Last January, USEPA published an Advanced Notice of Proposed Rulemaking, to implement Section 108(b) of CERCLA. USEPA’s approach has been to identify industries where a demonstration of financial responsibility will prevent future claims to Superfund. Bankruptcy is the leading cause of new projects moving into Superfund. It’s also the leading cause of PRP share increases in long-term cleanups.
Financial assurance is supposed to offset the probability – often the inevitability – of bankruptcy resulting in stranded environmental costs…to the taxpayers or peer PRPs. Cleanup projects that are already in the process will be subject to these requirements, once issued. If you’re managing a multiparty cleanup project, why is financial assurance a useful part of the relationship among the members of the PRP group?
Keep three scenarios in mind: “mind, bind and grind”.
Mind: documented financial assurance, even if it is just in the form of corporate guarantees and annual attestations, keeps PRPs contractually aware of the cost and pace to closure. For a site without current cash calls, employee turnover or a change in external counsel can unravel a PRP group.
Bind: for smaller PRPs without the financial strength to test out of financial assurance requirements, a binding instrument (like a letter of credit for the value of future cash calls) ensures a PRP group will not be an unsecured creditor if the PRP declares bankruptcy. Documenting financial assurance reinforces the corporate commitments.
Grind: when asked to provide a financial instrument, smaller PRPs with a significant allocation learn whether a multiparty site cleanup is a survivable exercise. If future cash calls are added to outside counsel and now financial instrument costs, a PRP will eventually quantify a better decision for all: cashing out promptly.
Remember that when USEPA knows a cleanup project has at least one deep-pocket PRP, their work is almost done. If a PRP group doesn’t implement an active financial assurance process, USEPA will enforce the work with a passive system until enforcement is needed. If you think of a cleanup project as the business risk that it is – a negative NPV investment that can get much worse – you would almost never select the peer PRPs as your partners. Financial assurance can clarify the decision of a shaky PRP to cash out of a site