the SEP's actual costs to the violator.
---------------------------------------------------------------------------

Callers can obtain assistance in downloading the BEN model and the
previously mentioned other models, as well as relevant policies and
guidance documents. In addition, callers can obtain advice on how to
access training courses on the models and related subjects. Inquiries
regarding the interpretation of Federal statutes and EPA policies will
be referred to the EPA, as will inquiries from nongovernment employees
except for relatively straightforward technical inquiries (e.g.,
installation problems).
The toll-free helpline phone number is 888-ECONSPT (326-6778), and
is staffed by a contractor, Industrial Economics, Incorporated, located
in Cambridge, Massachusetts. The helpline is in operation from 8:30 AM
to 6:00 PM Eastern time and will accept voice mail messages when it is
not in operation. In addition, the contractor has provided a companion
e-mail address: benabel@indecon.com. When requesting help, enforcement
staff should identify their governmental affiliation. As mentioned at
the beginning of this notice, anyone can download the model through the
EPA's Web site at:
http://www.epa.gov/compliance/civil/programs/econmodels/index.html.
2. Is the Information BEN Needs Difficult or Expensive to Obtain?
a. Background
One of the main breakthroughs BEN achieved over its predecessor
model was its streamlining of the data needed to operate the model.
While the model requires a minimum of only seven data inputs (mainly
just three dates and up to three cost estimates), some users apparently
feel the data is difficult to obtain. This has not been EPA's
experience, as most (if not all) of the required data inputs are based
on facts that are already or should be known to the litigation team as
the data are important to other parts of the settlement. Nevertheless,
the Agency welcomed any suggestions on how to make this data easier to
obtain as long as the model's degree of precision is preserved.
b. Final Changes
The Agency received a wide range of responses on this issue. Most
users thought the necessary data was easy to obtain; others thought it
was prohibitively difficult to obtain. EPA did not receive any specific
suggestions on how to streamline the model's data requirements even
further. The Agency did receive suggestions that the BEN model
incorporate some basic, generic compliance data.
The Agency has cost information on its Web site for the UST
(Underground Storage Tanks) and Clean Air Act (Stationary Sources) \35\
programs. In addition, it produced a written manual on standardized
RCRA (Hazardous Waste) costs. These information sources should assist
users in determining compliance costs, and then using them in the BEN
model to calculate an economic benefit figure. Although these
information sources are not a substitute for case-specific data, they
will at least provide a starting point and a reasonably accurate
estimate when a violator refuses to provide any detailed cost information.
---------------------------------------------------------------------------

\35\ The web address for the Clean Air Act Stationary Source
information is: http://www.epa.gov/ttn/catc/products.html.

---------------------------------------------------------------------------

Also, as noted at end of Section II C (1)(b), above, EPA has
established a toll-free helpline to provide assistance to government
enforcement personnel regarding financial economics issues in
environmental enforcement cases. Helpline staff can provide suggestions
on how to obtain the necessary data to run the BEN model.

[[Page 50339]]

D. Procedural Issues Regarding the Public Comment Process

Although the Agency did not request any comment on the public
comment process itself, the Agency did receive several comments
regarding procedural issues. EPA's responses to the major requests are
as follows:
? Extend the initial public comment period: In response to
such concerns, the Agency extended the deadline for the initial round
of public comments from the originally stated January 1, 1997, to a
significantly later March 3, 1997 (see Federal Register notice on
December 12, 1996, at 61 FR 65391).
? Follow up on the public comment period by first drafting
the findings, then requesting and evaluating further public comment,
and finally publishing a formal draft on the final decision: In
response to such concerns, the Agency has done exactly that. The June
1999 notice responded to the comments, came out with a proposal, and
then requested further comment on that proposal. This notice contains
the final findings.
? Provide a separate public comment process for the illegal
competitive advantage guidance document: Since the Agency has already
solicited public comment on illegal competitive advantage issues, a
separate public comment process would be duplicative. But as was
mentioned earlier in this notice, the EPA's Science Advisory Board has
initiated a peer review of the draft illegal competitive advantage
guidance document.
? Submit the BEN model to a formal peer review process: As
noted earlier, EPA submitted its draft BEN model changes to an academic
peer review in the spring of 2003. The process concluded at the
beginning of 2004.

III. Response to Comments

A. Broad Economic Benefit Recapture Issues

1. Alternatives to BEN
Comment: One commenter challenged the economic rationale of the
entire benefit recapture ideology, concluding that EPA's current
approach encourages compliance disproportionate with resultant social
benefits. The alternative recommendation was to base penalties on
violations' social costs rather than the private gains, thus providing
the possibility of an ``efficient breach,'' a concept from contract
law. The illustrative example was an individual lost in the woods who
steals food from a cabin to avoid starvation. Under the social cost
approach the individual would be required to repay the cost of the
stolen food. The commenter argues that EPA's approach in this context
would be analogous to attempting to recover the private gain,
presumably the value of the individual's life.
Response: As discussed in the main text of this notice, the Agency
finds this approach unacceptable, inconsistent, and infeasible with
regard to its objectives to enforce regulatory requirements. More
specifically, in the example of the starving person, society has
implicitly agreed that the individual may violate the normal respect
for private property and steal the food, being required later to repay
only the cost of the food. By contrast, society has not agreed that
companies may violate environmental statutes at will whenever they
expect their private gain to exceed the social costs. To use another
example at the individual level, motorists are required to stop at red
lights even at deserted intersections. If a driver is caught running a
red light, financial compensation to other parties may not be necessary
if no accident has occurred, but a regulatory penalty in the form of a
moving violation ticket is still appropriate. A police officer is
generally not convinced by a violator's argument that the lack of
social damage is outweighed by the violator's gain (in terms of time
saved in this example), and EPA is similarly not convinced by such an
analogous argument.
2. Illegal Competitive Advantage
Comment: Several commenters felt that EPA has not demonstrated a
clear need to broaden the benefit recapture framework to consider
illegal competitive advantage, and questioned whether the scenarios
described in the June 1999 notice were realistic and supported by
actual data. These commenters felt that consideration of illegal
competitive advantage is appropriate only under rare and limited
circumstances.
Response: The Agency agrees that consideration of illegal
competitive advantage will occur far less frequently than the typical
BEN-type of benefit, but it does not agree that such occurrences will
be rare. As the main text of this notice explains, specifically those
situations are where revenues in both the actual noncompliant and
hypothetically compliant states are not identical (as BEN implicitly
assumes). As previously noted, the Agency is not planning to issue any
guidance on the subject of illegal competitive advantage at this time.
Therefore it is premature to address the comments that were directed at
the scenarios that appeared in the June 1999 notice.
Comment: Two commenters recommended that the Agency adopt
alternative terminology for ``competitive advantage,'' because the
scenarios described in the June 1999 notice do not necessarily involve
``competition,'' as in antitrust cases.
Response: The Agency agrees that the term may not be ideal, and has
been open to alternative suggestions. Unfortunately, no commenter
proposed any. The underlying concept is economic benefit that goes
beyond the BEN model's simplifying paradigm of delayed and/or avoided
pollution control costs, but unfortunately this is difficult to convey
in merely two or three words.
Comment: Many commenters expressed concern over the additional
resources necessary for the data and analysis associated with illegal
competitive advantage. One commenter questioned whether such analyses
were feasible altogether, and another questioned whether EPA staff was
sufficiently qualified to undertake them. Finally, one commenter
suggested that attempts to calculate illegal competitive advantage
should not be made until EPA has issued formal guidance.
Response: Illegal competitive advantage cases may involve more
detailed financial data and analysis than typical BEN cases, although
in some cases they will involve less. When such cases do arise, the
Agency will rely heavily on expert support, just as it currently does
for much of its more complex economic benefit recapture work. Moreover,
the absence of formal guidance in the interim should not preclude staff
from identifying and analyzing illegal competitive advantage. Recapture
of economic benefit based on illegal competitive advantage has been
EPA's position since the inception of the policy in 1984 to recapture
all the economic benefit from noncompliance. There are now a series of
case decisions that have already based 100 percent of the violator's
economic benefit on illegal competitive advantage. It is worth noting
that in one of the cases, the benefit calculation was so simple that
the Agency did not even need to present expert testimony on illegal
competitive advantage.
Comment: One commenter disagreed with the June 1999 notice's
characterization of the role of marginal production costs regarding
illegal competitive advantage from increased market share. Figure 1
below reproduces the graph that the commenter attached. As in the
classic textbook example of a ``price-taking'' firm facing a
competitive market, the firm produces up to the point where its
marginal cost of

[[Page 50340]]

production (as depicted by the line MC_c for a compliant
firm) is equal to the market equilibrium price (as depicted by the
horizontal line, P). The firm produces quantity Q_c, with a
profit equal to the triangle described by the points P-A-B (i.e., the
area lying below the market price but above the marginal cost curve).
Although noncompliance may alter marginal costs such that the firm is
at the lower MC_nc, if it anticipates with 100-percent
certainty the imposition of and magnitude of a BEN-based penalty, then
it will continue to produce at Q_c (not the higher
Q_nc,) since the marginal costs will eventually be
retroactively incurred in the form of the penalty. Therefore, the BEN
model captures the entire economic benefit.
BILLING CODE 6050-50-P
[GRAPHIC]
[TIFF OMITTED]
TN26AU05.007

BILLING CODE 6050-50-C
Response: If the many economic assumptions necessary for this
hypothetical scenario are accepted (particularly the certain
anticipation of the size of the BEN component of a penalty), then the
conclusion is correct. But the complicated analysis necessary to arrive
at this conclusion is moot: if the firm has not altered its behavior
and not gained any market share, then market share from illegal
competitive advantage is not an issue.
Comment: The same commenter continued with this example, but
assumed alternatively that the noncompliant firm does not anticipate a
BEN-based penalty, for whatever reason. With the lower marginal cost of
production MC_c it produces at the higher Q_nc. A
BEN-type calculation would be based on the difference between
MC_c and MC_nc (i.e., the per-unit compliance
cost), multiplied by the number of units (i.e., Q_nc), and
therefore equal the area described by the points A-C-D-E. But this
overestimates the economic benefit the company has actually received,
which is A-C-D-B (i.e., the actual profit P-C-D, minus the compliant
profit P-A-B). Therefore, even if the firm does gain market share from
its noncompliance, BEN would overestimate the economic benefit, not
underestimate it.
Response: The Agency has never encountered such a situation,
especially

[[Page 50341]]

since such textbook graphs--while helpful for understanding broad
economic concepts and aggregate market behavior--may not be very
relevant for many individual firms. For example, marginal cost curves
for individual firms are often not smooth curvilinear functions, but
rather approximate more crude step functions. Combined with the
relatively small magnitude of typical compliance costs compared to
total variable production costs, the Agency is unaware of any violator
claiming that it would have produced less had it incurred the
compliance costs on-time. Nevertheless, this graph does illustrate the
theoretical possibility that a BEN-type calculation could overestimate
the economic benefit if all these conditions were present. The
opposite, however, is also possible: if the compliance costs
calculation is based upon a compliant level of production (i.e.,
Q_c), then the resulting area A-C-F-B will underestimate the
actual economic benefit (i.e., A-C-D-B). This further emphasizes the
need for a detailed examination of the company's actual noncompliant
and hypothetically compliant behavior (and cash flows), if the
noncompliance is reasonably believed to have increased a violator's
market share.
Comment: One commenter suggested that a warning message be
incorporated in the BEN module that advises the user that an
affirmative answer to any of the questions regarding illegal
competitive advantage indicates only the possibility that such a
situation exists and that any presumed illegal competitive advantage
may reduce the conventional BEN result.
Response: The Agency agrees with the goals of this comment. The
Agency has requested the Science Advisory Board to look at this issue
as part of its review of the ICA type of economic savings. Thus for the
immediate future, the BEN model will not contain any questions,
references or guidance regarding ICA.
Comment: Many commenters expressed concern over the potential for
double counting in situations where illegal competitive advantage is
considered. In particular, several commenters indicated that
conventional BEN calculations and those related to illegal competitive
advantage should be mutually exclusive options for penalty arbitration.
One commenter suggested that a penalty that incorporated both would
constitute double counting because the violator would have forgone some
profits that are captured in the BEN calculation. Another commenter
suggested that an illegal competitive advantage component should not be
considered unless evidence suggests that it is likely to outweigh the
conventional BEN result.
Response: The Agency agrees that simply adding an estimate of
illegal competitive advantage to the BEN model's result would create
the potential for double counting. But this is only a potential. In
some cases it will be appropriate to seek benefit recapture based upon
both types of benefit. In In re: Lawrence John Crescio III, No. 5-CWA-
98-004, 2001 WL 537494 (May 17, 2001), an administrative law judge
assessed a civil penalty that recaptured both types of benefit.
Nevertheless, the emphasis for illegal competitive advantage is on a
unified approach, laying out all the relevant cash flows associated
with the on-time and delayed compliance scenarios. The economic benefit
is then equal to the difference between the two scenarios' after-tax
net present values. This is the same approach that the BEN model
follows, although the scenario construction under illegal competitive
advantage will--almost by definition--be more complex than under the
BEN model.
Comment: Several commenters referred to the language of the penalty
provisions of many of the statutes that EPA is responsible for along
with the legislative history of those provisions. They claimed that
those provisions authorize neither the recovery of illegal competitive
advantage nor the mandated recovery of economic benefit as a necessary
penalty minimum. Similarly, another commenter questioned EPA's position
that the recovery of economic benefit is ``no fault'' in nature and
suggested that it would be incorrect to assert that it must be
recovered in every enforcement case.
Response: The passages these commenters cite clearly show that
various members of Congress were often equating economic benefit with
delayed/avoided compliance cost savings. But they made this association
only because economic benefit typically results from delayed and/or
avoided expenditures. There is nothing in the legislative history cited
by these commenters to suggest that Congress intended to exclude the
possibility of other kinds of economic benefit accruing from
noncompliant actions (i.e., illegal competitive advantage).
Furthermore, the minimum recovery of economic benefit in a penalty--
regardless of the violator's motives or the violation's impacts--is a
common-sense notion that need not rely entirely on the legislative
record for its support. Even if the argument is confined to statutory
interpretation, the trier of fact, in imposing a civil penalty, is not
limited to consider only those factors present in the applicable
statute's penalty provisions. For example, judges have recaptured
economic benefit in RCRA cases even though RCRA is silent as to the
consideration of economic savings.
3. Other Broad Economic Benefit Recapture Issues
Comment: Several commenters asserted that in cases of technological
infeasibility, shutdown as a means of compliance is an inappropriate
suggestion, both because EPA does not have the statutory authority to
mandate shutdowns and because of the consequential economic and social
displacement.
Response: The issue of whether the enforcement agency should
request a judge to order a violating firm to shut down is not germane
to the discussion of how to calculate the economic benefit of
noncompliance. What is relevant is that the economic benefit analysis
should as a general rule (though with reasonable exceptions) be modeled
on the actual or anticipated means of compliance. If the facility has
complied (or will comply) by shutting down, then the baseline
assumption for the economic benefit analysis is that the violator
should have complied on-time by shutting down at an earlier date.
Comment: Several commenters stated that penalties should not be
assessed in cases of industry-wide noncompliance. In particular, some
commenters argued that penalties should not be assessed in situations
where EPA has re-interpreted relevant regulations or failed to provide
``fair notice''.
Response: If an entire industry has failed to comply, then all of
the firms in that industry have gained an economic benefit that should
be disgorged. Otherwise, firms in a given industry would have an
incentive to collude in noncompliance. In addition, one industry may be
competing against another (hydroelectric power versus fossil fuel based
electric power) such that the industry that fails to comply obtains a
significant advantage in that competition. Finally, if for some reason
all the firms in a particular industry are out of compliance, each
violating firm still obtains an economic benefit. By delaying and/or
avoiding compliance expenditures, each of the firms is saving money
even if the playing field is level. The Agency needs to recapture that
benefit from any violating member of that industry if it wants to
produce deterrence.
EPA's perspective is that the economic benefit gained is ``no
fault'' in nature. By this the Agency means that a company need not
have intentionally

[[Page 50342]]

violated the law, or been aware of the violation, to have accrued
economic benefit. Nevertheless, the concept of ``fair notice'' can be
relevant to penalty assessment and may be an exception to this ``no
fault'' approach. Some courts have found that fair notice is a defense
to a penalty action if established by the defendant. This is not saying
that the violator failed to obtain an economic benefit from its
noncompliance. Fair notice is thus a legal defense, not an economic
one. As a policy matter, the Agency generally does not seek any
penalties where that defense has been clearly established.
Comment: Two commenters stated that the BEN model does not
accurately measure regulated utilities' economic benefit. Specifically,
one commenter noted that because regulated utilities are able to
recover their compliance expenditures and earn a rate of return on
those investments, the timing of periodic rate adjustments should be
considered. For example, if compliance expenditures associated with a
new facility are delayed until after a rate assessment, the utility
forfeits returns on that investment until the subsequent rate
assessment, a tacit loss that is not reflected in BEN model calculations
Response: The Agency generally agrees that the BEN model does not
reflect that potential loss in some situations, but it does not agree
with the implications. Specifically, the violator has created an
economic benefit, which, depending upon the particular circumstances,
has accrued either to the utility or to its customers in the form of
lower rates. In some cases, both the utility and the customers obtain
the benefit. Either way, this economic benefit should be recaptured.
Otherwise, given the joined-at-the-hips relationship between a
traditional rate-of-return regulated utility and its ratepayers, the
financial incentive would arise to avoid compliance and thus create
goodwill among ratepayers (knowing that the economic benefit would not
be recaptured) that could help the utility in the next rate hearing. To
ignore this benefit generated by such a regulated utility creates a
very strong incentive to evade compliance responsibilities.
The analogy of a landlord-tenant relationship helps to illustrate
this concept. Suppose that the lease conditions allow pollution control
costs to be passed through to the tenant, and suppose that the
regulatory agency agrees that the economic benefit that the landlord
created through its violations should not be recaptured via a civil
penalty since the economic benefit was passed through to the tenant (in
the form of lower rent payments). The landlord now has an incentive to
avoid compliance, since and thus create goodwill with its tenant
(knowing that the economic benefit will not be recaptured) that could
help the landlord in the next round of lease renegotiations.
Comment: Two commenters questioned whether economic benefit was
appropriate for Federal agencies and facilities.
Response: Federal agencies and facilities are no different from
local, regional, and State governmental jurisdictions in the context of
economic benefit. Although governmental entities do not have the same
profit motive as for-profit businesses, they may still benefit
economically from their noncompliance, and that benefit must be recaptured.
Comment: One commenter suggested that by increasing focus on the
recovery of economic benefit, EPA will in fact create an ``unlevel
playing field'' because it will limit the extent of the gravity
component it can assess given the statutory penalty maximum of $25,000
per day.
Response: The Agency has not seen many cases in which the economic
benefit exceeds (or is very close to) the statutory maximum, but
concedes that in those cases even the statutory penalty maximum may not
be sufficient for optimal deterrence. Ignoring or reducing the economic
benefit in all our penalty actions in order to address this situation
would make little sense. The solution required is probably a
legislative issue.
Comment: One commenter felt that EPA's abilities to recover
economic benefit should not be permitted to supercede the statute of
limitations.
Response: The application of the statute of limitations to a
benefit calculation is a legal issue and is well beyond the scope of
this notice. The purpose of this notice is to determine the best
economic methodology for the Agency employ when calculating the
economic benefit of noncompliance. From a financial economics
perspective, the statute of limitations issue is irrelevant. The
benefit accrues to the violator regardless of whether the first day of
noncompliance was two years ago or ten years ago.

B. The BEN Model's Calculation Methodology

1. Discounting/Compounding
Comment: Many commenters indicated that the risk-free rate is the
appropriate compounding rate for BEN calculations. This is because
investments in pollution control carry very little, if any, systematic
risk and do not add value to a firm. Similarly, the probability of the
violation attracting an enforcement action and the subsequent penalty
not being paid is not a relevant risk for the present value
adjustments. Because penalty payment cash flows are certain, a risk-
free rate is the appropriate compounding rate.
Response: The Agency is puzzled by the critical assertion in this
line of reasoning that pollution control investments do not add value
to a firm: would these commenters pay the same price to purchase two
firms that were identical but for their investments in required control
equipment? As discussed in this notice's main text, a risk-free rate
does not accurately reflect the benefit a company could gain through
alternative use of compliance funds. For these reasons, the Agency
maintains that an estimate of a violator's cost of capital is
appropriate for both discounting and compounding purposes in the BEN model.
Comment: Two commenters criticized EPA's distinction between tort
damages and economic benefit and advocated the adoption of a risk-free
compounding rate.
Response: The Agency maintains that tort damages and economic
benefit differ fundamentally in that the goal of the former is to
restore to the plaintiff the amount by which it was damaged, while that
of the latter is to return the defendant to the position it would have
been in had it complied, and thus remove from it the amount it
wrongfully gained. Therefore, the relevant rate to apply to the
violator's cash flows is its cost of capital, which reflects the
minimum rate of return it can expect to earn on average from funds not
invested in pollution control.
Comment: One commenter suggested that a risk-free interest-forward
rate be used in BEN model calculations because a violator would have to
place funds in a risk-free vehicle to pay the required penalty.
Response: Outside of cases in which a violator formally agrees
during settlement negotiations to escrow penalty funds, the Agency is
unaware of any violator that has ever done so, and therefore feels that
this suggested theoretical construct is highly unlikely.
Comment: One commenter pointed out that a risk-based discount rate,
specific to the project in question, should be utilized in BEN model
calculations.
Response: Because the project is an investment in required
pollution control equipment, it is essentially an investment in the
continuing operations of the firm as a whole (or the relevant

[[Page 50343]]

operations division). Thus, the WACC accurately reflects the risk of
the project.
2. Inflation Adjustments
Comment: One commenter felt that the cost indices relied upon in
the BEN model should include an installation component.
Response: The BEN model's default cost index, the Plant Cost Index
(PCI), includes such an installation component.
Comment: One commenter believed that future inflation rates should
not be linked to the Consumer Price Index (CPI).
Response: Publicly available forecasts are available only for the
CPI and the GDP price deflator. Both forecasts are fairly close to one
another, plus the chosen value has a very small impact upon the
economic benefit result. The Agency plans to evaluate all available
information during each year's update of the projected cost indices.
Comment: One commenter felt that future inflation rates should be
adjustable or, at a minimum, EPA should recognize analyses that
incorporate a more complex future inflation scenario.
Response: The revised BEN model allows the user to specify
estimates of compliance costs as of the noncompliance and compliance
dates to reflect an alternative cost index, case-specific inflation
assumptions, or entirely different actions for on-time and delayed
compliance.
3. Other Technical Aspects
Comment: Two commenters commended EPA's proposal to allow for
differences in delayed and on-time compliance scenarios. A third
commenter suggested that only in cases where the technology necessary
for compliance was unavailable at the time of noncompliance should such
adjustments be allowed. Otherwise, in the on-time scenario, violators
will be encouraged to seek lower penalties by searching for and
advocating less costly compliance measures.
Response: The Agency recognizes that certain technological, legal,
or other circumstances may occasionally cause on-time and delay
compliance scenarios to differ significantly. The revised BEN model
still maintains the default assumption that the on-time and delay
scenarios are identical (but for inflationary effects), reserving more
complicated scenarios only as an advanced option. The burden is
implicitly always upon the violator to provide convincing evidence
that: (1) A less-costly compliance method was available as of when
timely compliance was required; and, (2) the only reason the violator
invested in the more expensive equipment was to improve the
environment. If, as we usually find, that the motivation to purchase
the more expensive equipment was business-related (e.g., the more
expensive equipment was more reliable, fit better with on-board
equipment, allowed for expansion, etc.) the Agency assumes that the
company would have chosen that more expensive system as its compliance
option had it decided to comply on time. Thus the cost entry for BEN
would be based on the actual option selected by the violator for its
delayed compliance.
Comment: One commenter urged EPA to maintain the BEN model's
previous assumption of infinite replacement cycles, suggesting that it
is essential when the delay period is longer (or shorter) than the
useful life of the control equipment or when compliance involves
controls with different life expectancies.
Response: As noted earlier in section III.B.5, the revised BEN
model will solve this problem by implementing the concept of economic
depreciation, which essentially calculates the lease value of pollution
control equipment. In other words, instead of modeling the on-time
replacement capital investment and the subsequent depreciation tax
shields, and comparing that to delayed replacement, the calculation
models leasing the equipment over the period when the on-time equipment
would have required replacement yet the delay equipment is still
functional. The avoided lease cost therefore serves as a reasonable
approximation of the economic benefit from the delayed replacement
equipment installation, and also allows the two scenarios to the
modeled out the same end point.
Comment: One commenter felt that the BEN model default should not
consider capital replacement because (with rare exceptions) process and
control equipment are typically matched in terms of life expectancy.
Response: The Agency disagrees. The control equipment will still
have to be replaced in the future, and then the violator will benefit
again as its control equipment will still be functional whereas the
equipment would have already required replacement had the company
complied on time.
Comment: Two commenters felt that the BEN model should provide for
a broader range of costs, such as those additional costs that would not
have been incurred given timely compliance and precompliance expenditures.
Response: The revised BEN model's ability to accommodate different
on-time and delayed compliance cost scenarios, when justified, allows
for incorporation of supplementary costs, as this comment suggests.
Comment: One commenter proposed that when a defendant can justify
doing so, EPA should allow for alternative depreciation strategies.
Response: The BEN model's current depreciation schedule reflects
the most rapid recovery available for typical pollution control
investments, resulting in a conservative estimate of economic benefit.
The revised BEN model will default to shorter schedules when the useful
life is less than 10 years. BEN will also include a provision for the
Job Creation and Worker Assistance Act of 2002 depreciation bonus,
which will be keyed off the previously required noncompliance and
compliance dates, and therefore will not require any additional input
from the user.
Comment: Many commenters endorsed EPA's proposed changes with
respect to investment tax credits and low interest financing, specific
tax rates, and increased flexibility with respect to depreciation
assumptions and inflation indices.
Response: The Agency appreciates these comments, and hopes both
regulators and the regulated community will find the revised BEN model
a more useful and accurate tool.
Comment: One commenter felt that many of the changes described in
the June 1999 notice reflected ex post factors and recommended that EPA
maintain its ex ante perspective in calculating economic benefit.
Response: The Agency feels that the distinction between an ex post
(i.e., known only today, looking back in time) and ex ante (i.e.,
restricted to what was known at the time) perspective is not an
important one, and that almost all models necessarily use a mixture of
ex ante and ex post data. The BEN model has always used a mixture of ex
ante and ex post data, the latter of which can be viewed as reasonable
approximations for the ex ante data that was actually available at the
time. The changes described in the June 1999 notice merely make the ex
post data more precise (e.g., month-by-month inflation data, rather
than a simple 10-year average).

C. Improving the BEN Model's User-Friendliness

1. Is BEN Too Complex To Operate?
Comment: One commenter noted that BEN is easy to use, requires
minimal data and expertise and is well supported.
Response: The Agency similarly feels that BEN's ease of use and
technical

[[Page 50344]]

support are attractive features of the model.
2. Is the Information BEN Needs Difficult or Expensive to Obtain?
Comment: One commenter doubted that reliable information will be
readily available regarding on-time compliance costs that differ from
delayed costs.
Response: The use of different on-time and delayed compliance
scenarios is valid only in exceptional cases. In these situations, the
violator's best interest will be to provide complete information.
Otherwise, the default assumption is that the scenarios are identical,
except for inflationary effects over time.
3. Other Issues Affecting Use of BEN
Comment: One commenter encouraged EPA to abandon its position that
the intended use of the BEN model is primarily for settlement purposes.
Response: An expert witness in litigation may use any analytical
tool the expert deems appropriate, which may include the BEN model. But
the reality is that the Agency designed BEN with the goal of assisting
its staff for settlement purposes. This is not a policy position, but
rather a statement of fact, although BEN users are free to use BEN for
whatever purposes they deem appropriate. Should a witness in a case
wish to use the BEN model in court, that witness is free to do so, but
the Agency's position is that the model is primarily intended for
calculating the economic benefit for settlement purposes.
Comment: One commenter asserted that information regarding the BEN
methodology, assumptions and applications should be shared with the
regulated community. In addition, all parties should have access to
EPA's helpline. Finally, EPA should provide all of BEN's equations and
assumptions.
Response: The Agency has made precisely this information regarding
how the model functions available to the public for almost twenty
years. EPA does not necessarily share all of its case-specific
calculations with a violator as that information is enforcement
sensitive, but all of the BEN model's formulas and databases are
completely transparent to the user. In regard to the helpline, the
regulated community's access to this service is restricted to
straightforward issues regarding software installation and execution.
For resource and policy issues, EPA feels that it would be
inappropriate to provide free consulting advice to regulatees who are
usually the subject of enforcement actions.
Comment: One commenter felt that to ensure consistency in penalty
calculations, EPA should provide detailed guidance on economic benefit
calculations to its enforcement staff.
Response: In addition to the BEN model's user documentation and
assistance through the helpline, the Agency has provided extensive on-
site in-person training to Federal, State and local enforcement
personnel. Since, 1988 EPA has presented over 80 BEN courses. The
Agency has conducted over 42 ``live'' BEN training courses at EPA
facilities and invited State enforcement staff to attend nearly all of
them. In addition, EPA has conducted 45 BEN training courses primarily
for State and local government personnel in: Hartford, Connecticut
(three times); Indianapolis, Indiana (three times); Little Rock,
Arkansas; Baton Rouge, Louisiana (twice); Trenton, New Jersey; Boise,
Idaho (three times); Ft. Lauderdale, Florida; El Monte, California;
Baltimore, Maryland; Richmond, Virginia (twice); Phoenix, Arizona
(twice); Lacey, Yakima and Seattle, Washington (for State of Washington
personnel); Anchorage, Alaska (twice); Atlanta, Georgia (for State of
Georgia personnel); Miles City, Montana (for the State enforcement
staffs of Montana, North Dakota, and South Dakota); Frankfort,
Kentucky; Montpelier Vermont; Raleigh, North Carolina; Charleston, West
Virginia; Columbus, Ohio; St. Paul Minnesota; Nashville, Tennessee;
Denver, Colorado (for the State enforcement staffs of Utah, Colorado
and Wyoming); Santa Fe, New Mexico; Yakima and Seattle, Washington (for
State of Washington personnel) Boston, Massachusetts (for State of
Massachusetts personnel) (twice); Lansing, Michigan; Concord, New
Hampshire; Providence, Rhode Island; Austin, Texas; and Honolulu,
Hawaii (twice). EPA also presented a BEN course via satellite in 1994,
and made videotapes of that broadcast available to government
enforcement staff on request. In addition, EPA will soon be delivering
this training to enforcement personnel at their desks through WebEx
presentations.
Comment: One commenter recommended that EPA assemble an ``internal
appeal board'' of experts to resolve disputes over economic benefit
issues in settlement negotiations.
Response: Creation of such a board is not feasible. The Agency's
view is that the decision on the appropriate civil penalty is best
worked out between the Agency and the violator. Where appropriate, the
negotiations may involve experts. If an agreement on the appropriate
penalty cannot be worked out, then the matter must be resolved by a
trier of fact.
Comment: One commenter felt that EPA should disclose its methods
for calculation of economic benefit in litigation settings (as opposed
to settlement negotiations) and that the regulated community should be
allowed to comment on these methods.
Response: The methods employed in litigation follow the same
general principles of the BEN model, but the Agency is unable to
predict what each independent expert may do in each case. Experts must
testify as to their own expertise regarding the economic benefit of
noncompliance, not as to an Agency methodology designed to produce
settlements. In addition, parties in litigation have very limited
amounts of time in which to produce expert reports, depose experts,
etc. It would therefore be impossible to put these independent experts'
testimony through some sort of public review in the middle of
litigation. In addition, it would also be superfluous, since such
testimony is already subject to legal discovery, and also the focus of
considerable scrutiny in each case by the violator's counsel and experts.

D. Procedural Issues Regarding the Public Comment Process

Comment: Many commenters expressed concern over the form and
substance of the proposed guidance document on illegal competitive
advantage and felt that the document should be made available for
public comment.
Response: As stated previously, the Agency feels that a separate
public comment process would be redundant. Instead, it has initiated a
peer review process by the Agency's Science Advisory Board.
Comment: Two commenters advised EPA to subject the BEN model to
expert review. In addition, one commenter suggested that EPA should
open its broader civil penalty policy to public comment.
Response: As noted earlier, the Agency submitted the draft BEN
model changes to an academic peer review in spring of 2003. With
respect to broader policy issues, the Agency has attempted to solicit
relevant comments through this current informal notice and comment
effort. This has given the public and interested experts extensive
opportunities to comment on these issues. We would note that this
eight-year effort was not required by law.
Comment: One commenter alleged that the BEN model has no history of
peer review.
Response: The BEN model is exempt from peer review because the
Agency's peer review policy, issued in 1994,

[[Page 50345]]

applies only prospectively, not retroactively. Nevertheless, the Agency
put the BEN model through two peer reviews in 1988 and 1991. As
mentioned in the June 1999 Federal Register notice, copies of those
peer reviews are available to the public. In addition, since that
comment was made, the Agency has put the model through a third peer
review. That review focused on the changes to the model that we were
proposing as part of this Federal Register process.
Comment: One commenter felt that EPA should publish any final
decisions on economic benefit issues arising from the current public
comment process.
Response: All the final decisions are detailed in the main text of
this notice. Of course, as stated previously, the illegal competitive
advantage guidance document is not final and has instead been submitted
to a peer review by the Agency's Science Advisory Board.

Dated: August 18, 2005.
Granta Y. Nakayama,
Assistant Administrator, Office of Enforcement and Compliance Assurance.
[FR Doc. 05-17033 Filed 8-25-05; 8:45 am]
BILLING CODE 6050-50-C

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Calculation of the Economic Benefit of Noncompliance in EPA's Civil Penalty Enforcement Cases

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