Download Financial Environmental Risk Quantification Using Probabilistic Cost

John Lynch, P.E.
Palisade Software
Miami Users Conference
October 25, 2007
www.johnwlynch.com
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Drivers
15 minutes
– Regulatory Reporting
– Financial Planning
– Liability Management
Techniques & Practices
15 minutes
– Precision & Accuracy
– Expert Panels
– Resources
Case Studies
15 Minutes
– California Munitions Plant
– New Jersey River Sediments PRP
– Manufactured Gas Plants 15 Site Portfolio
Discussion – Q&A
15 Minutes
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Need to quantify environmental liability
under uncertain conditions
 “Not understanding the problem is not an excuse
for not having an answer”
 New accounting rule
▪ FIN 47 … Financial Accounting Board Interpretation
Notice
▪ Asset Retirement Obligation
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Financial Disclosure of Environmental
Liabilities
 Old …..Potential loss must be “probable” and can
be “reasonably estimated”
 New …. Use probabilistic tools
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FASB Interpretation No.47
 Accounting for Conditional Retirement
Obligations
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The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and (or) method of
settlement.
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Estimates for accruing reserves
 Tax and cash flow issues
 Uncertainties
▪ Need, scope, timing
▪ Regulatory
 Dissolution of entities
▪ Trusts, corporations
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Transfer Liability Obligation to Third Party
 Need legal entity
 Adequate funding
▪ Reliable and credible estimate
▪ Secure mechanism
▪ Insurance
▪ Trust
 Reliable Remediation Contractor
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Uncertainties
 Site …. How much, where, what
▪ Soils, groundwater, sediment
▪ Site characterization … risk vs. remedy
▪ Poor use of site characterization data
 Contaminants
▪ Location, concentration, remedy impact
▪ Regulatory status
 Technologies … what to do?
▪ Will it work
▪ How much will it cost
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Regulatory
 Federal (EPA), States (DEP, DEQ, etc.), Tribes, Fish
& Wildlife, Third Parties
 Superfund … Record of decision (RoD)
▪ ARAR Applicable or Relevant and appropriate
requirements? What are they?
 Classification of Waste
▪ RCRA, Listed wastes
 Contaminated Media
▪ Land ban on disposal
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Cost Estimating Tools
 Lots of detail
 Require an engineering design
 Not available for most projects
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Unit cost
 $/acre of cap
 $/gallon of stripping
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Federal Remediation
Technologies Roundtable
 http://www.frtr.gov/
 Means Estimating Guide
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Lack of historical cost data
 Inconsistency of remedy selection
 Not much cost data
▪ Insurers have loss/claims data
▪ DoD, DoE have good technology cost data.
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Regulatory uncertainty is most difficult
 Evolving standards
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Expert panels vs. data
 Access to data and decision makers
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3 to 5 senior technical & regulatory
professionals
 Mid-level support
 Review documents
 Identify alternatives
▪ Low, medium, high
 Use decision tress
▪ Probabilities
▪ Costs
 Run model and “gut test” results
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California Munitions Plant
 Driver…. Insurer needed to establish reserve
 WWII Era Munitions Plant
▪ Large Site
 Multiple Environmental Issues
▪ Groundwater …. 3 public water supplies impacted
 Perchlorate … environmental – public health
standard not established
▪ CA, EPA, DOD, USAF
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Perchlorate Drinking Water Standard
 CA and US EPA
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Uncertainties
 MCL – drinking water standard
▪ 3 – 30 µg/l (ppb)
 Extent of GW contamination
▪ Plume footprint
 Effectiveness and acceptability of treatment
technology
▪ RO, biological
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River Sediment PRP
 Trust holding liability
 Estimate needed to dissolve trust and distribute
assets to heirs
▪ Credible estimate for regulatory and other RPs.
 Billion dollar remedy
 Uncertainties
▪ Scope … sediment removal for navigation
▪ Technologies …
▪ Removed material management
▪ Capping material
▪ Dredging technology
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SE Utility’s Manufactured Gas Plants (MGPs)
 Utility has responsibility for environmental of 15
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MGPs …. $75M to $150M.
Regulatory Agencies allowed recovery of
environmental costs for a limited time
Utility wanted to use an finite risk environmental cost
cap insurance policy to fund the cleanup
Needed an estimate of the cleanup costs
Uncertainties
▪ Scope .. Soil, Groundwater, Sediments
▪ Regulatory … Standards, Technology.
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DoD
 BRAC. Cost Cap Insurance
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EU Petroleum Company
 US legacy holding
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Las Vegas Developer
 Former munitions plant. Cost Cap Policy
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Texas refinery
 Settle suit over cleanup liability