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Research and Analysis in Support of UIC Class VI Program Financial

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Research and Analysis in Support of UIC Class VI Program Financial Underground Injection Control (UIC) Class VI Program Research and Analysis in Support of UIC Class VI Program Financial Responsibility Requirements and Guidance December 2010 Office of Water (4606M) EPA 816-R-10-017 December 2010 http://water.epa.gov/drink/ Contents 1. Introduction ............................................................................................................................. 5 2. Summary of April and May 2009 Financial Responsibility Webcast Discussions ................ 6 3. Research and Analysis on Financial Responsibility Instruments ......................................... 15 I. Summary Matrices ............................................................................................................ 16 A. General Financial Considerations ............................................................................... 16 B. Considerations for GS ................................................................................................. 23 II. Research and Preliminary Analysis .................................................................................. 28 A. General Financial Considerations ............................................................................... 28 B. Considerations for GS ................................................................................................. 44 4. Rationale for Financial Responsibility Instrument Selection ............................................... 59 I. Introduction ....................................................................................................................... 59 A. Summary ..................................................................................................................... 59 II. Historical Precedent .......................................................................................................... 60 III. Potential for Instrument Failure ........................................................................................ 60 A. Owner or Operator Failure .......................................................................................... 61 B. Third Party Failure ...................................................................................................... 61 C. Other Factors ............................................................................................................... 61 IV. Resource Implications for the Owner or Operator and the Director ................................. 62 A. Director’s Review and Monitoring ............................................................................. 63 V. Recommendations and Rationale ...................................................................................... 63 A. Trust Funds ................................................................................................................. 65 B. Letters of Credit .......................................................................................................... 65 C. Surety Bonds ............................................................................................................... 66 D. Insurance ..................................................................................................................... 66 E. Escrow Account .......................................................................................................... 66 F. Financial Tests and Corporate Guarantees ................................................................. 66 G. Minimizing Instrument Weakness by Combining Instruments .................................. 67 5. Presentation on Financial Responsibility to Ground Water Protection Council ................... 68 I. Summary of Meeting Discussion ...................................................................................... 68 II. Presentation ....................................................................................................................... 70 6. Director’s Examination of Third Party Stability ................................................................... 74 I. Financial strength requirement based on credit ratings .................................................... 74 A. Credit rating requirements consistent with self-insurance requirements .................... 74 B. Credit rating by any Nationally Recognized Statistical Ratings Organization (NRSRO)............................................................................................................................... 75 C. [SELECTED] Hybrid of Option 1 and Option 2 ....................................................... 75 II. Minimum Rating ............................................................................................................... 75 A. [SELECTED] Minimum credit rating using the same option chosen for the credit rating requirement ................................................................................................................. 75 B. Broader range of minimum rating options .................................................................. 76 III. Minimum Capitalization ................................................................................................... 76 A. [SELECTED] Financial ratios consistent with the financial ratio test requirements for self-insurance .................................................................................................................. 76 B. Specific dollar value capital requirements .................................................................. 76 C. Minimum capital standards prescribed by the appropriate Federal banking agency .. 76 Research and Analysis Supporting Financial Responsibility Requirements and Guidance 2 D. Successful completion of the new comprehensive stress test for banks ..................... 77 IV. Ability to pass the bond rating when applicable ............................................................... 77 A. Financial ratios consistent with the bond rating test requirements for self-insurance 77 B. Bond rating by any Nationally Recognized Statistical Ratings Organization ("NRSRO") ........................................................................................................................... 78 C. [SELECTED] Hybrid of Option 1 and Option 2 ....................................................... 78 7. Rationale for the Selection of Self Insurance Requirements ................................................ 79 I. Financial Coverage Criteria .............................................................................................. 80 II. Bond Rating Test .............................................................................................................. 80 III. Financial Ratio Test .......................................................................................................... 81 IV. Corporate Guarantee ......................................................................................................... 82 8. Evaluation of Minimum Tangible Net Worth ....................................................................... 83 Options ...................................................................................................................................... 83 Objective for Setting TNW ................................................................................................... 84 Calibrated Model .................................................................................................................. 85 Results ....................................................................................................................................... 86 Context ...................................................................................................................................... 87 Appendix A: Costs to the Owner or Operator for each Mechanism ......................................... 88 Appendix B. Technical Description of Geologic Sequestration (GS) Financial Responsibility (FR) Model.................................................................................................................................... 90 Appendix C. Calibration of GS FR Model Parameters................................................................. 96 Tables and Figures Table 2.1: Summary of Topics in Webcast Discussion organized by Type of Financial Mechanism ...................................................................................................................................... 6 Table 3.1: How is the financial stability of a third party provider determined? ........................... 16 Table 3.2: What weaknesses are associated with the third party’s financial stability determination?............................................................................................................................... 17 Table 3.3: Under what conditions are the full estimated costs not covered? Does the mechanism manage uncertainty in cost? .......................................................................................................... 18 Table 3.4: What factors drive the costs associated with the securing/maintaining the instrument? What is the relative cost of the instrument to the owner or operator? .......................................... 19 Table 3.5: What is the historical use of the instrument? For environmental obligations? ............ 20 Table 3.6: Under what scenario is the instrument best or most commonly utilized? ................... 21 Table 3.7: Which conditions may lead to instrument failure (e.g.,
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