Appendix VI-3 EP A Policy re: Calculation of Economic Benefit

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FridayJlJlne 18, 1999

P,art III

Callculation of the Economic Benefit ofNoncompliance in EPA's Civil PenaltyEnlforcement Cases; Notice

32948 Federal Register/Vo1. 64. No.117 /Friday. June 18. 1999/Notices

ENVIRONMENTAL PROTECTIONAGENCY

[FRL-6361-7]

Calculation of the Economic Benefit ofNoncompliance in EPA's Civil PenaltyEnforcement Cases

AGENCY: Environmental ProtectionAgency (EPA).ACTION: Advance notice of proposedaction, response to comment, andrequest for additional comment.

SUMMARY: In a Federal Register Noticeon October 9, 1996, the EnvironmentalProtection Agency ("EP A ") requestedcomment on how it calculates theeconomic benefit that regulated entitiesobtain as a result of violatingenvironmental requirements; EPAmakes this calculation to establish anappropriate penalty for settlementpurposes. This Notice provides bothresponses to the public comments andadvance notice of the changes EPAproposes to make to its benefit recaptureapproach and to its BEN computermodel (which is used by EPA tocalculate economic benefit for purposesof settlement) .EP A also requestscomment on these proposed changes.After the comment period closes, theAgency plans to review all of thecomments and revise its benefitrecapture approach as appropriate.DATES: EPA urges interested parties tocomment in writing on its proposedchanges to the BEN model and to theAgency's benefit recapture approach.Comments must be received by EPA atthe address below by july 30, 1999.ADDRESSES: Written comments shouldbe submitted in triplicate to: U.S.Environmental Protection Agency,Office of Enforcement and ComplianceAssurance, Economic Benefit DocketClerk, Mail Code 2248-A, 401 M Street,SW., Washington, DC 20460, and shouldreference this docket. EP A will maintaina record of all written commentssubmitted pursuant to this Notice.Copies of the comments may bereviewed at the Ariel Rios FederalBuilding, 1200 Pennsylvania Avenue,Washington, DC 20004. Personsinterested in reviewing the commentsmust make advance arrangements to doso by calling (202) 564-2235.FOR FURTHER INFORMATION CONTACT:Copies of the BEN computer model andthe BEN User's Manual may be obtainedfrom the National Technical InformationService by calling (800) 553-6847.Callers should request order numberPB98-500382GEI. Electronic copies ofthese items are also downloadablethrough the Office of Enforcement and

Compliance Assurance's 1Norld WideWeb site on the Internet (Jlttp:f fwww .epa.gov foecal datas)rs/ dsm2.html) .Government users (federal, state, orlocal) can also obtain cop'les of themodel and manual through the Agency'stoll-free enforcement economicshelpline at (888) ECONSPT. For furtherinformation, contact Jonal:han Libber,Office of Regulatory Enforcement,Multimedia Enforcement Division, at(202) 564-6102, or through electronicmail atlibber .jonathan@epamail.epa.gov .SUPPLEMENTARY INFORMATION: ThisNotice is organized as follows:

I. BackgroundA. Overview

B. EP A Policy and Guidance on Recapturingthe Economic Benefit of NoncomplianceI. Policy Background2. BEN Calculates the Econolnic Benefit From

Delayed and Avoided Pollution ControlExpenditures

3. Current Model Usage and ApplicabilityC. How a Firm Obtains an Economic BenefitFrom Delaying or Avoiding C:omplianceCostsI. The Components of Economic Benefit

Measured by the BEN Model2. Taking Indirect Costs Into Account

II. Proposed ChangesA. Broad Economic Benefit Recapture IssuesI. Alternatives to BEN2. Illegal Competitive Advanl:ageB. The BEN Moders CalculationMethodologyI. Investment Tax Credit and Low-lnterest

Finandng2. Depreciation Method3. Tax Rates4. Differences in On- Time and Delay

Scenarios5. Replacement Cycles for Capital Equipment6. Inflation Treatment7. Discount Rate8. Discounting MethodologyC. Improving the BEN Moders UserFriendlinessI. Is BEN Too Complex to Ol=oerate?2. Is the Information BEN Ne.~ds Difficult or

Expensive to Obtain?

III. Response to CommentsA. Broad Economic Benefit Recapture IssuesI. Alternatives to BEN2. Illegal Competitive Advanl:ageB. The BEN Moders CalculationMethodologyI. Discount Rate2. Inflation Rate3. Other Technical AspectsC. Improving the BEN Model's User-FriendlinessI. Is BEN Too Complex to Operate?2. Is the Information BEN Ne,~ds Difficult or

Expensive to Obtain?3. Other Issues Affecting Use of BEN

D. General Comments on the PublicComment Process

I. Background

A. Overview

One ofEPA 's most importantresponsibilities is to ensure thatregulated entities comply with federalenvironmental laws. These laws-andtheir implementing regulations-setminimum standards for protectinghuman health and welfare and forachieving environmental protectiongoals, such as clean air and clean water .EPA upholds these laws throughvigorous enforcement actions thatcorrect the violations and appropriatelypenalize violators.

A cornerstone of the EPA's civilpenalty program is recapturing theeconomic benefit that a violator mayhave gained from illegal activity .Recapture helps level the economicplaying field by preventing violatorsfrom obtaining an unfair financialadvantage over their competitors whomade the necessary expenditures forenvironmental compliance. Penaltiesalso serve as incentives to protect theenvironment and public health byencouraging the prompt compliancewith environmental requirements andthe adoption of pollution preventionand recycling practices. Finally,appropriate penalties help deter futureviolations by both the penalized entityand by similarly situated regulatees.

EPA has promulgated a generic civilpenalty policy, as well as specificpenalty .policies tailored to suit theneeds of particular regulatory programs.For example, one civil penalty policyspecifically addresses violations of theClean Water Act. There are usually twocomponents to the civil penalties soughtby EP A: gravity and economic benefit.The gravity component reflects theseriousness of the violation and isgenerally determined through theapplication of the appropriate EP A civilpenalty policy.

The economic benefit component, onthe other hand, focuses on the violator'seconomic gain from noncompliance,which may occur in three basic ways.The violator can: (I) Delay necessarypollution control expenditures: (2)avoid necessary pollution controlexpenditures: or (3) gain an illegalcompetitive advantage during the periodof noncompliance. This competitiveadvantage may occur, for example, if acompany sells banned products orcaptures additional market share byselling its products at a lower cost thanits complying competitors.

The Agency designed the BENcomputer model to calculate-primarily

Federal Register/Vol. 64. No.117 /Friday. June 18. 1999/Notices 32949

for settlement purposes-the economicbenefit from these first two types ofeconomic gain. BEN may not beappropriate for all cases. The EPA'sregional offices can use an alternativeapproach that can produce reasonablyaccurate benefit calculations; however ,the Agency believes that BEN is by farthe best approach available forcalculating economic benefit derivedfrom delayed and avoided costs. TheAgency does not have a computer modelfor calculating the benefit gained froman illegal competitive advantage. EPAconsiders such gains on a case-by-casebasis.

B. EPA Policyand Guidance onRecapturing the Economic Benefit of

Noncompliance

Since the BEN computer model'sdevelopment in 1984, EPA staff haveused BEN extensively in generatingpenalty figures for settlement purposesthat reflect the economic benefit aviolator derived from delaying oravoiding compliance withenvironmental statutes.

l. Policy Background

Calculating a violator's economicbenefit using the BEN computer modelis usually the first step in developing acivil settlement penalty figure under theAgency's Policy on Civil Penalties(PT.l-l) February 16, 1984, and AFramework for Statute-SpecificApproaches to Penalty Assessments(PT.1-2) February 16, 1984. The Agencydeveloped the BEN computer model toassist in fulfilling one of the main goalsof the Policy on Civil Penalties:recovery-at a minimum-of theeconomic benefit derived from

noncompliance.The BEN computer model is a tool

that is primarily intended to be used incalculating economic benefit forpurposes of developing a settlementpenalty .In presenting economic benefittestimony at judicial trial or in anadministrative hearing, the Agencyrelies on an expert to provide anindependent financial analysis of theeconomic benefit the violator obtainedas a result of its violations. Thisindependent financial assessmentreflects the expert's own analyticalapproach as applied to the particularfacts of that case. Use of an expert in atrial or hearing allows the parties theopportunity to examine more closely theanalysis applied to the facts at issuethan would be possible through reliancesolely on a computer model. 1

1 EPA dcslgncd thc BEN modcl as a I1cxlblc toolfor usc In scttlcmcnt ncgotlatlons; Ills not uscd. norwas It cvcr Intcndcd to function. as a rulc. An

2. BEN Calculates the Economic BenefitFrom Delayed and Avoided PollutionControl Expenditures

The BEN model is designed tocalculate two types of economic benefit:those gained from delaying and thosegained from avoiding requiredenvironmental expenditures. Delayedcosts can include capital investments inpollution control equipment,remediation of environmental damages(e.g., removal of unpermitted fIllmaterial and restore wetlands) , or one-time expenditures required to complywith environmental regulations (e.g., thecost of setting up a reporting system, orpurchasing land). Avoided costs includeoperation and maintenaru:e costs and/orother annually recurring costs (e.g., off-site disposal of fluids from injectionwells) .BEN does not calculate the thirdtype of economic benefit: that gainedfrom a violator's competitive advantageassociated with noncompliance.

3. Current Model Usage aI1d

ApplicabilityThe BEN model can be used in all

cases that have delayed or avoidedcompliance costs. (The only exceptionis Clean Air Act Section 120enforcement actions, which require theapplication of a specific computermodel.) EPA designed BEN to be easy touse for people with little or nobackground in economics, financialanalysis, or computers. Because theprogram contains standard values formany of the variables needed tocalculate the economic benefit, BEN canbe run with only a small number ofinputs from the user. The program alsoallows the user to replace thosestandard values with user-specificinformation. Table 1 below lists theinputs to the BEN model. The optionalinputs listed in Table 1 are those forwhich the model has standard defaultvalues.

The BEN model can estimateeconomic benefit for many types of

organizations: corporations,partnerships, sole proprietorships, not-for-profit organizations, andmunicipalities. The BEN model has twosets of standard values: one applies tofor-profit business violators, and theother applies to not-for-profitorganizations. The BEN inputs listed inTable 1 are discussed in detail inChapter 4 of the BEN User's Manual for

cxpert wltncss tcstlfylng for thc govcrnmcnt mayuse thc ncw Windows vcrslon of BEN In court, butthc rcsponslblllty to dctcrmlnc thc cconomlcbencflt still resldcs with thc cxpcrt, That cxpcrtmay choose to use whatcvcr analytical tool (c,g"customlzcd computcr sprcadshccts, thc BEN modcl,or cvcn a calculator) hc or shc dccms approprlatcfor thc particular calculations nc(.cssary In thc case.

both for-profit and not-for-profitorganizations.Table 1.-lnputs for BEN

Required Inputs(1) Case Name, Profit Status, and Filing

Status.(2) Capital Investment.(3) One-Time Nondepreciable Expenditure.(4) Annual Expenses.(5) Date of Noncompliance.(6) Date of Compliance.(7) Date of Penalty Payment.

Optional Inputs (Standard Values That MayBe Modified):(8) Useful Life of Pollution Control

Equipment.(9) Marginal Income Tax Rate for 1986 and

Before.(10) Marginal Income Tax Rate for 1987 to

1992.(11) Marginal Income Tax Rate for 1993 and

Beyond.(12) Inflation Rate.(13) Discount Rate.

C. How a Firm Obtains an EconomicBeneflt From Delaying or AvoidingCompliance Costs

An organization's compliance withenvironmental regulations usuallyentaIls a commitment of financialresources, both initially (in the form ofa capital investment or one-timeexpenditure) and over time (in the formof continuing, annually recurring costs).These expenditures should result inbetter protection of public health orenvironmental quality , but they areunlikely to yield any direct economicbenefit (i.e., net gain) to theorganization. If these financial resourcesare not used for compliance, then theypresumably are invested in projectswith an expected direct economicbenefit to the organization. This conceptof alternative investment-that is, theamount the violator would normallyexpect to make by not investing inpollution control-is the basis forcalculating the economic benefit ofnoncompliance.

As part of the CivIl Penalty Policy, theAgency uses its penalty authority toremove or neutralize the economicincentive to violate environmentalregulations. In the absence ofenforcement and appropriate penalties,it is usually in an organization's besteconomic interest to delay thecommitment of funds for compliancewith environmental regulations and toavoid certain associated costs, such asoperation and maintenance expenses.

1. The Components of Economic BenefitMeasured by the BEN Model

A violator may gain economic benefitfrom either delaying or avoidingcompliance costs. By delaying

32950 Federal Register/Vol. 64, No. June 18. 1999/Notices

compliance, the violator can earn areturn on the delayed capital investmentor one-time expenditures required forpollution control compliance. In otherwords, violators have the opportunity toinvest their funds in projects other thanthose required to comply withenvironmental regulations. These otherinvestments are ordinarily expected toyield a monetary return at the violator'smarginal rate of return on capital. Butenvironmental expenditures typicallyyield no direct economic benefit. Thus,by delaying compliance, the violatorbenefits by the amount of earnings thatcould be expected from alternativeinvestments.

A violator can also gain an economicbenefit from avoiding pollution controlcosts. Avoided costs typically includethe continuing, annually recurring coststhat a violator would have incurred if ithad complied with environmentalregulations on time (e.g., the costs oflabor, raw materials, energy, leasepayments and any other expendituresdirectly associated with the operationand maintenance of the pollutioncontrol equipment). Unlike capitalinvestments and one-time expendituresthat are only postponed, annualexpenditures are avoided altogether.The resulting benefits to the violator arethe total avoided annual costs as well asthe return that could be expected onthese avoided costs.

2. Taking Additional Factors IntoAccount

EPA's BEN model evaluates economicbenefit in terms of the effect thatdelayed or avoided pollution controlcosts have on an entity's cash flows.Cash flow analysis is a standard andwidely accepted technique forevaluating costs and investments. Inessence, cash flow calculations focus onthe real, "out-of-pocket" cash effectsresulting from an expenditure. Thus,noncash expenditures, such asdepreciation, are considered only to theextent that they affect cash income orexpenses. The three additional factorsthe model considers are taxation,inflation, and the time value of money.

a. After-Tax Cash Flows. The BENmodel computes economic benefit inafter-tax terms to account for certainfinancial impacts associated withenvironmental expenditures. Forexample, one important impact of theseexpenditures is a reduction in incometax liability .Depreciation, one-timeexpenditures, and annual costs alleffectively reduce taxable income andthereby reduce income tax payments.Also, depending upon the tax year, theoriginal purchase of equipment mighthave resulted in an investment tax

credit. To account for these tax effects,BEN calculates the economic benefitusing after-tax cash flows.

b. Inflation. Inflation is another factorfor which BEN accounts. The BENmodel initially converts all costs todollars of the noncompliance year andthen compares the cost of complying ontime with the cost of complying late.The model uses the inflation rate toadjust the current or future cost ofcompliance into dollars from the yearnoncompliance began. The BEN User'sManual (see pages 4-27 to 4-29 andAppendix A of the manual) contains amore detailed discussion of the inflation

adjustment.c. Time Value of Money. A third factor

relates to the timing of the cash flows,because cash flows occurring indifferent years are not directlycomparable. A basic concept of fmancialtheory is "present value." This conceptis based on the principle that " A dollar

today is worth more than a dollar a yearfrom now," because today's dollar canbe invested immediately to earn a returnover the coming year. (Alternatively, adollar last year is worth more than adollar today because inve."tmentopportunities existed for last year'sdollar .) Therefore, the earlier a cost (orbenefit) is incurred, the greater itseconomic impact. BEN accounts for this"time value of money" effect byadjusting all estimated ca."h flows totheir "present value" equivalents. Toaccomplish this, BEN first "discounts"all cash flows back to thenoncompliance date, then calculates aninitial economic benefit as of this date,and finally "compounds" the economicbenefit forward to the penalty paymentdate. BEN uses a rate that reflects thetime value of money (known as adiscount rate or compounding rate) toadjust the cash flows for bothdiscounting and compounding.2 Theselection of the appropriate discountingmethodology is a significant issue in theBEN model. The BEN User's Manual(see pages 4-30 to 4-35 and AppendixA of the manual) contains a moredetailed discussion of the discountingand compounding that BE.N performsfor its present value calculations.

n. Proposed Changes

In its October 9, 1996, FederalRegister Notice, the Agency soughtcomment on three categories of issues:(I) Broad economic benefit recapturequestions, (2) the BEN model's

2For Ihc sakc ofslmp1ldly, Ihc Agcncy gcncrallyrcfcrs 10 prcscnl vaJuc adjuslmcnls In cllhcrdlrcclion as "dlscounling," aJlhough wcacknowJcdgc Ihal a morc prcclsc Icrm for adJuslingIhc Inllial cconomlc bcncfil forward Is"compounding."

calculation methodology andassumptions, and (3) the model's user-friendliness.

First, we invited comment on somefundamental questions that the benefitrecapture approach has raised: Can anapproach both more simple and moreaccurate than BEN measure theeconomic benefit of delayed andavoided pollution control expenditures?How should EP A evaluate the economicbenefit that companies receive as aresult of any illegal competitiveadvantage stemming fromnoncompliance?

Second, we invited comment on theBEN model's calculation methodology.While the Agency is confident that theBEN model's overall approach istheoretically sound, we welcomedconstructive and documented commenton alternative approaches. In addition,EPA is aware of substantial differencesof opinion with respect to the basis ofsome of the model's assumptions,particularly with respect to the discountrate and inflation rate. EP A requestedcomment on the BEN model'scalculation methodology , or any otheraspect of the model's assumptions ormethodology .

Third, we requested comment on themodel's user-friendliness. The Agencyhad heard concerns that the model istoo difficult to use, particularlyregarding BEN's ease of operation andthe difficulty of obtaining the necessarydata. Because EP A had never beenpresented with any concrete evidence insupport of these assertions, the Agencywanted either to substantiate theproblems and address them or to putthese issues to rest.

In the following sections, we addressthe changes that EP A proposes to makein each of the areas on which werequested comment.

A. Broad Economic Benefit RecaptureIssues

I. Alternatives to BENa. Background. EPA requested

comment on whether an approach bothmore simple and more accurate thanBEN could measure the economicbenefit of delayed and avoidedpollution control expenditures. EPAdesigned the BEN model to calculate theeconomic benefit of noncompliance insettlement of the vast majority of itscivil penalty enforcement cases.Although BEN has effectively servedthis purpose, the Agency recognizes thatit should be improved or even replacedif a better alternative exists or could bedeveloped easily. This concern isparticularly relevant because anincreasing number of state and local

Federal Register/Vol. 64, No.117 /Friday, June 18, 1999/Notices 32951

government enforcement personnel usethe BEN model regularly. Anyalternative approach must meet EPA's .policy objective of ensuring thatviolators are put on an even rmancialfooting with those regulated entities thatcomply on time. Alternatives must alsobe reasonably accurate, simple to use,and readily understandable to the vastmajority of the BEN model's users, asthese federal, state and localgovernment enforcement officialsusually have limited knowledge offinancial economics or accounting.

b. Proposed Changes. Manycommenters expressed variouscriticisms on different aspects of theBEN model. These criticisms, however ,focused on suggestions for improvingBEN. No commenter proposed analternative approach to a stand-alonecomputer model that performs netpresent value calculations. Therefore,the Agency plans to continue its use ofBEN, although it does proposesignificant revisions (see followingsections).2. Illegal Competitive Advantage

a. Background. Since 1984, EPA'scivil penalty policy has maintained thatany given penalty should be structured,at a minimum, to recover the economicbenefit a violator has enjoyed as a resultof its noncompliance. In addition to thiseconomic benefit component, EPAassesses a gravity component thatreflects the seriousness of the violation.This gravity component is designed toensure that the penalty puts the violatorin a worse position than those in theregulated community who compliedwith the law. The economic benefitcomponent ofEPA 's civil penalty policyfocuses specifically on identifying andrecovering the gain to a violator in orderto remove any economic incentive toviolate environmental regulations. Thepolicy does not address incidental and/or indirect losses or gains to society thatmight result from ,a violation. Forexample, consumers may enjoy aneconomic gain if a violator is able toreduce product prices.

The BEN model calculates the savingsfrom the delayed and avoided costs thatthe violator realizes through itsnoncompliance and uses this measureas a proxy for the total economic gainit accrued. This approach represents thelower bound of the total economic gainassociated with noncompliance. Forexample, given a new environmentalstandard, if all firms in the marketexcept the violator comply by investingin pollution abatement technology, themarket price for the product will rise toreflect the higher marginal costs borneby the producers. The violator has a cost

advantage and could (a) charge themarket price and pocket the avoidedcosts, (b) charge a lower price than itscompetitors in order to gain marketshare, or (c) combine strategies (a) and(b) .BEN is designed to calculate onlythe delayed and avoided costs ofnoncompliance regardless of whichstrategy the company pursues. BEN ,therefore, implicitly assumes that theviolator follows strategy (a) , and doesnot address the potential marketimpacts associated with the violator'slower marginal costs (i.e., strategy (b) or(c».

Illegal competitive advantage is anestimate of the total economic gain thatthe violator enjoys in the market as aresult of the violation. Illegalcompetitive advantage focuses on howdelaying and avoiding complianceallows violators to manufacture and sellproducts in the marketplace more cost-effectively, and also examines violators'short-term and long-term economicadvantages associated with improvedmarket position. Note that marginal costdifferences are key to illegal competitiveadvantage: if a company's violationaffects only fiXed costs, then BEN cangenerally capture the entire economicbenefit from noncompliance. A violatorneed not demonstrate an intent toimprove its market position in order forit to enjoy an illegal competitiveadvantage.

Illegal competitive advantage canoccur in a number of different ways,

including:Violator Sells Products at Below

Market Price: A violator might be ableto sell its products at a lower price thanits complying competitors because itdoes not incur environmentalcompliance costs. Depending on marketconditions (i.e., elasticity of marketdemand) the violator may then secure abigger share in that particular market,with the profit from the extra marketshare constituting the economic benefit.Some key questions are: how do weassess and prove what share of themarket resulted from underpricing, andhow do we determine the value of thatmarketshare?

Example: A metal finishing company failsto install pollution abatement equipment thatwould insure compliance with its wastewaterdischarge permit in order to keep costs low.A competitor producing the same product forthe same market cannot compete with theprice charged by the metal finisher innoncompliance and, asa reslllt, exits themarket. The violator now gains market share.BEN will capture the violator's delayed andavoided cosis while in noncompliance, butwill not calculate the added profits that theviolator realizes from its increased marketshare.

Example: An auto shop using illegaldisposal methods charges the same prices asits competitors and spends its avoided costson advertising. It builds a larger customerbase than it otherwise would have. BEN doesnot capture the full dimension of economicbenefit from the auto shop's expandedcustomer base-

.Violator Sells Products that WereProhibited by Law: Many EPAregulations prohibit the sale of certainproducts, either permanently or untilEPA reviews and approves them.3 If theviolator produces and sells theprohibited product. the violator willachieve an economic benefit by: (I)making money directly from the sale ofthe product; and (2) capturing themarket for the product, particularly ifthe product is new.

Example: A company mixes overstock of arestricted agricultural chemical into one of its"improved" popular lawn care products.Sales of the product are strong and customerbrand identification and approval is high.BEN does not calculate the economic benefitthe company has obtained through its illegalsales of the product nor the benefit that willaccrue in the future from customer brandloyalty.

.Violator Initiates Construction orOperation Prior to GovernmentApproval: Some regulatoryrequirements prohibit construction oroperation until EP A or anothergovernment agency grants a permit.When a violator initiates construction oroperation prior to this approval. it canbegin operating earlier than it wouldhave been able to had it complied withthe law (e.g.. if operation begins ninemonths earlier than it should have, theviolator can generate sales it should nothave made and thereby gain a head startin developing its market). The violatormay be partly motivated by the desire togain an "early mover" advantage in anew market. (Note that in many of thesecases. the violator will obtaingovernmental approval anyway. In suchcases. no environmental damage hasoccurred. A penalty is neverthelessnecessary. as EPA's policy is designedto maintain incentives to complypromptly with regulations.)

If the violator is operating in a new orrapidly evolving market, it may benefit

3 Notc that this dlITcrs from a company thatproduccs an approvcd product through a prohlbltcdproccss whcn thc final product posscsscs all thcsamc charactcr!stlcs from thc consumcr's point ofvicw, rcgardlcss ofthc production proccss (c.g., 0!1sold from a noncomplIant undcrground storagctank. or a mctal part flnlshcd with an !Ilcgalcoating). Thc cconomlc bcncfit In such cascs wouldbc bascd on thc pollution control costs that thcviolator dclaycd and/or avoldcd by producing thcapprovcd product through thc prohlbltcd proccss(c.g.. thc dclaycd costs of propcr tank Inspcctlon orthc avoldcd Incrcmcntal costs of a lcgal-andprcsumably morc cxpcnslvc--coatlng),

32952 Federal .64, No. 117/Friday, June 18, 1999/Notices

from an "early mover advantage." Forexample, by signing long-term supplycontracts with buyers at prices lowerthan from other potential entrants (whoplan to comply with environmentalregulations) , the violator may forestallcompetition in the market. An "earlymover" may also benefit by building acustomer base before other entrants. Ifdecreasing costs are associated with thesize or scale of production, the "earlymover" could also enjoy a long-termcost advantage over its competitors.Presumably an "early mover" couldthen parlay relatively thin profits (oreven losses) in the early periods withhigher profits in later periods.

One key issue in determiningeconomic benefit is that new businessesoften expect to lose money in the firstfew years of operation. Thus, if a firmstarts operating one year earlier than itshould have, and EP A examines grossincome minus expenses only for thatfirst year, then the violator might arguethat its economic benefit is zero eventhough this was part of the violator'splan. A more appropriate measure of theviolator's economic benefit may be thedifference in the present value ofexpected cash fiow over the life cycle ofthe facility from operating undercompliance (i.e., delayed opening) andin violation (i.e., actual opening date).

Example: A telephone cable companyneeded to obtain a dredging permit to laycable between the mainland and an island.Because of competitive pressures to be thefirst to offer fiber optics cable services on theisland, the company proceeded on anaccelerated schedule. Had the company gonethrough the permitting process, it wouldhave been delayed by eight months. Acompetitor in the same market is within eightmonths of being permitted. One of twoscenarios is possible here:

The violating company lays the cable andgains the first mover advantage, preventingthe other company from being able to enterthe market profitably. In this case, Illegalcompetitive advantage includes both theprofits the company receives during its eightmonths of operation that were the result ofnoncompliance, and also any monopolyprofits the company enjoys after this time.

The violating company lays the cable andenters the market with other competitorsselling the same service. In this case, illegalcompetitive advantage includes the profitsthe company receives during its eight monthsof operation that were the result ofnoncompliance. In the absence of thiscompany's entrance, the remainingcompanies would have expanded to meetdemand and would have earned the profits.

In both of these cases, BEN will notestimate the current and future benefits thatthe company realized from being the first tomarket.

.Violator Operates at HigherCapacity: A firm may be able to comply

with applicable environmentalregulations by maintaining its output orthroughput below a given thresholdlevel. A violator might produce abovethis threshold level in order to takeadvantage of high product prices.Alternatively, a violator might realize itslowest unit production costs at anoutput level that exceeds the level atwhich it can maintain environmentalcompliance.

Example: A paper mill can comply withthe terms of its wastewater permit as long asits daily output does not exceed 200 tons perday. In order to reap the benefits of a marketsurge in paper prices, the mill produces anaverage of 240 tons per day over a six-monthperiod. BEN does not capture the profitsrealized by the violator from the additional40 tons per day produced on average over theperiod of noncompliance.

Example: A cheese manufacturer iscommitted to purchase the total output of 55dairy farms through long-terrn "take or pay"contracts. Milk production from the farmsexceeds the level that the manufacturer canprocess while staying within the regulatorylimits of Its wastewater permit for a threemonth period. Rather than pay for milk thatit does not process, the manufacturer choosesto operate at a level that causes it to exceedits permit levels. The manufacturer enjoyedeconomies of scale due to noncompliance.That Is, the manufacturer's production costsof the additional units are lower while it isIn noncompliance because there is noadditional cost associated with pollutioncontrol.

In summary , EP A is examining therecovery of illegal competitiveadvantage in cases where the BENmodel fails to assess adequately the totaleconomic benefit that the violatorenjoys as a result of the violation. Theproper evaluation of illegal competitiveadvantage in EPA policy will involveeither identifying the incrementalbenefit enjoyed by the violator and notaddressed by the BEN mo,del, orapplying a different analytic tool thanBEN for the entire economic benefitcalculation.

b. Proposed Changes. The Agencydoes not believe that a stand-alonecomputer model analogOlJlS to BEN (oran add-on module to BEN) could easilyand reliably determine the economicbenefit from the widely varyingexamples of illegal competitiveadvantage described abov,e. To examinethe potential market repercussions ofnoncompliance clearly involves asignificantly greater effort thancalculating the benefit from delayed andavoided costs. Tracing thei probable useof the avoided cost savings by theviolator. investigating the specificconditions of the market or markets inwhich the violator operates, anddetermining the resulting impacts ofnoncompliance on the market dynamics

are all usually time-intensive tasks. TheAgency proposes to assist enforcementstaff in measuring economic benefit insuch cases by developing a module forthe BEN model that alerts the user tosituations in which illegal competitiveadvantage may be significant and todevelop guidance to assist enforcementstaff in their calculation of illegalcompetitive advantage.

EP A proposes to have the BEN modelquery users regarding a series ofconditions that might characterizesituations where significant economicbenefit from illegal competitiveadvantage could exist. Whenever theuser creates a case, the model wouldprompt the user to provide answers toa series of questions. Depending on theuser's answers to these questions, themodel would advise the user to seekassistance in assessing the possibleexistence and magnitude of theeconomic benefit gained from illegalcompetitive advantage. The followingquestions target certain types ofviolations that may result in illegalcompetitive advantage. They aredesigned to require only a basicknowledge of the company's productsand markets. An example of the types ofquestions to be included in this module(with interpretations of positiveresponses in parentheses) are as follows:

1. V iolator Initiates Construction orOperation Prior to GovernmentApproval

a. Did violator's failure to obtain theappropriate review/permits allow it tobegin production or sales sooner than itshould have? (If "yes," then the violatormay have received early moveradvantage.)2. Violator Sells Products Prohibited byLaw

a. Did violator sell prohibitedproducts? (If "yes," then go to nextquestion. If "no," then this is not anissue.)

b. Does the violator plan to continueselling similar products in same marketafter coming into compliance? (If "yes,"then possible lasting market shareeffects may result from the illegalaction.)3. Violator Sells Products Below MarketPrice

a. Are the required compliance costssignificant enough for the violator tohave been able to undercut itscompetitors during the noncomplianceperiod? (If "yes," then the violator mayhave benefitted from market share gains,as it may have been able to undercut itscompetitors through its price advantagefrom noncompliance.)

Federal Register/Vol. 64. No.117 /Friday. June 18. 1999/Notices 32953

4 Notc that this and othcr tax-rclatcd adjustmcnts

arc Irrclcvant for munlclpalltlcs and othcr not-for-profit cntlllcs bccausc Ihclr marginal tax ratc Iscqualto zcro,

'Thc crltcrla arc: "I, Itls c6nstructcd,rcconstructcd, or acqulrcd undcr a wrlllcn contractbinding on Dcccmbcr 31, 1985; 2,ltlsconstructcdor rcconstructcd by Ihc taxpaycr, construction wasbcgun by Dcccmbcr 31, 1985, and thc lcsscr of$1million or fivc pcrccnt of thc cost was Incurrcd or

commlllcdbyDcccmbcr31,1985;or3,ltlsancqulppcd buIlding or plant facIlIty, constructionwas bcgun by Dcccmbcr 31, 1985, undcr a wrlllcnspcclfic plan, and morc than onc-halfoflts cost was

IncurrcdorcommlllcdbyDcccmbcr31,1985,"(Commcrcc Clcarlng Housc, Inc" Explanation ofTax Rcform Act of 1986, pagc 328,)

b. Does violator market products thatcan develop "brand loyalty" or highswitching costs? (e.g., computersoftware, service such as automaintenance.) (If "yes;' then priceadvantage could have long-term marketdistribution effects that benefit theviolator.)

c. Has violator developed or marketednew products while in noncompliance?(If "yes," than violator may gain "earlymover" market share and discouragecompetitors by keeping prices low.)4. Violator Operated at Higher Output

a. Could the violator have operatedwithin the law cost-effectively byreducing its output/throughput to acertain level? (If it could have done so,but did not, the violator's gain from theincremental output above the level atwhich it would have been incompliance should be examined.)

EP A seeks comment on thesequestions and suggestions for otherquestions that would be necessary toassess sufficiently whether theeconomic benefit beyond avoided ordelayed costs a violator gains fromnoncompliance are likely to besignificant.

For situations where the modeladvises the user to assess the possibleexistence and magnitude of theeconomic benefit gained from illegalcompetitive advantage, EPA proposes todevelop a guidance document to assistenforcement staff in evaluating illegalcompetitive advantage. The goal of thisdocument is not to provide a fixedapproach to ~lculating the economicbenefit from illegal competitiveadvantage. Rather, the goal is to educateenforcement staff on the types of illegalcompetitive advantage that may arise inenforcement actions, as well as toprovide a framework for EP A analystsand outside experts who perform theactual calculations. This guidance willeventually be incorporated into arevision of the 1984 "Guidance forCalculating the Economic Benefit ofNoncompliance for a Civil PenaltyAssessment." EPA proposes thefollowing general outline for the contentof the illegal competitive advantageguidance document:

I. Definition of Illegal CompetitiveAdvantage2. Situations in Which CompetitiveAdvantage May Be Significant

a. The violator has an early moverpotential in a changing industry (i.e.,has opened facility early).

b. The violator is one of a fewmembers in an industry that dominatethat particular industry.

c. The violator has been: the low-priceproducer and gained market shareduring non-compliance.

d. The violator could have operatedwithin the law cost-effectively byreducing its outPUt/throul~hput to acertain level, but instead operated abovethat level and that conduc:t made theviolator more profitable.

3. Situations Where It Is Reasonable ToAssess

What is the appropriate thresholdvalue for use by EPA? (E.g., how largedoes the potential economic benefitbeyond avoided or delayed cost need tobe to warrant EPA's closer scrutiny?)

4. Guidance PrinciplesEP A needs to keep information

collection and analysis as simple andquick as possible.

5. Avoiding Potential Double Countinga. Use of an integrated approach that

constructs compliance on time anddelay compliance scenarios,incorporating the relevant cash flowsfrom delayed/avoided compliance costsand illegal competitive advantage.

b. Potential for recapture of both thebenefits from savings and illegalcompetitive advantage in cases wherethe economic benefit from illegalcompetitive advantage is additive to thetraditional BEN analysis.

c. Cases in which either thetraditional BEN analysis (Jlr the illegalcompetitive advantage an."llysis dropsout of the economic benefit calculation.

EP A seeks comment on the suggestedapproach and outline for this guidancedocument.

B. The BEN Model's CalculationMethodology

Over the years, the BEN model hasreceived criticism for allel~ed flaws in itscalculation methodology. The twoissues with the greatest potential impacton economic benefit estimates involvethe model's discount rate and itsinflation rate. The Agency. requestedsubstantive and constructive commentson how the BEN model handles thesetwo issues. In addition, ErA invitedcomment on all aspects of BEN'scalculation methodology .The Agencyasked commenters to address whethertheir proposed changes wlDuld add anycomplexity to the computer model, andif so, why the benefit of the changejustified the added compLexity .

I. Investment Tax Credit and Low-Interest Financing

a. Background. Economic benefitcalculations for cases witllnoncompliance dates prior to the mid-

1980s must account for two importanttax-code effects: the investment taxcredit (ITC) and low-interest fmancing(LIF) .

Prior to 1986, the Federal governmentallowed companies an ITC on capitalinvestments.4 The ITC effectivelyreduced the after-tax cost of a capitalinvestment. Complicated-andchanging-rules governed thedepreciation basis for a capitalinvestment with an associated ITC.

BEN accounts for the ITC that wasavailable on projects completed beforeJanuary 1, 1986, but does not do so forthe transition years of 1986 and 1987.The transitional rules allowedcompanies to obtain an ITC for projectscompleted after December 31, 1985, ifthe project met one of three criteriaregarding the level of planning andconstruction that had occurred by thatdate. s Because the allowance of the ITCin these years was far from automatic(although still possible) , BEN warns theuser about this issue if thenoncompliance date is between January1,1986, and June 30, 1987. If furtherresearch and analysis shows that thegranting of an ITC was likely in aparticular case, then a financial analystcan adjust the BEN result through an"off-line" calculation.

Prior to 1987, LIF was available for abusiness's investment in pollutioncontrol. An earlier version of the BENmodel included a variable thataccounted for LIF .The 1993 versionremoved this variable because it wasrelevant only for cases withnoncompliance dates before 1987. BENissues a warning to the user about LIFif the noncompliance date is beforeJanuary 1, 1987. If further research andanalysis show that LIF was probablyavailable in a particular case, then afinancial analyst can adjust the BENresult through an off -line calculation.

b. Proposed Changes. As a fewcommenters suggested, EP A couldrevise the BEN model to allow an optionfor ITCs during the 1986-87 transitionyears, as well as to account for LIF inyears prior to 1987. These revisions

32954 Federal Register/Vol. 64. No.117 /1..riday. June 18. 1999/Notices

would, however, add considerablecomplexity to the model. Furthermore,the Agency did not receive anycomments documenting recentinstances in which an off-linecalculation was necessary to account forITCs or LIF. This is not surprising-EPAHeadquarters has received only one callin the last two years in response to theBEN model's current warning about LIF.Furthermore, the already low likelihoodof the need to account for ITCs or LIFcontinues to decline with the passage oftime, as EP A is not likely to see manyenforcement actions now in the late-1990s for violations that began in theearly to mid-1980s.

EP A instead proposes that the revisedBEN model not accept noncompliancedates before July l, 1987. This willensure that BEN's omission of ITCs andLIF is not leading to incorrect economicbenefit estimates in instances whereusers do not heed the current model'scurrent warning. EP A will provideassistance in performing the necessarycalculations for cases that actuallyinvolve noncompliance dates beforeJuly l, 1987.

The Agency welcomes comment onthis proposed change. We areparticularly interested in how often BENusers have recently analyzed cases withnoncompliance dates before July 1,1987, and how often they anticipatedoing so after June of 1999, the expectedintroduction of the revised BEN model.

2. Depreciation Method

a. Background. The BEN modelcalculates depreciation for capitalinvestments, as the tax deduction foraccounting depreciation chargesprovides a real after-tax positive cashflow to businesses.6 BEN calculatesdepreciation using a five-year straight-line methodology for capitalinvestments made before January 1,1987, and a seven-year ModifiedAccelerated Cost Recovery System forcapital investments made after January1, 1987. These assumptions representthe most rapid depreciation periodsavailable for typical pollution controlinvestments, thereby producing thepositive depreciation cash flow effectsas early as possible. These particulardepreciation methods generally result ina conservative economic benefitcalculation (i.e., lower than wouldotherwise be calculated) because theyminimize out-of-pocket costs to theviolator. Therefore, BEN is often

.Thc IRS docs not allow companlcs to wrltc offcomplctcly a capItal Invcstmcnt In thc ycar ofpurchasc. Companlcs must sprcad thc cxpcnsc ofthc Invcstmcnt ovcr scvcral ycars usIng thcapproprlatc dcprcclatlon schcdulc.

producing economic benefit figures thatare very conservative.7

For capital equipment that has a veryshort useful life, the selection ofalternative depreciation schedulesmight be available and also morebeneficial to a business. In unusualcases where the violator candemonstrate that an alternativedepreciation schedule would be bothavailable and beneficial, then moredetailed calculations by a financialanalyst in lieu of the BEr\j model arenecessary .

b. Proposed Changes. A revised BENmodel could conceivably allow usersthe option of assuming an alternativedepreciation schedule, but we believethe drawbacks of the added complexityand potential user confu:sion outweighthe gains from addressin,g a rarecircumstance. The Ageru:y welcomesfeedback from BEN users: on how oftenviolators have asserted tllat a differentdepreciation schedule wlJuld be bothavailable and beneficial, and how oftenoff -line calculations have been

necessary.

3. Tax Rates

a. Background. BEN us:es threemarginal tax rates: a rate for 1986 andbefore, one for 1987 through 1992, andone for 1993 and beyond. Users canaccept the standard values-whichincorporate national averages of statetax rates-or modify the inputs to reflectspecific state values.8

b. Proposed Changes. E:PA proposesthat the revised BEN model require theuser to enter the state in 'Nhich theviolator is located. The model will thenautomatically reference an internaldatabase of state tax rates and performthe necessary calculations for theviolator's combined federal and state taxrate.9 EPA also proposes 1:hat BENcalculate the tax rate for each separateyear of noncompliance, to allow forannual changes in the relevant state taxrate (even when the federal rate remainsconstant). Users will haVE! the additionaloption of entering year-by-year

7Thc IRS rcqulres Ihal many I)'PCS of pollutionCon1r01 cqulpmcnl bc dcpreclalc.j ovcr a 10ngcrpcrlod Ihan assumcd In Ihc BEN modcl. Wcre EPA10 lallor Ihc dcprcclation 10 aCCounl for Ihallongcrpcrlod. Ihc resull would bc a hlghcr cconomlcbcncfil calculation.

.Uscrs mlghl also wish 10 modlry Ihc lax ralcs 10rcflccl a buslncss WhoSC loW ncllncomc cnlalls alax brackcl 01hcr Ihan Ihc hlghcsl onc assumcd InIhc slandard valucs. NolC IhoUgh lhal BEN'sassumption of Ihc hJghcst marglr181lax ralcproduccs a lowcr cconomlc bcncfil cstimalc(bccausc a hlghcr lax ralc dccrc8!lcs Ihc aflcr-Iaxvaluc of Ihc compllancc COSIS).

.Thc modcl wIll also offcr Ihc option oflhcnational avcragc of alllhc slalc lax ralCS for cascsIn which Ills unclcar 10 whal slatc Ihc vlolalor payslaxcs.

combined federal and state rates in aspreadsheet -like format. 10

Although these options may soundcomplex, the only data required of theuser would be the violator's state. Theother screens for additional data entryand modification would appear only tothose users who selected such advancedoptions. The Agency welcomescomments on the added flexibility andapplicability that would result fromthese proposed changes.

4. Differences in On- Time and DelayScenarios

a. Background. The BEN modelassumes that the violator would haveused the same technology and approachin the hypothetical on-time complianceas it did in the actual delayedcompliance scenario. The only alloweddifferences are in the two scenarios'exact costs of compliance, which BEN'sinflation rate adjusts automatically. Buttechnological. legal, or other relevantchanges between the on-time and delayscenarios can conceivably alter thecomponents of the compliancescenarios, increasing or decreasing thecompliance costs by a rate other thangeneral price inflation. Where the delaycase costs are substantially less than theon-time case costs (e.g., a technologicalbreakthrough in control equipment).BEN will understate the benefit. Wherethe delay costs are substantially higher(e.g., regulations become more strict, butwith .'grandfather" clauses for already-compliant firms), BEN will overstate thebenefit.

Where the on-time and delaycompliance scenarios are significantlydifferent, BEN's normal assumption oftwo identical scenarios is inappropriate.More sophisticated calculations arenecessary .II

b. Proposed Changes. Modifying BENto accommodate such circumstances ispossible, and we believe the gains fromthe model's consequently enhancedapplicability outweigh the drawbacks ofthe added complexity and potential user

loThis option would allow uscrs 10 accounl for-among olhcr siluatlOns-a company whoscprofilability (and hcncc lax brackcl) was highlyvariablc ovcr diiTcrenl ycars. (As nolcd bcforc.BEN's assumption of Ihc highcsl marginal lax ralcIhroughOUllhc noncompliancc pcriod results in alowcr cconomic bcncfil cstlmalc.) This option couldallow uscrs 10 accOUnl for Ihc 1987 Iransitlon ycarin Ihc fcdcrallax ralc changc. bullhis Is a mOolpolnllf Ihc BEN modclls changcd (as proposcd Ina prcvlous scctlon) 10 rcqulre noncompliancc dalcsaftcr junc 30. 1987.

II A sImIlar problcm arlscs whcn noIcchnologically fcaslblc mclhod of compliancc Isavallablc. In lhal casc. Ihc only posslblc complianccmclhod Is 10 ccasc all production. wllh Ihccconomlc bcncfil calculation rcqulring a losl-profilsapproach. whIch Is bcyond Ihc scopc oflhc BENmodcl.

32955Federal Register/Vol. 64, No.117 /1"riday, june 18. 1999/Notices

12Thc modcl would not apply an cxplidtInflation ratc. although an annualizcd ratc could bcImputcd from thc modcl's data. For cxamplc.supposc a $200 cost cstimatc from 1991 must bcadjustcd for inflation to thc samc day In 1992. Thc1991 cost IndcxvalucIs lOO. whcrcasthc 1992Indcx valuc Is 103. Thc calculation thc modclpcrforms Is $200 x 103/100 = $206 (J.c.. multiplying

thc original cost cstimatc by thc ratio of thc costIndcx valucs from thc datc on which thc cost Isactualiy Incurrcd, and thc datc on which thccstimatc Is madc). Thc Indcx changc from 1991to1992 docs rcprcscnt an annual inflation ratc of thrccpcrccnt (J.c.. 103/100 -1.03-1 -0.03). althoughthc modcl would not dlrcctly apply this ratc. Thccalculation that uscs thc ratio ofthc indcx valucsis both morc prcdsc and morc simplc thancalculating multiple annual Inflalion rates overdifferent pcrlods for historical costs.

IJSCC thc following tablc, Dlffcrcnt Cost Indlcles.

confusion. EPA, therefore, proposes tochange the BEN model to allow users toenter separate on-time and delayedcompliance costs.

It should be noted that the standardoperation of the model would still entailonly a single compliance scenario, andthe other screens for additional dataentry and modification would appearonly to those users who select suchadvanced options. The availability ofmore advanced options would alsoenhance the model's ability to accountfor such atypical situations such asvalid pre-compliance expenditures andcredits for salvaged capital equipment,thus decreasing the need for off-linecalculations. The Agency welcomescomments on this proposed change andhow significantly it will enhance themodel's flexibility and applicability.

5. Replacement Cycles for CapitalEquipment

a. Background. One of the three typesof compliance costs BEN analyzes is thecapital investment, which representsdepreciable pollution controlequipment. As the name implies,depreciable equipment wears out withusage and the passage of time. BEN ,therefore, asks the user if the violatorwill need to replace the equipment atsome point in the future. If the userspecifies that the investment in capitalequipment is recurring, then the usercan accept the standard value of 15years for the useful life of the capitalequipment, or enter another value.

If the cost of capital equipment isrecurring, then a violator receives morethan one benefit from delaying thepurchase of capital equipment. Theviolator first receives a benefit fromdelaying the purchase of the initialcapital equipment, and then receivesfurther benefits from delaying thepurchase of the replacement capitalequipment for each future recurringcycle.

b. Proposed Changes. Somecommenters stated that BEN's option ofrecurring capital equipmentreplacement cycles is "speculative," asthese cycles have yet to occur in thetypical case. Although BEN makes anassumption about the future, thisassumption is essentially a baseline one:BEN assumes that future pollutioncontrol requirements will be neithermore stringent nor more lax thancurrent requirements, and that the costof the replacement equipment willincrease by no more and no less than

the projected rate of inflation. Therefore.the Agency proposes to I<eep the optionof replacement cycles.

Some commenters argued that BENshould not offer infinitely recurringreplacement cycles. The modeling ofinfinite cycles might at first seemexcessive. but all future costs are"discounted'. back to their presentvalues (see following se<:tions for anexplanation of discounting) .The resultis that any cycle after the first onetypically has a negligiblE! impact uponthe economic benefit estimate.Therefore, the Agency proposes that therevised BEN model use a default valueof one replacement cycle. and offerusers a choice of anywhere from zero tofive replacement cycles. This approachis in contrast to the current choice ofzero or infinite replacement cycles, withno intermediate option.

6. Inflation Treatment

a. Background. The first step in theeconomic benefit calculation is todetermine the compliance costs-forboth the on-time and delay scenarios-as of the year in which they wereactually incurred (or should have beenincurred) .Therefore. BEJ'1 adjusts thecompliance costs from the date theywere estimated to the date the costs willbe incurred to account for the effects ofinflation.

To adjust for inflation. BEN currentlyuses a standard-value rate calculatedfrom the appropriate ten years ofmonthly inflation data from the PlantCost Index (PC!) in the magazineChemical Engineering. This simpleinflation rate adjusts the initialcompliance cost estimates, both back intime into noncompliance- andcompliance-year dollars, and thenforward in time into futulre-year dollars(typically for capital equipmentreplacement cycles). The PCI isparticularlyappropriate for adjustingthe costs for inflation that are typicallyassociated with pollution controltechnology.

b. Proposed Changes. Despite theAgency's specific request for commenton BEN's inflation adjustJment. wereceived almost none. The issues thatthe few commenters did raise were:

(1) The use of a single inflation ratefor both actual and projected inflation.

(2) The basis for the actual inflationrate, and

(3) The basis for the projectedinflation rate.

The Agency proposes to change theBEN model to allow two separateinflation adjustments. One adjustmentwould be for cash flows incurred duringthe period of historical noncompllance,and then a separate rate for projectedinflation which would adjust for futurereplacement cycles (and other futurecompliance costs in cases where theviolator has not yet come intocompliance).

For actual historical inflation, theAgency proposes that BEN adjust eachcash flow from the date of the costestimate to the date on which it isincurred by referencing a look-up tableof cost index values. 12 The default costindex would be the PCI. This particularindex may not be appropriate for everysingle case, but we have yet toencounter any other cost index thatwould form a better basis for a standardvalue. EP A also proposes that therevised BEN model allow the user toselect from multiple look-up tablesrepresenting different cost indices-including the Building Cost Index,Construction Cost Index. ConsumerPrice Index, and the Employment CostIndex-and the option of selectingdifferent indices for differentcompliance components.13 The userwould also be able to override BEN'sinflation adjustments for the capitalinvestment and one-timenondepreciable expenditure. andinstead enter separate estimates forthese compliance costs as of thenoncompliance date, compliance date,and the initial recurring cycle startdates. This customized data entry couldrepresent another alternative cost index,case-specific inflation assumptions, orentirely different actions for on-timeand delayed compliance.

-

32956 Federal Register/Vol. 64, No.117 /Friday, June 18, 1999/Notices

DIFFERENT COST INDICIES

Abbreviation and full name Typical applications

BCI-Building Cost Index

BEN-Current BEN model's constant inflationrate.

CCI-Construction Cost Index

CPI-Consumer Price Index ECIM-Employment Cost Index: Manufacturing

ECI-Employment Cost W-Index: White Collar PCI-Plant Cost Index

I General construction costs, especially struc-

tures.

Replication of results from current BENmodel.

General construction projects, especiallywhere labor costs are a high proportion oftotal costs.

Compliance involves use of consumer goods.One-time nondepreciable expenditures or an-

nual costs: mainly labor costs.Same as ECIM, except pro-fessional labor

(e.g., permits).Standard value.

The Agency welcomes suggestions forother cost indices that the BEN modelshould offer. Commenters' suggestionsshould not merely list various indices.but also provide a sufficient rationalefor the inclusion of each index.including its components, relevance topollution control costs, and bothhistorical and future availability .

For projected future inflation. theAgency proposes that the model use asimple, uniform rate. The model willprovide a separate standard value foreach cost index. (As explained above.users will be able to override the entireinflation adjustments for the capitalinvestment and one-timenondepreciable expenditures as of theinitial recurring cycle start date. as wellas any compliance dates that areexpected to occur in the near future.)The model will also use a separateprojected inflation rate for additionalrecurring cycles, and allow the user tospecify an alternative value for this rate.

The Agency proposes using aprojected value for each index. (This isa more sophisticated approach than theDOS version of BEN.) However, becausepublished forecasts are generally notavailable for specialized cost indices,we propose to start with an average ofpublished forecasts for the ConsumerPrice Index (CPl) because such forecastsare widely available. We would thenmultiply the average CPI projection bythe ratio of the CPIs to the relevant costindex's respective ten-year historicalaverages. Each of the alternative indiceswould have its own default futureinflation rate. calculated in a similarmanner. (Note that the user would notperform this calculation, nor would themodel; instead, the Agency wouldperform the calculations each year toupdate the standard value, and the

calculating a projected future inflationrate.

The standard operation of the modelwould still entail absolutely no inputwhatsoever from the usel[" who issatisfied with BEN's default values. Theother screens for additioJ1al data entryand modification would appear only tothose users who selected more advancedoptions. EPA welcomes <:omment fromBEN users on whether the proposedchanges will enhance the model'saccuracy, flexibility, and adaptability.

7. Discount Rate

a. Background. Once the compliancecost estimates are adjusted for inflation,and then for taxation, the! BEN modelmust adjust these after-tax cash flows toa common present value as of the dateof noncompliance. The differencebetween the two present values (of theon-time and delay scenarios) is theinitial economic benefit ~IS of thenoncompliance date. BEN thencompounds this initial e<:onomic benefitforward from the noncompliance date tothe penalty payment date to determinethe final economic benefit. A single rateto adjust all present valuE~s bothbackward and forward in time.14 Thissection addresses only the calculation ofBEN's standard value for this singlediscount rate, which is currently basedupon a ten-year after-tax 'Neightedaverage cost of capital (W ACC), with theinputs representing averages across allindustries.15

14 Thc Agcncy rccclvcd many (:ommcnts on thcusc of a slnglc ratc as opposcd to two dllfcrcnt ratcs.Thc Notlcc addrcsscs this Issuc 1[1 scctlon B(8).DIscounting Mcthodology .

'5Thc discount ratc standard valuc for not-for-profits Is bascd upon municipal bond yiclds.avcragcd across thc four Invcstm,~nt-quality ratingsof Aaa, Aa. A. and Baa. Thc only commcnt EPArccclvcd on thc not-for-profit dIscount ratc was a

The W ACC is the average of the costof debt and the cost of equity , weightedby the portions of debt and equity outof total financing. The WACC is firstcalculated for each year, and then theseannual values are averaged over themost recent ten-year period. The (after-tax) cost of debt is the.average return oncorporate bonds averaged across allindustries, and then multiplied by oneminus the average corporate tax rate(state and federal combined). The cost ofequity is based upon the widely usedCapital Asset Pricing Model (CAPM),and is equal to a risk-free ratecomponent plus the expected equityrisk premium (Le., the difference of thearithmetic means of stock marketreturns and risk-free rates since 1926).

b. Proposed Changes. We propose thatthe BEN model automatically tailor thestandard value discount rate to theperiod from the noncompliance date tothe penalty payment date.16 Thestandard value will reference a look-uptable, averaging the annual values overthe relevant years. Each individualannual calculation will be similar to thestandard value's current methodology,as displayed in Exhibit 4- 7 of the BENUser's Manual.17

thc avcragc W ACC for prlvatcly owncd wastcwatcrtrcatmcnt plants). Howcvcr, bccausc thc Agcncy Istrying to calculatc thc cconomlc bcncfit that thcmunicipality and Its rcsldcnts or ratc paycrs havcacJually galncd, thc Agcncy prcfcrs to use ancstlmatlon of thc municipal govcrnmcnt'sopportunity cost of financing proJccts, which Iscqual to thc Intcrcst ratc on thc municipality'sbonds, ThIs dcbt ratc-whlch forms thc basis for thcBEN modcl's not-for-profit standard valuc dIscountratc-wl11 almost always bc substantially lowcrthan thc prlvatc-sccJor-cquJvalcnt cost of capital.

16 Although thc following discussion focuses on

thc for-profit dIscount ratc, thc taIloring of thcdiscount ratc to thc rclcvant tlmc period would alsoapply to not-for-proflt cases.

17WC proposc rwo minor chanRCs to thc annual

Federal Register/Vol. 64. No.117 /Friday. June 18. 1999/Notices 32957

The model will also performadditional customizing automatically, orwith minimal input from the user.Because we have already proposed thatBEN have an input for the violator'sstate (thereby customizing the tax ratefor compliance costs), we propose usingthat same customized tax rate for theafter-tax debt cost component of theWACC. The model will even select theindividual tax rate if the company is notorganized as a C-corporation (as profitsand losses from S-corporations,partnerships, and sole proprietorshipsflow through the owners' individual taxreturns).

The standard operation of the modelwould still entail absolutely no inputwhatsoever from the user who issatisfied with BEN's default values. Theother screens for additional data entryand modification would appear only tothose users who selected such advancedoptions. EP A welcomes comment fromBEN users on how the proposed changeswill enhance the model's accuracy,flexibility , and adaptability .

8. Discounting Methodology

a. Background, As stated in theprevious section, once the compliancecost estimates are adjusted for inflation,and then for taxation, the BEN modelmust adjust these after-tax cash flows toa common present value as of thenoncompliance date. The differencebetween the two present values (of theon-time and delay scenarios) is theinitial economic benefit as of thenoncompliance date. BEN thencompounds this initial economic benefitforward from the noncompliance date tothe penalty payment date in order todetermine the final economic benefit.BEN uses a single interest rate to adjustall present values both backward andforward in time. Because BEN uses thesame rate for going both backward andforward, this calculation iscomputationally equivalent to bringingall cash flows-both past and future-

cach year's calculation wIll cmploy Ihc figurc Ihalwas aclually avallablc In lhal ycar ,

Second, wc proposc allcrlng Ihc horizon for Ihccqully risk prcmlum, Thc slandard valuc currenllycomblncs Ihc 10ng-Icrm Treasury sccurlly ralc wllhIhc long-horlzon cqully risk prcmlum, Ihc lallcrbclng cquallo Ihc diffcrcncc of Ihc arllhmctlcmcans of slack markcl rclurns and Ihccorrespondlng-malurlly rlsk-frcc ralc. Bccausc IhcW ACC calculation comblncs Ihc cqully riskpremium wllh Ihc rlsk-frec ralc of Ihc samcmalurlly Ihalls used Initially 10 calculalc Ihcpremium. Ihc Issuc of which horizon premium 10usc Is largely mool. (Thc cxpeclcd dcviatlons of Ihcrcsultlng WACC wIll Ihcrcby bc bolh small andnOnsyslcmallc,) Wc proposc 10 swllch 10 IhcInlcrmcdialc-horlzon risk prcmlum (and Ihccorresponding rlsk-frec ralc) as aslmplccompromlsc bclwccn Ihc long-horlzon and shorl-horizon,

'.Onc commcntcr agrced with compounding thcInitial bencfit forward at thc W A~:;C ratc, but onlyto thc compllancc datc, aftcr whl,ch a lowcr .

compoundIng ratc would be approprlatc. Hisratlonalc was that a company thcn must sct asldcspcclficfunds to pay a pcnalty; t!1crcforc. thccconomlc bencfit cstlmatc should be compoundedclthcr at thc actual Intcrest ratc on an escrow

accounl or allhe company's debl rale (whichrcfleclS Ils risk of going oul of business, resultingin an inabIlity 10 pay a penally),

directly to the penalty paIYment date atthe WACC rate.

The comments fell into threecategories. Some thought the W ACC ratewas too high and especially that thecompounding part of the calculationshould be based on a risk-free rate.Some agreed with EPA's approach.Others commented that E~PA's discountrate was too low and sholllld instead bebased on financing pollultion controlinvestments with 100% E~uity.

Several commenters cl;~imed thatBEN's use of a W ACC-b~;ed rate in allparts of the benefit calculation yieldedinappropriately high economic benefitcalculations. They claimed that futurecash flows represent uncertainty andrisk, while past cash flows are known,certain and riskless. Thus, theygenerally agreed that dis(:ounting futurecash flows should be done with aWACC-based rate or some other risk-freerate, but felt that compounding pastcash flows forward should be done witha riskless rate. They cited selectedacademic literature from economic andfinancial analysis of commercialdamages in torts cases, proposing twoalternative methodologies:

.(A) Use BEN's intermediate figure for theeconomic benefit as of the noncompliancedate (i.e" bring all cash flow:5, irrespective ofwhen they occur, back to the, noncompliancedate at a rate reflecting risk), but then bringthis intermediate economic benefit figureforward to the penalty payment date at a risk-free rate-

.(B) From the perspective of the penaltypayment date, bring all future cash flowsback in time at a rate reflecting risk (e,g" theWACC) and bring all past ca:;h flows forwardin time at a risk-free rate (e.g., the after-taxreturn on short-term U.S. Treasurysecurities).

Both of these methodologies producesignificantly lower econolmic benefitestimates than the BEN model. A rangefor the magnitude of the ~ypicaldifferences is difficult to providebecause of the many different types ofcases, but alternative B will oftenproduce negative economic benefitestimates for the capital investmentportion of the compliance, scenario.

The second group of commentersagreed that the WACC was appropriatefor discounting all future costs back tothe noncompliance date, and thencompounding the initial E!conomicbenefit forward to the penlalty paymentdate.IR The third group commented that

BEN's use of the W ACC is incorrect andleads to economic benefit estimates thatare too low. These commenters insteadfavored a company's higher cost ofequity capital, rather than the weightedaverage of the relatively higher-costequity capital and the relatively lower-cost debt capital. Their rationale wasthat excess returns flow to a company'sequity holders, not to a mixture of itsdebt and equity owners.

b. Proposed Changes. Although boththe conceptual bases and results of thetwo risk-free rate methodologiescontradict each other, they share asimilar rationale: cash flows that haveyet to occur in the future are uncertainand risky, whereas cash flows that haveoccurred in the past are certain andriskless. These methodologies, therefore,apply to future cash flows a rate thatincludes a risk premium (e.g., acompany's WACC or some other risk-adjusted rate) and apply to past cashflows a risk-free rate (e.g., the return onshort-term Treasury securities). Asdiscussed below, the Agency believesthat even if this approach were justifiedin the context of calculating damagesowed to plaintiffs in certain types of tortcases, it is entirely inappropriate ineconomic benefit calculations forenforcement actions. The goal in: the tortdamages approach is to make theplaintiff whole by compensating him forhis losses. The fundamentally differentgoal in enforcement actions is to deterfuture violations by both the defendantwe are suing and by other similarsituated defendants.

By contrast, the third approach tocalculating interest rates advocates theuse of an equity-based discount rate.This approach is more reasonable thanthe risk-free rate alternatives. Not onlyis it more persuasive, but there havebeen several court decisions thatadopted an equity-based discount rateand rejected a risk free rate approach.Nevertheless, the Agency still believesthat using the WACC throughout allaspects of the calculation is the mostreasonable and preferable approach.

(i) Risk-Free Rate Forward:Theoretical Issues. The goal in a tortaction is to make the plaintiff "whole."The settlement or court determinationultimately should place the plaintiff inthe same financial position as if thewrong had not occurred. The first stepin such a case is to calculate thenecessary compensation at the time ofthe actual wrong. The next step is toadjust the compensation calculated atthe time of the actual wrong to the time

32958 Federal Register/Vol. 64. No. 117/Friday. June 18. 1999/Notices

at which such compensation is to bemade. Certain authors writing about tortdamages have advocated bringing suchcompensation forward at a risk-freerate.19 Otherwise, the plaintiff would be..having-its-cake-and-eating-it-too": theinitial compensation has essentiallybeen invested at the time of the actualwrong at a rate reflecting risk taking, yetthe plaintiff is now granted thecompensation which grew at that rate,without ever bearing the accompanyingrisk. (In contrast, the regular investorwould have made the investment andthen had to stand by nervously as theinvestment's value either grew or fell).Some commenters thought BEN shouldemploy such a risk-free rate approach.

While the appropriate focus in a tortdamage action is on compensating thevictim (i.e., plaintift), this is notappropriate in an enforcement action.The enforcement agency is not suing fordamages it has suffered. The goal is notto make the plaintiff whole (Le., torestore to it the amount by which it wasdamaged) .The goal of the economicportion of a civil penalty is to return thedefendant to the position it would havebeen in had it complied, and thusdisgorge from it the amount itwrongfully gained. If civil penalties,composed of the economic benefit andgravity components. effectively allowthe violator to gain an economicadvantage from its violations, othercompanies will see an advantage insimilar noncompliance. This is afundamentally different perspectivefrom a tort case, and demands afundamentally different view of

discounting.The appropriate discount rate for

economic benefit calculations is acompany's opportunity cost of capital,reflecting the financing costs forpollution control investments or thevalue of investment opportunitiesforegone because of pollution controlpurchases. The opportunity cost ofcapital is the incremental expected rateof return a company must earn to payback its lenders (Le., bond holders) andowners (Le., stockholders), which is theweighted-average cost of capital(WACC).

The risk-free rate methodologies useshort-term U.S. Treasury bill rates thatare unrelated to a company'sopportunity cost of capital. Only theTreasury of the United States ofAmerica is able to borrow at the U.S.

..No conscnsus cxlsts, howcvcr, and many othcrauthors havc advocatcd othcr approachcs. judgcs Intort cascs havc arrlvcd at ruJlngs that mandatc manydl!Tcrcnt ratcs, with many di!Tcrcnt valucs andrationalcs.

Treasury bill rate.20 Companies lack theadvantage of such low tlnancing rates.To finance additional projects, theymust either issue debt at higher interestrates, and/or issue equity, whichrequires returns of even higher rates.

Applying the risk-free rate to acompany's cash flows presumes anunattainably low borrolNing rate and aninsufficient return on investments.(With the exception of mutual funds, acompany whose main b,usiness wasinvesting in T -bills would not be inbusiness for very long.) The trueopportunity cost of capital for acompany far exceeds the T -bill rate. Therisk-free rate will thereforesystematically understate the economicbenefit of pollution controlnoncompliance. Penalties based solelyon economic benefit calculated with aT -bill rate would allow a defendant toretain a potentially substantial gain.Because of the precedent of this retainedgain, other regulated companies mightsee an economic advantage in similarnoncompliance, and the penalties basedon a risk-free rate approach will fail todeter potential violators;.

(ii) Risk-Free Rate Folward: PracticalImplications. Not only are thetheoretical underpinnings of the risk-free rate forward metholjologies flawed,but their practical implications are alsotroubling. Specifically, I:he use of therisk-free rate fails to achieve theoverriding goal of economic benefitrecapture: to make the violatorfinancially indifferent betweencompliance and noncompliance, whichin turn constitutes a critically importantelement of deterrence.21 An examplehelps to illustrate this point.

Suppose a company is decidingwhether to purchase pollution controlequipment this year (i.e., 1999), or towait until the same month in the nextyear (i.e., 2000). The company is notnecessarily contemplatil'1g a willfulviolation of the law-perhaps the law'sinterpretation is unclear, and thecompany would like to Irnow thefinancial consequences of notpurchasing the equipment, and thenlater being found to be innoncompliance. The company,therefore, wants to know how much

2oThIs Is a vcIY ravorablc ratc). bccausc orthc u.s.Trcasury's ovcr lwo-ccntulY dcrault-rrcc record. Itsability 10 crcatc moncy. and also thc statc tax-rrccstatus or Its dcbtlnstrumcnts.

21 Bccausc bcncflt rccapture by Itsclf mcrclymakcs thc vIolator Indlffcrcntl:clwccn compllanccand noncomp1lancc. only a totall pcnalty amountthat cxcccds thc cconomlc bcncflt (by IncorporatInga gravity componcnt) can achicvc actual dctcrrencc.Thcrerore, a civil pcnalty ShoUld always bc at lcastcqual 10 thc Cconomlc bcncflt calculatIon plus somcnon-trivIal gravIty Componcnt.

better or worse off it will be by delayingthe purchase one year.

The company performs three sets ofeconomic benefit calculations. First, itcalculates the economic benefit as of thepresent time (e.g., June 1999). This letsthe company know how much better offit will be by delaying the purchase (i.e.,until June 2000), In the absence of anypenalty .Second, it calculates theeconomic benefit as of one year later(i.e., June 2000, when it wouldotherwise purchase the equipment, andalso pay any penalty) , and thendiscounts the calculated economicbenefit back to the present (i.e., June1999). This lets the company know thepresent value of any economic benefitbased penalty that is calculated andpaid the following year In 2000. Third,it subtracts the second result from thefirst result to determine the net amountby which it is better or worse off (i.e.,the economic benefit of itsnoncompliance, minus the presentdiscounted value of the economic-benefit-based penalty it can expect topay In 2000) .

The first economic benefit calculationyields the same result regardless ofwhich economic benefit methodology isused, because all the cash flows occurIn the future.22 In this example, the onlycompliance measure is a one-timecapital Investment of $10 million.23 Thecompany calculates that it is financiallybetter off now In 1999 by $494,314 froma projected one-year compliance delay.

The company also needs to know howmuch better off it will be on net shouldthe enforcement agency assess a penaltyIn 2000 equal to the calculatedeconomic benefit from its delayedcompliance. Assuming that the agencyuses BEN, the economic benefit isbrought forward one year by an estimateof the company's WACC (In this case 10percent), so the economic-benefit-basedportion of the penalty the company willpay is $543,745.24 But because thecompany will pay the penalty a year In

22 Thc rcsults mIght bc slIghtly dlffcrcnt

dcpcndlng on what ..rtsk-adjustcd ratc.. thc rtsk-frccratc forward mcthodologlcs usc for thc futurc cashflows In thclr calculations. Dlffcrcnt practltloncrshavc used dlffcrcnt ..rlsk-adjustcd ratcs" Indlffcrcnt cases. Including thc samc WACC.bascddIscount ratc that thc BEN modcl uscs. Thcrcforc.for thc purposcs ofthc cxamplcs that follow. wcassumc that thc altcmatlvc mcthodologlcs also usethc WACC for future cash flows. If. Instcad, thcywcre to usc a dlffcrcnt ratc. thc cxact flgurcs for thcrcsults would be slIghtly dlffcrcnt .but thc ovcrallImplIcations would rcmaln thc samc.

23 Othcr Inputs Includc a 40-pcrccnt tax ratc. 2.2-pcrccnt Inflation ratc, and 10-pcrccnt discount ratc.

24 Bccausc thc tlmc betwccn thc noncompllanccdatc and thc pcnalty paymcnt Is only onc ycar. thccompounding takcs thc form of simply multiplyingthc InItial cconomlc bencfit by thc sum of onc plusthc discount/compound ratc (J.c.. $494,314 x (I +0.10) -$543.745).

the future, it must discount that amount will always be equal to the economic indifferent between compliance andback to the present. If it discounts the benefit the company calculates for itself noncompliance. The column in thepenalty at the same rate that BEN used (in this case, $494,314). The company exhibit below labeledto compound the penalty forward to the can therefore expect to have any "BEN"summarizes these calculations.penalty payment date, the present economic benefit disgorged from itself,discounted value of the future penalty which makes the company financially

Economic benefit AlternativeA

$494,314507,166461,060

I33,254

AlternativeB

BEN

1. Penalty Payment Date of 61111999 2a. Penalty Payment Date of 61112000 2b. Result 2a discounted back to 61111999 3. Net Result (i.e., 1-2b)

$494,314543.745

1494.31~

Perhaps, however, the enforcementagency uses one of the alternativemethodologies. Under alternative A, asdescribed in Section II B(8)(a), above,the initial economic benefit as of the

noncompliance date is calculated withBEN, but is then compounded forwardat the after-tax risk-free rate, In this case,

compounding the initial economicbenefit forward from 1999 to 2000 at anillustrative risk-free rate of 2.6 percentyields $507,166. The companydiscounts this future penalty back to thepresent (i.e., 1999) at its WACC, andarrives at $461,060.2s Because this isless than the current economic benefitof $494,314, the company realizes a netgain of $33,254. This approach fails tomake the company indifferent betweencompliance and noncompliance and, inthe absence of any additional gravity-based penalty components, thecompany will have an incentive to delay

compliance.If the enforcement agency instead

uses alternative B, as described inSection II B(8)(a), the economic benefitas expected to be calculated a year fromnow in 2000 is a negative $175,797.26

25 Evcn If thc company wcrc 10 dlscountthcfuturc pcnalty back at a ratc 10wCr than Its WACC.this ratc would still cxcccd thc rlsk-frec ratc thataltcmatlvc A uscs 10 compound thc CConomlcbcncfil forward. and thcrcforc thc dlscountcd futurcpcnalty would still cxcccd thc currently calculatcdcconomlc bcncfil.

2. A ncgatlvc CConomlc bcncfit result for thccapital Invcstmcnt portion of compllancc Is typicalfor altcmatlvc B. In many rcccnl cascs. practltloncrsImplcmcntlng this approach havc arrlvcd atncgatlvc cconomlc bcncfil results for dclaycdcapital Invcstmcnls, dcspltc no changcs Intcchnologlcal or lcgal rcqulrcmcnls ovcr timcbclwccn thc datcs of noncompllancc andcompllancc. Applying thc combination of ancxtrcmcly loW rlsk-frcc ratc for past cash floWS anda hlghcr rlsk-adjustcd ratc for future cash floWS 10dclaycd capital Invcstmcnls (with thclr past cashoutfloWS for thc actual Invcstmcnl and thclr futurccash InfloWS for dcprcclatlon tax shlclds) canproducc abcrranl results that dcfy commonscnsc.Thcsc pcrvcrsc ncgatlvc cconomlc bcncfit cstlmatcsdo not rcflcct any rcal CConomlc 10SSCS bccausc ofthc cxpcndlturc dclay. Furthcrmorc, cvcn If thcparamctcrs In this cxamplc wcrc dlffcrcnl, thccconomlc bcncfit-although pcrhaps posltlvc-would still bc much smallcr than cvcn undcraltcmatlvc A, and would similarly fall 10 makc thc

2"ShoUld Ihe escrowcd amounl exceed Ihe bcnefilComponenl, Ihen Ihe lnlercsl on Ihe amounllhalexcccded Ihe economic bcnefil Componenl wouldaccrue 10 Ihe vlolalor.

The company realizes tllat anenforcement agency using this approachwill conclude a year from now in 2000that no economic benefit has beengained, and therefore the economicbenefit-based portion of the penalty willbe zero. But the companly currentlycalculates its economic benefit in 1999to be a positive $494,314. At the time ofinitial noncompliance ill 1999, thecompany concludes that delaying theequipment purchase will result in aneconomic gain, but that it will neverhave to pay any economic-benefit-basedportion of the penalty. Once again, arisk-free approach fails to make thecompany indifferent betweencompliance and noncompliance and,therefore, in the abSenCE! of anyadditional gravity-based penaltycomponents, the compalrly will have asignificant incentive to delay

compliance.(iii) Equity Rate Approach. By

contrast, an approach that employs acompany's equity rate focuses solely onthe company's equity ovmers, asopposed to its other stakeholders (whohold the company's deb1:), Because thecompany's cost of equit)' capital willalways exceed or at least be equal to acompany's WACC, the e,c:onomic benefitestimate-with all other assumptionsheld constant-will be higher or at leastthe same.27 While the A!:ency believesthat a reasonable argumE!nt supports theuse of equity , we nevertheless prefer the

WACC, because it better representsfirms' total capital structures and theirown typical business de(;ision-making

practices.(iv) Proposed Change: Use WACC,

Except for a Possible Early PenaltyPayment. For the above reasons, theAgency believes that the current basic

company Indifferent between complIance andnoncomplIance,

27 The WACC wIll equal the CJ:jultycost ofcapltalIf the company has no long-term debt, Note alsothat an economic benefit calcuJ.1Ilon using theequity rate should first net out any cash flowsattributable to debt financing. a!; the focus In sucha calculation Is on the rcturns to the company's

equity holders only.

discounting methodology is appropriateand should not be changed, with oneexception: If a company pays to theUnited States the benefit portion of thepenalty while the case is still inlitigation, EPA will cut off thecompounding rate at the date ofpayment. Thus, there will no longer beany dispute in that case over theappropriate compounding rate from thedate of payment into the future. Inappropriate cases, the United States mayconsider allowing the violator to escrowfunds for the economic benefit portionof the penalty demand (whether at thecompliance date or at any other time).Then, when EP A runs the BEN model,it will use the date the funds wereescrowed as the penalty payment date.The violator would have to furnishproof that it established the escrowaccount, as well as placed on theaccount appropriate restrictions (e.g.. allaccrued interest would go to theAgency).28 In cases where the periodfrom the initial noncompliance date tothe escrow date is short, this willeliminate much of the deviation inresults between the competingeconomic benefit methodologies. Wepropose that BEN incorporate thisguidance into its on-line help systemand user's manual.

C. Improving the BEN Model's UserFrJend1Jness

EPA understands that some users findthe BEN model difficult to use. Whilethat has not been EP A's experience, theAgency expressed its interest in learningof any difficulties users encounteredwhen running the model. The Agencyparticularly requested suggestions forrealistic alternatives that wouldpreserve the model's degree ofprecision.

32960 Federal 64. No.117 / Friday. June 18. 1999/ Notices

I. Is BEN Too Complex To Operate?

a. Background. EPA invitedcomments on whether any aspect ofBEN's operation or the BEN User'sManual is too complex. Although theAgency designed BEN to bestraightforward and easy to use, wewelcomed any suggestions to make themodel and manual easier to use withoutcompromising BEN's degree ofprecision.

b. Proposed Changes. Manycommenters thought that although theBEN model is generally easy to use,certain aspects of its operation arecumbersome. These concerns largelystem from the model's originalprogramming for a mainframe computerenvironment and its current existence inthe DOS operating environment.Because nearly all computer users arenow accustomed to the WindowsTMoperating environment, the Agencyproposes to reprogram the model forWindowsTM. The switch to theWindowsTM operating environmentshould make basic data entry and runsmuch easier to perform, as well as allowthe addition of various advancedfeatures without burdening the userwith additional complexity.

Furthermore, EPA has nowestablished a toll-free helpline forfederal, state, and local governmentenforCement staff who need additionalassistance in using the BEN model. Thehelpline provides federal, state, andlocal environmental enforcementagencies with advice regarding financialissues that impact enforcement cases.The main types of inquiries EPA isaddressing with this helpline are:

.The calculation of a violator's economicbenefit from noncompliance;

.The evaluation of a violator's claim thatit cannot afford to comply, clean up, or paya civil penalty, and the application of thethree computer models-ABEL, INDIPA Y,and MUNIP A Y 29-that address these issues;and

.The calculation of the after-tax netpresent value of a supplementalenvironmental project, and the application ofthe computer model-PROjECT JO-thataddresses this issue.Callers can obtain copies of the BENmodel and BEN User's Manual, copiesof the previously mentioned other keymodels, as well as relevant policies andguidance documents, In addition,

2. ABEL, INDIP A Y and MUNIP A Y cvaluatcInab111ty to pay claIms from for-proflt cntltlcs,IndIviduals and munlclpa!ltlcs, rcspcctlvcly,

30 As most supplcmcntal cnvironmcntal projccts(SEP's) arc taxdcductlblc and complctcd long aftcrthc cascs arc scttlcd, any statcd SEP cost Is usuallyfar abovc thc actual cost to thc violator, PROJECTdctcrmlncs a violator's actual out-of-pockct costs foraSEP,

callers can obtain advice on how toaccess training courses on the modelsand related subjects. Inquiries regardingthe interpretation of federal statutes andEPA policies will be referred to the EPA,as will inquiries from non-governmentalemployees.

The toll-free helpline phone numberis 888-ECONSPT (326-6778), and isstaffed by a contractor, IndustrialEconomics, Incorporated. located inCambridge. Massachusetts. The helplineis in operation from 8:00 AM to 6:00 PMEastern time and will accept voice mailmessages when it is not in operation. Inaddition. the contractor is providing acompanion e-mail address:benabel@indecon.com. When requestinghelp, enforcement staff should identifythe government entity for which theyare working.

2. Is the Information BEN NeedsDifficult or Expensive To Obtain?

a. Background. One of the mainbreakthroughs BEN achieved over itspredecessor model was its streamliningof the data needed to operate the model.While the model requires a minimum ofseven and a maximum of only eighteenpieces of data, some users apparentlyfeel the data is difficult to obtain. Thishas not been EP A's experience, as most(if not all) of the required data inputsare based on facts that are already orshould be known to the litigation teamas the data are important to other partsof the settlement. Nevertheless. theAgency welcomed any suggestions onhow to make this data easier to obtainas long as we can still preserve themodel's degree of precision.

b. Proposed Changes.-The Agencyreceived a wide range of responses onthis issue. Most users thought thenecessary data was easy to obtain;others thought it was prohibitivelydifficult to obtain. EPA did not receiveany specific suggestions on how tostreamline the model's datarequirements even further. The Agencydid receive suggestions that the BENmodel incorporate some basic, genericcompliance data.

The Agency is in the process ofdeveloping a computerized data base forRCRA compliance costs, based on thecurrent RCRA compliance costhandbook. This data base should enablethe user to look up the appropriateRCRA compliance costs easily, and thenuse them in the BEN model to calculatean economic benefit figure. Althoughthis database will not be a substitute forcase-specific data, it will at leastprovide a starting point and areasonably accurate estimate when aviolator refuses to provide any detailedcost information, The Agency welcomes

comment on which statutes wouldbenefit the most from similar databases,and what specific compliancecomponents most often need costestimates.

Also, as noted at end of Section II C(1) (b), above, EPA has established atoll-free helpline to provide assistanceto government enforcement personnelregarding financial economics issues inenvironmental enforcement cases.Helpline staff can provide suggestionson how to obtain the necessary data torun the BEN model.

ill. Response to Comments

A. Broad Economic Benefit RecaptureIssues

1. Alternatives to BENComment: One commenter stated that

the BEN result should be adjusted forthe violator's probability of detectionand prosecution.

Response: The commenter'ssuggestion that the penalty should bemultiplied by the inverse of the chanceof detection and prosecution fmds solidsupport in the literature on deterrenceand economics. In brief, the theoryunderlying the comment is that areasonable economic actor will weighits willingness to violate against the sizeof the penalty that will be assessed,multiplied by the inverse chance ofgetting caught. For instance, ifpreventing a violation would cost aperson $100 , and the penalty that wouldbe assessed if the person is prosecutedis $200, then the person will elect toviolate, all other things being equal,unless the chance of getting caught is atleast 50%. Nonetheless, despite thevalidity of the commenter's premise, thecomment is beyond the scope of thecurrent public notice. The Agency hasasked for comments only on the methodfor calculating economic benefit, not onthe broader deterrent effect of penaltiesgenerally.

Comment: One commenter thoughtBEN understates the economic benefit ofnoncompliance because the modeldefines benefit as the income earnedfrom investing the funds that otherwisewould have been used to paycompliance costs. The real economicbenefit, according to the commenter, isthe producer's surplus obtained duringthe noncompliance period. Thecommenter proposed that EP A obtainestimates of how people value pollutionreductions to estimate a demand curvefrom which to determine the supply-demand framework facing the violator.

Response: This commentmisunderstands the Agency's task,which is to calculate the economicbenefit that an individual firm has

32961Federal Register/Vol. 64. No.117 /Friday, June 18, 1999/Notices

gained (whether from mere delay ofcompliance cO$ts or larger issues ofmarket share gains), not the benefit thesociety gains from pollution levelchanges. The commenter might also beconfusing the economic benefit to theviolator (which the Agency is trying tomeasure) with the monetized value ofenvironmental damages that result fromnoncompliance (which in this contextthe Agency is not trying to measure).

2. Illegal Competitive AdvantageComment: One commenter

maintained that if EP A decides topursue illegal competitive advantage(that is, focusing on issues such asillegal profits or market share), then itmust establish the appropriate analytictools that conform to both mainstreamfinancial and economic theory(considering items such as price effects,elasticities, and economies of scale) ,while keeping BEN relatively user-friendly.

Response: The Agency generallyagrees with these sentiments.Nevertheless. keeping BEN relativelyuser friendly is a nonissue as the modelcannot be modified to calculate a benefitbased upon illegal competitiveadvantage.

Comment: Several commentersthought that revenues from the sale ofprohibited products were toocomplicated to include in the BENmodel.

Response: The Agency believes thatthe concept of capturing the revenues orprofits from the sale of prohibitedproducts is relatively uncomplicated.Nevertheless. the Agency agrees that itcould not modify the BEN model toperform this calculation and remainsufficiently user-friendly for itsintended audience. Therefore. theAgency is proposing guidance toaddress this question as well as theother illegal competitive advantagequestions. In addition, the Agency isproposing adding some questions to theBEN model to alert users to these issues.

Comment: One commenter stated thatif the prohibited product is the onlyproduct produced by a company. thenthe after-tax net profit is the bestmeasure of the economic benefit ofnoncompliance. If the prohibitedproduct is one of several produced, thenone should allocate the costs andrevenues among the products todetermine the profit per product. In thiscase, the commenter concluded, theafter-tax profit on only those productsthat are prohibited should be includedin the economic benefit ofnoncompliance.

Response: The Agency agrees that onefactor which it should consider is

whether the company is a single-product company or a multi-productcompany in recapturing any benefitfrom producing a prohibited product.However, a clear distinction does notalways exist between products, productlines, or even companies and divisionswithin corporations. Where possible insuch cases, the analyst may have toevaluate several similar products andmake a reasonable judgment regardingthe per-unit or per-division after-taxprofits that were unlawfully gained.

Comment: One commenter thoughtthat to calculate the benefit a violatorgains from selling illegal products, oneshould calculate the net profit gained bysales of that product, augmented byinterest and discounted over time.According to this commenter, net profitequals gross profit less the proportion ofgross expenses and overhead attributedto sales of that product, which BEN canalready calculate.

Response: The Agency is in agreementthat this is a conceptually valid methodfor calculating the economic benefitfrom the sale of an illegal product. Butthe correct allocation of incrementaloverhead to a specific product is adifficult task, and one for which theBEN model is irrelevant.

Comment: Several commentersthought that the benefit ofnoncompliance in cases in which lossesare reported in the first year of thebusiness's operation is too complicatedfor the BEN model to address. Anothercommenter thought that the benefit insuch cases equals the future tax benefitreceived from these net operating losses.However, because the business maychoose not to apply these losses forsome time, it is difficult to calculate.

Response: The Agency agrees that theBEN model is unable to address thesituation in which start-up costs lead toinitial losses, even though future profitsmay be significant.

Comment: One commenter thoughtanother kind of benefit that EPA doesnot recognize is "advantage of risk,"which is the benefit a company gains byputting off expenses in the hopes thatfuture events will render the expensesunnecessary .

Response: EPA already addresses thisadvantage: the economic benefitcalculation can reflect whether eventsafter the noncompliance date (NCD)have rendered the expensesunnecessary .In such a situation, it isnecessary to analyze the expenses thecompany has not merely delayed, butinstead has avoided entirely (whichincreases the resulting benefit). Thecurrent BEN model requires an off-linecalculation to arrive at the correct result,although the revised BEN model may be

able to add flexibility to perform sucha calculation internally.

Comment: Several commentersthought that the issue of competitiveadvantage cannot be adequatelycalculated in terms of an economicbenefit penalty. For example, oneperson noted that a given market edgemay grow over the years, or may be thedeciding factor determining whether theviolator could stay in business, makingit difficult to calculate a benefit figure.Others noted that BEN is inapplicable tocases involving illegal market sharegains from violating concentrationlimits or cap limits in permits. Anothersuggested that EPA should develop aprotocol or give more guidance forillegal competitive advantage cases,including source-specific factorsagencies could use to calculate illegalprofits or market share gained.

Response: The Agency agrees thatthere are a number of complex factors toconsider in many analyses of illegalcompetitive advantage. The Agencyplans to issue guidance that will aidanalysts in such situations.

Comment: One commenter noted thatEP A should develop a punitive penaltyto discourage violators from achieving acompetitive advantage, instead of tryingto determine the economic benefit fromcompetitive advantage. Similarly, oneperson thought that the profit associatedwith illegal competitive advantageshould be a non-negotiable portion ofthe gravity component of a penalty.Another person thought that whenillegal competitive advantage has beenproven, companies should befinancially punished to a point at whichthey are worse off (not equal to) theirindustrial counterparts.

Response: The total penalty comprisestwo components: economic benefit andthe gravity (of the violation). Therecapture of economic benefit isdesigned to place all firms on a "levelplaying field" so that no firm canbenefit by avoiding or delaying thenecessary compliance expenditure.'). It isnot punitive in nature, but rather is "no-fault." Competitive advantage is acomponent of economic benefit, and,therefore, should be analyzed in a "no-fault" framework. But the presence ofcompetitive advantage could indicatethe existence of certain other factors(e.g., recalcitrance) that can enter intothe gravity calculation. Once the fulleconomic benefit is recaptured, theAgency then imposes a significantgravity component to ensure that theviolator will be worse off than itscompetitors.

Comment: A few commenters assertedthat the competitive advantage gainedby delaying or avoiding compliance

costs does not exist after collecting apenalty equal to the BEN-calculatedeconomic benefit. For example, thedisadvantages of "predatory"underpricing by a company of itsproducts may outweigh the temporarilyenhanced market share. Therefore,pursuing illegal competitive advantagewould be a form of double recovery.Another commenter stated that "lostprofits" and "illegal competitiveadvantage" measure the same thing (i.e..the economic benefit fromnoncompliance), and that EPA is notauthorized to collect both.

Response: The apparent disagreementwould again appear to stem fromwording issues. EP A does not intend to"double count" economic benefit, butinstead seeks different conceptual termsto approach economic benefitcalculations in different situations. Asstated previously, EPA's intention is todetermine fairly what economic benefitis, and then recapture it as part of anoverall penalty , including a significantgravity component refiecting theseriousness of the violation. Alternativeapproaches such as calculating illegalcompetitive advantage are meant to addflexibility and are not necessarilyadditive. Nevertheless, should EPAdetermine that it needs to consider bothtypes of economic benefit in a particularcase, it will do so. Predatory pricingmay sometimes be counterproductive,but in certain situations the enhancedmarket share may constitute an additionto the economic benefit.

Comment: One commenter stated thatany marginally increased deterrenteffect from trying to capture any illegalcompetitive advantage would be morethan offset by the complications andcontroversy involved in performingsuch a calculation. Similarly, somecommenters asserted that becauseevidence suggests that the BEN model ismeeting its goal of deterringnoncompliance, adding newcomplications to the model is notjustified. Others warned that addinganother dimension of economic benefitto measure would make BEN lessattractive for states to use, decreasingthe usage of BEN in even simpler cases.

Response: Measuring illegalcompetitive advantage may addcomplexity to the economic benefitcalculation. In some cases it may beworth dealing with the additionalcomplexity if there is only a smallincrease in economic benefit. In othercases, however, the presence ofsignIficant illegal competitive advantagewill cause the BEN model to miss mostof the economic benefit, and thereforethe additional efforts are necessary .

Comment: One commenter contendedthat EPA's "illegal competitiveadvantage" proposal is driven at least inpart by a desire to avoid any possiblereductions in fines resulting fromproposed changes to the BEN model..Response: EPA's goal since the

establishment of the benefit recapturerequirement has been to determineaccurately-within reason-theviolator's economic benefit ofnoncompliance from alll sources,including illegal competitive advantage.In pursuing that goal, EP A has neverreached its various decisions onmodifying the BEN model based onkeeping annual penalty assessments at acertain level. If that were the case, EP Awould never have chan,~ed its discountrate assumptions from the equity cost ofcapital to the weighted average cost ofcapital (WACC), which--all else beingequal-would lower penaltyassessments. With regard to illegalcompetitive advantage, EPA isconcerned that its penalty assessmentsare missing a major component ofeconomic benefit by ignoring illegalcompetitive advantage. Therefore, EPAis committed to calculating the benefitfrom illegal competitive advantage inappropriate cases regardless of whatother modifications are made to the BENmodel.

Comment: One commenter expressedthe view that all illegal (:ompetitiveadvantage situations cannot be groupedunder the heading of "illegalcompetitive advantage:' and noted thatremoving such an advantage is only onereason for the economic benefitcomponent of the penalty. Thecommenter further noted that a violatorcan receive an economic benefit evenwithout competitive ad~antage; i.e.,when all the firms in an industry aresimultaneously out of compliance.

Response: The Agency believes thatany apparent disagreement on this issuestems mainly from wording issues. TheAgency agrees that many different typesof economic benefit exist outside ofavoided and delayed pollution controlexpenditures, but uses the term "illegalcompetitive advantage" ;as a convenientcatch-all. The Agency al~;o agrees thateconomic benefit can exist even if allfirms in an industry are not incompliance.

B. The BEN Model's Calc:ulationMethodology

1. Discount Rate

Comment: Several commenters statedthat the discount rate for future cashflows and the compounding rate for pastcash flows (i.e., the rate at which theinitial economic benefit ;15 of the

noncompliance date (NCD) is broughtforward to the penalty payment date(PPD» should continue to be the same.One person noted that using a discountrate that is larger than the compoundingrate would underestimate economicbenefit. One commenter stated that thereason the weighted average cost ofcapital (W ACC) is the appropriate rateto use as the for-profit entity discountrate is that it represents the fairest andmost realistic rate available. Severalcommenters similarly stated that theWACC should be used for bothcompounding and discounting, if theEPA wants to ensure that companies donot profit from the additional fundsavailable through noncompliance, as theW ACC accurately reflects theopportunity return of alternativeinvestments.

Response: EPA agrees with thesepositions, as the W ACC is the minimumrate that one would expect companies toreturn to their investors in order forthose companies to continue to operatein their current lines of business.

Comment: Some of the commentersexpressed concern that the BEN modelis essentially flawed by using only onerate-the W ACC-for both discountingfuture cash flows (back to the NCD) andcompounding the initial economicbenefit (from the NCD to the PPD).These commenters contended that aproper calculation should use twodifferent rates.

Response: The Agency believes thatusing one rate for compounding anddiscounting cash flows is soundly basedin financial and economic theory .(SeeSection ll.B(8) above.) The use of onerate also maintains an internalconsistency within each cash flow thatusing two different rates could notachieve. For example, assume that a$100 after-tax cash flow was incurred ayear after NCD. These commenterswould advocate discounting the $100back to the NCD at a rate of, forexample, 10 percent, which would givethe cash flow a present value ofapproximately $91 as of the NCD. Butthe commenters would then compoundthe $91 forward to the PPD at a lowerrate of, for example. 4 percent. Theresulting cash flow would have apresent value of approximately $95 as ofone year after the NCD (as it is broughtforward to the PPD) .even though theactual cash flow as of that time wasreally $100. This result is clearlyinconsistent with reality and commonsense. (This is an entirely differentsituation than one in which the violatoris already in compliance and has eitherpaid the benefit portion to the UnitedStates or escrowed (at the discretion ofthe government) funds for the economic

32963Federal Register/Vol. 64. No.117 /Friday, June 18. 1999/Notices

benefit portion of the penalty demand.If the benefit portion is paid, then thebenefit portion will immediately ceaseaccruing any interest. In the escrowsituation, the economic benefit portionwill accrue interest at the escrow fund'sinterest rate, but all the interest willaccrue to the United States. In eithersituation, when EPA runs the BENmodel it should use the date the fundswere paid or escrowed as the penaltypayment date.)

Comment: Several commenters statedthat the compounding rate shouldaccount only for the "time value ofmoney," and that the after-tax risk-freerate is the correct rate to use. Theyfurther contended that since no risk isborne by shifting the net economicbenefit forward in time, BEN's use of thecompany's WACC is wrong because itreflects a risk premium. Anothercommenter similarly stated thatnoncompliance, while representing abenefit to the firm, is essentially a newproject deserving its own project-specific cost of capital, which is equalto the risk-free rate or the company'sdebt rate (which reflects its risk of goingout of business and hence its inabilityto pay a penalty) .

Response: The processof recapturingthe economic benefit of noncomplianceis not merely an exercise in movingdisembodied cash flows through time toaccount for the time value of money.Bringing cash flows forward in time(compounding) at a risk-free rate fails tocapture the reasonable benefit thecompany could earn from alternativeinternal or external investments. TheAgency believes that using a risk-freerate would fail to make the violatorindifferent to noncompliance.

Comment: One commenter stated thatusing the equity cost of capital todetermine the correct compounding ratelacks support within the mainstream ofmodern financial theory .Severalcommenters alternatively argued thatthe cost of equity was the best rate forbringing the economic benefit forwardin time, because excess funds availablefrom noncompliance have a very wideinvestment opportunity horizon that isbest reflected in the equity market rates.Another commenter stated that usingequity was preferable because it issimple, fair, easily calculated, and notas prone to a "battle of the experts" asis the WACC.

Response: The Agency believes thatthe use ofWACC best captures aviolator's benefit. Nevertheless, theAgency also believes that a reasonableargument supports the use of equity , asthe equity rate reflects the economicbenefit earned by the company's equityowners. The Agency disagrees that

using equity would significantlydiminish the contentiousnesssurrounding expert witness analysis innegotiation. If anything, it wouldprobably make it even greater.

Comment: Several commentersasserted that future cash flows shouldbe discounted at an after-tax risk-adjusted rate that is less than acompany's WACC, because capitalinvestment in pollution controlequipment usually involves a lowerdegree of risk than in other capitalinvestment projects.

Response: Because investments inpollution control equipment allow acompany to remain in business, they areessentially investments in the companyas a whole. Therefore, these types ofinvestments have the same degree ofrisk as other capital invp.stment projectsand are financed at the company'soverall cost of capital (i.e., the W ACC).

Comment: One commenter thoughtthe default discount rate is too generaland results in incorrect economicbenefit results. The commenter thoughtthat EPA should instead require a case-specific input for the discount rate.Another commenter thought that whiledefault values are sufficiently accuratefor most cases, BEN could be improvedby adding an option that allows the userinputting current and historical data tocalculate a discount rate specific to thetime period during whichnoncompliance occurred.

Response: The model's default rates(for the discount rate and certain otherinputs) allow enforcement staff withlittle knowledge of financial economicsto perform reasonably accurate analyses.This is one of BEN's significantimprovements upon its predecessor(CIVPEN), whose many required inputslimited its applicability and utility. Inthe vast majority of cases, the defaultrates do not differ significantly fromcase-specific inputs, and EPA is alwaysopen to good-faith efforts by a violatorto supply case-specific inputs.Furthermore, the revised BEN model forthe Windows operating environmentwill incorporate look-up data tables thatwill be able to provide more tailoreddefault rates without any input fromusers.

Comment: One commenter stated thatthe initial economic benefit should bebrought forward from NCD to thecompliance date (CD) at the WACC, andthen from the CD to the PPD at the debtcost of capital. Another commenterproposed a lower compounding ratebased on the violator's actual after-taxrate of return on funds in a dedicatedescrow account-ifthe violator hasactually set aside such funds for apenalty payment.

Response: The Agency fully agreeswith using the lower rate, but only if theviolator has actually escrowed suchfunds. Because such instances seem tobe extremely rare, the Agency does notbelieve the economic benefit shouldautomatically be brought forward fromthe compliance date at the lower rate.Instead, if a company escrows funds forthe economic benefit portion of thepenalty demand (whether at thecompliance date or at any other time) ,then when EPA runs the BEN model, itwill use the date the funds wereescrowed as the penalty payment date.Once the government approved of thearrangement, the violator would have tofurnish proof that it established theescrow account, as well as placed on theaccount appropriate restrictions (e.g., allaccrued interest would go to theAgency, except for any interest that isattributable to escrowed amounts inexcess of the benefit component) .Incases where the period from the initialnoncompliance date to the escrow dateis short, this approach will eliminatemuch of the deviation in resultsbetween the competing economicbenefit methodologies. We propose thatBEN incorporate this guidance into itson-line help system and user's manual.

Comment: One commenter made thepoint that choosing an appropriate"interest rate" was very important, andit was not clear from the FederalRegister notice that EPA was solicitingcomments specifically on this issue.

Response: This seems to be amisunderstanding caused by wordchoice, as the Agency's request forcomment on the "discount rate" issue isintended to encompass both the rateused to bring future cash flows back intime, and the "compounding" or"interest" rate used to go forward fromthe NCD to the PPD.

Comment: A few commenters statedthat the tort law literature suggests ratesfor bringing the initial economic benefitforward in time from the NCD to thePPD.

Response: The goal in a tort action isto make the plaintiff "whole." In a tortaction, the settlement or courtdetermination should place the plaintiffin the same position as if the "wrong"had not occurred. The first step in sucha case is to calculate the necessarycompensation at the time of the actualwrong. The next step is to adjust thecompensation calculated at the time ofthe actual wrong to the time at whichsuch compensation is to be made. Thisrequires compounding and the issuethen becomes: what is the appropriatecompounding rate to use to make theplaintiff "whole"? This is sometimes arisk-free rate or a corporate debt rate. On

Federal Register/Vol. 64, No. 117/Friday. June 18, 1999/Notices32964

the other hand, in an environmentalenforcement action the Agency is notsuing for damages it has suffered. Thegoal is not to make the plaintiff whole,restoring to it the amount by which itwas damaged. Rather, the goal is toreturn the defendant to the position itwould have been in had it complied,and thus disgorge from it the amount itwrongfully gained. This is afundamentally different perspectivefrom a tort case and demands afundamentally different view ofcompounding the initial economicbenefit forward to the penalty paymentdate. The literature from tort law is notrelevant.

Comment: Another commenter statedthat moving all cash flows directly tothe PPD-as opposed to first movingthem back to the NCD and then forwardto the PPD-was a way of avoidingmoving the same funds through time attwo different rates.

Response: This approach wouldeliminate the advantage of being able tosee the initial economic benefit as of theNCD, which can provide insight into theviolator's decision making. In anyevent,the BEN model itself uses the same rateto move cash flows back to the NCD andto move the initial economic benefitforward to the PPD. Adopting thisapproach would not change the endresult.

Comment: A commenter stated thatthe theoretically correct discountingmethod would be first to discount backto the NCD the expected cash flows forthe on-time compliance case (includingthe depreciation tax shields that occurafter the NCD, as well as the annualcosts that are avoided under thedelayed-compliance scenario), and thento compound these cash flows forwardto the PPD. The commenter furtherstated that cash flows for the delayedcompliance case should be discountedback to the compliance date (i.e., thebeginning date of that delayed-case setof cash flows) , before similarlycompounding them forward to the PPD.The difference between the two presentvalues as of the PPD would be theeconomic benefit.

Response: The Agency believes theBEN model's current approach istheoretically correct; i.e., the cash flowsfor both the on-time and delay scenariosshould be discounted back to the NCDto calculate the initial benefit as of theNCD, and then brought forward to thePPD. The calculation for the initialeconomic benefit as of the NCD can bethought of from the violator's viewpointat the time of the NCD, weighing theoptions of on-time compliance anddelayed compliance. Therefore, theviolator is looking forward at the two

Engineering Plant Cost Index (PCI) tothe exclusion of all other relevantinflation indices. A few commenterssimilarly thought that BEN could beimproved by establishing subroutines orlook-up tables that allow inputtingcurrent and historical inflation rate datato calculate a rate specific to the timeperiod during which noncomplianceoccurred.

Response: The Agency proposes toaddress these three concerns in therevised BEN model. First, the modelwill use a separate projected inflationrate for compliance costs occurring inthe future. Second, BEN will use look-up tables (without requiring any inputfrom the user) of cost indices for actualhistorical inflation. Third, users willhave the option to reference cost indicesother than the default PCI for cases inwhich compliance costs merit adifferent index.

3. Other Technical Aspects

Comment: One commenter thoughtBEN incorrectly changes the tax rates onJuly 1 instead of on January I. Thisindividual felt that if this is notchanged, the BEN manual shouldexplain why this convention is used.

Response: This is not in fact whatBEN does. The Agency believes that thecommenter's attempt to replicate BEN'scalculations may have been thrown offby BEN's use of the mid-point of eachyear to calculate the present value ofannual costs and depreciation taxshields (with each year starting atmonth of the NCD).

Comment: One person commentedthat BEN does not account forinvestment tax credits (ITCs) for capitalinvestments after 1985, even thoughITCs were still available for certaintypes of projects in 1986 and 1987.

Response: Given how rare thesecircumstances are, the Agency believesthat the BEN model's current warningabout this issue (and the consequentneed to consult a financial analyst forthe necessary off-line calculations) issufficient. Nevertheless, the Agencyproposes that the revised BEN modelnot accept noncompliance dates beforeJuly 1, 1987. This will ensure that BEN'somission of ITCs-and also low-interestfinancing (LIF)-is not leading toincorrect economic benefit estimates ininstances where users do not heed thecurrent model's current warning. EPAwill provide assistance in performingthe necessary calculations for cases thatinvolve noncompliance dates beforeJuly 1, 1987.

Comment: One person thought thatEPA had not adjusted the standardvalues in BEN for more than two years,

Federal Register/Vol. 64. No. 117/Friday. June 18. 1999/Notices 32965

31 Pcnaltlcs arc almost ncvcr dcductlblc, (fhc

only arca whcrc thcy arc deductlblc Is whcrc thc"pcnalty" Is compcnsatlng the govcmmcnt cntltyharmed by thc violation, but this Is rarcly an IssucIn thc bcncfit contcxt,)

even though they should be updated Response: The Agency disagrees. The number. Nevertheless, there is no legalregularly. appropriate noncompliance and obligation on the enforcement staff to do

Response: The Agency updates the compliance dates for an economic so.standard values every year and benefit analysis are usually the same as Comment: One person felt thatencourages users to download the most their legal counterparts. The because BEN, by design, can onlycurrent model version from its Internet noncompliance date is when the calculate an "estimate," it cannot createsite, at http:/ /es.epa.gov/oeca. violator should have incurred the costs values that should be used as hard and

Comment: One commenter stated that necessary for compliance, and the fast penalties.using BEN is inappropriate in instances compliance date is when the violator Response: Any calculation ofin which the violator achieves actually incurred such costs (typically, economic benefit is by necessity ancompliance by using a different when compliance is achieved). The estimate, as one can never determineproduction method or by simply significance of the violations is economic benefit as precisely as, say,submitting the proper paperwork. irrelevant: what matters is when the determining the money a bank robberSimilarly, another commenter noted company should have spent the money stole (i.e., a violator's financialthat BEN should have the flexibility to necessary for compliance, and when- statements have no line item forincorporate changes in technology by contrast-it actually did spend such "economic benefit from pollutionbetween the on-time and delayed money. There are some situations in control noncompliance.") The Agencycompliance scenarios, taking into which the noncompliance date may believes that BEN is sufficientlyaccount the lowest total cost of have different legal and economic accurate for its intended purpose.compliance as of the compliance date, meanings, such as when the first Furthermore, the economic benefit israther than the actual cost incurred. One instance of noncompliance occurred only one component of the penalty, tocommenter stated that changing prior to the statute of limitations cutoff. which is added the gravity component.pollution technologies are inconsistent For purposes of settlement, the Comment: One person suggested thatwith the recapture of economic benefit enforcement team may choose to use the a list of common environmentalbased solely on the BEN model statute of limitations date as the expenditures that are known to be tax-(regardless of the discount or inflation noncompliance date even though this deductible (e.g., engineering costs forrate used) .Another commenter stressed means the actual economic benefit that permits) would be helpful to those withthat more of the structure of the model has accrued to the violator may little or no knowledge of this area.and circumstances of the substantially exceed the economic Response: While the EP A does notnoncompliance scenario need to be benefit that the enforcement team give tax advice, the Agency understandstaken into account, which cannot be calculates. Nevertheless, EPA believes that virtually all environmentaladdressed by just changing input values. that a very strong argument can be and compli.ance expenditures are tax-

Response: If the violator eventually should be made for using the actual deductible, except for land.31c~~ into compliance using noncompliance date and not the statute Enforce~ent staff using BEN can alwaysstgnificantly dIfferent methods than of limitations date. Economic benefit is check With the IRS for confirmation ofwould have been required had it a factor for consideration in imposing a case-specific items. .complied on-time (i.e., if the civil penalty , and a trier of fact should Comment: One state agency thought Itcompliance components and costs for not be precluded from considering the could not use B~N to evaluate a .the on-time scenario differ from those violator's entire economic gain from its company th.at falled to install a piece offor the delay scenario by more than just violations. In these situations, the control equipment t~at was required forthe inflation rate), then the current BEN statute oflimitations would serve to onlya three-year period. (Themodel lacks the flexibility to analyze limit the maximum size of the civil equipment in this particular case was asuch a situation without assistance from penalty. conden~er .) Thus, the company ~voideda financial analyst, who would perform Comment: One person stated that the equipment. cost entirely, but if thethe necessary off-line calculations. The unless the penalty is paid over a long company had Incurred the cost, then theAgency hopes that the revised BEN period of time through several equipment would have commanded amodel for the WindowsTM operating installments, no additional charges resale value after three yea~. .environment will be able to offer such should accrue if the penalty is paid Response: I~ the va~t majOrity offlexibility without additional within 90 days of the date when the cases, the equipment 15 t.nstall~d andcomplexity. parties agree to the payment. The operated by the firm for Its entire useful

Comment: One commenter thought commenter also noted that the regulator life. BE!'J assumes ~ere is no resalethat BEN is not applicable to not-for- should act quickly to propose an v.alue smce the equipment has n.o usefulprofit entities. amount and immediately make the lIfe left and/or is not worth movmg to

Response: This commenter appears to violator aware of the possibility of a ne,:" site. In a ~emporary use situation,be misinformed, as BEN offers the user further compounding the penalty if the off-lme calculations are necessary. Athe option of selecting not-for-profit payment date is pushed back. user in this s~tuation should ~onsultstatus, which then sets the tax rate to Response: Once final settlement is Appendix B m the BEN User s Manualzero and the discount rate to the cost of reached, the payment date and the rate to determine the economic benefit frommunicipal debt. at which the penalty should be an avoided capital investment, and then

Comment: One commenter argued compounded if not paid on time are subtract from that the resale value (orthat minor infractions should not be debt collection issues and not relevant salvage value) of the condenser once itconsidered when determining the dates to the economic benefit analysis. In no longer would have been needed.of noncompliance and compliance- contrast, the payment date selected for Alternatively, the equipment's lease costonly significant violations should signal a benefit analysis is a relevant (if such a lease is feasible, and the datathe noncompliance date. Similarly, as consideration. Here, the Agency agreessoon as the facility has remedied the and encourages enforcement staff tovast majority of its violations, the period make violators aware early inof noncompliance should be considered negotiations that the later the penaltyover. payment date, the higher the benefit

32966 Federal Re,p;ister/Vol. 64, No.117 /Friday, June 18, 1999/Notices

is available) could be entered as an Comment: A few individuals thought control expenditures had ramificationsannual cost. that in cases where a violator that resulted in economic losses.

Comment: One commenter stated that ineffectively spends significant Response: The Agency recognizes thatBEN should stress "incremental" resources trying to achieve compliance, economic benefit can be negative--inoperating and maintenance (0 & M) or where funds are spent on other both theory and practice. Enforcementcosts (i.e., the additional costs necessary unprofitable ventures, the company's staff must scrutinize such claims veryfor compliance, over and above the costs economic benefit of noncompliance is carefully because violators generally dothe company would otherwise incur in smaller than that estimated by BEN. not avoid or delay pollution controlthe absence of compliance). This result occurs because BEN assumes expenditures when making such

Response: BEN already stresses this: that all resources not spent on achieving expenditures are in the violators' bestfor example, the "help" statement compliance are spent on alternative financial interests. Critical factors inoption that is available when entering profitable ventures. One commenter such a case may be the variousannual costs states, "The annual noted that not allowing credits for assumptions for hypotheticalexpense is an estimate of average annual unsuccessful compliance transactions, the postulated sequence ofincremental costs of operating or implementation is not an economic events, and the relevance of claimedmaintaining required environmental decision, but simply a bad policy environmental expenditures to thecontrol measures." decision by EPA. Similarly, one group statute at issue. Furthermore, there are

Comment: One group of commenters stated that denial of credit for failed limits as to what the Agency willstated that the analysis of the on-time precompliance expenditures "sends a consider in this regard.case m~st be based on the compliance clear message" that mitigation of Comment: A few commenters madealternatIve that would have been chosen pollution problems has no value. Some the point that BEN does not take intofrom a rational business decision commenters stated that a way should account different types of complianceper~pective, meaning the compliance exist to account for "good faith" yet credits, such as those for increasedoptIon with the lowest ex ante net unsuccessful attempts at compliance. In production, reduced operating costs, orpresent value of total cost to the contrast, other commenters argued that recycling in.the producti.on process.co':11pany. They further stated that no no adjustment or credit for costs of Response. The Agency s position isratIona~ business would. spend more compliance efforts that eventually fail that the economic benefit co~ponent ofthan thIS amount to achIeve compliance. should be given. One re;3Son given was the penalty should not be adjusted forAnother group argued that the economic that the entire regulated community any supplemental environmentalbenefit calculation should be adjusted faced a similar set of ch~illenges in projects that the violator elects tofor compliance costs that go beyond the achieving compliance by the required undertake, which can instead mitigateregulatory effort, an~ that companies date: another reason giv~~n was that the gravity portion of a pro.posed .should not be penalIzed for ineffective compliance methods should penalty .If the commenter IS referrmg toimplementing "Cadillac" remedies be treated as delaying tactics. the cost savings from compliancewhen trying to be good environmental Response: The current BEN User's expenditures, then BEN will acceptstewards. They commented that Manual (1993 edition) provides an negative entries for annual costs. Forcompanies will have no incentive to explanation of the Agency viewpoint, example, suppose a $1 million capitalmove "beyond compliance" if the BEN which is that credit may be given for investment will require annualmodel continues to calculate economic unsuccessful yet good-faith efforts to operation and maintenance costs ofbenefit based on the more expensive comply, as opposed to purported $100,000, but at the same time willcontrol option chosen by the company. compliance actions that in fact had entail annual savings of $200,000. In

Response: The Agency agrees that other motives. Nevertheless, the that case, the BEN user can enter $1regulatees will generally select the decision as to what constitutes such a million for the capital cost estimate, butcompliance optiO? that has ~he I.owest good-faith efforts can be made only on a negative $100,000 for the annual costcost. ~owev~r, thIS assumptIOn IS only a case-specific basis. estimate. The BEN User's Manuala startmg pomt and does not ~ways Comment: One commenter stated that provides further guidance and examples?old tru~: therefore, case-s.peclfic the EPA could provide more guidance for this issue.InformatIon must be exammed. on the subject of compliance credits. Comment: One commenter expressedRegulatees may choose more expensive The commenter suggested that to the idea that BEN could be adjusted tocompliance options because they will provide the correct incentives, EPA take into account market-basedulti~ately work better with existing should not grant credit unless pollution control strategies, such as aequI~ment and, conseq~ently, a. ' , compelling evidence' .was present that permit system or pollution taxes.seemmgly more expensIve outlay will the noncompliant firm had reason to Response: For atypical cases thatultimately entail lower total costs. believe that its effort and costs would involve noncompliance under anAlternatively, a lower quote from one actually bring it into compliance. incentive-based pollution controlvendo: may not be as reliable or realistic Another commenter echoed the system, a relatively simple computeras a hIgher quote from another vendor. sentiment that a case-by-case model such as BEN is generally notThe Agency generally agrees, determination is required. sufficient, and the assistance of anevertheless: that the compliance costs Response: The Agency will try to financial analyst is necessary .for the BEN mputs should not include elaborate more on its guidance in future Comment: Several commenters notedadditional costs expended in an effort to versions of the BEN User's Manual, but that the BEN model uses inputs that arego beyond minimum compliance. The the determination in eac]:1 case still a mixture of both ex ante (i.e., knownAgency also cautions enforcement staff requires the judgment of the only at the time of initialto scrutinize such claims closely as the enforcement staff. noncompliance) and ex post (i.e.,more expensive approach is often Comment: One commenter provided known only now that the calculation isundertaken because that was the reports from actual cases in which he being performed) .Several of theminimum that a rational business would had calculated a negative economic commenters stated that BEN should use~ake for the regulatory requirements at benefit, typically because the violator's an ex ante view for the cost inputs,Issue. avoidance and/or delay of pollution although others felt an ex post view was

32967Federal Register/Vo1. 64. No.117 /Friday. June 18. 1999/Notices

appropriate. Still another commentersaw little value in the ex ante/ex postdistinction, and felt that virtually allmodels use a combination of ex anteand ex post data.

Response: A pure ex ante approach isgenerally impractical because it wouldrequire ignoring all information (e.g., taxrate changes, inflation data) that hasbecome known since the date of initialnoncompliance. Therefore, BEN uses expost data as an approximation of ex anteexpectations. The Agency also agreesthat the entire ex ante/ex postdistinction is not very important.

Comment: One commenter stated thatthe EPA should "affirmatively indicate"that specific input values are preferredover the BEN default values. He alsostated that BEN needs to reflect theplant-specific financial informationwithin the context of complexcorporations. This idea was echoed byanother commenter who stated that if afirm has two specific lines of business,then each line will have its own cost ofcapital and, therefore, the discount rateshould be division-specific. However,another commenter stated that the useof the WACC to discount future cashflows was in most cases appropriate andconstituted a harmless approximation.

Response: Specific input values aregenerally preferred, although the basisfor their calculation must be inaccordance with the general principlesof the BEN standard values (e.g., WACCfor discount rate with for-profit entities,marginal tax rates, etc.). However, theeffort required for their calculation maynot always be worth the additionalaccuracy gained. The Agency agreesthat, where practical, discount ratesshould ideally be tailored to specificlines of businesses, although often theseseparate lines are sufficiently similar sothat a company-wide rate can be used,especially if calculating a line-specificdiscount rate will entail furthercomplications and inaccuracies.

Comment: One commenter stated thatthe BEN model should use a 20-yearpollution control capital replacementcycle with a finite facility or processlifetime, instead of infinitely recurringfuture replacement cycles. Onecommenter thought the use of aninfinite number of cycles wasspeculative.

Response: BEN uses a l5-year capitalreplacement cycle default value, but theuser has the option to enter anothervalue, such as 20. The user must alsospecify whether the capital investmentis one-time, or whether futurereplacement cycles will occur. Even ifthe user chooses an infinite number ofreplacement cycles, the discounting offuture cycles means that only the first

several replacement cycles typicallyhave any noticeable effect upon theeconomic benefit result. Furthermore,although BEN is making an assumptionabout the future, this assumption isessentially a baseline one and hardlyspeculative: BEN assumes that futurepollution control requirements will beneither more stringent nor more lax thancurrent requirements, and that the costof the replacement equipment willincrease by no more and no less thanthe projected rate of inflation. Butbecause the additional cycles after thefirst several have almost no impact uponthe economic benefit result, the Agencyplans to modify the BEN model toincorporate a default value of tworeplacement cycles, with the option forthe user to specify anywhere from zeroto five replacement cycles.

Comment: One commenter expressedthe opinion that BEN should use anaverage marginal corporate tax rate inlieu of the highest marginal corporatetax rate. By contrast, a few commentersasserted that EP A appears to havepicked the rates for the BEN model thatwill produce the highest economicbenefit. Another commenter felt theinputs and structure of BEN do notcapture the "real world."

Response: The BEN model, like anyother financial economics model, isdesigned to capture the essence of the"real world" by use of simplifyingassumptions that produce a reasonableapproximation of the violator'seconomic benefit. The Agency believesthat its default rates are reasonableapproximations and are appropriate touse in most cases. The BEN standardvalues are nevertheless onlya default,and the user is free to enter any value.Regarding the tax rate, in most cases thehighest marginal rate applies, which iswhy such a rate is the basis for thedefault value. Note that the use of thehighest marginal rate is highlyconservative in that it lowers the after-tax cost of compliance to the greatestextent possible, and as a result producesa lower economic benefit estimate thanwould a lower marginal tax rate.

Comment: One commenter stated thatBEN's replacement cycle assumptionsshould be consistent with those of thePROJECT model (which calculates theafter-tax net present value of asupplemental environmental project) .

Response: The replacement cycleassumptions used in BEN and PROJECTare based on different conditions. BENassumes that the violator will have toreplace the capital equipment in thefuture, because the equipment'soperation is mandated by law.PROJECT, by contrast, gives no creditfor future replacement cycles because

the capital equipment purchased as partof the supplemental project is bydefinition not required by law; it hasbeen put in place for penalty mitigation,with no law or agreement mandatingfuture replacement. Investment in SEPequipment carries no guarantee that theviolator will be replace it after its usefullife.

Comment: One coml'11enter noted thatEPA should recognize that in somesituations no technologically feasiblemeans of compliance may exist.

Response: One means of compliancealways exists: shutdown. The economicbenefit in this situation is the illegalprofits the violator gained during theperiod of noncompliance (i.e., whenoperations should not have occurred).

Comment: One commentermaintained that the EP A shouldrecognize that when it changes theinterpretation of a rule, newlynoncompliant companies have gainedno past economic benefit. Similarly,another commenter stated that thereshould be no recovery of economicbenefit when an entire industrymisinterprets EPA's rule.

Response: Economic benefit is "nofault" in nature: a company need nothave deliberately violated the law, oreven have been aware of its violation, togain economic benefit. If a companyshould have been in compliance, butwas not, then it is better offeconomically for not having complied-whether determined prospectively orretroactively. Furthermore, if any entireindustry has been in noncompliance,then all of the firms in that industryhave gained an economic benefit.

Comment: One commenter claimedthat BEN should not be applied toregulated utilities.

Response: The Agency disagrees withthis comment and believes that the BENmodel applies to regulated utilitieswithout regard to arguments that theywould have received higher rates fromtheir ratepayers had they complied ontime. Whether and how a businessrecoups its pollution controlexpenditures is not part of the benefitcalculation for for-profit entities andgenerally should not be considered inbenefit calculations for regulatedutilities.

Comment: One commenter noted thatalternative depreciation schedulesshould be allowed when pollutioncontrol costs can be verified.

Response: If a company has in factused a depreciation schedule other thanthe depreciation schedule that BENuses, then a financial analyst canperform the necessary off-linecalculations to supplement or substitutefor the BEN model's results.

32968 Federal Register/Vol. 64. No. 117/Friday, June 18, 1999/Notices

C. Improving the BEN Model's User-Friendliness

1. Is BEN Too Complex To Operate?Comment: Several commenters

thought that the BEN model is easy touse and understand, and that it shouldbe kept that way.

Response: The Agency believes thatBEN represents a proper balancebetween ease of operation and accuracyin calculation, and will try to ensurethat any future enhancements preservethis balance.

Comment: One commenter suggestedthat to improve user friendliness, EPAshould make the model and manualreadily available to the public. Anothercommenter expressed the difficulty hehad in downloading the BEN model anduser's manual from the electronicbulletin board system. He also had adifficult time obtaining these materialsfrom the EP A regional library .Anothercommenter noted that both the modeland manual were available from theNational Technical Information Service(NTIS).

Response: The Agency is aware of thedifficulty of downloading largedocuments such as the BEN User'sManual and will try to rectify this in thefuture, as well as to improve the printedquality of the downloaded document.The easiest way to obtain the model isthrough the Office of Enforcement andCompliance Assurance's World WideWeb site on the Internet (http:1 Iwww .epa.gov loecal datasysl dsm2.html) .

Government users can also obtain themodel and manual (for BEN and otherapplications) via the newly createdenforcement economics helpline: 888-ECON-SPT (326-6778), which is staffedby a contractor. Industrial Economics,Incorporated. located in Cambridge.Massachusetts. The helpline is inoperation from 8:00 AM to 6:00 PMEastern time and will accept voice-mailmessages when it is not in operation. Inaddition. the contractor is providing acompanion e-mail address for thishelpline: benabel@indecon.com. Thehelpline is strictly limited to providingadvice to federal. state, and localenvironmental enforcement agenciesregarding financial issues that impactenforcement cases. Callers will also beable to obtain advice on how to accesstraining courses on the models andrelated subjects. EPA feels that many ofthe public comments it received fromstate and local government enforcementagencies could have been addressedeasily and quickly with a call to thehelpline. Inquiries regarding theinterpretation of federal statutes andEPA polices, will be referred to EPA, aswill inquiries from non-governmental

employees. Non-government users canobtain the models and user's manualsfrom NTIS at 800-553-16847. (NTISpackages each model and its user'smanual together; requesters will alsoneed the following publicationnumbers-BEN: PB 98-500382GEI;ABEL: PB 99-500357GEI; CASHOUT:PB 98-500390GEI; PROJECT: PB 98-500408GEI; INDIPAY: PB 99-500407GEI; and MUNIF'AY: PB 99-500415GEI.)

Comment: One commenter stated thatBEN could be used witllout the manual,although this made the application moredifficult.

Response: The Agency agrees, andalso reminds users that the modelprovides significant on-line help, bothin the introductory statement and byallowing the user to enter .'HELP" ateach prompt.

Comment: One commenter thoughtthat increasing the flexibility of BENcould result in a less accurate measureof the economic benefit (i.e., too wide adispersion of many economic benefitvalues). Another commenter expressedthe view that increasing the flexibility ofBEN would also increase the complexityof using BEN, which in turn wouldpreclude some states from calculatingeconomic benefit.

Response: The Agency does not feelthat the added flexibilit)f will make BENany less accurate, although it does agreethat the potential for added complexitymust be considered when addingflexibility to the BEN model.

Comment: Many commenterssuggested that in order to improve user-friendliness, EP A should use aWindows-type format. Olne commentersuggested that an interactive format forBEN could be based on somecommercially published financial or taxprograms, which have a "Wizard"-typeguidance feature; another suggested thatBEN should use a format for commonspreadsheet software. Although, onecommenter stated that although point-and-click Windows-type features andthe ability to move between data entryfields freely would improve the model,it might not be worthwhile to scrap allthe original code. Various commentersalso suggested that the Il1lodel should:

.Allow users to add headings andexplanatory text to the BEN output;

.Calculate avoided costs without theneed for a hand-held calculator;

.Allow printing of individual BENruns, make printing morestraightforward, and print each result onits own sheet of paper;

.Accept data in a table format forcases in which each month must beentered in a separate run:

.Prompt the user about whether touse the standard [default] or state-specific values:

.Accept other than the capital letters"Y" and "N" for yes and no answers:

.Save model inputs electronically forfuture use:

.Modify instructions for printing theoutput- "positioning the paper" seemsirrelevant; and

.Allow the user to exit the model inthe middle of a run.

Response: The Agency plans toreprogram the model for the Windowsoperating environment, which shouldaddress most of these concerns. (TheAgency will still maintain the currentDOS-based version for a time.) Anactual spreadsheet may confuse manyusers. although the Windows-basedmodel will incorporate manyspreadsheet-type features.

2. Is the Information BEN NeedsDifficult or Expensive To Obtain?

Comment: One commenter thoughtthat although BEN is a very effectivetool for cases in which the violator mustinstall pollution control equipment orperform similar actions to achievecompliance, it is less effective whencompliance comprises administrativeactivities. The commenter explainedthat this is primarily because of thedifficulty of obtaining cost figures forsuch activities, and suggested that BENhave a subroutine for such cases thatprovides default cost values.

Response: The Agency understandsthat cost data can be difficult to obtainfor certain cases. But if the violator hasalready come into compliance. then anestimate of its actual costs should beavailable. The Agency has begundeveloping a computerized RCRAcompliance cost database which willcomplement the revised version of theBEN model.

Comment: While some users felt thatinputs for BEN are readily available,others found that inputs are difficult toobtain when violators areuncooperative.

Response: In such situations.enforcement staff should use thediscovery process to obtain thenecessary information. whether throughinterrogatories, depositions, requests forproduction, or other legal processes.Another approach is to contact state orfederal experts familiar with theregulatory requirement at issue foradvice on cost estimates. Finally,retaining an outside consulting expertmay occasionally be necessary todevelop the compliance cost estimates.

Comment: One commenter wantedthe Agency to develop a set ofstandardized rules or a protocol to be

Federal Register/Vol. 64, No. 117/Friday, June 18, 1999/Notices 32969

followed when applying case-specificinfonnation to an economic benefitcalculation.

Response: The Agency strives toprovide sufficient guidance toenforcement staff, but does not feel thata strict protocol is feasible. Therefore,enforcement staff will always have toexercise case-specific judgment.

Comment: One commenter suggestedthat users should perform a cost-benefitanalysis when contemplating the use ofcase-specific inputs in lieu of BENdefault values. The commenter furtherstated that the Agency should considerallowing enforcement staff moreflexibility with respect to the use ofinvestment tax credits, depreciationschedules, tax rate choices, differentinflation options, and low-interestfmancing. Another commenter stressedthe increased workload andquestionable reliability associated withcase-specific data. Similarly, anothercommenter noted that BEN is intendedto serve as only a gross indicator of theeconomic benefit, rather than as aprecise calculation, and that morespecific information should be usedonly if such information will improvethe result significantly. This commenterfurther asserted that the occasional useof more specific data than BEN's defaultvalues will lead to skewed results in theaggregate, because only firms that willbenefit from the precise infonnationwill make it available.

Response: The Agency agrees that thepursuit of case-specific inputs takesplac.e within a resource-constrainedenvironment and should be measuredagainst the expected gains in accuracy.The Agency adopts the same approachto adding flexibility to the model, wheresuch flexibility may make the modelmore difficult to use for less advancedusers. The Agency also agrees that,theoretically, a firm will disputestandard values such as the discountrate only when a more accurate value isin its best interests. But it is theAgency's policy that if it the violatorurges the use of a particular company-specific value in place of standardvalue, the Agency will insist on usingcompany-specific values in place of allthe standard values. The Agencybelieves this approach will limit theaggregate impact of adopting regulatee-specific values instead of standardvalues.

3. Other Issues Affecting Use of BENComment: One person stated that

Appendix A of the BEN User's Manualshould be expanded to include themodel's entire mathematical algorithm,and should be written with more focuson economic theory, like a textbook.

Another stated that Appendix A shouldinclude a thorough development ofequations lSa and lSb.

Response: The Agency is pleased thatat least some members have taken thetime and effort to familiarize themselveswith the details of the BEN User'sManual. A user's manual for anycomputer model, however, can not takethe place of a textbook on mathematicsor financial economics. To answer someof the specific concerns, Equation lSa isthe sum of an infinite geometric series,which can be found in most calculustexts. Equation lSb is a simple discountformula similar to the one given on pageA-4 in Appendix A. Equation lSc is thesum of the present value of the firstreplacement cycle plus all theadditional replacement cycles toinfinity .The Agency encouragesenforcement staff who have furtherquestions along these lines to contact itsenforcement economics helpline at 888-ECONSPT. As mentioned above, thishelpline is strictly limited to employeesof federal, state and local governmentenforcement agencies.

Comment: One person thought themodel departs from the formulae inAppendix A for depreciation, andinstead appears to use a simplifiedformula that calculates each year'sdepreciation as a percentage of theprevious year's. This commenter feltthat any simplifications or departuresfrom theory made for the sake ofsimplifying the model's programmingshould be detailed in the manual.

Response: BEN uses no suchsimplifying formula, and instead uses aseven-year depreciation life (for capitalinvestments after 1987). The rlfst fouryears use a double-declining balancewith a half-year convention switching toa straight -line depreciation for the rest,corresponding to the revised tax law'sModified Accelerated Cost RecoverySystem (MACRS). The model adjusts thedepreciation deduction to occur once ayear at midyear .

Comment: One person stated that themanual should answer questions suchas: What is the difference between a CCorporation and an S Corporation?What, other than land, constitutes a one-time nondepreciable expense? Whathappens when you choose a useful lifethat is shorter than the depreciationschedule?

Response: Between the BEN User'sManual and the "Help" prompts withinthe model, BEN attempts to provide asmuch guidance as is feasible inanswering these frequently askedquestions. For example, the differencebetween a C Corporation and an SCorporation can be found by selecting"3" of input number lC-BEN will

show information about both types ofcorporations. On page 4-10 of the user'smanual, "nondepreciable expenditures"are defined as items that "do not wearout;" the manual proceeds to list severalexamples, such as a record-keepingsystem, employee training, wasteremoval, etc. For questions such as howto account for a useful life shorter thanBEN's depreciation schedule (whichrequires off-line calculations by afinancial analyst) , the Agencyencourages enforcement staff to contactits enforcement economics helpline at888-ECONSPT. As mentioned above,this helpline is strictly limited toemployees of federal, state and localgovernment enforcement agencies.

Comment: Several commenters agreedthat BEN is a useful tool for calculatingthe economic benefit of noncompliance,and encouraged EP A to retain themodel. But other commenters assertedthat the regulator's discretion should beused in lieu of BEN's calculation todetermine economic benefit: thesecommenters felt that EP A should notmandate the use of BEN. From thedefense bar's viewpoint, one commenterthought that the plaintiffs failure toaccept anything other than a BENcalculation can lead to "unprinciplednegotiations."

Response: Although computerspreadsheets or even programmablecalculators can calculate economicbenefit accurately, the Agency suspectsthat leaving economic benefitdetermination up to the regulator'sdiscretion will result in either nocalculations at all or fundamentallyflawed calculations. (For example, theAgency examined one state's"alternative" to BEN and found itunreliable and even more difficult touse than BEN.) The Agency isconvinced that BEN is a reasonablyaccurate, relatively simple way tocalculate the economic benefit fromnoncompliance, and it continues topromote the use of BEN. The Agencydoes not require state enforcementagencies to use BEN, but the Agencystrongly encourages them to employ it.State enforcement personnel who wantto employ a valid alternative to BEN arewelcome to do. For example, one stateenforcement staff member's spreadsheetversion of BEN was perfectly adequate.Nevertheless, EPA strongly believes thatthe "risk-free rate" approaches areseriously flawed and discourages theiruse as alternatives.

Comment: Some commenters notedthat BEN is reasonable and providesresults that are fair to the violator.Others thought that estimates ofeconomic benefit obtained from BEN areat times so high that they are useful only

32970 Federal Register/Vol. 64. No. 117/Friday. June 18. 1999/Notices-

-

for their shock value. Some commentersnoted that BEN gives penalty amountsthat are so high that many Agencyresources are spent negotiating orpursuing legal judgments with violatorswho are not confident of the accuracy ofBEN's assumptions and methodology.One commenter felt that BEN wasdesigned to produce the maximumpossible penalty .

Response: The Agency strives toprovide enforcement staff with a modelthat makes reasonable estimates ofeconomic benefit. If the model producesnumbers so high that they are shockingto either the enforcement staff or theviolator, then that is generally becausethe violator has gained a high economicbenefit and not because the model isdesigned to produce the maximumpossible penalty .The compliance costinputs to the BEN model are alwaysopen to discussion, but themethodology, by contrast, is not open tocompromise. The Agency is comfortabledefending its benefit calculations basedon the BEN approach.

Comment: One commenter noted thatBEN is an inexpensive method ofdetermining economic benefit, making itan economical option for case work,although others thought that BEN isresource-intensive and not cost-effective. Several others felt thatattempting to use BEN in "smallenforcement activities was a waste ofresources, with one commenter notingthat in many small cases, the costassociated with using BEN wouldexceed that of the penalty itself.

Response: The Agency disagrees thatBEN is "resource-intensive and not cost-effective." A typical analysis takes aboutfive minutes. The only potential issue isthe user's need to determine thecompliance costs, which normallyshould not take much time, particularlyfor small enforcement actions. Inaddition, the Agency is not confidentthat enforcement staff are always able todetermine beforehand that a case is toosmall to merit the use of BEN. Often, itis only after running BEN that themagnitude of the economic benefitbecomes apparent.

Comment: Some commenters thoughtBEN was difficult to understand andexplain for enforcement staff, who areoften engineers untrained in andunfamiliar with financial economics.While BEN may be designed for peoplewith little background in financialeconomics, many commenters felt thatdetermining actual numerical inputs,and whether to use BEN's standardvalues, requires the judgment of afinancial expert. Another commentersimilarly noted that the EPA needssufficiently trained staff to handle a

variety of "real world" circumstanceswhich presumably may requirecalculations in addition the BEN model.

Response: The Agency strives to makeBEN as easy to undersGmd for non-experts as is possible. lIlterestingly,BEN's compliance cost inputs typicallyrequire engineering expertise, notknowledge of financial economics. Oncesuch cost inputs have been obtained-either based on the violator's actualpurchases or through the discoveryprocess-then the BEN model can berun with no knowledge of financialeconomics. The Agency also encouragesenforcement staff who have questions tocontact its enforcement economicshelpline at 888-ECONSPT, from whichstaff can receive copies of trainingvideos, training materials, and user'smanuals. The helpline can also assistusers in performing off-line calculationsfor circumstances that the BEN modelcannot accurately calculate by itself. Asmentioned above, this helpline isstrictly limited to employees of federal,state and local government enforcementagencies. Finally, in the coming yearstraining courses for the new, revisedBEN model will be conducted in eachEP A Region and at the nationalheadquarters, to which state and localgovernment enforcement staff will beinvited.

Comment: One commenter felt thatEPA should not "oversell" the idea thatBEN can be used by people with noknowledge of economics, as that mayinvite misuse. According to thiscommenter, users of BEN must at leastbe willing to learn what the model isdoing.

Response: Our experiE'nce with themodel over the last thirteen years is thatusers can be very effecti'"e in thesettlement context without thoroughlyunderstanding the theor:y behind themodel. We do include an extensivepresentation of the theory in the BENtraining course, although the model issufficiently simple that llsers need notpossess an intricate knowledge ofeconomic theory to calclllate accurateand reliable results.

Comment: One commenter noted thatit is not feasible to expect states to hirefinancial experts and, therefore, that theBEN model should be made easier tounderstand for non-expert users. Severalother commenters thougJ:}t that EP Ashould provide the expert assistance tostates.

Response: EP A believes that themodel is easy to undersGmd and operateas is. Most of our users have taken thefour-hour BEN training course, whichwe have found covers almost everysituation our enforcement professionalswill encounter. While we are working

on ways to improve BEN's simplicityand yet make it more flexible, thecurrent model was designed for use byenforcement professionals with little orno background in finance. The model isused effectively across the country bysuch personnel. With respect toproviding expert assistance to the states,EPA has established the helpline,mentioned above, to address this need.

Comment: One commenter suggestedthat EPA develop a progmm to provideinvestigative and analytical assistance tostate and local agencies.

Response: The provision of analyticalassistance is being addressed by thehelpline mentioned above. Theprovision of investigative assistance isclearly beyond the scope of this effort toreview and revise the Agency's benefitrecapture approach.

Comment: In addition, manycommenters felt that EP A shouldprovide more training for users of theBEN model.

Response: The EP A has presentedover forty BEN courses since 1988. TheAgency has conducted over thirty "live"BEN training courses at EP A facilities,and EP A invited state enforcement staffto nearly all of them, In addition, EPAhas conducted fourteen BEN tminingcourses primarily for state and localgovernment personnel in Hartford,Connecticut (twice): Indianapolis,Indiana (twice): Little Rock, Arkansas;Baton Rouge, Louisiana: Trenton, Newjersey: Boise, Idaho: Ft. Lauderdale,Florida: El Monte, California: Baltimore,Maryland; Richmond, VirginIa, Phoenix,Arizona: and Anchorage, Alaska. (Otherstate and local governments that areinteresting in at least sharing thedelIvery costs with the EPA can alsoarrange for such a course.) EPA alsopresented a BEN course via satellite in1994, and has made videotapes of thatbroadcast avaIlable to governmentenforcement staff on request.

Comment: One cornmenter arguedthat EPA should put pressure onindividual states to account for theeconomIc benefit component ofnoncompliance in their enforcementprogmms; another stated that EPAshould help states incorporate theconcept of economIc benefit in penaltiesor assessments.

Response: The Issues the Agency isaddressing in thIs Notice are related tothe determination of the economicbenefit of noncompliance. Whetherstates are adequately accounting for theeconomic benefit component Is beyondthe scope of this effort. The EP A Isready and willing to provide support tostates in using the model. Not only hasthe Agency provIded such support tostates in the past, but it has even

32911Federal 64. No.117 /Friday. June 18. 1999/Notices

provided it to the governments ofIndonesia, China, Taiwan, BraziJ,United Kingdom and Mexico.

Comment: Several commenters notedthat short, in-depth, case-specificreviews by experts should replace BENanalyses, as they yield more credible,defensible results than BEN.

Response: The Agency is convincedthat the BEN model producesreasonably accurate calculations ofeconomic benefit. It has proven to be aneffective enforcement tool over the past14 years. Furthermore, the new BENmodel may often be a sufficientlyaccurate analytical tool for experts touse in such case-specific reviews. Bycontrast, to adopt an in-depth review ofevery case would require costs-eitherin contractor support and/or full-timein-house staff-that would beprohibitive, as well as add little value.

Comment: Several commenters notedthat defending the BEN model's resultsin court is difficult, for a variety ofreasons. While EPA's earlier guidanceexplains that BEN should be used onlyin settlement discussions, and that theregulator should never be put in theposition of having to defend BEN incourt, one commenter felt that moststate users cannot follow EP A's advice.According to this commenter, a state'snegotiations or settlements occur after adocument has already been mailed tothe violator with a penalty amount onit: therefore, if the case goes to court, thestate must defend the amount.

Response: The suggested protocol isto hire an expert witness to perform aneconomic benefit calculation forpresentation in court, as an expert isnecessary to explain the methodology(either that of BEN or of some otheranalytical tool) .If the result of this morecustomized analysis differs significantlyfrom the initial BEN result, then thepenalty demand can be changed.

Comment: One commenter noted thatalthough BEN is not appropriate for allcases, if BEN is not used in every case,then the regulator is subject to criticismfor inconsistency.

Response: BEN is appropriate in everycase in which compliance costs wereavoided or significantly delayed. BEN isnot appropriate when the benefit comesfrom an illegal competitive advantage.As long as the regulator applies the BENmodel to all the cases for which it wasdesigned, then the regulator will beconsistent.

Comment: Several commentersthought that small businesses andsources which are genuinely ignorant oftheir violations should be treateddifferently than large companies whichhave many resources and who commitegregious violations. One commenter

suggested that small communities andbusinesses should be helped by smallbusiness assistance programs to achievecompliance, rather tharl be penalized forwhat may well be a genuine mistake.This commenter also suggested that ifEPA continues to supp<>rt the use of theBEN model in these cases. BEN shouldat least allow the regula.tor to accountfor the size of the community orbusiness in question. A few commentersnoted that sometimes, even when BENcalculates a positive economic benefit. itmay be inappropriate to ask the violatorto pay that amount: similarly, somecommenters suggested that the regulatorshould run the ABEL model inconjunction with the BEN model todetermine the effects of payment on theentity .

Response: Economic benefit is no-fault in nature and as a result accruesregardless of genuine mistakes. If asmall business delays a requiredpollution control expenditure-forwhatever reason-then it obtains aneconomic benefit. The regulatory agencymust recover this benefit, otherwise thebusiness will have an ul1fair advantageover those businesses that complied. Ifviolations are especially egregious, thenthis should be reflected in the gravitycomponent of the penalty or in criminalsanctions. The size of the violator isrelevant only to the abilIty to pay a civilpenalty .The Agency maintains theABEL, INDlPAY, and MUNIPAY models(for corporations, individuals. andmunicipalities. respecti"ely) to guide itsenforcement personnel in determiningability to pay. BEN already favors smallbusinesses in that the standard valuediscount rate is based upon the typicallarge company's WACC. Significantevidence exists that small companies onaverage have higher costs of financingthan larger ones, but EP A hasconservatively decided to base itsstandard value discount rate on largecompanies, instead of sn1all firms'higher (by about two percentage points)discount rate. (For a detailed discussionof this issue, see the Ibbc)tson AssociatesStocks. Bonds, Bills. and Inflationannual yearbooks, in particular Chapter7. "Firm Size and Return.") Similarly,many small communitie:s have higherdebt costs on average than largecommunities, but the not-for-profitstandard value discount rate isnevertheless based upon the averageinterest rate for communities that haveaccess to the municipall>ond marketand are able to obtain ratings for thedebt issues. If the discount rate weretailored to such small businesses andcommunities. then the discount rate.economic benefit result. and hence the

penalty demand, would be higher. Inorder to maintain simplicity, BENactually favors small businesses andcommunities in this regard.

Comment: One commenter stated thatthe BEN model should be used more asa tool for promoting environmentalcompliance than merely for recapturingthe economic benefit of noncompliance.Another commenter noted that the EP Ashould de-emphasize penaltyassessment and instead encourage self-compliance. One commenter noted thatEPA's goal should be to prevent futurenoncompliance, which could in somecircumstances be accomplished with afine smaller than the economic benefit.

Response: The Agency is always infavor of promoting compliance andencouraging self -compliance. Onemeans of promotion and encouragementis penalty assessment based upon fulleconomic benefit recapture, whichensures that any gain potential violatorsreap from noncompliance will be fullytaken awa,y from them in the form of acivil penalty .Any penalty assessmentshort of this creates an incentive amongregulatees to wait until they are caughtbefore complying.

Comment: One commenter suggestedthat the EPA has been secretiveregarding the BEN methodology.

Response: The BEN model and itsuser's manual are freely available, andthe calculations are easily replicable.

Comment: One commenter noted thata supplemental environmental project(SEP) would in some cases be betterthan a "disgorge" of economic benefit.

Response: The Agency's policy is thata SEP can be performed for mitigationof orily the gravity component of thecivil penalty , not for the economicbenefit component. Otherwise, given theadditional motivations a violator mayhave for performing a SEP, the Agencycould never ensure that the violator wasreally financially indifferent withrespect to noncompliance. Therefore,the civil penalty must always, at aminimum, recapture economic benefit.

Comment: One commenter noted thatthe EP A should address the issue thatcompeting regulatory requirements mayforce firms into noncompliance underone set of regulations when these firmscomply with another.

Response: This is outside the scope ofthe issue of economic benefit recapture.

Comment: One commenter noted thatit would be helpful if some type of"gravity'. component could beincorporated into BEN fornoncompliance prevention and/or acompliance incentive.

Response: The Agency feels thatgravity component calculations in thevarious penalty policies are sufficiently

32912 Federal Register/Vol. 64. No. 17/Friday. June 18. 1999/Notices

field of financial economics disagreesignificantly (both on economic benefitanalysis and a myriad of other issues),the Agency does not feel that theformation of an expert panel would bea productive exercise. For instance,tenured professors from businessschools have reached diametricallyopposed conclusions in the writtencomments they have submitted on theBEN model.

Comment: Some commentersexpressed doubts about the nature ofand manner for this public commentprocess and recommended a more openpolicy. To do otherwise, they state,would only continue the controversyand would not be in either EPA's or theregulated community's best interest.Similarly, one commencer stated thatthe adoption of the procedures for thepublic comment session should besubject to administrative due process.

Response: The Agency has madeevery effort to make the public commentprocess as open as possible.

Comment: A few commenterscriticized the limited time for interestedparties to respond to the request forcomment as listed in the FederalRegister notice of October 9, 1996.

Response: In response to suchconcerns, the Agency extended thedeadline for public comments from theoriginally stated January I, 1997, to asignificantly later March 3, 1997, (seeFederal Register notice on December 12,1996, at page 6539l).

Comment: Some commentersexpressed concern that EP A has yet torelease earlier statements made byseveral prominent professors in the fieldof finance that allegedly criticized theBEN model. These commenters assertedthat the professors' prior remarks, ifrelevant, should also become part of thepublic record and be incorporated intoany forthcoming decision.

Response: The Agency released thesestatements in April of 1997. The Agencyrecognized the merit of those comments

simple and straightforward so that amodule in BEN is not necessary .

Comment: One commenter stated thatBEN has historically been available onlythrough a mainframe, making it uselessto staff without such access.

Response: BEN now runs on the EP ALAN or on a personal computer. Copiesfor the latter are available through theInternet (http://es.epa.gov/oeca) or, forenforcement staff, through EPA'senforcement economics helpline at 888-ECONSPT or, for non-governmentemployees, through National TechnicalInformation Service (NTIS) at 800-553-6847.

D. General Comments on the PublicComment Process

Comment: Several commenters madethe point that EP A does not need to gothrough a formal rulemaking processwith the BEN model.

Response: The Agency recognizes thedistinct advantages of public input onits benefit recapture approach which iswhy it is seeking comment at this time.

Comment: Some of the commentersexpressed the need for the formation ofone or more "blue ribbon" panels ofoutside experts in financial economics(similar to the National Oceanic andAtomospheric Administration panel onthe use of contingent valuation innatural resource damage assessment).Along these lines, one commenterthought EPA's goal should be to find asolution with the broadest possiblesupport in the financial field. Bycontrast, one commenter stronglyopposed the "weight of opinion"process for adopting changes in BEN.Another commenter felt that althoughsuch expert panels might be beneficial,the financial and economic principlesBEN uses are simple enough that anyfinance professor could discoverwhether the model held to themainstream of modern finance andeconomics.

Response: Given that bothacademicians and practitioners in the

long before they were released, but someof the statements were the subject of athree-year Freedom of Information Actcase. That case was eventually resolved,and the Agency has since released theanalyses sought in that case. In addition,the Agency released three other similaranalyses which were not sought. Someof the statements were critical of theBEN model as it then existed, and theAgency adopted many of the changesthey suggested. In any event, all of theanalyses were of the prior BEN modelversion, not the current version. Copiesof these statements are available bycalling 202-564-2235.

Comment: Several commenters feltthat the EPA should follow up on thepublic comment period by first draftingthe findings, then requesting andevaluating further public comment, andfinally publishing a formal draft on thefinal decision.

Response: The Agency agrees, and istaking that approach.

IV. Request for Comments

The Agency is interested in commentsrelating to its proposed changes to itsbenefit recapture approach as discussedin Section II of this Notice. After thecomment period closes, the Agencyplans to review all the comments andrevise its benefit recapture approachand the BEN computer model asappropriate. EP A encourages parties ofall interests, including state and localgovernment, industry , not-for-profitorganizations, municipalities, publicinterest groups and private citizens tocomment so that we can have as broada spectrum as possible.

Dated: June 8, 1999.Sylvia K. Lowrance,Deputy Assistant Administrator. Office ofEnforcement and Compliance Assurance.[FR Doc. 99-15271 Filed 6-17-99; 8:45 am]BlLUNG CODE 6560-50-U