oversight

Underground Petroleum Storage Tank Owners' Ability to Comply With Federal Financial Responsibility Requirements

Published by the Government Accountability Office on 1990-02-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                            United States General Accounting                 .Office
                            Testimony




For   Release
                             Underground             Petroleum          Storage        Tank    Owners'
on Delivery
Expected      at             Ability           to   Comply       With    Federa,        Financial
10:00    A.M.     EST
                              Responsibility             Requirements
Tuesday,
February      20,    1990




                              Statement     of
                              Peter     F. Guerrero,         Associate        Director
                              Environmental         Protection         Issues
                              Resources,      Community,          and Economic
                              Development       Division

                              Before     the
                              Subcommittee            on Environmental              Protection
                              Committee       on      Environment      and         Public      Works
                              United     States         Senate




                                   (-Jd.qw               ‘,“pju 70 3
 GAO/T-RCEII-~O'*~
Mr. Chairman      and Members of the Subcommittee:

       The Superfund Amendments and Reauthorization             Act (SARA) of
1986   required    that we report    to the Congress on whether owners of
underground     petroleum  storage tanks could obtain         liability
insurance     or meet the act's    financial   responsibility         requirements
by some other method.1        These requirements     are intended         to ensure
that tank owners have the resources          to clean up any tank leaks and
compensate anyone harmed by the leaks.

        Our report,        issued in January 1988, concluded                that insurance
for underground           petroleum    tanks was generally           unavailable    and that
the alternatives           to insurance      permitted     by the law,        such as self-
insurance,       were not practical          or available      for small businesses.2
Since thousands of tank owners might not be able to meet the
deadline      for demonstrating          financial     responsibility         under
consideration         at the time, we recommended that the Environmental
Protection       Agency (EPA) phase the requirements                  in over a more
realistic      timetable.         We thought that a gradual            approach might
permit     the development          of a more active       insurance      market and other
financial       assurance methods.

       Since our report,         EPA grouped firms owning underground
petroleum       storage tanks into four categories             and phased in its
financial       responsibility      requirements       over 2 years starting      from
the regulation's         issuance in October 1988.            Category 1 firms,      which
are very large petroleum            marketing      firms,   had to comply by January
1989; category         2 firms,    which include       large and medium-sized
firms,     had until     October 1989.        Category 3 firms,      which comprise
smaller     firms,     have until    April    1990,    and category   4 firms--which

'These requirements    can be satisfied             by either  the tanks'         owners or
operators.    For convenience,  we refer             only to tank owners          in this
statement.
2Superfund:     Insuring       underground       Petroleum    Tanks    (GAO/RCED-88-39,
Jan. 15, 1988).
                                             1
include  very small petroleum       marketing    firms; most tank facilities
that do not produce,     refine,    or market petroleum;     and all local
governments--have   until     October 1990 to comply.       We are pleased to
be here today to discuss our report           and update its findings     to the
extent we could in the time available.

OVERVIEW

        In summary, because the category              1 firms     generally      can self-
insure,     they did not have problems complying                 with EPA regulations.
Many of the estimated        500 firms in the second category                   appear to
have satisfied       the financial     responsibility          requirements       through
insurance      or by coverage from special            funds established          by some
states.       However, it is uncertain        whether a sufficient              amount of
affordable      commercial    insurance    or state funds will              be available       to
cover the last two categories            of tank owners--especially               the many
thousands of small businesses.             Recently        one of the largest
suppliers      of tank insurance      announced that it is suspending                   new
policy     sales,   and another is reducing           its area of operations.               In
addition,      most states either      have not submitted             for EPA approval
trust     funds to help tank owners establish               financial       responsibility
or have created        funds that only partially            satisfy      the regulations'
coverage requirements.

       Firms that do not meet the financial            responsibility
requirements      are potentially      subject  to large federal        fines.
Noncompliance,       according    to industry   representatives,        also violates
tank owners' contracts         with creditors     and suppliers,       which require
them to operate        in accordance with all laws and regulations.
Additionally,      noncompliance      creates  a risk that damages to the
public     and the environment      from a tank leak may not be adequately
compensated.       Therefore,     whether EPA should delay its financial
responsibility       requirements     or suspend enforcement         has again become
a pressing     issue.


                                               2
       EPA decided not to postpone the regulations                      or suspend
enforcement       for category       2 tank owners but has not yet announced a
decision     about the 1990 deadlines.               Currently,      there does not
appear to be reasonable            assurance that category             3 and 4 firms can
meet the financial           responsibility      requirements.          We therefore
believe    that EPA needs to consider              further      postponement     of the
requirements,         for possibly       up to a year, for these firms while it
develops     information        showing that the rules can generally                be met.
Meanwhile,       EPA needs to increase         its collection          of information     on
the cost and availability             of insurance       and the consequences of
noncompliance         on the business relationships              of tank owners.       At
the same time,          we think EPA needs to ensure,             through a more active
enforcement        program, that category           1 and 2 firms       comply with the
financial      responsibility        rules.

BACKGROUND

         EPA estimates        that nationwide        there are up to 2 million
petroleum        underground      storage tanks at three quarters                  of a million
facilities,        such as gas stations,           utility       companies, or car
dealerships.          EPA believes       that hundreds of thousands of these
tanks have corroded and are leaking.                       About     8,000    cleanups have
been completed          since EPA began making cleanup grants to states in
mid-1987,        and another 24,800 cleanups                are underway.         Leaking tanks
can contaminate           groundwater--a      drinking         water source for half of
our nation-- and cause fires               or explosions.            To protect      against   such
risks,      the Hazardous and Solid Waste Amendments of 1984 required
EPA to develop regulations               to prevent,         detect,       and correct    tank
leaks.        Issued in September 1988, these regulations                        set forth spill
cleanup procedures            and standards       for tank construction              and
operation,        effective      over a lo-year          period.

         SARA subsequently    directed   EPA to issue regulations       containing
a   $1   million,  per occurrence,     minimum financial  responsibility


                                                3
requirement      for owners of underground       petroleum      tanks.3
Noncompliance       could subject   tank owners to fines of up to $10,000              a
day.      However, SARA allows EPA to suspend enforcement                of financial
responsibility        requirements  for 6-month periods         for individual
classes of owners if EPA determines           that insurance         and other
financial      assurance methods are generally         unavailable        and progress
is being made toward meeting financial            responsibility.
Additionally,        the law states   that, in developing         regulations,     EPA
may consider       the impact of any rules on small businesses.

      In October 1988, EPA published             final   regulations     requiring
all petroleum        tank owners to maintain        evidence of financial
responsibility        of $1 million   or $2 million,        depending on the number
of their      tanks.4    As discussed   earlier,       these regulations       are to be
phased in over 2 years by size category                of tank owner.

        Under the law, states can with EPA approval                operate and
enforce    underground    storage tank programs "in lieu              of" the federal
program.     To obtain     approval      for these programs,       states must (1)
establish    technical    and financial        responsibility      requirements    at
least as strict       as the federal        government's      and (2) provide   for the
enforcement     of these requirements.            EPA has one state program
under consideration        (Mississippi)       and expects to approve about 13
others over the next 12 months.

GAO'S REPORT TO THE CONGRESS

      In January     1988,   we reported  that uncertainty about  potential
losses had kept      insurance   companies out of the underground   tank

3SARA also gave EPA discretion      to set lower          limits    for low-volume
tank facilities,    referred   to as nonmarketers,           that   do not produce,
refine,   or market petroleum.
4EPA originally     published    proposed financial        responsibility
regulations     in April   1987, with implementation          to have taken     effect
about June 1988.
                                          4
market.      Two sources provided        virtually           all the tank insurance
sold in the United States in the 3 years prior                        to our report,          and
one of them had withdrawn           from the market midway through 1987.                        The
two firms had insured about 14 percent of U.S. tanks, mostly those
owned by bulk sellers        of petroleum            products,     known as jobbers.            We
also found that the alternatives                to insurance        permitted       by the law,
such as self-insurance,         letters       of credit,         and surety bonds, were
not feasible      for most tank owners.               Only the largest          firms,     such as
the major oil companies and national                    bus companies, could use these
alternatives     because they were (1) expensive                   for smaller         firms,
(2) did not transfer       risk,      or (3) required            more assets to be
pledged than the average tank owner could afford.                          At the time of
our review,     relatively     few states had established                 funds to clean up
tank leaks,     although   we said that these funds might be the only
hope for small       firms to establish            financial      responsibility.

       We related       the insurance      experience    of eight tank owners of
various    sizes from around the country.               Six of these firms had
insurance     expiring      in 1988, and they were having extreme difficulty
in replacing       it; the other two had no insurance.              Some companies
with insurance        reported    increasing      rates and declining    coverage on
their   policies.

       Our report    recommended a phase-in        of financial    responsibility
requirements     to allow time for insurers         to develop tank programs
and tank owners to pursue insurance           alternatives.       We also
recommended that EPA speed up implementation                of the tank
construction     and operation    requirements,       which we believed     were
most important     for protecting     the public      and the environment.

FINANCIAL RESPONSIBILITY COMPLIANCE EASIER,
BUT UNCERTAINTY STILL EXISTS

       Since our January          1988 report, two developments   have made it
possible    for more tank         owners to comply with the financial
                                               5
responsibility        requirements.      First,   more insurance     companies have
started     offering     tank coverage.       Second, more states have created
funds to pay for tank leak damages and are using these funds to
help owners meet EPA's financial             responsibility    regulations.
Nevertheless,        many small businesses       may not be able to obtain
insurance      or state trust       fund coverage.

       According     to EPA, about 15 sources are now offering            liability
insurance     for underground     petroleum    tanks,   including     1 company that
specializes      in tank owners with 25 or fewer tanks.             However, one
of the most active       insurers    (Petromark)    recently     announced that it
is suspending       new sales pending a review of its reserves,             and
another     (Federated)    is suspending    new sales in some states with
tank funds.

         Within    the last 6 months, we discussed            tank owners' insurance
prospects       with representatives        of EPA, the Small Business
Administration,         insurance     companies,    state agencies,        and industry.
These officials         generally     said that tank insurance           was available    on
some terms to many businesses.                According    to EPA and industry
representatives,          the very large firms already           required     to meet the
regulations        have complied through self-insurance.                 In addition,    an
official       of an association       representing      small gasoline      dealers    said
that insurance         was available      to these dealers,        although     he did not
know how many actually            had it.     However, industry        representatives
said that available           insurance    was expensive,      did not always meet
regulatory       requirements,      or was sometimes offered            by companies with
unproven track records.

       Despite the availability      of tank insurance,       representatives     of
the groups we interviewed       said that many small firms,           including
those not in the business of selling        petroleum,      such as farmers or
operators    of delivery  vehicles,    were not likely      to qualify        for
insurance.     A Small Business Administration       official       told us that
these small companies were not insurable          at present because they
                                            6
knew little        about tank technology     or      risk management and there was
no actuarial        history  for their   tank      leaks.    According   to an EPA
official,       these firms,    many of which        have older,   less safe tanks,
will      need to rely on the state trust            funds for financial
responsibility.

       In January 1988 we reported              that 12 states      had established
funds as of August 1987.             The situation        has improved.      According      to
EPA, at this time, 34 states              have created trust        funds to pay for
tank cleanups and in some cases compensate victims                      of leaks.      EPA
has given final        or conditional       approval      to about 23 state trust
funds so that tank owners can use them to satisfy,                      at least    in
part,    the financial      responsibility         requirements.       EPA expects     that
additional     states will      have approved funds by October 1990,                in time
for the financial        responsibility         deadline     for the smallest     tank
owners.     It should be noted that some of these tanks are in such
poor condition       that they will        not qualify       for coverage under state
funds.

       Most   state  funds are financed      by gasoline      taxes or tank fees.
Many states place conditions         on the eligibility        of tank owners to
use the fund to meet financial          responsibility      requirements,      such as
requiring    owners to be in compliance         with technical        tank standards.
In addition,     most state funds will       pay costs only above a specified
deductible,     and some limit    or exclude third-party          coverage.
Therefore,    tank owners will      have to supplement the state fund
coverage with insurance        or other financial       responsibility      methods.

       We discussed with EPA three options             it could use to provide
relief    to businesses       that cannot comply with the financial
responsibility      regulations.       First,    EPA can revise    its regulations
or support legislation           to move compliance      dates back.      Second, it
can formally     suspend enforcement          of the regulations,      as permitted
by the law.      Third,     it can exercise      its discretion    not to use its
full   enforcement      authority    to discover     and penalize    violations.
                                             7
        So far, EPA has followed           this last approach.        The Director      of
the Office of Underground            Storage Tanks has advised EPA regional
offices    by memo that,        for tank owners who cannot comply with the
financial     responsibility       regulations,       "alternative,       non-punitive
enforcement      responses may be the most appropriate              initial     formal
enforcement      response--versus        assessing    penalties."      Violations      of
the financial       responsibility       requirements      are described      in the memo
as "low priority."

        EPA was not willing       to formally     defer enforcement        or postpone
by regulation      the deadline     for category       2 firms that went into
effect    in October 1989, because it did not have sufficient
evidence that insurance         was "generally        unavailable"     to those larger
firms.      EPA has not decided on suspension             or postponement      of
deadlines     for the next two categories           of firms required       to comply
in 1990.      But EPA officials       told us they would consider           petitions
for suspension       or postponement       if any are made. under the 1984
amendments, anyone can petition              EPA to delay implementation           of
regulations,      and EPA is required         to respond to the petition           in the
Federal Register.        About    a week ago, a group of trade            associations
representing      mainly gasoline       marketers     requested    that EPA suspend
enforcement      of the financial       requirements.

       We agree with EPA that the evidence on the availability              of
insurance     did not justify    postponing   compliance   by larger    firms
with the October 1989 deadline.           However, as deadlines      approach for
smaller    firms,    it becomes increasingly     important   for EPA to have
reasonable      assurance that the insurance      market or state funds will
make compliance        possible.  In our opinion,     it does not appear that
EPA now has such assurance.

      In addition       to uncertainty    over the availability     of insurance
and state trust       funds, EPA needs to address another issue.
Representatives       of petroleum     marketers  raised a possible    problem
                                            8
resolved    by flexible       enforcement     policies     or a suspension       of
enforcement.      According        to the representatives,           tank owners who
cannot establish        financial     responsibility       will    violate   contracts
with their    creditors       and suppliers       because such agreements commonly
require   that the owners comply with all laws and regulations                       to
qualify   for further       credit    or supplies.        A suspension     of
enforcement     would remove the threat             of government penalties         but not
cure the contractual          problem.     EPA officials        said that this
situation    may represent         a real threat       to tank owners but that EPA
did not consider        this issue when it developed             the regulations.

        Recently,       following    a recommendation         we made to the EPA
Administrator,         EPA has begun to collect            information      on insurance
availability.           But this data collection           effort    is very limited.
For example, it covers only half the insurance                       companies now
writing       tank insurance       and does not provide much information                 on the
insurance        market in individual          states.     In addition,      EPA has
little      information       on the risks of noncompliance              to owners' credit
and supply arrangements.              We think that EPA needs to actively
collect       more information       so that it can determine             when financial
responsibility         requirements        should be imposed.          If deadlines      are
deferred,        it will     be especially       important     for EPA to stress       the
enforcement        of its standards         for safe tank construction           and
operation.

MORE ACTIVE ENFORCEMENTNEEDED

        As we have indicated,          EPA has assigned a low priority          to
enforcement      of the financial        responsibility      requirements.      It plans
to check on the compliance            of category       1 and 2 firms    in 13 states.
But, at this time EPA does not intend to actively                    check tank
owners' compliance         nationwide      and has no tank inspectors         in its
regional    offices.       It plans to rely mainly on state referrals                of
violations,      although,      according    to EPA officials,       the states have
also assigned enforcement            a low priority.        Even if financial
                                              9
responsibility       violations     are uncovered,  EPA does not plan                to
penalize      a firm unless,     for example, its tanks are leaking                  and the
firm cannot or will          not clean up the leaks.

       We believe      EPA should modify its enforcement                 strategy.       While
it is reasonable         to be flexible       in penalizing       firms that cannot
comply with the regulations             despite    their    best efforts,          the law
should be enforced when it is willfully                  disregarded        by firms for
whom deadlines        become effective.          Tank owners who incur the expense
of compliance        should not be placed at a disadvantage                   with
competitors      who could comply but do not.               EPA needs to adopt a more
active    enforcement       strategy.      For example, it should monitor                and
enforce compliance          in states where it is possible               for categories       of
owners to obtain         insurance     or qualify     for state trust          fund coverage
and should encourage states             to do the same.         Conversely,          EPA should
more   closely    monitor      compliance     with the technical           standards     in
states where insurance            coverage and state trust            funds are not
widely    available.

CONCLUSIONS

        In closing,    Mr. Chairman,         too much uncertainty       exists    about
the insurance       market for smaller          tank owners and too few states
have approved trust         funds to reasonably         ensure that category        3 and
4 firms can generally         comply with the financial           responsibility
requirements       at this time.         Before EPA decides on when smaller
firms can comply, it will             need considerably       more information      on
insurance     and state trust         fund availability       and cost and on the
effects    of regulatory       violations       on the relations      of tank owners
with creditors       and suppliers.          In the meantime, we support
postponing      the effective       date for deadlines        on category      3 and 4
firms for a reasonable           period-- perhaps as long as 1 year.              This
should give states the time needed to establish                   trust    funds and EPA
time to better       assess the whole situation.


                                              10
       In addition,     to promote compliance   with the law and more
balanced competit ion among tank owners in categories          1 and 2,
reasonable    enforcement     of the financial  responsibility   requirements
needs to be ensured.        The low priority   EPA has assigned to
enforcement     could lead tank owners to believe       that compliance   with
the requirements      is unimportant.

      In October 1989,  we testified on underground     storage tanks
before a subcommittee   of the House Small Business Committee.5       In
that testimony,  we recommended that the Administrator,       EPA,

      -- determine    what regulatory        course to follow      by (1) actively
         monitoring    the cost and availability           of tank insurance      and
         other financial      responsibility        mechanisms and (2)
         evaluating    how noncompliance         will  affect   tank owners'
         credit    and supplies    and

      --   plan and implement a strategy     to more actively            enforce      the
           financial responsibility   requirements.

     Although    EPA has taken     some actions  to address        our
recommendations,    it has not     fully implemented  them.

     Mr. Chairman, this concludes my prepared  statement.                    I will     be
happy to respond to questions  that you or members of the
Subcommittee  may have.




SAbility  of Underground Petroleum      Storage Tank Owners to Comply
With Federal Financial   Responsibility      Requirements (GAO/T-RCED-
90-9, Oct. 31, 1989).
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