10/14/2011 rules and regulationsanthony donatoni, hazardous materials branch, 6th and walnut...

Federal Register / Vol. 47, No. 67 / Wednesday, April 7, 1982 / Rules and Regulations

ENVIRONMENTAL PROTECTIONAGENCY

40 CFR Parts 264 and 265

[SWH-FRL-1942-761

Standards Applicable to Owners andOperators of Hazardous WasteTreatment, Storage, and DisposalFacilities; Financial Requirements

AGENCY: Environmental ProtectionAgency..ACTION: Revised interim final rules.

SUMMARY: These regulations reviseinterim final regulations that werepromulgated on January 12, 1981 (46 FR2851-66, 2877-88) Under the January 12,1981, regulations owners or operators ofhazardous waste management facilitieshad to estimate the costs of closure andpost-closure care of such facilities andhad to assure financial responsibility forthose costs through any of threemechanisms:-A trust fund-A letter of credit, or-A surety bond.

State guarantees or State-requiredmechanisms that are equivalent to themechanisms specified in the regulationscould also be used to satisfy therequirements. Today's regulationsprovide two additional options that canbe used by owners or operators todemonstrate financial responsibility:-A financial test which demonstrates

the financial strength of the companyowning the facility (or a parentcompany guaranteeing financialassurance for subsidiaries), or

-An insurance policy that will providefunds for closure or post-closure care.In addition, specifications for the

mechanisms included in the January 12,1981, regulations have been modified,and minor clarifications have beenmade to the rules for estimating thecosts of closure and post-closure care.

These amendments thus deal onlywith closure and post-closure financialassurance requirements. Third-partyliability insurance requirements werealso included in the January 12, 1981,promulgation. They will be the subjectof a separate Federal Register notice tobe published shortly.DATES: Effective Dates: July 6, 1982 forstandards for financial assurance ofclosure and post-closure care (40 CFR264.142-151 except 264.147, and 265.142-151 except 265.147); November 19, 1980,for the cost-estimating standards forinterim status facilities (40 CFR 265.142and 265.144), and July 13, 1981, for costestimating standards for general status(40 CFR 264.142 and 264.144). Theliability requirements (§ § 264.147 and

26,5.147) currently have an effective dateof April 13, 1982.

C omment Date: EPA will acceptpublic comments on the revisedregulations until June 7,1982.

ADDRESSES: Comments should be sentto Docket Clerk (Docket No. 3004),Office of Solid Waste (WH-562), U.S.Environmental Protection Agency, 401 MStreet, S.W., Washington, D.C. 20460.

?ublic Docket: The public docket forthese regulations is located in Room$269-C, U.S. Environmental ProtectionAgency, 401 M Street, S.W.,Washington, D.C., which is open to thePublic from 9:00 a.m. to 4:00 p.m.,Monday through Friday, excludingholidays. Among other things, thedocket contains background documentswhich explain, in more detail than thepreamble to this regulation, the basis forthe provisions in this regulation.

Submissions and Correspondence tothe Regional Administrator: Alldccuments and correspondence to besubmitted to the Regional Administratorregarding these financial requirmentsshould be marked "Attention: RCRAFinancial Requirements" as part of theaddress.

Copies of Regulations: Single copies ofthese regulations will be available whilethe supply lasts from RCRA Hotline,(800) 424-9346 (toll-free) or (202) 382-3000.

FOR FURTHER INFORMATION CONTACT:For general information call the RCRAHotline or write to Emily Sano, DeskOfficer, Economic and Policy AnalysisBranch, Hazardous and IndustrialWaste Division, Office of Solid Waste(WH-565), U.S. EnvironmentalProtection Agency, 401 M Street, S.W.,Washington, D.C. 20460.

For information on implementation ofthese regulations, contact the EPAregional offices below:

Region I

Gary Gosbee, Waste ManagementBranch, John F. Kennedy Building,Boston, Massachusetts 02203, (617)223-1591

Region II

Helen S. Beggun, Chief, GrantsAdministration Branch, 26 FederalPlaza, New York, New York 10007,(212) 264-9860

Region III

Anthony Donatoni, Hazardous MaterialsBranch, 6th and Walnut Streets,Philadelphia, Pennsylvania 19106,(215) 597-7937

Region IV

Dan Thoman, Residuals ManagementBranch, 345 Courtland Street, N.E.,Atlanta, Georgia 30308, (404) 881-3067

Region V

Thomas B. Golz, Waste ManagementBranch, 230 South Dearborn Street,Chicago, Illinois 60604, (312) 886-4023

Region VI

Henry Onsgard, Attention: RCRAFinancial Requirements, 1201 ElmStreet, First International Building,Dallas, Texas 75270, (214) 767-3274

Region VII

Robert L. Morby, Chief, HazardousMaterials Branch, 324 E. 11th Street,Kansas City, Missouri 64106, (816)374-3307

Region VIII

Carol Lee, Waste Management Branch,1860 Lincoln Street, Denver, Colorado80203, (303) 837-6258;

Region IX

Richard Procunier, Hazardous MaterialsBranch, 215 Fremont Street, SanFrancisco, California 94105, (415) 974-8165

Region X

Kenneth D. Feigner, Chief, WasteManagement Branch, 1200 6thAvenue, Seattle, Washington 98101,(206) 442-1260

SUPPLEMENTARY INFORMATION:

1. Authority

These regulations are issued under theauthority of Sections 1006, 2002(a), and3004 of the Solid Waste Disposal Act, asamended by the Resource Conservationand Recovery Act of 1976 (RCRA), asamended, 42 USC 6905, 6912(a), and6924.

II. Background

Section 3004(6) of RCRA requires EPAto establish financial responsibilitystandards for owners and operators ofhazardous waste management facilitiesas may be necessary or desirable toprotect human health and theenvironment. EPA has concluded that, ata minimum, financial responsibilitystandards are necessary and desirableto assure that funds will be available forproper closure of facilities that treat,store, or dispose of hazardous wasteand for post-closure care of hazardouswaste disposal facilities. The financialresponsibility standards promulgatedJanuary 12, 1981, included requirementsfor such assurance and also for liabilityinsurance coverage. The amendments

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promulgated today, and this Preamble,are limited to the requirements forfinancial assurance for closure and post-closure care.

Financial responsibility standards forinclusion in Part 264 (general standardsto be used in issuing permits) and Part265 (interim status standards for existingfacilities awaiting final disposition ofpermit applications) were first proposedon December 18, 1978 (43 FR 58995,59006-07). Under the proposedregulations, the owner or operator couldassure payment of closure and post-closure costs only with a trust fund. Theclosure trust fund had to be fully paid upwhen established, while the post-closurefund could be built up over 20 years orthe remaining operating life of thefacility, whichever was shorter.

As a result of commenters'suggestions and further Agencyanalysis, a reproposal was issued May19, 1980 (45 FR 32260-32278), whichallowed a variety of options in providingfinancial assurance for closure and post-closure care: trust fund, surety bond,letter of credit, financial test, guaranteeof the owner's or operator's obligationsby an entity meeting the financial test,and a revenue test for municipalities.The reproposal allowed both the closureand post-closure trust funds to buildover 20 years or the remaining life of thefacility, whichever was shorter. Stateguarantees or State-requiredmechanisms could be used to satisfy thefinancial requirements if they weresubstantially equivalent to themechanisms specified.

Also on May 19, 1980, final regulationsestablishing interim status standards forestimating the costs of closure and post-closure care (40 CFR 265.140, 142, and144) were promulgated (45 FR 33243-44).The compliance date for these cost-estimating standards was chanied fromNovember 19, 1980, to May 19, 1981, byan amendment issued October 30, 1980(45 FR 72040).

Interim final regulations establishingrequirements for mechanisms providingfinancial assurance for closure and post-closure care were promulgated onJanuary 12, 1981 (46 FR 2851, 2877-2888)with an effective date of July 13, 1981.These regulations allowed the use oftrust funds, surety bonds, and letters ofcredit to satisfy the requirements forfinancial assurance for closure and post-closure care. For interim status facilities,the closure and post-closure trust fundpay-in period was 20 years or theremaining life of the facility, whicheverwas shorter. The pay-in period waslimited to the term of the permit forpermitted status. State guarantees andState-required mechanisms that areequivalent to the mechanisms specified

in the regulations could also be used tosatisfy the requirements.

At the time of the January 12promulgation, the Agency had not yetdecided whether to allow use of afinancial test, a guarantee based on afinancial test, or a revenue test formunicipalities to satisfy the financialrequirements. The Agency's analysis ofthe numerous issues raised bycommenters regarding thesemechanisms was not complete at thattime. The Agency decided to proceedwith promulgating regulations for theother mechanisms because of the needto begin assuring financial responsibilityfor hazardous waste management andalso the need to meet the court-orderedschedule for issuing RCRA regulations.The Agency intended to publish itsdecisions or regulations on the financialtest, guarantee, and revenue test within3 months of the January 12, 1981,promulgation so that owners andoperators would have adequateopportunity to consider any newlyavailable options prior to the effectivedate of July 13, 1981. However, this workcould not be completed in the expectedtime. Furthermore, comments on theJanuary 12 regulations indicated thatsome revision of those regulationswould be desirable. To allow adequatetime for completing the work on theadditional options and the revisions, theeffective date was deferred from July 13to October 13, 1981 (notice publishedMay 18, 1981, 46 FR 27119). On October1, 1981, the effective date was againdeferred, to April 13, 1982, because therevised regulations were not ready forpromulgation, and the Agency wasconsidering whether to proposewithdrawal of the liability requirements.

The effective date for the standardsfor financial assurance of closure andpost-closure care is now July 6, 1982.The effective date is thus furtherextended because the Agency believesthat owners and operators will needapproximately 3 months afterpromulgation to review the revisedregulations and make arrangements toestablish financial assurance. Ownersand operators who plan to use the newinsurance option need only submit bythe effective date a statement from aqualified insurer saying that the insureris considering issuance of a closure orpost-closure insurance policy meetingthe specifications of the regulation to theowner or operator. Within 90 days afterthe effective date, these owners andoperators must submit a certificate ofinsurance as specified in the regulationsor, if the policy is not issued, evidence ofhaving established other financialassurance. The Agency is making thisspecial provision for prospective users

of the insurance option because theclosure and post-closure insurancemechanisms are being published for thefirst time today; a competitive rharket inthis insurance is not available; and theAgency believes an additional periodshould be allowed during which themarket might develop and the priceadvantages of a competitive marketmight become available to owners andoperators.

The current effective date for theliability requirements, April 13, 1982, isretained for the present; theserequirements will be the subject of aseparate Federal Register notice to bepublished shortly.

Today's promulgation consistsessentially of the January 12, 1981,regulations with revisions to themechanisms for financial assurance forclosure and post-closure care, theaddition of certain other mechanisms,and revisions to the cost-estimatingprovisions. The added mechanisms thatmay be used in providing financialassurance for closure and post-closurecare are a financial test, a guaranteebased on the financial test, andinsurance. A revenue test formunicipalities was not adopted forreasons explained below.

The following sections discuss theadditions, significant changes, andmajor issues raised by commenters:III. Financial Assurance for Closure andPost-Closure Care

A. The Financial Test and Guarantee

Following the original proposal offinancial requirements in December1978, commenters suggested that theAgency allow many different means offinancial assurance as alternatives tothe proposed trust fund, including a testof financial soundness. The Agencyagreed that a financial test mightprovide adequate assurance of financialresponsibility and developed such a testfor inclusion in the reproposedregulations of May 19, 1980 (45 FR 332u8,33272). Evaluation of comments receivedon that test and further Agency analysisresulted in the financial testpromulgated today.

1. The Proposed Test. Under thereproposed regulations of May 19, 1980,an owner or operator could satisfy therequirements for finanical assurance ofclosure or post-closure care by having:(1) At least $10 million in net worth in

"the United States; (2) a total-liabilities-to-net-worth ratio of not more thanthree; and (3) net working capital in theUnited States equal to at least twice theestimated closure and post-closure costsof the owner or operator. These

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characteristics had to be demonstratedin a financial statement audited by anindependent certified public accountant.The statement was to containunconsolidated balance sheets dated nomore than 140 days prior to the date thatthe test was applied. An owner oroperator using the financial test had tonotify the Agency within 5 days oflearning that he no longer met the test;,he was then obliged to substitute otherfinancial assurance within 30 days. Thisfinancial test was intended to work sothat an owner or operator who passed ithad the financial capability to establishone of the alternative forms of financialassurance should he later fail the test.Firms passing the test were not likely tofail suddenly. This objective wasretained in the subsequent developmentof the financial test.

2. The Financial Test PromulgatedToday. After a detailed reevaluation, theAgency is promulgating regulations thatallow an owner or operator to satisfythe financial assurance requirements bydemonstrating that he meets either ofthe following sets of criteria.

Alternative I:(A) Two of the following thr~e ratios:

a ratio of total liabilities to net worthless than 2.0; a ratio of the sum of netincome plus depreciation, depletion, andamortization to total liabilities greaterthan 0.1; and a ratio of current assets tocurrent liabilities greater than 1.5; and

(B) Net working capital and tangiblenet worth each at least six times thesum of the current closure and post-closure cost estimates: and

(C) Tangible net worth of at least $10million; and

(D) Assets in the United Statesamounting to at least 90 percent of totalassets or at least six times the sum ofthe current closure and post-closure costestimates.

Alternative II:(A) A current rating for his most

recent bond issuance of AAA, AA, A, orBBB as issued by Standard and Poor's orAaa, Aa, A, or Baa as issued byMoody's; and

(B) Tangible net worth at least sixtimes the sum of the current closure andpost-closure cost estimates; and

.(C) Tangible net worth of at least $10million; and

(D) Assets in the United Statesamounting to at least 90 percent of totalassets or at least six times the sum ofthe current closure and post-closure costestimates.

In developing the financial test theAgency was particularly concerned withthree general goals: (1) Funds should beavailable for closure and post-closure

care for protection of human health andthe environment. (2) As a matter ofeqluity, the parties responsible forclosure and post-closure obligations, i.e.,owners and operators, should pay thosecosts. (3) Costs to the regulatedc mmunity of providing financialassurance should be as low as possible.The amount of direct public costs in theform of unfunded closure and post-closure care resulting from use of thetest indicates the degree to which thefirst two goals are achieved, and theamount of private costs to owners andoperators of providing financialassurance is the indicator for the thirdgoal. In assessing the various possibletest criteria, the Agency examined thesecosts and considered them in selectingthe elements of the test.

The following sections summarize thecomments received on the proposedfinancial test and how the finalrequirements were selected. Thishiformation is presented in detail in aBackground Document which covers thefinancial test and revenue test formunicipalities.

3. Comments on May 19, 1980,Proposed Test- General Aspects. Somecommenters suggested that the minimumnet worth and working capitalrequirements be higher, lower, ordeleted entirely. Alternative tests oradditional elements of a test weresuggested, including net income, cashflow measures, "quick assets," andfinancial ratios. Bond ratings weresuggested as an alternative to orsubstitute for the proposed financialtest. Many commenters said thereporting requirements were notconsistent with other financial reportingrequirements and therefore representedhigh additional costs.

4. Separate Industry Tests. Somecommenters suggested that eachindustry should have its own financialtest. A review of the industries thatprovided comments of this kind, as wellas a general analysis of industry dataand previous studies of the forecasting(if financial distress, suggest that asingle test can be used for most firmsengaged in manufacturing. However,financial tests found to be valid fordistinguishing viable from nonviablefirms engaged in manufacturing wereoften not valid or useful for establishingihe viability of firms in industries withunique financial characteristics, such asutilities. Positive net working capital, forinstance, is uncommon for electricutilities and firms in some other service-related industries. As a result, analternative financial test option wasdeveloped (see Alternative II above),which is based on bond ratings and ismore appropriate for utilities and firms

with similar financial characteristics.The Agency believes on the basis of itsevaluation (see paragraph 8 below) thatwith these two options the financial testis valid for all industries likely to engagein hazardous waste management.However, anyone who believes thatseparate test criteria are necessary for aparticular industry may submit apetition under Section 7004(a) of RCRArequesting inclusion of such criteria inthe regulations. To enable the Agency toevaluate the petition adequately, itshould describe the proposed criteriafully and how they may be routinelyverified, and include data and analysisdemonstrating the need for separate testcriteria and their validity.

5. Net Working Capital Requirement.Some commenters strongly objected tothe use of working capital as a testcriterion, stating that their industriescommonly did not maintain a positivenet working capital position (excess ofcurrent assets over current liabilities).The Agency's analysis found that inmanufacturing industries likely toengage in hazardous waste treatment,storage, or disposal, virtually all viablefirms maintain positive net workingcapital. For a manufacturing firm, anegative net working capital position isan excellent indicator that the firm is ina difficult financial situation. TheAgency's review of financial data forbankrupt manufacturing firms indicatedthat the vast majority experienced rapiddecline in working capital in the yearsimmediately prior to bankruptcy. As aresult, the Agency decided to requirethat firms maintain a multiple of the costestimates in the form of net workingcapital in one of the two test options.Firms that satisfy the other test option,which requires an investment-gradebond rating, will have proven access tocredit and demonstrated viability.

Some commenters suggestedmodifications to the common definitionof working capital that would allowowners and operators to use existinglines of credit, cash fLow, or fixed assetsthat could be liquidated to satisfy partor all of the net working capitalrequirement. The Agency has decided toretain the present definition of workingcapital. Some of the alternativesproposed by the commenters (lines ofcredit, liquidation value of fixed assets)are not usual line items in financialstatements and would therefore add tothe administrative burden of theseregulations. More importantly, theAgency believes that, given thesignificance of negati4ve net workingcapital as an indicator of financialdistress, it is useful to retain net working


capital, as currently defined, as anelement in one of the test alternatives.

In the proposed test of May 19, 1980,the owner or operator had to have networking capital amounting to twice thecost estimates in order to use thefinancial test. This was intended toensure that the payment of closure andpost-closure costs could be made beforeinsolvency occurred. However, given thepossibility of rapid deterioration in networking capital of a firm experiencingserious financial distress, and thepossibility that lengthy legalproceedings may be required before theowner or operator establishes otherfinancial assurance, a higher multipleseemed advisable. The Agencyconducted an analysis of firms whichhad experienced rapid deterioration oftheir financial condition for 2 to 3 yearsprior to business failure. This analysisshowed that net working capital of thesefirms fell by an average of 66 percent in2 years. The Agency believes that inorder to ensure that adequate liquidassets, as indicated by net workingcapital, will be available for closure andpost-closure care, net working capital ofat least six times the estimated costs isan appropriate level. This figure isobtained by multiplying the factor of 2(to ensure current ability to pay) times 3(to ensure against a high rate ofdeterioration before payment can bebrought about). With a multiple of 6, it islikely that even a rapidly deterioratingfirm will have net working capitalamounting to twice the cost estimates 2years after failing the test.

6. Net Worth Requirements. The May19, 1980, proposed financial test requirednet worth (total assets minus totalliabilities) of at least $10 million. TheAgency has decided to retain thatrequirement for several reasons. Thebusiness failure rate for firms with $10million or more in net worth issignificantly lower than for firmsoverall. The Agency estimates that itwould enter into twice as manybankruptcy proceedings to recoverfunds for closure and post-closure careif the $10 million in net worth criterionwere dropped, even if other criteriawere retained. In addition, the numberof instances in which the hazardouswaste facility itself represents the onlysignificant income-producing asset of anowner or operator will be reduced by a$10 million in net worth requirement. Ifthe facility is the owner's or operator'sonly source of income, closure will cutoff all his income and thus increase therisk that there will not be adequatefunds to complete closure and post-closure care.

Since firms with $10 million or more innet worth are more stable than smallercompanies, the Agency believes theselarger firms are less likely to abandonhazardous waste facilities or otherwiseavoid closure or post-closure -responsibilities. The Agencyfurthermore believes that retaining the$10 million requirement will keep theburden of administering this newfinancial assurance mechanism atmanageable levels; monitoring the use ofth6 financial test by less stable firmscan be expected to be more time-consuming and a greater administrativeburden. The Agency will, however,continue to explore the possibilities ofhaving a financial test for firms of lessthan $10 million in net worth.Suggestions from the public are invitedon this issue.

A number of commenters suggestedthat a firm passing the financial testshould be required to have a net worthat least as great as the net workingcapital requirement. While it is unusualfor firms to have less net worth than networking capital, the possibility doesexist, and such a firm would be veryweak financially. The Agency agreeswith these commenters and has added arequirement that a firm have a net worthof at least six times the closure andpost-closure cost estimates.

One commenter recommended thatowners and operators be allowed tomeet requirements for amounts of networth with tangible net worth only.Assets of firms often include intangiblessuch as goodwill, patents, andtrademarks which may be difficult toconvert into cash to pay for closure orpost-closure costs. The Agency agreeswith the commenter and is providingthat only tangible net worth may beused to meet the requirements for $10million in net worth and for net worth ofat least six times the cost estimates. Inthe financial ratio requirements,however, net worth rather than tangiblenet worth is used since that iscustomary for financial ratios, whichwere found to be effective predictors offinancial stability.

7. Financial Ratios. The thirdcomponent of the proposed financial testwas a required ratio of total liabilities tonet worth of less than 3 to 1. A numberof commenters suggested that this ratiowas unrealistically high and that cutoffpoints of 2 to 1 or 1.5 to 1 would bebetter measures of viability. Inreevaluating this requirement, theAgency found that a ratio of 2 to 1 to bea more appropriate ratio. Othercommenters suggested adding otherfinancial variables to the test, such ascash flow, net income, and current and

quick asset ratios. The Agencyconsidered all of these in its evaluationof alternative tests, as describedimmediately below.

8. Evaluation of Alternative Tests.Following the suggestions of severalcommenters, the Agency conducted anextensive analysis of the performance ofnumerous financial tests and madedetailed calculations of the costs theywould entail.

A sample consisting of 178 viablefirms and 66 bankrupt firms wasconstructed for the empirical testing ofcandidate financial tests. The bankruptfirms were identified from previousbankruptcy forecasting literature and anindependent search; all had filed forbankruptcy between 1966 and 1979. Thesample of nonbankrupt firms wasdesigned to represent the expected assetsize range and mix of industries likely toseek to use a financial test. Anothersample of 26 nonbankrupt utilities wasalso studied. From the comments on theproposed test, and from the researchresults of previous bankruptcyforecasting, the Agency assembled a listof over 300 candidate financial tests.. For each test evaluated against thesample, the Agency computed twoprimary measures of effectiveness. Onewas the likely rate of bankruptcy forfirms passing the test. This measuredetermines the effectiveness of a test ineliminating firms that would be majorsources of direct public costs and alsoindicates the potential burden of the teston Agency resources (i.e., the burden ofhaving to recover closure and post-closure costs from these firms inbankruptcy proceedings). The otherprimary measure was the percentage ofviable firms that would be able to usethe financial test as an option. Thisfactor represents the test's potential forreducing private costs by allowing firmsto use an alternative which costs lessthan a letter of credit or other financialmechanism.

The effectiveness of tests ineliminating firms in the bankrupt firmsample varied widely. Where severaltests attained the same level ofeffectiveness in eliminating bankruptfirms, the test that simultaneouslyallowed the greatest number of viablefirms to use it was judged a "best test."This methodology enabled the Agencyto identify 16 "best test" options whichcould be further evaluated. Among these"best tests," those without the $10million in net worth requirement wereeliminated because, as explained above,the Agency believes the requirement isnecessary for assuring that funds will beavailable for closure and post-closurecare.

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Of the tests requiring $10 million intangible net worth, the one whichresulted in the lowest sum of directpublic and private costs was selected asone of the financial test options. Itrequires that an owner or operator have$10 million in tangible net worth, havetangible net worth and net workingcapital each at least six times the sum ofclosure and post-closure costs, and passtwo of the following three ratio tests: aratio of total liabilities to net worth lessthan 2.0; a ratio of the sum of net Incomeplus depreciation, depletion, andamortization to total liabilities greaterthan 0.1; and a ratio of current assets tocurrent liabilities greater than 1.5. (The"sum of net income plus depreciation,depletion, and amortization" used in thesecond ratio is often referred to as "cashflow.")

Finally, the owner or operator musthave assets in the United Statesamounting to at least 90 percent of totalassets or at least six times the sum ofthe closure and post-closure costestimates. This requirement wasincluded to help ensure accessibility tofunds in the event of bankruptcy orother default. The Agency believes thatallowing firms to meet this requirementby having 90 percent of their assets inthe United States rather than requiringall firms using the test to have six timesthe cost estimates in U.S.-located assetswill save some firms added reportingcosts while providing equivalentassurance. The standards of theAmerican Institute of Certified PublicAccountants provide that informationabout the identifiable assets fo a firm'sforeign operations should be included inits financial statements if those assetsare 10 percent or more of total assets.The Securities and ExchangeCommission requires that firms filingForm 10K reports indicate those assetslocated outside the United States if 10percent or more of their assets arelocated outside this country. A firm withless than 10 percent of its assets outsidethe country and filing a Form 10K willtherefore not have to take the additionalstep of identifying the exact amount ofassets in the United States in order tomeet this requirement of the financialtest.

Bond ratings are required in thealternate test option. An analysis ofavailable data on the performance of thetwo major bond rating servioes(Moody's and Standard and Poor's)showed that firms receiving any of thefour highest ratings (investment-gradebonds) have compiled a record offinancial strength at least equal to thatindicated by meeting the criteria of thefirst test option. In order to ensure that

adequate assets are available to coverpossible closure and post-closureexpenditures, a firm using the bondratings test must also have (1) tangibleret worth amounting to at least $10million and at least six times the sum ofclosure and post-closure cost estimatese.nd (2) assets in the United States mustrepresent at least 90 percent of totalEssets or at least six times the sum ofcost estimates.

The Agency will initially accept bondratings issued only by Moody's orStandard and Poor's. However, in orderto determine whether there are otherbond rating services that could also beused, EPA requests informationestablishing how well the ratingsassigned by other bond-rating serviceshave performed over time.

In its study of ratings that might beused in the financial test, the Agencyfocused on bond ratings because theyrelate to long-term debt, and closure andpost-closure costs are generally long-term obligations. However, the Agencyis considering the advisability of alsousing commercial paper ratings in thesame manner. If its analysis indicatestbat they would be effective when soused, the Agency intends to amend theregulation to allow use of certaincommercial paper ratings as analternative to bond ratings in thefinancial test. The Agency invitescomment on such use of commercialpaper ratings.

The Agency estimates that amendingthe financial assurance requirements toallow use of the financial testsignificantly reduces the overall costs ofthe regulation. As much as 96 percent ofcurrently viable firms with $10 million innet worth would pass the test. If the testwere not allowed as a financialassurance mechanism, the additionalcosts to those firms are estimated at $3million per year. The Agency's analysisindicates that only a very smallpercentage of the firms that pass thistest could be expected to go bankruptwithout providing alternative financialassurance (.01 percent).

The Agency concluded from itsevaluation that the financial test shouldbe allowed as a means of satisfying thefinancial requirements because itprovides strong assurance of availabilityof funds and minimizes regulatory costs.

9. The Closure and Post-Closure CostEstimates. An owner or operator mayuse the test to demonstrate financialassurance for closure, post-closure care,or both closure and post-closure care ofone or more facilities.

The "current closure and post-closurecost estimates" referred to in the testcriteria must include, first, all such

estimates for facilities of which the firmusing the test is the owner or operatorand for which it is demonstratingfinancial assurance through the financialtest of Parts 264 or 265. Second, if thefirm is providing one or more guaranteesas specified in these regulations (seelater discussion of corporate guarantee),the cost estimates of the facilities forwhich closure or post-closure care isbeing guaranteed must be included.Third, if the firm has facilities in Stateswhere EPA is not administering thefinancial requirements but the firm isdemonstrating financial assurance to theState through a financial test equivalentor substantially equivalent to the test inParts 264 and 265, the cost estimatescovered by such tests must be included.Finally, if the firm is the owner or -operator of facilities for which financialassurance for closure or required post-closure care is not being demonstrated,to a State or EPA, through the financialtest or any of the other mechanismsspecified in these regulations orequivalent or substantially equivalentState mechanisms, the closure and post-closure cost estimates for such facilitiesmust be included. There are likely to besome facilities in this last categorybecause, in the first phase ofauthorization of States to administer theRCRA regulations, States are notrequired to adopt requirements forestablishment of financial assurance,although they are encouraged to do so.In later phases of authorization, Statesmust have financial requirementsequivalent or substantially equivalent tothose in Parts 264 and 265.

The Agency's objective in theseprovisions is to assure that the sum ofclosure and post-closure costs againstwhich the firm's financial condition isbeing tested through the financial test iscomplete. The sum should include allestimated closure and post-closure costswhich the firm is obligated to cover,minus those covered by acceptablefinancial assurance mechanisms otherthan the financial test.

10. Reporting Requirements. Thereporting requirements of the proposedtest were revised following evaluationof the numerous comments on therequirements and further informationobtained on financial reportingpractices. To mininilze reporting costs,and as recommended by commenters,the Agency evaluated only tests which itcould administer without requiring theroutine submission of financial datawhich would ordinarily not be obtainedin the preparation of financialstatements.

As evidence of satisfying the financialtest, a firm must submit:


(1) A letter to the RegionalAdministrator signed by its chieffinancial officer that includes therequired data from the firm'sindependently audited, year-endfinancial statements and the costestimates for closure and post-closurecare; and

(2) A copy of the independent certifiedpublic accountant's report onexamination of the owner's or operator'sfinancial statements for the latestcompleted fiscal year; and

(3) A special report from the owner'sor operator's independent certifiedpublic accountant to the owner oroperator stating that the accountant hascompared the data which the letter fromthe chief financial officer specifies ashaving been derived from theindependently audited, year-endfinancial statements for the latest fiscalyear with the amounts in such financialstatements and, in connection with thisprocedure, no matters came to hisattention which caused him to believethat the specified data should beadjusted.

The Agency believes that theindependent accountant's reports addsignificantly to the reliability of the datasubmitted and therefore must berequired. Independent accountants areguided by standards set by theSecurities and Exchange Commissionfor auditors within the scope of theFederal securities laws and by a Code ofProfessional Ethics promulgated by theAmerican Institute of Certified PublicAccountants. In addition, the professionis regulated, to differing extents, byState licensing boards and Statesocieties of certified public accountants.

If the auditor's opinion that isincluded in his report on examination ofthe owner's or operator's financialstatements is an adverse opinion orcontains a disclaimer of opinon, theowner or operator will be disallowedfrom using the financial test to satisfythe financial requirements. An adverseopinion states that the financialstatements do not present fairly thefinancial condition of the firm inconformity with generally acceptedaccounting principles. A disclaimer ofopinion states that the auditor does notexpress an opinion on the financialstatements. The Agency believes that ineither case it cannot rely on data fromsuch financial statements to determinewhether the firm passes the financialtest.

The Regional Administrator maydisallow use of the financial test basedon other qualifications expressed in theauditor's opinion of the firms's financialstatements. If the opinion raisesquestions as to whether the firm will

continue as a "going concern," theRegional Administrator will disallowuse of the financial test. Other qualifiedopinions will be evaluated on a case-by-case basis. The owner or operator mustprovide alternative financial assurancewithin 30 days after disallowance.

After the initial submission of theletter from the chief financial officer andthe accountant's reports, a new letterand new reports for each subsequentfiscal year must be submitted to theRegional Administrator within 90 daysafter the end of the firm's fiscal year.Alternatively, the owner or operatormust deliver to the RegionalAdministrator, by the end of this 90-dayperiod, a notice of intent to providesubstitute financial assurance asspecified in the regulations and, within120 days after the end of the fiscal year,establish the substitute financialassurance.

If the Regional Administrator hasreason to believe that the owner oroperator may no longer meet the testcriteria, he may request additionalfinancial reports or other relevantinformation from the owner or operator.Upon a finding by the RegionalAdministrator that the owner oroperator no longer meets the criteria, theowner or operator will be required toestablish other financial assurance.Failure to provide alternate assurancewhen required, after disallowance orafter no longer passing the test, will beconsidered a violation of RCRAregulations and cause for issuance of acompliance order or initiation of legalproceedings under Section 3008 ofRCRA.

A number of firms will probably showpart or all of the estimated costs ofclosure and post-closure care of theirhazardous waste facilities as liabilitieson their financial statements. However,since thfs may not yet be commonpractice, and it is not clear to whatextent the estimated costs will appearas liabilities in the statements, the testas currently constituted does notassume that the statements include theestimated closure or post-closure costsas liabilities. In order not to penalizethose firms that do include these costs intheir liabilities, the chief financial officeris authorized to subtract any portion ofclosure and post-closure costs includedjn liabilities from the figure shown fortotal liabilities in his annual letter andadd that amount to the figures for networth and tangible net worth.

The effective date of the regulationsmay come too soon after the end of anowner's or operator's fiscal year toallow adequate time to prepare therequired documents based on data forthe just-completed fiscal year. To

resolve this problem, the financial testprovisions in Part 265 allow a one-timeextension if an owner's or operator'sfiscal year ends during the 90 daysbefore the effective date and if the firm'sfinancial statements are beingindependently audited. The extensionmay last up to the date 90 days after theend of the fiscal year. To obtain theextension the chief financial officer ofthe firm must send a letter to theRegional Administrator by the effectivedate of these regulations. In the letter hemust request the extension; certify thathe has grounds to believe that his firmmeets the financial test criteria; identifythe facilities to be covered and their costestimates; specify the date when thefirm's fiscal year ended; specify the dateno more than 90 days after the end ofthe fiscal year when he will submit thedocuments required; and certify that thefirm's year-end financial statements arebeing independently audited.

The Agency is studying the possibilityof reducing the reporting burden of thefinancial test for many owners andoperators by using data they havealready submitted in routine reports tothe Securities and ExchangeCommission. Such data are available oncomputer tapes from commercialcompanies. If this approach provesfeasible, users of the test who file dataregularly with the SEC may have toreport only current closure and post-closure cost estimates annually to EPA.The Agency plans to examine theworkability of this system during thefirst year that the financial test is in use.Following evaluation of the results, theAgency will decide whether to amendthe regulations to eliminate reporting ofdata that is obtainable through theautomated system.

11. The Corporate Guarantee. Underthe May 19, 1980, proposal, an owner oroperator could meet the financialassurance requirements by obtaining aguarantee from another entity that metthe financial test requirements. The'object was to allow qualified parentcorporations to provide financialassurance for subsidiaries. In theguarantee requirements promulgatedtoday, the guarantee is explicitlyrestricted to such use. Furthermore, theAgency has adopted a definition ofparent and subsidiary (a parent mustown at least 50 percent of the votingstock of the subsidiary) which ensuresthat the connection between the twofirms will be close and direct. Theparent company is likely to have astrong interest in the satisfactoryperformance of its subsidiary, and thisincentive strengthens the guarantee, inthe Agency's view. Nevertheless the

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Agency invites comments on thequestion of whether a guarantee by abusiness entity other than a parentcorporation, as defined in theseregulations, should be allowed.Comments addressing the extent of needfor such an option, how it should differfrom the one promulgated today, and theenforceability of such a guarantee underState laws are particularly encouraged..

Under the regulations promulgatedtoday, the parent-guarantor must meetthe same requirements as an owner oroperator using the financial test and hasan independent. contractual obligation toEPA. In effect, he "stands in the shoes"of the owner or operator, as far asassurance for closure or post-closurecare is concerned, through thisguarantee. If the owner or operator failsto perform closure or post-closure careas required, the guarantor must do so orfund a trust fund in the full amount ofthe cost estimates in the name of theowner or operator. If the guarantor fallsbelow the test criteria or is disallowedfrom continuing as a guarantor becauseof qualifications in the auditor's opinionof the guarantor's financial statements,the guarantor must provide alternateassurance financial assurance in thename of the owner or operator if theowner or operator himself does not doSO. so

The cancellation provisions arecomparable to those of the surety bondsand letters of credit (infra). Theguarantor must give a 120-day notice ofcancellation to the owner or operatorand the Regional Administrator bycertified mail. If the owner or operatordoes not establish alternate financialassurance and obtain the RegionalAdministrator's written approval of thisassurance within 90 days after thenotice is received, the guarantor mustprovide alternate assurance in the nameof the owner or operator.

B. Closure and Post-Closure Insurance

This promulgation includes insuranceas another mechanism that may be usedto satisfy the financial assurancerequirements (§ § 264 143(e), 264.145(e),265.143(d), and 265.145(d)). Theinsurance mechanism was notsufficiently developed for inclusion inpast proposals or in the interim finalregulations of January 12, 1981, althoughthe Agency's consideration of such amechanism was noted in theBackground Document for the January12 regulations. The Agency believes thatthe insurance mechanism will providestrong financial assurance; add to therange of options available to ownersand operators, especially small entities;and offer cost advantages to someowners and operators.

As explained above in theBackground section, owners andoperators who plan to use the insuranceoption have until 90 days after theeffective date to submit evidence ofhaving obtained the insurance. They dohave to submit by the effective date astatement from a qualified insurersaying that the insurer is consideringissuance to the owner or operator of aclosure or post-closure insurance policyconforming to the specifications of theregulations. If such a policy is notissued, the owner or operator mustsubmit evidence of other financialassurance as specified in theseregulations within 90 days after theeffective date.

The Agency decided to include theinsurance option in the interim finalregulations without first proposing it forseveral reasons. First, inclusion of theinsurance option In today's regulationswill provide a reasonable degree ofassurance that owners and operatorswill be able to consider insurance alongwith the other mechanisms as the meansthey will use to satisfy the financialassurance requirements by the effectivedate. Later promulgation of theinsurance option could mean thatowners and operators who prefer thisoption would first have to obtainSnother instrument until the insurancemechanism was allowed and until theycould review its provisions and makearrangements to obtain it. Second,promulgation of the insurance option atthis time provides prospective suppliersof the insurance with a firm basis foranalysis and planning. The Agencybelieves this may lead to the -development of a more competitivemarket among insurers by the datecertificates of insurance must besubmitted by owners and operators, andthat such competition would be 'conducive to reasonable prices for theinsurance. Third, the insurance optiondoes not impose additional regulatoryburdens on the owner or operator butrather adds to his range of alternativesin meeting a regulatory requirement.

Because the financial requirementsare being issued as interim finalregulations, there will be a 60-daycomment period. Any inadequacies inthe closure and post-closure insuranceprovisions may be called to theAgency's attention during that time. Theagency will make any necessarycorrections before the date by whichthose who select the insurance optionmust submit a certificate of insurance(90 days after the effective date of theregulations).

1. Face Amount of Policy. The policywill be issued with a face amount (the

total amount the insurer is obligated topay under the policy) equal to at leastthe current cost estimate for closure orpost-closure care unless the policycovers only part of the estimated costand the rest is covered by anotherinstrument. When the cost estimateincreases, the face amount of the policymust be increased by the owner oroperator, unless the increase is coveredby another instrument, when theestimate decreases, the face amountmay be decreased following writtenapproval by the Regional Administrator.

During the post-closure period, theface amount of the post-closure policywill increase annually to reflect earningsof the funds remaining under the policy.The minimum increase must be equal tothe face amount, less any payments bythe insurer for post-closure, expenses,multiplied by 85 percent of the mostrecent investment rate or the equivalentcoupon-issue yield announced by theU.S. Treasury for 26-week Treasurysecurities. The Agency believes thisprovision ensures a rate of return that isreasonable compared with other low-risk investments and allows forcompensation to the insurer foradministrative costs. A higher rate ofreturn may be agreed upon by insurerand insured.

2. Maintenance of Coveraga Theowner or operator must continue tomake premium payments which are dueunless alternate financial assurance asspecified in the regulations issubstituted. Failure to pay the premiumwithout alternate financial assurancewill constitute a serious violation ofthese regulations, a violation that beginsupon receipt by the RegionalAdministrator of a notice ofcancellation, termination, ornonrenewal.

The insurer may cancel, terminate, orfail to renew the policy only if thepremium is not paid. The automaticrenewal of the policy must at aminimum, provide the insured with theoption of renewal at the face amount ofthe expiring policy. If the cost estimatesto which the policy applies haveincreased, the insurer and insured mayagree to cover that increase in therenewal policy,

In order to cancel, terminate, or notrenew the policy upon nonpayment ofpremium, the insurer must provide 120days' notice to the owner or operatorand the Regional Administrator, bycertified mail. Cancellation, termination,or nonrenewal may not occur, however,if by the expiration date:.the RegionalAdministrator deems the facility to beabandoned; the Regional Administratorterminates interim status or the permit,


whichever is in effect; closure is orderedby the Regional Administrator or a U.S.district court or other court of competentjurisdiction; the owner or operator isnamed as a debtor in bankruptcyproceedings; or the premium is paid.

The owner or operator may cancel thepolicy if the Regional Administratorgives written consent based on hisreceipt of alternate financial assurancethat meets the requirements of theregulations or on completion of theclosure or post-closure obligations.

3. Payment Provisions. The insurerwill make available the face amount ofthe policy for closure whenever closureoccurs. The amount for post-closure carewill be made available whenever post-closure care begins. These funds forclosure and post-closure care will bemade available regardless of theowner's or operator's ability to paythese costs. The insurer will pay out thefunds at the direction of the RegionalAdministrator to the owner or operatoror any other party authorized to conductclosure or post-closure care. TheRegional Administrator will approvepayments when they are in accordancewith the closure or post-closure plan orotherwise justified.

The Regional Administrator maywithhold reimbursement of a portion ofclosure expenditures as he deemsprudent if he determines that the cost ofclosure appears to be significantlygreater than the face amount of thepolicy. The purpose of such withholdingis to extend financial assurance untilcompletion of closure. Any fundswithheld will be released whensatisfactory certifications of closure arereceived by the Regional Administrator.These provisions for payment are thesame as those for the trust fund.

4. Costs and Availability.Development of the insurance plan wasencouraged by the Agency in hopes ofproviding smaller entities with a widelyavailable alternative to the trust fund.Insurance offers several advantagesover the trust fund. The insurance planassures that the full amount of the costestimate will be available for closure orpost-closure care whenever the thefunds are needed, even uponabandonment of the facility, financialincapacity of the owner or operator, orpremature closure. By contrast, the trustfund can provide only that which hasbeen paid into the fund plus trustearnings. The owner or operator as wellas the public benefits from this completecoverage, as the owner or operator isrelieved of the economic burden of thepotential liability for closure and post-closure costs. With insurance coverage,these costs will not appear as liabilitieson the financial statements of the firm.

The cost of the insurance to ownersand operators will be strongly affectedby the tax treatment of the premiumpayments. EPA plans to ask IRS toclarify how tax rules apply to thisinsurance plan. Individual owners andoperators may request a ruling ordetermination letter under RevenueProcedure 80-20.

5. Requirements for Insurers. Therequirements for this insurance includequalifications of the insurer. The insurermust, at a minimum, be licensed totransact the business of insurance, or beeligible to provide insurance as anexcess or surplus lines insurer, in one ormore States. The Agency is studying theneed to include other qualifications andinvites comments on this matter. Amongthe possible qualifications that theAgency is studying are those suggestedby the National Association ofInsurance Commissioners and others inconnection with the liabilityrequirements of § § 264.147 and 265.147.

The NAIC recommended the followingwording for a provision setting forthqualifications that must be met byproviders of the liability insurance:

"The Regional Administrator shall notaccept insurance policies as complying withthis section unless such policies areunderwritten by an insurance institutionwhich:

"(1) Is domiciled in the United States andauthorized to transact the business ofinsurance as an admitted or nonadmittedinsurer in the state where the insured facilityis located, or

"(2) Is a captive insurer licensed under astate law authorizing the formation andoperation of captive insurers, or

"(3) Is an alien insurer in good standing onthe Non-Admitted Insurers Quarterly Listpublished by the Non-Admitted InsurersInformation Office of the NationalAssociation of Insurance Commissioners."

Another commenter said a rating of atleast "A" in Best's Insurance Reportsand a Best's financial size rating, whichmay be related to the size of the riskinvolved, should be required of insurers.Other commenters advised that manycompanies rely heavily on captiveinsurers for liability coverage andcaptives should not be excluded by theregulations.

The Agency invites comments on thesubject of qualifications for insurersproviding insurance for costs of closureand post-closure care, includingcomments on the suggestions receivedregarding liability insurance.

C. Trust Funds

A number of revisions, mainlyclarifications and corrections, have beenmade to the January 12, 1981, trust fund

provisions. The following describes therevisions and major comments received.

1. The Trust Agreement. The Agencyhas made the following changes to thewording of the trust agreement. In therevised agreement, the identification offacilities and cost estimates are on aseparate Schedule A instead of in theagreement itself; this avoids amendingthe entire agreement when a costestimate changes. Inadvertentcarryovers from a trust agreement usedas a model (an agreement for trustsunder the Employee Retirement IncomeSecurity Act] were eliminated. Aclarification was made to avoid theimplication that the owner or operatorcould impose specific investmentdirections on the trustee. The section onannual valuations was revised to makeit clear when the trustee must furnishthe valuations (at least 30 days prior tothe anniversary date of establishment ofthe fund, with securities valued as of nomore than 60 days prior to theanniversary date). The section onsuccessor trustees was revised to allowtrustees to resign without first obtainingwritten agreement from the RegionalAdministrator and the owner or.operator but with resignation effectiveonly after a successor is appointed andaccepts the trust, which is standardpractice. These changes in the trustagreement resulted from evaluation ofsuggestions from the bankingcommunity.

2. Updating Cost Estimates in theTrust Agreement. The trust agreementmust show the current cost estimate orportion thereof for which financialassurance is bein demonstratedthrough the trust fund. The January 12,1981, regulations did not explicitly statethat the owner or operator must keepthis information up to date. Thisinformation must be up to date in orderfor the Regional Administrator tomonitor the amount of funds beingassured through the trust fund and theadequacy of payments. A provision hastherefore been added to the trustregulations stating that whenever theamount of the cost estimate beingassured through the trust fund changes,the owner or operator must updateSchedule A of the trust agreement,which contains this information,within60 days after the change.

3. The Pay-In Period. Severalcommenters said that limiting the pay-inperiod for the trust funds under Part 264to the term of the permit seemedunreasonable and recommended aperiod of 20 years or remainingoperating life, whichever is shorter, asunder Part 265. As stated in thepreamble to the January 12 regulations,

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however, the Agency does not want tobe in the position of considering, at theend of the term of a pemit, whether toallow a poorly managed facility toremain in operation so that it couldcontinue to build its trust fund to coverthe costs of closure and post-closurecare. The trust must therefore be fullyfunded over the term of the initial permitor the remaining operating life of thefaciiity, whichever is shorter, to assurethat the money to provide proper closureand post-closure care will be available.In the January 12, 1981, regulations, thepay-in period under Part 264 was theterm of the permit only; it was assumedthat the term would never exceedoperating life. The change to term ofpermit or operating life, whichever isshorter, was made since it is possiblethat operating life will not alwaysextend to the formal term of the permit.

4. Initial Payment into Trust for aNew Facility. The January 12,1981,regulations required the first paymentfor a trust fund for a new facility 60 daysbefore waste was first received fortreatment, storage, or disposal. Acommenter said that this wasunnecessary and that it was also unfairbecause the surety bonds and letters ofcredit do not have to be effective untilwaste is received. The revisedregulation requires the initial paymentto be made before the first receipt ofwaste rather than 60 days before. TheAgency agrees with the commenter thatlittle is gained in added financialassurance by requiring payment 60 daysin advance. The trust agreement,however, must be submitted to theRegional Administrator 60 days inadvance of the initial receipt of waste atthe facility.

5. Tax Treatment. One comment wasreceived on the tax treatment of thetrust fund. The Internal Revenue Serviceis currently considering the taxtreatment of these trusts. Owners andoperators who desire individual rulingsmay request them from the IRS.

6. Payments for Closure. Under theproposed regulations of December 18,1978, the entire amount of the closuretrust fund was retained by the trusteeuntil completion of closure. Financialassurance for closure was thusmaintained in case closure was notcompleted or not completed properly.The Agency decided, however, that thiswould impose a hardship on someowners and operators, since, in effect,they would have to pay for closure twicebefore they were reimbursed. Under theproposed regulations of May 19, 1980,therefore, owners and operators couldbe reimbursed even while closure wastaking place. However, the Regional

Administrator was to withhold approvalol payment of 20 percent of the funduntil he received satisfactoryc,.-rtifications of closure. The January 12,1981 regulations continued thewithholding of 20 percent, and the trustagreement required the trustee to notifythe Regional Administrator when 20percent remained in the fund followingpayment of bills. The Agency hasconcluded, however, that it is moreproperly the Regional Administrator'srole to keep track of the amount of fundsremaining and therefore deleted thatrquirement in the trust agreement. Inaddition, the Agency is concerned thatin some instances where the costestimate is found to be seriouslyinadequate, more than 20 percent shouldbe held in reserve. Therefore, theregulations now provide that if the costof closure appears to be significantlygreater than the value of the trust fund,fie Regional Administrator maywithhold such amounts from payment asbe deems prudent until he receivessatisfactory certifications of closure.. Both in the January 12, 1981

regulations and the revised regulations,the Regional Administrator has 60 daysto make determinations regardingrequests for payments out of the trustfunds. One commenter stated that thisprovision penalized the owner oroperator by restricting cash flow. TheAgency believes that there will beinstances when 60 days will be neededby the Agency to approve paymentsfrom the trust funds in order toadequately assess whether the bills arein accordance with the closure plan forthe facility or are otherwise justified.The Regional Administrator may needpart of this period to determine whetherthe cost of closure is signifiuantlygreater than the value of the trust fund,and if so, what portion of the fundshould be withheld from disbursementuntil satisfactory completion of closure.The Agency recognizes that withholdingapproval of release of the funds cancause a problem to owners andoperators and will follow a policy ofexpediting payment requests as quicklyas possible, with 60 days as the limit.

D. Surety Bonds

The only substantive changes to theJanuary 12, 1981 regulations for suretybonds used to satisfy the financialassurance requirements are changes inthe cancellation provisions and in thetiming of the guaranteed payment offunds for closure into a standby trustfund.

1. Cancellation Provisions. Therequirements for the surety bonds andletters of credit in the January 12, 1981regulations included a provision

preventing their cancellation ortermination while a complianceprocedure was pendir.g. This prohibitionhas been eliminated and other relatedchanges have been made in thecancellation provisiors. The changes arethe same for letters of credit and suretybonds and are discussed in thefollowing section on letters of credit.

2. Time of Funding. The financialguarantee bond for closure nowguarantees funding of the standby trustfund before the beginning of finalclosure, while in the January 12regulation the trust had to be funded 60days before the beginning of closure. , ,(Alternatively, the standby trust must befunded 15 days after an order to beginclosure is issued by the RegionalAdministrator or a court of competentjurisdiction.) The 60-day period wasrequired to ensure that funds would beavailable by the expected date ofclosure, either from the owner oroperator or the surety. Uponreconsideration, however, the Agencybelieves the added assurance ofadvanced funding is not necessary. Inorder to obtain and retain the suretybond, the owner or operator must assurethe surety company of its continuingcapacity to meet obligations. TheAgency believes it is unlikely that theowner or operator with a surety bondwill fail to fund the trust; however, if hedoes fail, under the terms of the bondthe surety must fund the trust in hisplace.

3. Limits on Use of PerformanceBonds. Financial guarantee bonds maybe used as a financial assuranceinstrument during interim status (Part205) and permitted status (Part 264), andthey may be used to cover part or all ofthe closure or post-closure cost estimate.Performance bonds are allowed only forpermitted status and must cover thewhole amount of the estimate.

A few commenters disagreed with theAgency's decision to not allow use ofperformance bonds during Interim status(Part 265). The Agency's reason forretaining this restriction is as follows.During interim status the closure andpost-closure plans for a facility aregenerally not reviewed by the RegionalAdministrator until shortly before thetime of closure. Upon such review theRegional Administrator may find thatmajor changes are needed in the plans.The*Agency believes a performancebond is not appropriate when the actualrequired performance for the particularfacility may not be specified in anydetail during most of the term of thebond.

One commenter said he disagreedwith the Agency's decision not to allow


an owner or operator to cover a costestimate partially with a performancebond and partially with otherinstruments. The commenter said thesurety company would simply pay itspro rata share if the owner or operatordefaulted. The Agency has decided toretain this restriction because puttingtogether the performance guarantee withfunds from sources other than the suretymay necessitate protracted negotiationsamong financial institutions whichwould delay closure or post-closurecare.

4. Format. The January 12, 1981regulations had separate bond forms forclosure and for post-closure carebecause the Agency believed combiningthem might be confusing. Commenterssuggested that a combined format wouldbe more convenient and savepaperwork. The Agency accepted thissuggestion. One financial guaranteebond or performance bond may now bewritten to cover closure, post-closurecare, or both. Identifying information atthe beginning of the form will indicatewhich type of coverage is beingprovided for each facility.

5. Availability. Several members ofthe surety industry commented that,because of the long periods of theobligations and the cancellationprovisions requiring alternate financialassurance, they would either not writethese bonds or do so only for theirlargest, strongest clients. Commentersfrom the regulated community, however,have recommended that bonds beincluded as an allowable option orindicated that they intended to obtainbonds. The Agency believes that theavailability of surety bonds mayincrease as experience of sureties withhazardous waste facilities increases.Also, bonds may be more available forfacilities that are nearing the time ofclosure since the period of the obligationwould then be relatively short anddefinite.

E. Letters of CreditSeveral changes were made in the

letter of credit in the January 12, 1981regulations. Most were recommended bybanks and banking organizations toachieve conformity with currentpractices.

1. Cancellation Provisions. Under theJanuary 12, 1981 regulations fortermination or cancellation of letters ofcredit and surety bonds, the issuinginstitution had to provide at least 90days' notice of intent to terminate orcancel the instrument. The notice was tobe sent by certified mail to both theowner or operator and to the RegionalAdministrator. Upon receipt of thenotice, the Regional Administrator was

to issue a compliance order requiring theowner or operator to provide, within 30days, alternate financial assurance inaccordance with the regulations. Theissuing institution could not terminatethe instrument while a complianceprocedure was pending. If the owner oroperator failed to establish alternatefinancial assurance, the RegionalAdministrator could direct the issuer ofthe letter of credit or bond to pay theamount of the credit or bond into theowner's or operator's standby trust. TheAgency believes a complianceproceeding should be instituted toprovide opportunity for a hearing inaccordance with procedures underSection 3008 of RCRA prior to orderingsuch payment. Since it might not alwaysbe possible to hold a hearing within the90-day period, it seemed necessary toprevent termination until the complianceprocedure was completed.

Financial institutions that issue lettersof credit expressed strongdissatisfaction with the provisionpreventing expiration while acompliance procedure is pending, sinceit did not permit a definite date oftermination, which is considered animportant feature of letters of credit.Staff of the U.S. Comptroller of theCurrency confirmed that thiscancellation proyision went againstaccepted principles regarding letters ofcredit. Sureties did not cite the provisionspecifically but said that thecancellation provisions did not givethem adequate opportunity to limit theirrisk.

One commenter opposed issuance of acompliance order by the RegionalAdministrator upon his receipt of anotice of cancellation from a surety. Thecommenter said it seemed unfair to theowner or operator since he would nothave an opportunity to obtain alternatefinancial assurance before such an orderwas issued.

In response to the comments byfinancial institutions and others, theAgency modified its approach tocancellation of letters of credit andsurety bonds. The prohibition ofexpiration while a complianceprocedure is pending was eliminated.Under the revised regulations, notices ofcancellation must be delivered to boththe owner or operator and the RegionalAdministrator at least 120 days beforeactual cancellation. A complianceprocedure will not be instituted becausea cancellation notice is received.Owners or operators will have 90 daysto provide alternate financial assyranceand obtain written approval from theRegional Administrator based on hisdetermination that the mechanism is inaccordance with the required

specifications. If the owner or operatorfails to provide such assurance andobtain such approval within the 90 days,the Regional Administrator will directthe issuing institution to make paymentinto the owner's or operator's standbytrust. The Agency views such drawingson the instruments in the 30 days beforecancellation as the normal andnecessary means of maintainingfinancial assurance through theseinstruments.

The Agency believes that thisprovision avoids the problem of theuncertain expiration date and allows theowner or operator an adequateopportunity after a cancellation noticeto clearly establish alternate financialassurance before the RegionalAdministrator draws on the instrument.

Several commenters said thatuncertainty of the expiration date wouldalso be caused by the provision in theJanuary 12 regulations requiring that the90-day period for notice of cancellationwas to begin on the date of receipt ofthe notice by the RegionalAdministrator, as shown on the returnreceipt, rather than on the date suchnotice was sent. The Agency believes,however, that the amount of uncertaintyshould be minimal in most instances andthat the possibility of delay in deliverycan be planned for and monitored by thesender. The provision is necessary toprevent expiration from taking placewithout the knowledge of the RegionalAdministrator or the owner or operatorand to prevent shortening of theeffective notification period due todelays between mailing and actualreceipt. As explained above, under therevised regulations 120 days' notice isrequired to allow adequate time for theowner or operator to obtain substitutefinancial assurance and approval ofsuch assurance by the RegionalAdministrator. This period is to begin onthe date when both the owner oroperator and the Regional Administratorhave received the notice, as evidencedby the return receipts.

2. Standby Trust. Comments werereceived on the requirement that theissuing institution deposit any paymentsit makes into the owner's or operator'sstandby trust. Banks said that letters ofcredit do not usually entail such aresponsibility, and furthermore the bankcannot know whether it has depositedthe money into the right trust. Theyrecommended that the RegionalAdministrator make the deposit or atleast have the bank depend on theRegional Administrator's instructions inmaking the deposit. Under the revisedregulations the bank still must depositthe funds into the standby trust, since

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15042 Federal Register I Vol. 47, No. 67 / Wednesday, April 7, 1982 / Rules and Regulations

EPA does not have authority to directlyreceive funds derived from financialassurance mechanisms under RCRA, butthe deposit must be made in accordancewith the Regional Administrator'sinstructions.

3. Separate Letter IdentifyingFacilities and Cost Estimates. The letterof credit in the January 12, 1981,regulations incorporated informationidentifying the facilities for which fundswere being assured and the amounts ofthe credit designated for financiallyassuring closure or post-closure care ofeach facility. Commenters said that suchinformation is usually not included inletters of credit, which should be writtenas simply and briefly as possible. Sincethe information could be in anaccompanying letter from the owner oroperator, the Agency decided to requiresuch a letter and remove therequirement for having the informationin the letter of credit itself.

4. Certifications. Certification ofauthority to execute the letter of creditwas part of the required language for theletter of credit included in the January12, 1981, regulations. Commenters saidsuch a certification is not part of otherletters of credit and serves no purpose.One commenter said that a person whowould write a letter of credit withoutauthority to do so would not be stoppedby a certification in the letter. TheAgency agrees that it provides littleadded protection and has removed it.

Commenters also recommended thatcertification that the wording of theletter is identical to the wordingspecified in the regulations beeliminated, but the Agency believes therequirement is necessary to ensure thatthe specified wording is used. Standardlanguage is necessary because infinitevariations are otherwise possible, andthe Agency does not have the resourcesor expertise to review unlimitednumbers of variations to determinewhether they adequately assureavailability of funds for closure andpost-closure care.

One commenter stated that it wasunreasonable to require wordingidentical to that specified in theregulations because regulations change.To clarify the Agency's intent, therevised regulations now state that thewording of the letter of credit must beidentical to that specified in theregulations as these regulations wereconstituted on the date the letter wasexecuted. This change has been madealso in each of the other financialassurance instruments.

5. Facilities in Different Regions.Several commenters from the regulatedcommunity said they should be allowedto cover facilities in different Regions

with one letter of credit. The Agency didriot allow this in the January 12, 1981,regulations because it appeared that,taider the policies of some banks,increasing and decreasing the amount ofthe credit could be a complex procedurewhen multiple beneficiaries wereinvolved. However, the Agency has nowdecided to allow coverage of facilities indifferent Regions with a single letter ofcredit. Where banking procedures arecumbersome the owner or operator islikely to use a separate letter of creditt1r each Region since he must still meetthe time requirements for increasing theamount of the credit if the cost estimategoes up. In instances where coverage indifferent Regions through one letter isnot complicated, there may bepaperwork savings for the owner oroperator in obtaining such a letter ofcredit.

F. Revenue Test for MunicipalitiesA revenue test for municipalities was

part of the May 19, 1980 reproposal (45]7R 33268, 33273). A municipality passedt1he test and thereby demonstratedfinancial assurance If it had annualgeneral tax revenues which were 10times the cost estimates to be covered.As with the financial test, however, theAgency could not reach a decision as towhether to include or not include therevenue test in time for the January 12,1981, regulations.

After intensive study the Agency hasdecided not to include the revenue test!For municipalities among the allowedmechanisms. The analysis leading to'this decision is described in the3ackground Document for the financialtest and revene test. The Agency isconcerned that if funds are not set asidespecifically for closure and post-closurecare, the municipality will facedifficulties in allocating funds for thatpurpose when they are needed. Ifbudgetary and legislative processes,bond issues, or voter approval of newtaxes are necessary, there is thepossibility that necessary closure andpost-closure activities will not beperformed in a timely manner. Amajority of comments received fromlocal officials and other individualsknowledgeable about local governmentfinances, as well as the literature on thesubject, stress the fact there is littleleeway in most local budgets and somemunicipalities are presently in severefinancial straits. A 10-percent budgetreallocation would be possible only Inextreme situations. Also, the Agencyhas not been able to find strongempirical support for the argument thata larger multiple will providesatisfactory assurance. It Is not clearthat municipalities will be able to shift

expenditures rapidly to closure or post-closure care regardless of the multipleadopted. Furthermore, enforcementproceedings to bring about such areallocation by a municipality mayengender difficult issues in Federal-State-local relations.

The Agency considered the use of atest for municipalities based on detailedfinancial information indicative ofcurrent financial solvency. Accountingand reporting procedures ofmunicipalities in general vary greatly,however. The Agency concluded that arequirement which would be based uponthe quantification of assets and tangiblenet worth would not be uniformlyapplicable because of these variousaccounting and reporting methodspresently employed by municipalities.The Agency does not believe thatmunicipal bond ratings, a criterionsuggested by several commenters,would be adequate as a sole indicator ofability to pay the amounts of theestimated closure or post-closure costs.The Agency was thus unable to developa set of financial indicators, similar tothe financial test criteria, that would besuitable for municipalities in general. Anumber of special-purpose, fee-basedmunicipalities are essentially identicalto private entities; because of theirfinancial characteristics and accountingand reporting practices they may beable to use the financial test to satisfythe financial assurance requirements.

The Agency believes that othermunicipalities that are financially soundwill be able to use a trust fund or one ofthe other financial assurancemechanisms allowed. The guarantee bythe State (§§ 264.150 and 265.150) maybe an especially appropriate mechanismfor municipalities. Municipalities arecreated by State law, and the States arein a far better position to gauge thefinancial condition of theirmunicipalities than is EPA.Consequently, in the event a Statewishes to reduce the cost of the programupon its municipalities, it may choose toguarantee the obligations of certain orall of Its municipalities. In the even aState lacks sufficient confidence in thefiscal strength of its municipality toextend such a guarantee, It wouldclearly not be appropriate for EPA toallow the municipal entity to avoidproviding adequate financial assurance.

G. Use of State Mechanisms

States in which EPA is administeringthe RCRA financial requirements mayalso have issued their own financialrequirements applicable to owners andoperators. Under the financialrequirements of Parts 264 and 265, an


owner or operator may use State-required mechanisms to meet EPA'srequirements for financial assurance forclosure and post-closure care andliability coverage if such mechanismsare equivalent to those specified byEPA. Commenters on this provision(§§ 264.149 and 265.149) in the January12, 1981, regulations said it wasinadequate because it did not say whowould decide whether the mechanismwas equivalent or how equivalencywould be determined. The Agencyagreed with these comments and revisedthe Section. It now provides that theRegional Administrator will decidewhether the mechanism is equivalent.Two principal factors will be evaluated:whether availability of funds forfinancial assurance for closure or post-closure care or for liability coverage isof a least equivalent certainty, andwhether the amount of funds assured isat least equivalent. The RegionalAdministrator also has discretion toconsider other factors. If a mechanism isequivalent except in the amount offunds it will make available, the owneror operator may still use the mechanismin satisfying the EPA financialrequirements but must make up thedifference in amount by increasing thefunds available through the Statemechanism or through use of the EPA-specified mechanisms.

An owner or operator who wishes touse a State-required mechanism tosatisfy the financial requirements ofParts 264 or 265 must submit a request todo so and evidence of establishment ofthe State-required mechanism. He willbe considered to be in compliance withthe relevant portion of the financialrequirements of Parts 264 or 265 pendinga determination of equivalency by theRegional Administrator.

These same provisions fordetermining equivalency wereincorporated into § § 264.150 and 265.150,which allow owners and operators touse State guarantees to satisfy thefinancial requirements of Parts 264 and265 if they are equivalent to mechanismsspecified in those Parts.

H. Exemption of Facilities With SmallCost Estimates

Several commenters recommendedthat the Agency exempt facilities withsmall closure cost estimates from therequirements for financial assurance forclosure because the cost of establishingfinancial assurance would amount tomore than the cost of closure. TheAgency has concluded that, on the basisof current available information, anexemption should not be allowed on thegrounds that the cost estimate is small.A small cost estimate is not an

indication that the risk of damage issmall. The failure to perform necessaryclosure or post-closure activities at sitesat which even a small amount ofhazardous waste is present could resultin a great deal of damage. Many largefirms will be able to use the financialtest to easily cover small estimates.Small firms should be able to reduce theadministrative costs of financialassurance for small amounts to aminimum by using a fully collateralizedletter of credit.

The Agency believes a facility forwhich the cost estimate is as small asthe minimum cost of providing financialassurance will usually be a smallstorage facility owned or operated by ahazardous waste generator. Underexisting rules for hazardous wastegenerators (§ 262.34), waste generatorscan avoid providing financial assuranceby not storing waste on site longer than90 days. This practice would alsopromote environmental protection.

Over the next year, the Agency plansto study actual facilities with relativelysmall closure cost estimates to evaluatethe potential risks posed to humanhealth and the environment should anexemption be allowed. The Agency willthen review the question of exemptingfacilities with small estimates in light ofthe study findings. For purposes of thisreview the Agency also solicitsinformation from owners and operatorswith closure cost estimates of up to$10,000 on the specific costs of themechanisms they are using to satisfy thefinancial assurance requirement.

I Restricting Means of FinancialAssurance

Several commenters have stated thatEPA should not require specific meansof financial assurance and specificwording of financial instrumentsbecause alternate methods and wordingmay be preferable to some owners andoperators and equally effective for theAgency's purposes.

As discussed in the Preamble to theJanuary 12, 1981, regulations (46 FR2823), the Agency has concluded that itmust require specific mechanisms forfinancial assurance. An open-endedapproach would impose an intolerableadministrative burden on the Agency,especially in light of its limitedexperience and resources in the area ofevaluating financial mechanisms. EPAbelieves it has allowed thosemechanisms which adequately providefinancial assurance and are feasible,and EPA will continue to be receptive toproposals and petitions for additionsand improvements to the allowedoptions.

J. Notice of Release From FinancialAssurance for Post-Closure Care

The January 12, 1981, regulations inPart 264 provided that when an owner oroperator completed all post-closure carerequirements to the satisfaction of theRegional Administrator-for the period ofpost-closure care specified in the permitfor the facility or the period specified bythe Regional Administrator afterclosure, whichever period was shorter,the Regional Administrator would, atthe request of the owner or operator,notify him that he is no longer requiredto maintain financial assurance for post-closure care of the facility. In Part 265,this provision was the same except that,rather than the period specified in thepermit, a period of 30 years for post-closure care was used, in accordancewith Subpart G of Part 265. In therevised regulations, the notice of releaseis contingent on completion of all post-closure care requirements in accordancewith the post-closure plan. The Agencyintends that the post-closure plan for thefacility will continuously reflect thepost-closure care requirements for thefacility, including the period of post-closure care. The Agency thereforedecided that financial assurance forpost-closure care should be explicitlytied to the plan and the period set forthin the plan.

During the post-closure period, if theowner or operator can demonstrate thatthe amount of funds assured by amechanism specifie'd in theseregulations exceeds the amount that willbe needed over the entire period of post-closure care, the Regional Administratormay approve a decrease in the amountassured by the mechanism. Potentialeffects of inflation as well asrequirements specified in the post-closure plan will be majorconsiderations in evaluating requests Fordecreases in the amounts of fundsassured.

K. Incapacity of Owners, Operators,Guarantors, and Issuing Institutions

The January 12, 1981, regulationsrequired that if the institution that hasissued the surety bond, letter of credit,or insumace policy used by an owner oroperator to satisfy the financialrequirements become incapacitated bybankruptcy, insolvency, or suspensionor revocation of its license or charter,the owner or operator must establishother financial assurance within 60 daysafter such an event. The Agency decidedto eliminate insolvency of the issuinginstitution from this provision in therevised regulations because of its

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conclusion that insolvency is not areadily identifiable condition.

Under the revised regulations, anowner or operator using a trust fund tosatisfy the financial requirements mustalso obtain alternate financial assuranceif the trustee institution becomesbankrupt or its authority to act astrustee is suspended or revoked. TheAgency decided that mainenance andquality of financial assurance are betterprotected if trust funds are also coveredby this provision. T

10/14/2011 rules and regulationsanthony donatoni, hazardous materials branch, 6th and walnut...

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