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.,