The Devil, The Detail and Cost Benefit Analysis

On January 18, 2011, President Obama signed an Executive Order that addresses regulatory reform. Among other things, all federal rules affecting business will be reviewed to see if they are “outmoded, ineffective, insufficient or excessively burdensome.” Prominent in the Order is a directive that:

Each agency must, among other things: (1) propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs (recognizing that some benefits and costs are difficult to quantify); (2) tailor its regulations to impose the least burden on society, consistent with obtaining regulatory objectives, taking into account, among other things, and to the extent practicable, the cost of cumulative regulation; (3) select, in choosing among alternative regulatory approaches, those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity); (4) to the extent feasible, specify performance objectives, rather than specifying the behavior of manner of compliance that regulated entities must adopt; and (5) identify and assess available alternatives to direct regulation, including providing economic incentives to encourage the desired behavior, such as user fees or marketable permits, or providing information upon which choices can be made by the public.

In other words, the agencies are to do a cost/benefit analysis of their regulations. This is not a new requirement, but it is interesting that the President would choose this time (just before the State of the Union Address) to reiterate the principle.

Perhaps not surprisingly, the EPA has decided to modify its method of determining the value of a human life when it comes to regulatory analysis. In a draft White Paper issued on December 10, 2010, EPA sets out its new formula. I’ll leave it to you to decipher the sixty-two page tome, but you should be happy to know that you are worth more today than you were last year. (While perhaps a consoling thought, one should consider the source). 

One notable aspect of the Paper is that EPA proposes to add a 50% “cancer differential” to arrive at the appropriate life valuation. In effect, this says that dying is costly but dying of cancer is 50% costlier than the risk of dying in other ways. That increased risk, then, must be calculated into the cost/benefit analysis.

There is no question that applying cost/benefit analysis to regulatory reform is necessary and appropriate. Like so many economic tools, however, the devil is in the detail; that is, what you count (and don’t count) becomes the real fighting issue. As a general rule, one side tends to emphasize the hard costs of environmental regulation while the other attempts to put a dollar value on the benefits of the regulation.  Benefits tend to be the harder side of the equation because many are intangible or unquantifiable (like "human dignity" and "fairness" - newly added by the President), with the "value of life" being high on the list.  For the fourteen economists who can decipher it, the White Paper changes the way that value is computed.   And don't forget that the U.S. Supreme Court has recently said that it is up to the agency to determine what to include in a cost/benefit analysis for regulatory purposes.  

My only comment about the change is that we shouldn't get too exited (or buy more life insurance) just yet -- we likely will be considered for "re-valuation" in two or six years.


RELATED POST:  Entergy Corporation v. Riverkeeper, Inc.

Charging for Rain on the Federal Plain


Regulation of stormwater runoff is a requirement handed down from Congress to the states and from the states to the cities.  For many years, EPA has placed stormwater regulation on its list of priorities, which is not going to change any time soon. Since many point sources are located within city limits, it is the cities that find themselves scrambling to come up with funds to maintain the necessary infrastructure and staff needed to comply with the regulations.

Not unexpectedly, cities have found this to be an ever-increasing expense in a time of decreasing revenues.  For this reason, many cities have taken this expense out of the general fund obligation and have created, or are creating, stormwater utilities that allow a fee to be imposed on each assessable property within city limits (with some restrictions). While this has certainly been helpful to a municipality’s budgeting process, it has always been a bit frustrating that federal facilities within city limits get a free ride because of their exemption from state or city-imposed assessments. This has now changed.

In the waning hours of the 2010 lame-duck congressional session, an amendment to the Clean Water Act was passed (S.3481) which allows municipalities to require stormwater fees to be assessed against federally owned roads, buildings and structures. The measure was signed into law on January 4, 2011.

The change will be good news for cities. Though it will not be a large dollar amount, it will compel the federal government to help fund the huge, unfunded mandate required by the stormwater regulations. Maybe if some pain is felt by the Fed it will encourage EPA to get serious about the real elephant in the room -- nonpoint sources.  Until then, cities should accept the invitation to collect stormwater fees from federal facilities located within their city limits.   


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Another Nail In The Arranger Liability Coffin

If someone moves a hazardous substance from their property to a property owned by another and the substance is released into the soil or groundwater, that party can be liable for the resulting damages under a theory of arranger liability under CERCLA. The tough question is usually the level of proof necessary to show that the party caused such a transfer. In the recent case of DVL, Inc. v. General Electric Co., et al., the United States District Court for the Northern District of New York set a rational, but surprisingly high, bar for that proof.

Before setting out the facts, I should point out that the Court acknowledged that there is a relaxation of traditional causation principles under CERCLA:

[T]he party seeking costs need only show that there was a release or threatened release, which caused incurrence of response cost, and that the defendant generated hazardous waste at the cleanup site. What is not required is that the government (or another authorized party) show that a specific defendant’s waste caused incurrence of cleanup costs. CERCLA thus “relaxes” but does not eliminate the causation requirement: a plaintiff need not show a causal link between that particular waste and the response costs the plaintiff incurred, but it must demonstrate that a defendant deposited hazardous waste at the site in question.

While the Court was agreeable to allowing the use of circumstantial evidence to prove the relaxed causation standard, it found that such evidence did not exist in this case.

In DVL, Inc., the plaintiff owned property that was 150 feet “down-gradient” from a property owned and operated by General Electric for the production of capacitors and electrical components. It was undisputed that the GE site was contaminated with polychlorinated biphenyls (PCBs). Although GE never owned or operated any portion of the DVL site, the DVL site was found to be heavily contaminated with PCBs. (DVL had made no investigation of the site when it purchased the property for $500,000 in foreclosure in 2002).

Despite the fact that the DVL property was down-gradient from the GE site, two monitoring wells placed between the properties consistently tested non-detect for PCBs. As such, if the contamination was traveling to the DVL site from the GE site, it apparently was not doing so via the tested aquifer. As a result, there were only two remaining possibilities: the contaminant was being physically transported from the GE site and allowed to be released on the DVL site or the contaminant was moving next door via storm water runoff.

With regard to the physical transportation theory, the plaintiff could produce no evidence that anyone from GE had transported materials to the DVL site. Although there was some testimony that electrical transformers containing PCBs could have leaked on the DVL site, there was no showing that they were GE transformers.

Turning to the possibility of surface water transport, the testimony showed that such water did, in fact, flow from the GE property to the DVL site but there was no proof that the water contained any PCBs. The Court noted:

DVL has not presented an expert to opine that [the surface water had PCB contamination] and that this migration of surface water explains the contamination at the DVL site. In the absence of eyewitness testimony or other direct evidence, and without expert opinion linking GE to the contamination at the DVL site, the circumstantial evidence DVL cites does not provide the Court with a basis for denying GE’s Motion for Summary Judgment.

The case is an interesting read for causation in lateral migration cases because it is a situation that so often arises. The question in these cases is always: How did the contamination get from there to here? For the plaintiff, the clean wells between the properties presented an almost insurmountable problem because if the contamination was not traveling underground, how else could it have been conveyed from the upstream property? The Court’s answer was likely the correct one; that is, either someone must have seen the release of the hazardous substance from a GE activity (either the delivery of the hazardous waste onto the property or the sale of a GE transformer that was seen leaking) or expert testimony would need to be used to fill the gap regarding the unknown delivery. For example, if storm water transported the contamination from the GE site to the DVL site, testing might establish that the contamination was confined to the surface runoff paths and the contamination was greatest on the surface and at the property border and decreased away from property border and at depth. While expert testimony is never cheap, the plaintiff was seeking the recovery of cleanup costs that were in excess of $1 million dollars. (I should note that it is possible that this analysis was done and an expert could not support the theory, though the opinion does not give that impression).

While the Court gave lip service to the prior case law that there is a “relaxed standard” for arranger liability under CERCLA, it certainly did not give the plaintiff in this case much benefit of the doubt, even though the Court was simply considering a motion for summary judgment. The Court made it clear that for arranger liability, you must show how the defendant’s hazardous material got from there to here -- and for this showing, close is not good enough.


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