oversight

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

Published by the Government Accountability Office on 1990-03-21.

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

                         United States General                Accountins!       OflIce
                         Testimony




 For   Release             Underground                Petroleum          Tank      Owners'
on Delivery
                           Ability          to      Comply        With      Federal      Financial
Expected       at
9:iO     a.m.     EST      Responsibility                    Requirements
Wednesday
March      21,    1990




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

                           Before    the
                           Committee      on            Small   Business
                           United    States              Senate
Mr. Chairman     and Members of       the Committee:

       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
Because thousands of tank owners might not have been able to meet
the deadline      for demonstrating        financial    responsibility        under
consideration       at the time, we recommended that the Environmental
Protection      Agency (EPA) phase in the requirements                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,   such as special       state funds.

       In a regulation  issued after        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.    On March
14, 1990, EPA announced that it will            amend the regulation      to extend
by one year the compliance        deadlines     for two categories     of smaller



lThese requirements    can be satisfied   by either  the tanks’                owners or
operators.    For convenience,   we refer  only to tank owners                 in this
statement.
2Superfund:   Insurinq        Underground       Petroleum   Tanks   (GAO/RCED-88-39,
Jan. 15, 1988) .

                                            1
firms.3       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.
Under EPA's newly announced rule,               Category   3 firms,     which comprise
smaller     firms,    will have until     April     1991, and category       4 firms--
which include        very small petroleum        marketing     firms;   most tank
facilities       that do not produce,       refine,     or market petroleum:       and
all local       governments --will    have until      October 1991 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

       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            trust    funds established           by some states.
However, it is uncertain              whether a sufficient            amount of affordable
commercial      insurance      or sufficient         state trust        funds are available
for owners in the last two categories--especially                           the many
thousands of small businesses.                  Recently,       one of the largest
suppliers      of tank insurance          announced that it is suspending                the
sale of new policies,            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

3GA0 had suggested     this        action   in testimony     on February   20, 1990,
before   the Subcommittee          on Environmental      Protection,    Senate
Committee on Environment            and Public    Works (GAO/T-RCED-90-29).
                                              2
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 owners may not be
able to pay for damages to the public        and the environment   caused by
tank leaks.    Therefore,    the issue of when to impose the financial
responsibility   requirements    mandated by law is important.

        EPA decided not to postpone             the regulations         or suspend
enforcement      for category        2 tank owners but last week announced a
decision    to postpone the category              3 and 4 deadlines          for one year.
Currently,     there does not appear to be reasonable                     assurance     that
category    3 and 4 firms can meet the financial                   responsibility
requirements.       We therefore         agree with EPA's postponement               decision.
During the extension          period,     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.     EPA also needs to continue               to work with the states           so that
more of them can use state             funds to help tank owners               in categories
3 and 4 satisfy       federal      financial      responsibility        rules in the
future.     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 federal       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.4        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

4According      to EPA, owners have reported    1.7 million    underground
petroleum     storage tanks to state regulatory     officials,    but EPA
estimates     that there are hundreds of thousands of unreported           tanks.
                                      3
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,       to become effective     over a lo-year        period.

        SARA subsequently        directed      EPA to issue regulations
stipulating      a minimum financial           responsibility        requirement      of $1
million     per occurrence        for owners of underground              petroleum    tanks.5
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 tanks they own.6          These regulations         were to be phased in over 2
years by size category          of tank owner: however,            EPA has recently
decided to extend the         phase-in    period     to 3 years.


       Under the law,       states  can with EPA approval  operate and
enforce   underground       storage  tank programs "in lieu of" the federal

5SARA 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.
~EPA originally     published   proposed financial            responsibility
regulations     in April   1987, with implementation             to have taken       effect
about June 1988.
                                            4
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's)         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
market.       Two sources provided         virtually        all of 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 these methods 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 that EPA phase in the 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 stated were most
important      for protecting    the public      and the environment.

THE INSURANCE MARKET AND
DEVELOPMENT OF STATE FUNDS

        Since our January 1988 report,            two developments     have made it
possible       for more tank owners to comply with the financial
responsibility          requirements.     First,    more insurance    companies have
started      offering      tank coverage.      Second, more states have created
funds to pay for damages caused by leaks from tanks 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 insuring     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     insurer    (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
                                          6
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.             Of the 10 insurance        companies we
contacted,       only two company representatives             said that private        tank
insurance      is currently      available     and affordable       for both category       3
and 4 firms.         When we spoke with representatives              of the largest
insurers     before EPA's announcement            of postponement,        they told us
they    favored postponing         the category     4 October 1990 deadline.

       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 firms are not
insurable      at present because the firms know little                    about    tank
technology      or risk management, and there was no actuarial                        history
for their      tanks.        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
cleanups       and in many cases compensate victims              of leaks.       EPA has
given final        or conditional      approval     to about 23 state       trust    Eunds
so that tank owners can use them to satisfy,                    at least    in part,     the
financial       responsibility      requirements.       EPA expects      that it will
approve additional            state funds in time for the deferred             financial
responsibility        deadlines.       EPA plans to use the additional             time
made available       by the extension   to work with the states  in
developing     trust   funds.   It should be noted that even with state
trust    funds, some tanks are in such poor condition       that they will
not qualify      for coverage   under the funds.
                                               7
      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.

        Within    the last  few weeks, prior     to EPA's extension      of the
compliance       dates,  we asked underground      storage tank program
officials      from 44 state    governments   plus the District     of Columbia
whether they thought        that category    3 and 4 firms would be able to
comply with the 1990 deadlines.            The majority    of the officials
said that half or more of the category      3 and 4 firms would not be
able to comply.    Even in states    with EPA approved trust  funds,
officials  were not optimistic    about owners' compliance.    Officials
in 9 of 21 states   with trust   funds we spoke with thought    half or
more of the category    3 owners would not be able to comply, and
officials  in 13 states   said the same thing about category     4 firms.

       In view of the status     of state  trust  funds and the condition
of the insurance       market, we believe  that EPA's decision  on the
financial    responsibility    deadlines  was appropriate.

NEED TO MONITOR
FUTURE DEVELOPMENTS

        During the next 12 to 18 months, EPA will  need to monitor
closely     conditions in the insurance market and the development                    of
state funds so that it can act appropriately                 as the extended
deadlines      approach.     Several  factors    indicate       that uncertainty       over
the ability      of small tank owners to comply with the financial
responsibility       requirements    may persist.        First,     most states    still
                                            8
do not have EPA-approved                  trust      funds.      It is uncertain           how many
will    obtain     approval        by the new 1991 deadlines.                   Second, a very
small percentage            of category          3 and 4 firms are now insured.                   The
10 insurers        we contacted           reported        having issued about 3,600
policies      to category          3 and 4 firms,           while EPA estimates             that these
two categories           include      225,000 owners.              Third,    because many of the
insurers      offering        pollution        liability       insurance      to underground
petroleum       storage       tank owners are new to this market,                        the extent     to
which they will            service      the tank owner population                 remains to be
seen.      Most of the insurers                we talked       with thought          that smaller
firms could not comply with the financial                             responsibility
regulations         for 1 or more years or could make no estimate                              at all.
In addition,         some insurers           require       that owners upgrade their              tanks
to qualify        for coverage.             This will        pose financial         hardships     for
some smaller          tank owners.           State and federal            programs to help tank
owners upgrade tanks are limited                         or non-existent.           Thirty     of 45
states     we contacted          had no plans to offer                such assistance.

        The need for close monitoring       is also indicated    by the
differences     between the abilities     of category    3 and category     4
firms to meet requirements.          The state officials     we contacted     were
more optimistic      about the compliance     prospects   of category     3 firms
than category      4 firms.

       In addition     to monitoring        the availability          of insurance         and
the development     of state financial            assistance       programs for small
businesses,     EPA needs to address another                issue in advance of the
1991 deadlines.       Representatives          of petroleum        marketers       raised a
possible    problem with the financial              responsibility         regulations         that
could not be 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
                                                   9
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,          the agency has begun to collect              information       on
insurance      availability.          But this data collection            effort    is
limited.        For example,        it covers only about half of 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
whether financial            responsibility        requirements     should be imposed in
 1 year.

MORE ACTIVE ENFORCEMENTOF THE FINANCIAL
RESPONSIBILITY REQUIREMENTS NEEDED

        EPA has assigned       a low priority         to enforcement      of the
financial    responsibility         requirements.         EPA's regions      are working
with 13 states      to check on the compliance               of category     1 and 2 firms
in these 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 an EPA official,
the states have also assigned enforcement                    a low priority.      Even if
financial    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 adopt         a more active       enforcement
strategy.      While it is reasonable          to be flexible        in penalizing
                                             10
firms that cannot comply with the regulations                 despite      their  best
efforts,    the law should be enforced          when it is willfully
disregarded      by firms for which deadlines          become    effective.       Tank
owners who incur the expense of compliance                should not be placed at
a disadvantage      with competitors       who can comply but do not.             EPA
should monitor and enforce         compliance      in states     where     it is
possible    for owners to obtain        insurance     or qualify      for state trust
fund coverage,      and the agency should encourage states                 to do the
same.     In light    of the extended      deadlines,     it will     be especially
important     for EPA to stress      the enforcement        of its standards        for
safe tank management.

CONCLUSIONS

         In closing,       Mr. Chairman,       too much uncertainty            exists      about
the insurance          market for smaller           firms with underground            tanks 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.           We support      EPA's
decision       to postpone the effective               date for deadlines         on category        3
and 4 firms until            1991.    This will        give states more time to
establish        trust    funds and EPA more time to assist                 states      in
developing         these funds and to better               assess the entire        financial
responsibility          situation.       In preparation          for the 1991 deadline,
EPA will      need considerably          more information           on the availability
and cost of insurance,              on state      financial      assistance      programs,       and
on the effects          of regulatory       violations         on the relations         of tank
owners with creditors              and suppliers.

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


                                                11
      In October 1989 we testified  on underground    storage tanks
before a subcommittee   of the House Small Business Committee.7                         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 Committee
may have.




7Ability  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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