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Enforcement Economic Models
The enforcement economic models are used to analyze the financial aspects of enforcement actions. Five models currently are available:
- ABEL - Evaluates a corporation's or partnership's ability to afford compliance costs, cleanup costs or civil penalties.
- BEN - Calculates a violator's economic savings from delaying or avoiding pollution control expenditures.
- INDIPAY - Evaluates an individual's ability to afford compliance costs, cleanup costs or civil penalties.
- MUNIPAY - Evaluates a municipality's or regional utility's ability to afford compliance costs, cleanup costs or civil penalties.
- PROJECT - Calculates the real cost to a defendant of a proposed supplemental environmental project.
The Models:
Click
here to install any or all of the following five
models:
About the Models
All five penalty assessment computer models were modified as part of the routine annual update process. In addition to updating the financial information in the models (i.e. tax rates, inflation rates, discount/compound rates) and enabling the applications to launch by double-clicking on a file name, OECA made a number of modifications to some of the models either to enhance their utility or to respond to changes in policy and/or legal interpretation. The models experiencing the most significant changes were PROJECT, INDIPAY and ABEL.
With ABEL, the most significant change was adding the capacity to utilize tax information from Commonwealth of Puerto Rico tax returns. ABEL, since its inception, provided line references only for Federal corporate and partnership tax returns. That was a significant problem in Puerto Rico due to its unique tax issues. In some cases, all we had to analyze were Commonwealth tax returns because certain companies did not have to file federal tax returns. So the new version of ABEL can now prompt the user for where to find the data on those Commonwealth forms.
The changes to BEN and MUNIPAY, were relatively insignificant. A typical BEN output will probably be slightly lower due to a decrease in the spread between the discount/compound rate and the inflation rate. BEN also now analyzes an additional entity type: not-for-profit organizations. For not-for-profits, BEN combines a zero-percent tax rate with a discount/compound rate based on the pre-tax interest rate for corporate debt. Prior to this version, we lumped all the not-for-profit entities in the municipal category, which applied a discount/compound rate based on the cost of municipal bonds. While that rate did approach the not-for-profit organizations cost of capital, this new version is a much better approach.
In regard to INDIPAY, the model had been giving the user the option of either conducting an ability-to-pay analysis for a violator that was currently employed, or for a violator that was retired. The “retiree loop” was useful for determining when the retirees could not afford the civil penalty, clean-up costs and/or compliance costs. But the retiree loop did not give any definitive guidance when the violator could afford to pay regardless how financially strong the retirees were. The revised INDIPAY model now provides that guidance where retirees can afford to pay and how much that amount is. The retiree loop’s calculations have also been refined, although that change will be transparent to most users. In addition, INDIPAY now compares the individual tax payer’s living expense against IRS averages for a family of the same size.
In regard to PROJECT, the Internal Revenue Service issued a directive and guidelines indicating that a taxpayer may not deduct the portion of the costs incurred for the performance of a SEP that is an amount analogous to a non-deductible penalty. Subsequently, OECA modified PROJECT
such that the user cannot adjust any of the SEP expenses for taxes. Since the costs are no longer tax deductible, the net present value of the SEP will increase substantially. And the resulting PROJECT output will also increase substantially.
PROJECT had a second, totally non-enforcement use: determining when pollution prevention projects break even. Some of our users were businesses that were employing PROJECT in making these purely business decisions. With the tax adjustments removed from the model, PROJECT can no longer be used in determining when pollution prevention projects break even.
If you are a representative of a state, tribal, local or national government and need help installing, using, or understanding the models' outputs, please call the EPA Enforcement Economic Models Help line, staffed by an Agency contractor, at 888-ECONSPT (888-326-6778). This is an international toll-free line. Users can also access the help line via e-mail at benabel@indecon.com. For further information, contact Jonathan Libber of EPA's Office of Enforcement and Compliance Assurance. He can be reached at (202) 564-6102 or by e-mail at libber.jonathan@epa.gov.
Illegal Competitive Advantage (Beyond BEN Benefit)
Illegal competitive advantage (ICA) is not addressed by any of the above models. ICA is economic benefit that goes beyond the simplifying paradigm of delayed or avoided pollution control expenditures that BEN addresses. The EPA Science Advisory Board issued an Advisory (PDF) (55 pp, 228 KB, About pdf) on September 7, 2005 regarding some suggested changes in how EPA looks at this issue. EPA responded to the Advisory and is in the process of implementing the changes to the ICA approach that the SAB recommended. In the meantime, EPA will continue to seek benefit recapture based on this type of economic gain while the Agency is implementing those changes. Note that one of these changes is that the name of this type of economic gain will now be referred to as Beyond BEN Benefit instead of ICA.