53 FR 43322-43383 Wednesday, Oct. 26, 1988 40 CFR Parts 280 and 281, Underground Storage Tanks Containing Petroleum-Financial Responsibility Requirements and State Program Approval Objective; Final Rule--Preamble Section VII. Economic and Regulatory Impacts
40 CFR Parts 280 and 281
VII. Economic and Regulatory Impacts
A. Regulatory Impact Analysis
1. Compliance with Executive Order 12291
Sections 2 and 3 of Executive Order 12291 (46 FR 131393, February 19, 1981) require that a regulatory agency determine whether a new regulation will be "major" and, if so, that a regulatory impact analysis (RIA) be conducted. A major rule is defined as one that is likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers, individual industries, federal, state, or local government agencies, or geographic regions; or (3) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of U.S.-based enterprises to compete with foreign-based enterprises in domestic or export markets.
EPA has conducted an RIA of the Subtitle I financial responsibility requirements for petroleum-containing underground storage tanks. Based on this analysis, the Agency has concluded that this regulation may have annual costs of greater than $100 million. Therefore, the regulation promulgated today is a major rule, as defined by E.O. 12291. The following six sections summarize the results of the RIA: Section 2 describes the integration of the technical standards and financial responsibility RIAs; Section 3 describes the regulated community affected by this regulation; Section 4 presents some of the methods and assumptions used to produce the financial responsibility RIA; Section 5 presents EPA's estimates of the present value of real resource costs; Section 6 discusses the regulation's economic impacts; and Section 7 describes its potential benefits.
2. Integration of the Financial Responsibility and Technical Standards Regulatory Impact Analyses
Under Section 9003 of Subtitle I of RCRA, the Administrator of EPA is required to promulgate both technical and financial responsibility requirements for USTs. The RIA described here presents the costs, economic impacts, and benefits associated with the UST financial responsibility requirements. A separate RIA assesses the costs, economic impacts, and benefits of the technical standards (53 FR 37212, September 23, 1988).
The results of the RIA for the financial responsibility regulation are presented both in terms of the incremental costs and economic impacts of the financial responsibility requirements (the additional costs and impacts that owners or operators complying with the technical standards will absorb to comply with the financial responsibility requirements) and in terms of the total costs and economic impacts associated with the imposition of the technical standards and the financial responsibility requirements. (The benefits of the technical standards and the financial responsibility requirements were not integrated because these two regulations have different types of benefits that are not additive.)
Methodology -- There are two important differences between the regulated community for the technical standards rules and that for the financial responsibility requirements. First, the technical standards apply to petroleum-containing and hazardous-substance-containing USTs. The financial responsibility requirements only apply to petroleum-containing USTs. Owners or operators of hazardous-substance-containing USTs are not yet required to demonstrate evidence of financial responsibility. Second, all owners or operators of USTs falling within the scope of the technical standards rule will incur costs to comply with the technical standards. States and the federal government, however, will not incur costs to comply with the financial responsibility requirements, because they are not required to demonstrate evidence of financial responsibility for their USTs. Therefore, the regulatory impact analysis for the financial responsibility requirements applies to a smaller universe of USTs (approximately 1.5 million) than does the regulatory impact analysis for the technical standards (approximately 1.7 million). The combined costs and economic impacts of both rules apply to the entire universe of 1.7 million USTs.
The technical standards will require firms to improve their methods of leak detection within 2 to 5 years after these rules are promulgated; in addition, firms are allowed up to 10 years to replace or upgrade their UST systems to meet UST system performance requirements. To comply with the financial responsibility requirements, many firms will similarly have to improve their methods of leak detection and replace or upgrade UST system components, although within a faster timeframe. This is because, to demonstrate evidence of financial responsibility, many firms that cannot self-insure and that do not currently have insurance will have to attempt to get insurance within two years of the financial responsibility rule's effective date. Insurers will generally require upgrading of UST systems as a prerequisite to coverage.
For the financial responsibility RIA, EPA assumed that insurers would require that:
- Tanks be less than 15 years old or retrofitted to meet new tank performance standards; and
- Leak detection measures taken by tank owners or operators be at least as stringent as those required by the technical standards.
To avoid double-counting leak detection and tank upgrading costs, the combined costs of the technical standards and the financial responsibility requirements are estimated by attributing to the financial responsibility requirements the difference between the present value of the costs of meeting insurers' criteria and the present value of the costs of meeting the technical standards. The only other cost elements added by the financial responsibility requirements to the total costs of both rules are the costs of procuring and maintaining financial assurance mechanisms.
The financial responsibility RIA compares the economic impacts of the technical standards alone to the combined economic impacts of the technical standards and the financial responsibility requirements. While the combined impacts of both requirements are, in all cases, more severe than the impacts of the technical standards alone, in individual cases, the financial responsibility requirements actually help to mitigate the economic impacts of the technical standards. Quicker detection of UST releases and the availability of insurance to pay UST corrective action costs will lessen, for some firms, the economic impacts of having to comply with corrective action requirements.
3. The Regulated Community
This regulation is estimated to apply to 1.5 million underground storage tanks (USTs) containing petroleum located at 468,000 separate facilities. For the purpose of this analysis, the regulated community was divided into four major sectors: retail motor fuel marketing, agriculture, local government entities, and general industry. Retail motor fuel marketing is the largest single affected sector and includes 193,000 retail motor fuel outlets owned by approximately 90,000 firms. This sector has been further subdivided into three segments: refiners, multi-outlet retail chains, and open dealers (defined as firms owning and operating a single retail motor fuel outlet). The agricultural sector includes all farms owning USTs with capacities of more than 1,100 gallons; approximately 46,000 USTs located at 30,500 farms meet this definition. Local government entities own approximately 62,000 USTs at 29,000 facilities. For the purposes of this analysis, the general industry sector includes all other sectors (i.e., sectors other than retail motor fuel marketing, governments, and agriculture) where USTs are located. Firms in the general industry sector range from large manufacturing concerns to small retail operations. USTs in this sector usually are used to provide motor fuel for fleets of vehicles (e.g., at trucking firms and automobile rental agencies) or to provide convenient access to motor fuel for off-the-road vehicles (e.g., construction equipment). The general industry sector is estimated to contain 642,000 USTs at 192,000 facilities owned by approximately 137,000 firms.
4. Assumptions and Methodology Used in the RIA
Following are the key assumptions used to estimate the costs and other impacts of this regulation:
- The costs and economic impacts of the technical standards are the baseline from which the costs and economic impacts of the financial responsibility requirements will be measured.
- Owners, rather than operators, satisfy and pay the costs of financial responsibility requirements, except when the owner is a private individual and the operator is a business corporation.
- All owners who qualify for self-insurance use this mechanism to satisfy their financial responsibility requirements and incur real resource costs for developing and maintaining the required records and reports.
- All firms or local governments currently insured for corrective action and compensation of third-parties will maintain their insurance to comply with this regulation.
- Firms or local governments that are not currently insured and that cannot use the financial test of self-insurance will attempt to obtain insurance (rather than other financial assurance mechanisms) to comply with this regulation.
- Insurance will only be available to firms or local governments meeting insurers' criteria for insurability. The RIA presents regulatory costs assuming that all firms and local governments that do not currently have insurance or pass the financial test are able to get insurance by meeting insurers' criteria for insurability (i.e., upgrading or replacing tanks greater than 15 years old and instituting suitable leak detection measures). Using this assumption results in higher costs than assuming that firms and local governments that do not currently have insurance or meet the financial test cannot get insurance. Obtaining a suspension of enforcement should be less expensive than meeting insurers' eligibility requirements within 2 years and paying insurance premiums thereafter.
- Insurance premium costs are estimated by assuming that premiums will be double the expected value of corrective action and third-party liability costs for the USTs covered. The expected value of costs of corrective action and third-party liability are based on the UST model developed for the technical standards RIA.
5. Annual Real Resource Costs
There are three main cost elements in the combined total costs of the financial responsibility and technical standards requirements: costs related to the tank replacement and upgrading and to leak detection; costs related to performing corrective action; and the costs of procuring financial assurance mechanisms. The costs of procuring financial assurance mechanisms do not include the costs related to performing corrective action because these costs are accounted for separately. They also do not include the costs of satisfying third-party liability awards because such costs would be incurred even if the technical standards and the financial responsibility requirements were not promulgated. The cost of insurance, for example, does not include that portion of insurance premiums used to pay the costs of corrective action and third-party liability awards. It does include the cost of insurers' profits, administrative costs, and sales costs.
These costs (the real resource costs of insurance) are equal to approximately 40 percent of the total insurance premium cost.
The present value of the combined real resource costs of the technical standards and the financial responsibility requirements over 30 years is $70.28 billion. $38.83 billion of these costs represent the costs of tank replacement, tank upgrading, and leak detection. $29.49 billion of these costs represent the costs of performing corrective action. $1.96 billion of these costs represent the real resource costs of financial assurance mechanisms. A portion of these costs (e.g., the costs of tank upgrading and replacement, and the costs of procuring insurance) would be incurred even if the technical standards and financial responsibility requirements were not promulgated. The present value of the total incremental costs of both rules (the costs of the technical standards and the financial responsibility requirements attributable to the promulgation of these rules) is $49.63 billion. $18.50 billion of these costs are attributable to tank replacement, tank upgrading, and leak detection; $29.49 billion are attributable to corrective action; and $1.64 billion are attributable to procuring financial assurance mechanisms.
The incremental costs of complying with the financial responsibility requirements represent a minor portion of the combined incremental costs of the technical standards and financial responsibility rules. The incremental costs of the financial responsibility requirements alone are $701 million. These incremental costs include $1.55 billion for accelerated tank replacement, tank upgrading, and leak detection (to meet insurers' criteria for insurance); $1.64 billion for financial assurance mechanisms (for firms that do not currently have them); and a $2.49 billion cost savings in the costs of corrective action. This savings results from the earlier application of improved leak detection, and earlier tank upgrading than would be required if only the technical standards were promulgated.
6. Economic Impacts
The economic impacts of the regulations are assessed for all firms in the retail motor fuel marketing sector, except refiners, and for firms in the general industry sector for which the expected annual insurance premium costs are more than 10 percent of before-tax-profits.
In the retail motor fuel marketing sector, economic impacts are measured in terms of the percentage of existing outlets surviving 5, 10, and 15 years after the imposition of regulations. Through year 5, 57 percent of existing small-firm-owned outlets would survive if only the technical requirements were imposed. (Small firms are defined as firms with less than $4.6 million in annual sales. This corresponds to the Small Business Administration's definition of small firms in this sector.) Assuming the imposition of technical and financial responsibility requirements, 55 percent of existing outlets survive, if all small firms obtain insurance. By year 15, 34 percent of outlets would survive the imposition of technical requirements and 47 percent would survive the imposition of both technical and financial responsibility requirements, if all small firms obtain insurance. Thus, by year 15, the imposition of the financial responsibility requirements has a beneficial impact on the survival of small-firm-owners and operators.
Small-firm-owned outlets that do not have existing releases and that can afford improved leak detection and tank upgrading or replacement costs are better able to survive with insurance than without it. Those small-firm-owned outlets with existing releases and outlets owned by financially-marginal small firms will exit the industry more quickly with the imposition of the financial responsibility requirements than with the imposition of the technical standards alone.
The technical standards RIA does not account for the fact that many large firms in the retail motor fuel marketing sector have insurance which can mitigate the economic impacts of having to perform corrective action. It thus presents a worst case economic impact scenario. The technical standards RIA estimates that 73 percent of existing retail motor fuel marketing outlets owned by large firms (other than refiners) would survive through year 5. The financial responsibility RIA, which accounts for the fact that many of these firms have insurance, estimates that 83 percent of large-firm-owned outlets survive through year 5. By year 15, only 50 percent of large-firm-owned outlets would survive the imposition of the technical standards if they did not have insurance. When insurance is considered, 78 percent of large-firm-owned outlets survive through year 15.
In the general industry sector, EPA examined financial data for firms in 65 four-digit SIC code categories that contain firms that own USTs. In only 4 of these SIC code categories would the value of premiums exceed 10 percent of the before-tax profits of average firms in those categories having less than $1 million in assets, and the impact of these premium costs on the pre-tax returns on assets for these firms ranged between 0.1 and 0.9 percent. Most firms in these SIC code categories do not use USTs, and it is possible that, if the costs of today's regulation imposed severe impacts on those firms in those sectors that do use them, they could avoid these costs by closing their UST facilities.
Today's rule is associated with a variety of potential economic benefits that are discussed in qualitative terms in the RIA. Potential economic benefits from the financial responsibility requirements can be placed in three categories:
- Resource allocation;
- Willingness to pay for distributional goals; and
- Reductions in cleanup costs, environmental and health damage, UST releases, and business disruptions.
If the financial responsibility requirements induce firms to consider the full costs of UST releases as part of their real production costs (i.e., cost internalization), the result may be an improvement in the allocative efficiency of UST users. Since allocative efficiency improvements result in improvements for the population in the aggregate, the population can be expected to be willing to pay for this improvement. Similarly, the population also could be willing to pay for progress toward distributional goals (i.e., be willing to incur some cost to ensure that the UST owners and operators and the consumers of goods whose production involves the use of USTs and who benefit from the use of the USTs also bear the costs of that activity).
Small firms that use insurance to meet their financial responsibility requirements may be more inclined to report releases from their USTs promptly, whereas firms without insurance may be reluctant to report releases out of a fear that the costs associated with the release could force the firms out of business. In addition, firms having to obtain insurance will have to meet insurers' eligibility requirements (e.g., improved leak detection and tank upgrading), thus reducing the likelihood of releases.
As reported above, meeting insurers' eligibility criteria is estimated to save $2.49 billion in corrective action costs over 30 years. Over the long term, the imposition of the financial responsibility requirements also reduces the economic disruptions caused by the bankruptcy of firms unable to meet the costs of performing corrective action or satisfying third-party liability awards. After 15 years, the number of surviving outlets is 14 percentage points higher if financial responsibility requirements are imposed.
The RIA also estimates the quantitative benefits of the financial responsibility rule. It provides a comparison of the value of unfunded financial responsibility obligations that would occur if the technical standards alone were implemented, to the value of unfunded financial responsibility obligations if all businesses in the retail motor fuel marketing sector meet financial responsibility requirements using insurance or the financial test. In making this comparison, the RIA finds that the promulgation of the financial responsibility, in addition to the technical, standards saves $391 million, or $494 per UST, over a 30-year period.
B. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. 601, et seq.), whenever an agency is required to publish a general notice of rulemaking for any proposed or final rule, it must prepare and make available for public comment a regulatory flexibility analysis that describes the impact of the rule on small entities (i.e., small businesses, small organizations, and small governmental jurisdictions). No regulatory flexibility analysis is required, however, if the head of the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities.
EPA has conducted an analysis of the impacts of this regulation on small businesses as part of its regulatory impact analysis (RIA) and has concluded that this regulation may have a significant economic impact on some small businesses. EPA examined the economic impacts of financial responsibility requirements on the small business segments of the retail motor fuel marketing industry and on the general industry sectors for which expected annual insurance premium costs are more than 10 percent of before-tax profits.
In the retail motor fuel marketing sector, economic impacts are measured in terms of the percentage of existing outlets surviving 5, 10, and 15 years after the imposition of regulations. Through year 5, 57 percent of existing small-firm-owned outlets would survive if only the technical requirements were imposed. Assuming the imposition of technical and financial responsibility requirements, 55 percent of existing outlets survive, if all small firms can obtain insurance. By year 15, 34 percent of outlets would survive the imposition of technical requirements and 47 percent would survive the imposition of both technical and financial responsibility requirements, if all small firms can obtain insurance. Thus, by year 15, the imposition of the financial responsibility requirements has a beneficial impact on the survival of small-firm-owned outlets.
In the general industry sector, EPA found that the costs of insurance premiums represent 10 percent or more of the before-tax profits of firms that have less than $1 million in assets in 4 of the 65 four-digit SIC codes examined. The impact of these premium costs on the pre-tax returns on assets for these firms ranged between 0.1 and 0.9 percent.
The RIA does not examine the possibility that all corrective action costs and third-party liability awards might be paid by state funds financed by taxes on gasoline. Such funds would minimize economic impacts on small businesses and transfer the costs of these financial responsibility requirements to the consumers of motor fuel.
C. Paperwork Reduction Act
The information collection requirements in this rule have been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. and have been assigned OMB control number 2050-0066. The reporting and recordkeeping burden on the public for this collection is estimated at 65,707 hours for the 265,534 respondents, with an average of 0.1 hours per response. These burden estimates include all aspects of the collection effort and may include time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, completing and reviewing the collection of information, etc.
If you wish to submit comments regarding any aspect of this collection of information, including suggestions for reducing the burden, or if you would like a copy of the information collection request (please reference ICR #1359), contact Rick Westlund, Information Policy Branch, PM-223, U.S. Environmental Protection Agency, 401 M St., S.W., Washington, D.C. 20460 (202-382-2745); and Marcus Peacock, Office of Management and Budget, Washington, D.C. 20503.
List of Subjects in 40 CFR Parts 280 and 281
Administrative practice and procedure, Environmental protection, Hazardous materials insurance, Oil pollution, Penalties, Petroleum, Reporting and recordkeeping requirements, State program approval, Surety bonds, Underground storage tanks, Water pollution control.
Lee M. Thomas,
Dated: October 14, 1988