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Do we need to update underground tank regulation?

Do We Need to Update Underground Tank Regulation?

Over the next five to 10 years, some 600,000 underground storage tank (UST) facility owners and operators must bring more than 2 million UST systems into compliance with federal and state technical standards for construction, leak detection, overfill protection and general operation, or permanently close the systems. The size and diversity of this community are underlying factors in the controversy surrounding the implementation of the Resource Conservation and Recovery Act. The Environmental Protection Agency estimates the cost of compliance to be in the billions of dollars, and when you add in the financial responsibility requirements, the equation becomes even more complex.

Responsible for implementing the federal tank regulations, state governments are currently trying to find a way to protect public health and the environment and still keep small businesses from shutting down in response to these burdensome new regulations. Petroleum marketers and service station dealers associations, at the national and state levels, have been fighting hard for some relief from the devastating economic effects of these new regulations.

Financial Responsibility

The focus, although not completely justified, has been on financial responsibility requirements. EPA rules require UST owners or operators in the petroleum marketing sector to demonstrate their ability to pay up to $1 million in cleanup costs and compensation to third parties for bodily injury or property damage in the event of a leak. Non-marketers whose facilities have a monthly throughput of 10,000 gallons or less, must demonstrate the ability to pay $500,000 per leak. While major oil companies and other large corporations can comply with these requirements by self-insuring, most tank owners must rely on insurance coverage that has been, to date, both scarce and expensive. Marketer associations argue that insurance companies writing policies for tank owners impose underwriting criteria and premium levels that are out of reach for the smaller tank owners.

At a recent public hearing held by the Wisconsin Assembly, small gas station owners told of impending financial disaster as a result of the implementation of the EPA rules. Small to medium-sized petroleum retailers and wholesalers added that insurance was only available or affordable to a limited number of tank owners, mainly large marketers. These businessmen argued that because major petroleum companies could meet the requirements for their retail outlets by self-insuring, small businesses were put at a serious competitive disadvantage.

It became apparent through the course of the Wisconsin hearing that small operators were facing two overwhelming obstacles to meeting the financial responsibility requirements. First, many of the facilities operated by small businesses are old, with some reporting tank systems older than 25 years. Many of these businesses are old, with some reporting tank sysin system upgrades and some banks are not willing to provide credit to uninsured small businesses for upgrades, mainly because an indeterminate number of these UST facilities are either leaking or have contaminated soil.

As older sites are upgraded or closed, contamination of varying degrees is being discovered when old tanks are closed or refurbished. Some small gas station owners in Wisconsin complained that they do not have the option of going out of business, as the costs associated with closing tanks and completing necessary cleanups is beyond their financial means. Without the cleanup, there is a dearth of prospective buyers for their properties.

Insurance Options

Pollution insurance companies cite the high number of older sites with existing contamination as the major reason for the restricted market for coverage and recent premium increases. There are a handful of insurance companies, risk retention groups and at least one risk purchasing group offering pollution insurance to tank owners and operators, and the market is slowly growing.

Many of the states that have enacted financial assurance funds in the past year have concentrated on providing an alternative to private insurance coverage, rather than focus on the real need to eliminate barriers to greater insurer participation. The states' approach has only added to the confusion in the UST insurance market and to the frustrations of tank owners and operators.

The range of cleanup coverage available to tank owners through state funds can vary greatly from state to state. For example, in Georgia, owners or operators of USTs can be reimbursed for all corrective action costs exceeding $10,000 but less than $1 million. In Illinois, the range of coverage for reimbursement of corrective action is over $100,000 but less than $1 million and the owner or operator must cover the first $100,000 using a private financial assurance mechanism, such as insurance.

Adding to the complexity of the state programs is the fact that differences exist in the way each state finances the fund, the level of funding available, eligibility requirements for owners or operators, reimbursement procedures, corrective action administrative requirements and cleanup criteria owners or operators must meet for corrective action. These factors become additive, making private insurer participation in the state funding program extremely difficult.

One option being explored by insurance companies is to try to "wrap" cleanup coverage around a state assurance fund through which the insurance company would pick up a portion or all of the EPA-required limits not covered by the state fund.

The diversity of funds has made wrap-arounds difficult for insurers because a different policy must be developed for each state. However, the biggest problem the wrap-around approach presents is, in many instances, the insurer is asked to give up the customary right of site intervention necessary to minimize environmental damage and subsequent restoration costs. If the state fund retains the cleanup responsibility and dictates the schedule for corrective action, the insurer potentially loses control over the cleanup claim. Another problem may occur if the list for site reimbursements grows too long, and the insurer must wait many months or years to be reimbursed for cleanups initiated by the insured tank owners that fall within the state fund coverage.


Florida saw the need early to clean up the problem in order to move forward with its loss prevention program. The state legislature instituted the first "amnesty" program to cover petroleum releases, which terminated December 31, 1988. Florida's "Super Act" program was originally designed to encourage tank owners to report releases without fear of having enforcement action taken against them and also to be eligible for either state reimbursement for cleanups or state cleanup of the site on the owner's behalf.

Florida's program resulted in over 9,000 amnesty notices being filed with the state before the termination date. Most notices were filed in the last few weeks before the deadline. Many of the later notices were protective filings to cover any potential cleanups, regardless of whether contamination had actually been discovered at the site.

This type of open-ended amnesty program suffers from several shortcomings. First, all tank owners storing petroleum are usually eligible for cleanup, regardless of responsibility for the incident or financial ability to pay for the cleanup. Only clear incidents of gross negligence were denied in Florida. Second, the huge number of claims that must be processed places an enormous administrative and financial burden on available state resources. Reimbursement claims must be reviewed and prioritized according to state guidelines, and the potential total funding needed for cleanups can become staggering. If all amnesty notifications in Florida turn out to be actual cleanups, the total liability to the state program is expected to exceed $1 billion, twice the amount of money that will be taken in at current funding levels over the next 10 years.

Another weakness of the amnesty approach is the lack of incentive to upgrade UST systems, because the facility owner or operator has not shouldered any responsibility for the contamination caused by the facility's operations. In response to this situation, some states have taken a more direct route by making low interest loans available to owners and operators of UST systems for upgrading to reduce the amount of contamination from leakage in the future. An upgraded tank population would also help increase the availability of insurance to move tank owners.

Public-Private Partnerships

Better environmental protection incentive and cleanup programs are needed if the insurance market is to develop into a viable alternative for all tank owners. Many owners and operators of sites that are presently contaminated by petroleum products are in need of financial assistance to undertake a cleanup. The cleanup of these contaminated sites is an opportunity for the public and private sectors to form partnerships that can complete site remediations expeditiously.

Public/private efforts can be structured as either a local or state-based approach, a Clean Sites model type approach or market-based approach. There are also many different alternatives for funding a partnership program.

The local-based approach is concerned with creating viable alternatives for hazardous waste disposal, and the concepts developed within this approach can be transferred to cleaning up contamination from underground storage tanks. On the local level, the management group could be a public benefit corporation, a newly created agency to handle cleanups or a UST cleanup utility arrangement. The group could be either publicly owned or operated by a private entity. However, public ownership is not necessarily perceived as an advantage either by the state or local existing regulators, the regulated community or the local residents. This could be especially true when dealing with a large number of cleanups in a very short time.

Public involvement may be needed to offset potential liabilities or shortcomings that provide a disincentive for totally private efforts. Several tools are available to assist the private sector, including: public financial support specifically for qualified UST cleanups; public contracts with a private partner that constitute financial support; public insurance indemnification or risk absorption; and public financial supplements for projects privately undertaken.

Possible funding options from these public/private partnerships include the following supports:

* grants provided to support a private

service contract for UST contamination

remediation on either the regional or local


* contracts for investigation, operation and

related cleanup services;

* public authority financing by creating a

series of regional UST remediation


* revolving fund financing similar to

existing state funds that guarantee or

insure repayment of UST cleanups;

* public risk assumption on the state or

local level to alleviate risk liability

encountered by private cleanups; and

* site acquisition efforts for the most

seriously contaminated sites and, after

cleanup, lease or sale of the sites back to

private developers.

The local-based approach could be difficult to implement and can be used only in states or localities with a strong interest in setting up a partnership and in providing enough incentives to the private sector to undertake this type of highly technical and potentially risky venture. The private corporation or the Clean Sites model type approach may be a more viable alternative for the long term.

Clean Sites, Inc. was created in 1984 "to help accelerate the cleanup of hazardous waste through voluntary participation." The goal of the organization is to facilitate cleanup activities by overcoming bureaucratic barriers that can slow down cleanup efforts. Clean Sites is funded by corporate contributions and, by the end of 1987, had assisted at 15 major Superfund sites with cleanup studies, waste removal and remedial actions. Clean Sites was also involved with five legal settlements which avoided the cumbersome court process.

The Clean Sites model could be applied to existing contamination from USTs and could incorporate a public/private partnership structure. It would be necessary to decentralize the structure to accommodate the problem on a national level. If the program were established on a national basis, it would have to be administered on at least a regional level. A potential framework for a Clean Sites approach might resemble the following:

* Formation of a private national

corporation to assist the cleanup of existing

contamination at sites unable to pay for

cleanup and not presently meeting

insurability status.

* Formation of branch offices in each state

or within each of the 10 EPA regions to

initiate specific cleanups and interact

with state and local UST regulatory


* Funding for cleanups could be a

combination of tax at the wholesale level on

gasoline marketing, tax credit incentives

for the owner or operator choosing to

partially fund initial cleanup activities or

site stabilization, selective grant

programs from federal or state governments

and corporate tax-deductible


The key to success for the Clean Sites approach is to make sure the private and public interaction is not delayed and that the funding options are flexible. The system must be designed so that many sites can be dealt with simultaneously and payments to cleanup contractors can be made quickly for completed work.

The market-driven approach, is characterized by private economic decisions, combined with regulatory requirements, that indirectly foster cleanup activities. Recent events in New Jersey clearly illustrate the market-driven approach.

The state's requirement for all retail petroleum marketing facilities to install stage II vapor controls has led to many site cleanups. In order to operate the stage II devices, piping runs must be dug up and new piping installed to capture and transport hydrocarbon vapors.

Uncovering tank and piping excavations has led to the discovery of previously undetected petroleum contamination on sites that had been cleaned up prior to installing the stage II vapor recovery devices and/or the upgrading of the entire UST system. Although currently exempted from New Jersey's ECRA statute, the owners and operators of gas stations may, in the future, become subject to its environmental review provisions that require site assessments to be conducted prior to any ownership, sale or transfer. The site assessment requirement may become mandatory in other states as well. The net effect of these requirements is that contamination that has previously gone undetected may become evident during the site assessment process and foster cleanups prior to a site ownership change.

Myra R. Anderson is assistant vice president and William P. Gulledge is vice president of Front Royal Group in McLean, VA.
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Author:Anderson, Myra R.; Gulledge, William P.
Publication:Risk Management
Date:Aug 1, 1989
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