The Financial Implications of Releasing Small Firm and Small Volume Contributors from Superfund Liability

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PREFACE

Recent Congressional proposals to reform the federal Superfund program release potentially responsible parties (PRPs) that are small in size or only played a minor role at the site from liability for cleanup costs. These reforms transfer the cleanup costs of parties released to the Superfund Trust Fund. This report estimates the number of PRPs that would be released and the cleanup costs that would be transferred to the Fund by recent proposals. It also estimates the cost transferred to the Fund per firm released and the financial consequences for those PRPs that remain liable. This research was funded by the U.S. Environmental Protection Agency and the Institute for Civil Justice. It should help policymakers and policy researchers assess the effects of modifications to Superfund’s liability provisions.

RAND Institute for Civil Justice 1700 Main Street, P.O. Box 2138 Santa Monica, CA 90407-2138 (310) 393-0411 x7893 Director: Alan F. Charles Research Director: Robert T. Reville For information about the Institute for Civil Justice, contact: Beth Giddens, ICJ Communications Director, [email protected]

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FIGURES

S.1.

Estimates of Number and Volume-Based Cleanup Costs of Small Firms at Generator/Transporter Sites ....................................... xvii

S.2.

Estimates of Number and Equal-Share Cleanup Costs of Small Firms at Owner/Operator Sites .......................................... xvii

S.3.

Percent of PRPs and Volume-Based Cleanup Costs Accounted for by Small-Volume Contributors..................................... xviii

4.1.

Ratio of Combined Volumetric Share of Business Firms with $3 Million or Less in Annual Revenues to Combined Volumetric Share of Business Firms with More Than $3 Million in Annual Revenues at 11 G/T Sites ............... 24

5.1.

Percent of Sampled Generators with Less Than 1 Percent Volumetric Share at 12 G/T Sites with Waste-In Lists and Site Cleanup Costs .................. 32

5.2.

Proportion of Combined Volumetric Share Accruing to PRPs with Less Than 1 Percent Volumetric Share at 12 G/T Sites with Waste-In Lists and Site Cleanup Costs .................................................. 32

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TABLES

S.1.

Cost of Superfund Liability Exemptions to the Fund Per Site-PRP Pair Released ...................................................... xix

2.1.

Distribution of Sites and PRPs by Number of PRPs at the Site.................. 4

2.2.

Characteristics of G/T and O/O Sites ................................... 6

2.3.

Data Subsets Used in Analysis ........................................ 8

3.1.

Type of PRPs at Nonfederal Superfund Sites ............................. 14

3.2.

Annual Revenue of Business Firms at Nonfederal Superfund Sites ............. 15

3.3.

Relation Between Number of Employees and Annual Revenue for Business Firms at NPL Sites ................................................ 16

3.4.

Number of Employees for Business Firms at Nonfederal Superfund Sites ........ 17

3.5.

Average Volumetric Share Per Generator by Firm Size...................... 18

3.6.

Percent of Firms Released by Various Liability Cutoffs ..................... 19

4.1.

Distribution of Cleanup Costs at O/O Sites by PRP Type and Size of Business Firm ................................................. 22

4.2.

Comparison of Subsample of 12 G/T Sites Used in Cleanup Cost Analysis with the Overall Sample of G/T Sites ...................................... 23

4.3.

Distribution of Cleanup Costs for Generators at G/T Sites by PRP Type and Firm Size ...................................................... 25

4.4.

Distribution of Cleanup Costs for Owners and Operators at G/T Sites by PRP Type and Firm Size............................................ 26

4.5.

Proportion of Cleanup Costs Borne by Small Firms ........................ 28

4.6.

Cleanup Costs Potentially Transferred to EPA When Business Firms of Different Sizes Are Released from Liability ............................ 29

5.1.

Volumetric Share of Generators ...................................... 33

5.2.

Relation Between Volumetric Share and PRP Type and Annual Revenue ........ 34

5.3.

Volume-Based Cleanup Costs by Volumetric Share Category for Generators at 12 G/T Sites .................................................... 34

6.1.

Distribution of Firms in 18-Site Study by Annual Revenue ................... 37

6.2.

Cleanup Expenditures Through 1991 by Firm Annual Revenue ............... 38

7.1.

Summary of Business Firms Released and Cleanup Costs Transferred to EPA by Proposals to Release Small Business Firms from Superfund Liability ......... 42

7.2.

Summary of Generators Released and Cleanup Costs Transferred to EPA by Proposals to Release Small-Volume Generators from Superfund Liability ........ 44

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B.1.

Site Selection and Response Rate for Site Survey .......................... 49

B.2.

Number of Site-PRP Pairs at 114 Responding Sites Reported by RPMs and in SETS .......................................................... 49

B.3.

PRP Sampling Rates at 114 Sites ...................................... 50

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SUMMARY

The Superfund program was established in 1980 to provide for the cleanup of the nation’s worst inactive hazardous waste sites. Congress adopted a liability approach to funding it: Parties that generated or transported the hazardous material at a site or that owned or operated the site—potentially responsible parties—were held liable for cleaning it up. The rationale for this approach was to make polluters pay for cleanups, to shift the burden to the private sector, and to create strong incentives for firms to handle hazardous substances more carefully in the future. Although the program has produced some benefits, it has long been criticized for being slow, inefficient, and unfair. Consequently, policymakers have been considering modifications to Superfund’s liability provisions, including exempting from liability small businesses and parties that played only a minor role at a site. Some proposals would also transfer the cleanup costs of the exempted parties to the Superfund Trust Fund. In this case, the cleanup costs of the exempted parties would then be paid from the Superfund Trust Fund, a fund made up of general appropriations and of tax revenues from oil and chemical companies. This report provides information that can help decisionmakers understand the financial effects of such proposals on the parties potentially responsible for cleanup (potentially responsible parties or PRPs) and on the Superfund Trust Fund. We have assembled information on the size and waste contributions of parties involved at Superfund sites to analyze •

the number and proportion of business firms that would be released by proposals to exempt small firms from Superfund liability

•

the dollar value of the cleanup costs that would be shifted to the Trust Fund under the provisions of current reform proposals

•

the proportions of PRPs and of associated cleanup costs that would be released by proposals to exempt PRPs that generated only a small proportion of the waste at a site

•

the cost-effectiveness of the proposed liability exemptions in terms of dollars transferred to the Fund per firm released

•

the effect of releasing small firms or small-volume contributors on the cleanup costs of the PRPs that would remain liable.

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DATA AND ANALYTIC APPROACH To begin the study, we selected a random sample of 1,774 site-PRP pairs from 114 sites on the Superfund National Priorities List (NPL).1 A site-PRP pair identifies a particular PRP at a particular site. Next, we classified these PRPs by type (individuals, government agencies, or business firms) and then used data from Dun & Bradstreet and our own telephone survey to determine the annual revenue and number of employees for the business firms in the sample. We collected information on the expected cleanup costs for the sites in the sample, and where available, the waste contributions of the individual PRPs to the site. For the purpose of this analysis, Superfund sites are classified into two basic types— generator/transporter (G/T) sites and owner/operator (O/O) sites. G/T sites are sites where waste was generated or transported by parties other than the owners and operators of the site. O/O sites are sites at which no hazardous substances were contributed by parties other than those that owned or operated the site; in other words, the PRPs that generated and transported the waste are the same as those that owned and operated the site. We analyze these sites separately because they differ significantly in expected cleanup costs and in the number of PRPs per site. For example, the EPA estimates that G/T sites account for 53 percent of nonfederal NPL sites, and, according to our estimates, they account for about 75 percent of total cleanup costs. We also estimate that there are 127,000 site-PRP pairs at nonfederal NPL sites, with the vast majority— 125,700—at G/T sites. Furthermore, separate analyses of G/T and O/O sites are necessary because some reform proposals have called for releasing PRPs at one type of site but not at the other. Reforms that shift the cleanup costs of small firms released from Superfund liability to the Superfund Trust Fund must somehow determine the cleanup liabilities of these firms. Concepts such as “fair share allocation”2 or “equitable share of liability”3 are used in reform proposals to allocate liability. Based on the available information, we developed two measures of the cleanup costs that might be shifted to the Trust Fund by such concepts: volume-based cleanup costs for generators (which are only at G/T sites) and equal-share cleanup costs for all other PRPs at G/T sites (transporters, owners, and operators) as well as for all PRPs at O/O sites. Volume-based cleanup costs are calculated by multiplying a generator’s share of the total volume of waste at a site by the expected cleanup cost of all generators at the site. For the non-generators at G/T sites, equal-share cleanup costs are calculated by dividing the cleanup liability of non-generators by the number of non-generators. At O/O sites, equal-share cleanup costs are determined by dividing ___________ 1There are 1,210 nonfederal sites listed on the Superfund National Priorities List. 2U.S. Senate, 1999, p. 76. 3U.S. House of Representatives, 1999, p. 115.

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the overall expected site cleanup cost by the number of PRPs at the site (the number of PRPs that have ever owned or operated the site). Volume-based cleanup cost seems like a reasonable estimate of the cleanup costs that might actually be transferred to the Fund by reform proposals. On the other hand, the equalshare cleanup costs will probably overstate the fair share of small firms because a firm’s degree of involvement in a site is likely to be correlated with its size. Consequently, in constructing ranges for cleanup costs that may be transferred to the Fund by non-generators at G/T sites and by small firms at O/O sites, we base the lower bound on the smallest estimate found in our various analyses. Although the resulting range of estimates is large, it is likely to contain the magnitude of cleanup costs that would actually be transferred to the Fund based on a firm’s involvement with a site.

THE EFFECTS OF PROPOSALS TO RELEASE SMALL BUSINESS FIRMS Recent congressional proposals to reform Superfund liability define small firms as either having $3 million or less in annual revenue or employing 75 or fewer people. We focus here on the effects of releasing these two groups of firms, although the study findings include estimates for other firm-size cutoffs. Estimates for Generator/Transporter Sites By either definition—annual revenue or number of employees—small firms account for a substantial share of the businesses at G/T sites. The top left panel of Figure S.1 illustrates that between 44 and 63 percent of site-firm pairs have $3 million or less in annual revenue. Estimates for the share of site-firm pairs with 75 or fewer employees are higher (57 to 72 percent). These percentages translate into a sizable number of site-firm pairs. We estimate that between 40,000 and 57,000 of the 125,700 site-PRP pairs at non-federal G/T sites would be released by a $3 million annual revenue cutoff; 52,000 to 65,000 pairs would be released by the employee cutoff measure. (See the middle panel of Figure S.1.) Despite their large numbers, small firms account for a more modest share of the cleanup costs at G/T sites. As shown in the top panel of Figure S.1, estimates of the proportion of generator cleanups costs that would be transferred to the Fund by a $3-million liability cutoff range from 17 to 29 percent (and 34 to 43 percent of firms with fewer than 75 employees). Estimates for owners, operators, and transporters range from 5 to 51 percent (or 13 to 60 percent for the alternative measure). The wide range reflects our lack of information on the degree of involvement of the owners, operators, and transporters at the sites. Our findings at G/T sites are based on the 12 sites where we were able to assemble information of the waste contributions of

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RANDMR1171-S.1

≤ 75 employees ≤ $3 million annual revenue

Proportion of site-firm pairs

Generators Proportion of cleanup costs

Nongenerators 0

10

20

30

40 50 Percent

60

70

80

≤ 75 employees ≤ $3 million annual revenue

Site-firm pairs released 0

10

20

30 40 50 Site-firm pairs (1000s)

60

70

≤ 75 employees Generators Costs transferred to Fund by

≤ $3 million annual revenue

Nongenerators Total

0

2

4

6 $ Billions

8

10

12

Figure S.1—Estimates of Number and Volume-Based Cleanup Costs of Small Firms at Generator/Transporter Sites generators to the site. Comparing these sites with the other G/T sites in our sample suggests that this subset of sites will, if anything, overstate the cleanup costs accruing to small generators. The results should be interpreted cautiously, however, given the small sample size. The shares of cleanup costs potentially transferred to the Fund at G/T sites translate into sizable dollar amounts. (See the bottom panel of Figure S.1.) We estimate that total costs transferred to the Fund would fall between $3.1 billion and $8.9 billion if firms with $3 million or less in annual revenue are exempted at G/T sites. The range rises to between $6.4 billion and $11.8 billion for firms with 75 or fewer employees. The size of these potential transfers can be

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placed into perspective by comparing them with the EPA’s $36.3 billion (or about $30 million per site) cost estimate for cleaning up all non-federal NPL sites. Estimates for Owner/Operator Sites The proportions of site-firm pairs released and the cleanup costs potentially transferred to the Fund by exempting small business firms at O/O sites are lower than at G/T sites. (See Figure S.2.) We estimate that there are only 1,300 site-PRP pairs at all the O/O sites on the NPL. Exempting firms with $3 million or less in annual revenue would release only 200 to 300 site-PRP pairs. Exempting firms with 75 or fewer employees would release 300 to 400 pairs. Cleanup costs at O/O sites are only about one-third those at G/T sites, but the cleanup costs potentially transferred to EPA are still a sizable $400 million to $900 million for the $3-million cutoff and $1.2 billion to $1.7 billion for the 75-employee cutoff. The costs actually transferred to the Fund by liability reforms may be much lower than the estimates above. The EPA reports that PRPs have agreed to perform cleanups worth over $15 billion at NPL sites through FY 1998. Thus, restricting the exemption to new cleanup commitments or expenditures might reduce the totals by as much as half. Continuation of EPA policies to pay the cleanup costs at orphan sites (i.e. sites for which no viable PRPs have been identified) and for some orphan shares at sites where PRPs have been identified will also reduce RANDMR1171-S.2

Proportion of site-firm pairs

≤ $3 million annual revenue

≤ 75 employees

Proportion of cleanup costs 0 Site-firm pairs released

10

15

20 Percent

≤ $3 million annual revenue 0

Costs transferred to Fund

5

50

100

25

30

35

40

350

400

≤ 75 employees

150 200 250 Site-firm pairs

300

≤ 75 employees ≤ $3 million annual revenue 0

0.2

0.4

0.6

0.8 1.0 $ Billions

1.2

1.4

1.6

Figure S.2—Estimates of Number and Equal-Share Cleanup Costs of Small Firms at Owner/Operator Sites

1.8

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the totals. To date, however, these expenditures have not been large relative to the total cleanup bill at all nonfederal NPL sites. THE EFFECTS OF PROPOSALS TO RELEASE PRPs THAT ARE RESPONSIBLE FOR A SMALL PROPORTION OF WASTE AT A SITE Small-volume generators account for the vast majority of generators at G/T sites but a small share of the volume-based cleanup costs.4 Figure S.3 shows that at the subset of 12 G/T sites for which the required data were available, 96 percent of the site-generator pairs have a volumetric share less than or equal to 1 percent. Taken together, they account for only 22 percent of the volume-based cleanup costs. Even more startling, nearly three-quarters of generators have volumetric shares less than 0.01 percent (each accounting for less than 1/10,000 of the waste at the site) and total only 0.3 percent of the volume-based cleanup costs.

RANDMR1171-S.3

Site-generator pairs

Volume-based cleanup cost

100

Percent

80 60 40 20 0

≤ 0.01%

≤ 0.10%

≤ 1.00%

Volumetric share

Figure S.3—Percent of PRPs and Volume-Based Cleanup Costs Accounted for by Small-Volume Contributors The characteristics of the 12 sites used in this part of the analysis probably cause our estimates to overstate somewhat the proportion of small-volume PRPs and volume-based cleanup costs that ___________ 4Since proposals to release PRPs that contributed only a small portion of the waste at a site target generators at G/T sites, we do not address how such proposals might affect O/O sites or transporters, owners, and operators (non-generators) at G/T sites. However, our analysis suggests that restricting attention to generators at G/T sites would still address at least 85 percent of the PRPs at all nonfederal NPL sites and roughly 50 percent of the cleanup costs.

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accrue to them, but the estimates are probably suggestive of the distribution at all G/T sites on the NPL.

COST OF LIABILITY EXEMPTIONS TO THE FUND PER PRP RELEASED In terms of the cost potentially transferred to the Fund per site-PRP pair released, exempting firms at G/T sites appears preferable to exempting those at O/O sites, and exempting firms with $3 million or less in annual revenue appears preferable to releasing those with 75 or fewer employees. Our estimates of the cost per site-PRP pair released range from $54,000 to $222,000 for a $3-million cutoff at G/T sites and from $1.3 million to $4.5 million at O/O sites (see Table S.1). The cost per site-PRP pair released is higher across the board for a 75-employee cutoff. Targeting firms that contributed only a small proportion of the waste to a site appears to be far more cost-effective than targeting small firms. For example, releasing generators that generated less than 0.01 percent of the waste at a site would release a large number of site-PRP pairs but would transfer only $600 to $800 to the Fund per site-PRP released. Even a 1.0 percent cutoff is attractive in terms of cost per site-PRP released relative to exemptions based on a firm’s size. Table S.1 Cost of Superfund Liability Exemptions to the Fund Per Site-PRP Pair Released (in $1000/site-PRP pair released) G/T Sites Liability Cutoff

O/O Sites

Generators

Non-Generators

All PRPs

Firm Size Cutoff $3 million 75 employees

$1,300–4,500 $3,000–5,700

$51–169 $90–194

$28–880 $67–867

$54–222 $98–227

— — —

$0.6–0.8 $6–8 $36–48

— — —

— — —

Volumetric Share Cutoff 0.01 percent 0.10 percent 1.00 percent

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EFFECTS OF LIABILITY REFORMS ON THE PRPs REMAINING LIABLE Small firms exempted from Superfund liability will clearly benefit from such an exemption, but the benefit to large firms remaining at the site—if any—will depend in part on how the cleanup costs transferred to the Trust Fund compare with what small firms would have paid at the site under the current liability system. Comparing the estimates of cleanup costs potentially transferred to the Fund with data on actual cleanup costs collected from past work performed by the RAND Institute for Civil Justice suggests that actual cleanup costs for small firms (in terms of annual revenue or numbers of employees) are far less than the costs we have estimated that potentially could be transferred to the Fund. Whether or not this relationship will persist over time as sites move through the cleanup process and large firms attempt to recover costs from small firms is unknown. But if it does, large firms would benefit if a fair share, as defined here, of small firms’ liability is transferred to the Fund. Furthermore, these results suggest that even if the liability reforms do not transfer the cleanup costs of the exempted firms to the Fund, the actual losses to the firms remaining liable would be much less than estimates based on volume-based or equal-share cleanup costs. This scenario can be understood if one considers, for example, an NPL site where large firms are liable for 80 percent and small firms are liable for the remaining 20 percent of volume-based cleanup costs. Large firms often pay more than their volumetric share; say they pay 95 percent of the cleanup costs. If small firms then are released from liability and large firms must pay the entire cost, they actually will pay only 5.3 percent more than they are already paying, not the 25 percent more that the volume-based cleanup costs of the small firms would suggest. Whether or not cleanup costs are shifted to the Fund, releasing small firms may also reduce the legal and other transaction costs of the larger firms that remain liable. Transaction costs may be lower if the number of PRPs at the site declines, and they will also probably fall as the amount of cleanup costs at stake falls. While there is good evidence that large firms will benefit from the transfer of small firms’ cleanup costs to the Fund, the effect of such a transfer on the larger-volume contributors remaining liable is ambiguous, because small-volume contributors can be large firms that currently pay cleanup costs far in excess of their share of the waste at the site.

COMPLICATIONS TO IMPLEMENTING THESE LIABILITY REFORMS Moving to implement reforms that would release small firms or small-volume contributors from liability and transferring their volume-based cleanup costs to the Fund raises several difficult issues. First, not all PRPs are business firms. One-quarter of the site-PRP pairs in our sample appear to be individuals. We do not know how these individuals became connected to

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sites. Some may have sent household waste to a site, but others may have disposed of waste generated by firms at which they were employees or owners. Consequently, many individuals may claim to be covered by proposals to release small firms from liability, generating investigation costs and perhaps increasing the share of site-PRP pairs released. Second, volumetric-share allocations will have to be constructed for many sites on the NPL. EPA site managers had volumetric information for only 12 of the 51 G/T sites in our sample. Even though private parties may have assembled waste-in information at some additional sites, this low proportion suggests that waste-in lists have not been assembled at a large number of sites. It may be costly, and in some cases impossible, to assemble this information. Finally, if transporters, owners, and operators are to be released, methods to allocate cleanup costs among them must be developed. Resolving all these issues will take time and undoubtedly generate a great deal of contention. Policymakers must decide whether the additional transaction costs will be worth the benefits of liability reform.

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ACKNOWLEDGMENTS

Several people made important contributions to this project. Tom Gillis at U.S. EPA helped define the initial project. EPA’s Chris O'Donnell helped us gain access to various EPA databases and coordinated our survey of Superfund remedial project managers within the Agency. Bruce Pumphrey and Peter Tsirigotis, then in the Office of Remediation Site Enforcement, were extremely helpful in providing data as well as direction on what analyses would be most useful to the reauthorization debate. Pat McColloch and Bruce Gruenenald at DPRA in Rosslyn, VA were also very responsive to our data requests. Corey Warshaw at Dun & Bradstreet Information Services spent a good deal of time understanding the needs of a different type of customer than normally comes to Dun & Bradstreet. We appreciate his efforts to provide the data we needed and to personally search the Dun & Bradstreet database for firms in our sample that were not matched in the initial run. The report benefited greatly from comments made on the various drafts. Jim Hammitt at the Harvard School of Public Health and Mark Bernstein at RAND provided helpful formal technical reviews. Bruce Pumphrey provided useful and detailed comments on the final draft, and Steve Garber at RAND provided insightful comments on an earlier draft. Many people at RAND also made important contributions to the project. Donna Hoffman ran the RPM survey and meticulously coded the survey data, constructed the PRP sample frame, and picked the sample. Her thoroughness contributed greatly to the project. Bob Bell helped design the sampling approach, John Adams provided advice on how to construct the confidence intervals, Tanya Burton wrote the computer code to merge EPA databases with our own, and David Bassin and Pamela Gross located and surveyed the firms that Dun & Bradstreet could not find. Mary Vaiana and Beth Giddens helped make the presentation clearer and more accessible, Miriam Polon edited the document, and Pat Williams, Robin Grant, and Nikki Wickham formatted and corrected it.

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1. PROPOSALS TO REFORM SUPERFUND’S LIABILITY PROVISIONS

Policymakers have been considering various modifications of Superfund's liability provisions, including exempting small businesses and parties that played only a minor role at a site from liability. Some proposals would transfer the cleanup costs of the exempted parties to the Superfund Trust Fund. This report provides information that can help decisionmakers understand the financial effects of such proposals on the parties potentially responsible for cleanup under current law and on the Superfund Trust Fund. 1.1 THE SUPERFUND PROGRAM The Superfund program was established by the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 to clean up the nation’s worst inactive hazardous waste sites. Rather than adopt a pure public works program funded by tax revenues, Congress emphasized a liability approach: Parties that generated or transported the hazardous materials at a site or that owned or operated the site (termed potentially responsible parties [PRPs]) are liable for cleaning it up. The rationale for the liability approach was to make polluters pay for cleanups, to shift the cleanup burden from the public to the private sector, and to create strong incentives for firms to handle hazardous substances more carefully. The program has produced some of the benefits envisioned but has been criticized for being slow, inefficient, and unfair. Many believe that cleanups take much longer than they should, that assigning liability among the parties at a site creates excessive legal and other transaction costs,1 and that parties can be required to pay cleanup cost far in excess of their contribution to the waste at the site.2 1.2 PROPOSALS TO EXEMPT PARTIES FROM SUPERFUND LIABILITY Congress is responding to criticisms of the program by considering proposals to reform Superfund’s liability provisions (as well as other aspects of the program). Both the bill currently under consideration in the House of Representatives (H.R. 1300) and the bill currently under consideration in the Senate (S. 1090), release small business firms from liability. H.R. 1300 would release from liability businesses with 75 or fewer employees and $3 million or less in annual revenues. S. 1090 would release businesses with 75 or fewer ___________ 1See Dixon (1994), Dixon, Drezner, and Hammitt (1993), and Acton and Dixon (1992) for estimates of the transaction costs generated at Superfund sites. 2Superfund’s joint and several liability provision means that a PRP can be held liable for cleaning up an entire site even if it was responsible for only a small share of the waste at a site.

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employees or with $3 million or less in annual revenue. Both bills shift cleanup costs attributable to these firms to the Superfund Trust Fund. Concepts such as “equitable share of liability” and “fair share allocation” are used to define the cleanup costs attributable to small firms. The Senate bill would also release parties that only sent a small amount of waste to the site. The so-called de micromis exemption would apply to parties that sent less than 200 pounds or 110 gallons of material containing hazardous substances. Other proposals have called for releasing parties that contributed less than one percent or 0.1 percent of the waste to the site. 3 1.3 CONTRIBUTION OF THIS STUDY This study assembles information on the size and waste contributions of the parties involved at Superfund sites to analyze the effects of releasing small firms and firms that contributed only a small proportion of waste at a site from liability. In particular, we estimate •

the proportion and number of business firms that would be released by proposals to exempt small firms from Superfund liability

•

the magnitude of the cleanup costs potentially shifted to the Trust Fund

•

the proportion of PRPs and associated cleanup costs released by proposals to exempt PRPs that only generated a small proportion of the waste at a site

•

the cost-effectiveness of liability exemptions in terms of dollars transferred to the Fund per firm released

•

the impact of releasing small firms or small-volume contributors on the cleanup costs of the PRPs that remain liable.

1.4 ORGANIZATION OF THE REPORT The next section provides an overview of the data and analytic methods used in the analysis. Section 3 presents our findings on the distribution of the business firms at Superfund sites by annual revenue and number of employees. Findings on the magnitude of cleanup costs that could potentially be shifted to EPA by the liability exemptions are reported in Section 4. Section 5 presents findings on the proportion of PRPs released by proposals to exempt smallvolume contributors from Superfund liability and their associated cleanup costs. Section 6 examines the impact of releasing small firms or small-volume contributors on the PRPs that remain liable. We integrate and summarize our findings in Section 7 and calculate the costeffectiveness of the various liability reforms. The appendices provide additional detail on survey and statistical methods. ___________ 3See, for example, Inside EPA’s Superfund Report (1998), p. 20.

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2. DATA AND METHODS

In this section we describe first the data and then the methods used to estimate the quantities of interest listed in Section 1. 2.1 DATA 2.1.1 Sample of NPL Sites We assembled a list of the known PRPs at a sample of sites on the NPL. To do this, we selected 200 sites at random from the 1,126 nonfederal NPL sites as of mid-1993. We then sent a short survey to the EPA Regional Project Manager (RPM) for each site asking for information on the number of PRPs; their names, addresses, and telephone numbers; and the amount of waste they sent to the site. (A copy of the survey instrument is included as Appendix A.) The survey was completed for 114 of the 200 sites (57 percent). The distribution of sites and response rate by EPA region is shown in Appendix B. The RPMs reported 10,671 site-PRP pairs at the 114 responding sites. The number of site-PRP pairs measures the number of parties identified by RPMs as potentially liable at the sites, whether or not they are financially viable and whether or not EPA has been able to locate or contact them. To this number we added site-PRP pairs that were not reported by the RPMs but were listed at these sites in EPA’s Site Enforcement Tracking System (SETS).1 This increased the number of pairs by 12 percent to 11,939.2 A proportional extrapolation of the 11,939 site-PRP pairs at the 114 sites to all 1,210 nonfederal NPL sites that have been listed on the NPL through mid-1999 implies that approximately 127,000 site-PRP pairs have been named for the entire NPL. The number of distinct PRPs is lower because some PRPs are involved at many sites.3 Table 2.1 reports the distribution of sites and site-PRP pairs by the number of PRPs at the sampled sites. Sites with zero PRPs are sites at which no PRP, viable or not, has been identified. Note that nearly 90 percent of the site-PRP pairs are at sites with 200 or more PRPs. ____________ 1These might be PRPs that were involved in earlier EPA investigations or enforcement actions but are no longer being pursued by EPA. They may also simply be PRPs that are erroneously linked to the site. The relationship between the RPM and SETS databases warrants further investigation. 2SETS reported only 2,796 site-PRP pairs at these sites. See Appendix B for details. 3Our analysis of a 15 percent sample of the 11,939 site-PRP pairs (discussed below) found that the PRP is the same in approximately 6 percent of the site-PRP pairs. Further analysis is required to determine what this implies about the number of distinct PRPs on the NPL.

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2.1.2 Sample of Potentially Responsible Parties We randomly selected 1,774 site-PRP pairs (15 percent) from the 11,939 site-PRP pairs at the 114 sites. Because we wanted to ensure that PRPs from all sites were represented in the sample, the sampling rate was based on the number of PRPs at the site—with higher sampling rates at sites with fewer PRPs. The sampling rates are detailed in Appendix B. We classified the 1,774 PRPs by type—with type referring to whether the PRP is an individual, government agency, or business firm. We determined type based on name4 and then used Dun & Bradstreet data, coupled with our own survey of the businesses that were not in the Dun & Bradstreet database, to determine the size of the 1,426 business firms. Dun & Bradstreet maintains the most comprehensive database on U.S. business firms. It contains information on 18 million publicly and privately held U.S. firms and has annual sales figures for 7.7 million of them (Dun & Bradstreet, Inc., 1993).5 The database focuses on currently operating firms. Firms that go out of business remain in the database for a few years but are then deleted. We asked Dun & Bradstreet to provide information on the line of business, annual sales, number of employees, and parent company for each of the business firms in our sample. Dun & Bradstreet updates the information in its database regularly. The data were extracted in 1994, Table 2.1 Distribution of Sites and PRPs by Number of PRPs at the Site Sites Number of PRPs 0 1 2-9 10-49 50-199 200-999 ≥ 1000 Total

Number 10 24 41 21 8 7 3

Percent of Total 9 21 36 18 7 6 3

114

100

Site-PRP Pairs Percent Number of Total 0 0 24 0.2 151 1 419 4 736 6 3,222 27 7,387 62 11,939

100

____________ 4PRPs that had names not suggestive of either a government agency or a business were classified as individuals. For example, “The John Doe Company” and “John Doe and Sons” would be classified as businesses, but “John Doe” would be classified as an individual. 5Some of these firms may be subsidiaries or divisions of larger firms, but we do not know what fraction. The Internal Revenue Service estimates that there were approximately 20 million business firms nationwide in 1990 (Internal Revenue Service, 1994, p. 189).

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so most of the information is likely to be at least as recent as 1990. Because the parent company is normally liable for the Superfund liabilities of its subsidiaries and divisions, we report the annual revenues for the parent company of the named PRP.6 Annual revenues are reported in current-year dollars, so the figures reported represent a mix of 1990 through 1994 dollars. The data on annual revenues from Dun & Bradstreet are now getting old but are still relevant to the proposed Superfund liability reforms. S. 1090 defines small businesses in terms of employees or annual revenues in the taxable year preceding the date of transmittal of notification that the business is a potentially responsible party (U.S. Senate, 1999, p. 45). The same is true in the House version for annual revenues, but the employee cutoff is defined in using the average number of employees over the 3 years prior to enactment of the bill (U.S. House, p. 74). Potentially responsible parties have been notified from the early 1980s to the present, so the dates of the Dun & Bradstreet data fall in the middle of the relevant range. Approximately 72 percent of the 1,426 sampled business firms were in the Dun & Bradstreet database. Using CD-ROM databases such as Disclosure (produced by Disclosure, Inc. of Bethesda, MD) and telephone directory assistance, we attempted to contact the remainder directly and ask for sales and employment information. This effort increased the percentage of firms found modestly—from 72 to 77 percent. 2.2 ANALYSIS METHODS 2.2.1 Generators, Transporters, Owners and Operators Through much of our analysis we distinguish between PRPs based on their role at the site. As the categories imply, generators generated the waste deposited at the site, transporters transported the waste to the site, and owners and operators owned or operated the site. PRPs may have multiple roles at the same site. 2.2.2 Generator/Transporter and Owner/Operator Sites Where possible, we analyze the outcomes of interest separately for owner/operator (O/O) and generator/transporter (G/T) sites. O/O sites are sites at which no hazardous substances were contributed by parties other than those that owned or operate the site. At O/O sites, the PRPs who generated and transported the waste are the same as those who owned and operated the site. G/T sites are sites where waste was generated or transported by parties other than the owners and operators of the site. At G/T sites, generators and ____________ 6In Dun & Bradstreet terminology, the parent company is the one corresponding to the ultimate DUNS number.

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transporters may be different from the owners and operators. We separately analyze these two types of sites because they differ a great deal in expected cleanup cost, number of PRPs per site, and the methods for allocating cleanup costs to the PRPs. We also analyze them separately because some liability reforms proposals have called for releasing PRPs at one type of site but not at the other.7 About 47 percent of sites on the NPL are O/O sites and about 53 percent are G/T sites.8 This breakdown roughly parallels the split between G/T and O/O sites in our sample (see Table 2.2). As shown in Table 2.2, G/T sites have far more PRPs than O/O sites on average and are only three times as expensive.9 We combine (1) the ratio of the number of site-PRP pairs at G/T and O/O sites with (2) the relative frequencies of the two types of sites on the NPL and (3) the estimated 127,000 site-PRP pairs at all nonfederal NPL sites to estimate the number of site-PRP pairs at G/T sites and O/O sites. We conclude that there are 125,700 site-PRP pairs at G/T sites and only 1,300 at O/O sites. The ratio of cleanup costs at G/T and O/O sites implies that G/T sites account for roughly 75 percent of the cleanup costs at all nonfederal NPL sites. Recent EPA estimates of the cost of different phases of the cleanup process suggests that the average nonfederal NPL site costs Table 2.2 Characteristics of G/T and O/O Sites

Number of Sites in Samplea Average number of PRPs Average ultimate cleanup cost ($ millions)

G/T Sites 51 231 21.5b

O/O Sites 49 2.6 8.1c

a Four of the 104 sites where PRPs have been identified have not been classified as either G/T or O/O sites. bBased on 43 sites for which an estimate of ultimate cleanup cost was available. cBased on 43 sites for which an estimate of ultimate cleanup cost was available.

____________ 7Some EPA staff, for example, have discussed limiting liability releases to G/T sites. 8Based on data provided by Bruce Gruenenald of DPRA to the author in July 1999. 9Estimates of cleanup costs for most sites were taken from EPA’s RPM Site Database (U.S. EPA, 1994). We used the answer to question E53: “Estimate a) the dollar range that represents the money spent or likely to be spent by the PRPs for site cleanup, and b) all the events included in this estimate.” We obtained estimates directly from RPMs for some sites when the entry in the RPM Site Database was missing.

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about $30 million to clean up.10 This extrapolates to $36.3 billion for all 1,210 nonfederal NPL

sites, with G/T sites accounting for $27.2 billion and O/O sites the remaining $9.1 billion. 2.2.3 Types of PRPs at Nonfederal NPL Sites We analyze the distribution of PRPs by type at G/T sites, O/O sites, and at all sites. As discussed above, we classify PRPs as individuals, government agencies, or business firms, based on name. We do not know how PRPs that are classified as individuals became connected to the sites. Some may have sent household waste to the sites. Others may have been associated with business firms at the time of disposal, either as employees or owners. Table 2.3 lists the different data subsets used in the various analyses in this report. The full dataset of 1,774 PRPs at 104 sites (Dataset 1) is used to analyze the distribution of type at all NPL sites. Datasets 3 and 9 are used to analyze the distribution at G/T sites and O/O sites, respectively. 2.2.4 Size of Firms at Nonfederal NPL Sites We examine the distribution of business firms by size at G/T sites, O/O sites, and at all sites. Datasets 2, 4, and 10 are used for these analyses. We use two measures of firm size: annual revenue and number of employees. We report results for various cutpoints for each of these two measures but focus our attention on firms with $3 million in annual revenue or less and on firms with 75 or fewer employees because these are the cutpoints used in the most recent Congressional Superfund reauthorization bills. We were not able to find 23 percent of the business firms in our sample. We were able to find, but not able to determine the size of another 10 percent or so. We make various assumptions on the distribution of firms by size in these two groups to develop ranges for the proportion of business firms that are small. The assumptions are based on correlations of characteristics that we are able to observe for these two groups with firm size. ____________ 10EPA has developed ranges into which the average costs of the various phases of the cleanup process for each operable unit at a Superfund site are likely to fall. The ranges are $0.6 to $1.4 million for remedial investigation/feasibility study, $0.7 to $1.4 million for remedial design, and $7.1 to $11.1 million for remedial action. Operation and maintenance is estimated to cost about $0.5 million annually. On average there are 1.5 operable units per site. (Personal communication, Alan Youkeles, U.S. EPA, September 1999.) We summed these estimates to develop a range for average OU cost. We assumed operation and maintenance costs ran for 30 years and discounted them back to the present using 3 percent and 5 percent discount rates.

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Table 2.3 Data Subsets Used in Analysis

Dataset I. All Sites 1. All PRPs 2. All firms II. G/T Sites 3. All PRPs at G/T sites 4. Firms at G/T sites

PRPs

104 104

1,774 1,426

PRPs by type at all sites Firms by annual revenue and employees at all sites

3.1 3.2

51

1,618

PRPs by type at G/T sites

3.1

51

1,301

Firms by annual revenue and employees at G/T sites

3.2

A. Generators at G/T sites 12 5. PRPs with vol. share at G/T site with cleanup cost 6.

B. 7.

8.

Analyses Done

Cleanup costs for generators and transporters at G/T sites by PRP type; cleanup costs by size of volumetric share 12 404 Cleanup costs for generators and Firms with vol. share at G/T sites transporters that are business firms at with cleanup cost G/T sites by annual revenues and employees Owners, operators, transporters at G/T sites PRPs without vol. 12 190 Cleanup costs for owners and share at G/T site operators at G/T sites by PRP type with cleanup cost Firms without 12 169 Cleanup costs for owners and vol. share at G/T operators that are business firms at sites with cleanup G/T sites by annual revenues and cost employees

III. O/O Sites 9. All PRPs at O/O sites 10. Firms at O/O sites 11. PRPs at O/O sites with cleanup cost 12. Firms at O/O sites with cleanup cost

Discussed in Section:

Sites

487

49

117

49

90

41

97

41

75

4.2.1

4.2.1

4.2.2

4.2.2

PRPs by type at O/O sites

3.1

Firms by annual revenue and employees at O/O sites Cleanup costs at O/O sites by PRP type

3.2

Cleanup costs at O/O sites for business firms by annual revenues and employees

4.1

4.1

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2.2.5 Cleanup Costs Shifted to the Trust Fund by Releasing Small Firms Reforms that shift the cleanup costs of parties released from Superfund liability to the Superfund Trust Fund must somehow determine the cleanup liabilities of small firms. Concepts such as “fair share allocation”11 or “equitable share of liability”12 are used in reform proposals to allocate liability. Factors listed used to define those concepts in these proposals include the •

quantity and toxicity of hazardous substances contributed

•

degree of involvement in the generation, transportation, treatment, storage, or disposal

•

care exercised with respect to the hazardous substances

•

cooperation with the cleanup process.13

Based on the information available, we develop two measures of the cleanup costs that potentially would be shifted to the Trust Fund by proposals to release small firms from liability. For generators (which are only at G/T sites), we use volume-based cleanup costs. For all other PRPs at G/T sites (transporters, owners, and operators) and all PRPs at O/O sites we use equal-share cleanup costs. We now define each of these measures and discuss how they would likely relate to measures of cleanup liability that might actually be used by EPA in determining how much of the site cleanup costs should be paid by the Trust Fund. Volume-Based Cleanup Costs. We were able to assemble information on the waste contribution of generators at a subset of the G/T sites in our sample. We used this information to calculate volumetric shares for each generator at a site—that is, the share of the overall waste generated by the party. A generator’s volume-based cleanup cost is then the product of its volumetric share and the total cleanup liability of the generators at the site. This seems like a reasonable estimate of the “fair” or “equitable” share of liability that might actually be used by EPA in determining the costs to be picked up by the Fund. We have no direct data on whether PRPs are generators, transporters, owners, or operators. At sites where we have waste-in data, we assume that the PRPs with waste-in information are generators and that the remaining PRPs are not. It is unlikely that this is literally true. There may well be some generators that contributed small amounts of waste to the site that have not yet warranted or never will warrant quantification. We will see below that small-volume contributors are likely to be small firms; thus volume-based cleanup costs ____________ 11U.S. Senate, 1999, p. 76. 12U.S. House of Representatives, 1999, p. 115. 13U.S. Senate, 1999, pp. 76–77.

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may understate the amount of generator cleanup costs that might actually be transferred to the Trust Fund. The size of this bias is unknown. However, it is probably not big because the amounts of waste in question are likely small. As indicated by Datasets 5 through 8 in Table 2.3, we were able to assemble waste-in information only for 12 of the 51 G/T sites in our sample. The small sample raises questions about the representativeness of our results. In the analyses that follow, we compare the characteristics of these 12 sites with the other G/T sites in our sample in order to understand how our findings might be biased. Equal-Share Cleanup Costs. We have no information on the degree of involvement of the various owners, operators, and transporters at a site. For example, we have no information on length of time a PRP owned or operated a site or the amount of waste deposited at the site during the PRP’s tenure. For lack of a better alternative, we allocate liability equally among the PRPs at O/O sites and the non-generators at G/T sites. At O/O sites, these equal-share cleanup costs are determined by dividing the overall expected site cleanup cost by the number or PRPs at the site (the number of PRPs that have ever owned or operated the site). Because we were not able to separate transporters from owners and operators at G/T sites, we spread the site cleanup costs that are not allocated to generators equally among the remaining PRPs at the sites. The equal-share cleanup costs for non-generators are calculated by dividing the cleanup liability of non-generators by the number of PRPs at the site less the number of generators. It is likely that the length of an owner’s or operator’s tenure or the amount of the waste deposited during an owner’s or operator’s tenure is correlated with firm size. It seems even more likely that the firms that transported the larger shares of waste to a site will be larger firms. Thus, it seems likely that equal-share cleanup costs will overstate the liability that EPA would assign to the small owners, operators, and transporters released from liability using concepts such as fair share allocation or equitable share of liability. The possibility that some of the parties that we have classified as non-generators are actually small generators compounds this bias. Proportionate Distribution of Cleanup Costs by Firm Size. The next step in our analysis of the cleanup costs that potentially would be shifted to EPA by releasing small firms is to esti-mate the percentage distribution of cleanup costs by firm size. We report distributions separately for (1) O/O sites, (2) generators at G/T sites, and (3) owners, operators, and transporters at G/T sites. As before, we make assumptions about the size distribution of cleanup costs for firms that could not be found and for firms for which data on

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firm size were unavailable to develop ranges of the percentage of volume-based and equalshare cleanup costs that accrues to small firms. Dollar Value of Cleanup Costs Shifted to the Trust Fund. We then apply the proportionate distributions of cleanup costs to total cleanup costs at all O/O sites on the NPL, the generator cleanup costs at all G/T sites, and the non-generator cleanup costs at all G/T sites. For O/O site cleanup costs, we use the $9.1 billion estimated above. There is currently little systematic information available on the split of cleanup costs between generators and nongenerators at G/T sites. Based on their experience with the program, EPA staff believe 70 percent is a good estimate of the proportion of cleanup costs typically paid by generators.14 In calculating the amount of cleanup costs potentially shifted to the Fund, we alternatively assume that 60 and 80 percent of G/T site cleanup costs (which total $27.2 billion) are paid by generators. The costs actually transferred to the Fund by liability reforms will depend on a number of policy decisions in addition to the definition of equitable or fair shares. For example, Congress may decide to apply liability exemptions only to new cleanup commitments or expenditures, not to expenditures or commitments that have already been made. Or, EPA may continue to pay costs at sites for which no PRPs can be identified (so-called orphan sites) or to pay costs of defunct PRPs at a site (so-called orphan shares). In either case, calculations based on the total expected cleanup costs of all nonfederal NPL sites ($36.3 billion) would overstate the costs that would actually be shifted to EPA. In the analysis below, we provide some empirical information on how large these overstatements might be. 2.2.6 Releasing Small-Volume PRPs from Superfund Liability We use waste-in data for the generators at a sample of G/T sites to calculate the proportion of generators that would be released and the proportion of volume-based cleanup costs that would be affected by proposals to release small-volume contributors. In our analysis we focus on PRPs that generated less than 1 percent of the waste at the site (de minimis parties) and those that generated less than 0.1 percent (de micromis parties). Further analysis is required to understand how proposals to release parties that played only a minor role of the site would affect transporters, owners, and operators. ____________ 14Personal communication with Bruce Pumphrey, U.S. EPA, 1998.

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2.2.7 Effect of Releasing Small Firms or Small-Volume Contributors on PRPs Remaining at the Site So far we have focused on the proportion and number of business firms released and the cleanup costs that might be transferred to the Trust Fund by proposals to release small firms or small-volume contributors from Superfund liability. Clearly, the PRPs released from liability would benefit, and the public, through added outlays from the Fund, would suffer. But what is the impact of the reforms on the larger PRPs that remain? If cleanup liability is shifted to the Fund, the effect on larger firms depends fundamentally on how the costs transferred to EPA relate to what small PRPs would actually spend on cleanup costs under Superfund’s current liability provisions. If costs are not shifted to the Fund, how much worse off the larger PRPs would be depends on what the firms released would have actually paid, which may be very different from the volume-based and equal-share cleanup costs discussed above. To examine how larger firms might be affected, we use data from a previous study on actual expenditures at a sample of NPL sites. We compare the distribution of actual expenditures by firm size with volume-based and equal-share cleanup costs. The results provide insight into how the larger firms that remain liable might be affected.

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3. TYPE AND SIZE OF PRPs AT NPL SITES

In this section we report findings on the percentage distribution first of the site-PRP pairs by type (individual, government agency, or business firm) and then of business firms by size. Two measures of firm size are used: annual revenue and number of employees. We report the results separately for generator/transporter (G/T) sites, owner/operator (O/O) sites, and all sites combined. We report the findings for various cutpoints for annual revenue and number of employees; however, we focus our attention on firms with $3 million in annual revenue or less and on firms with 75 or fewer employees because these are the cutpoints used in the most recent Congressional bills to release small business firms from liability. We conclude this section by combining estimates of the percentage of site-firm pairs that are small with estimates of the total number of site-firm pairs developed in Section 2 to predict the total number of site-firm pairs that would be released by different liability cutoffs. 3.1 TYPES OF PRPs AT NONFEDERAL SUPERFUND SITES The breakdown of PRPs into individuals, government agencies, and business firms at all sites is reported in Panel A of Table 3.1. After reweighting the raw data to adjust for the difference in sampling rates across sites, an estimated 73 percent of site-PRP pairs at the 114 sites are business firms.1 One-quarter are individuals, and a small proportion are federal, state, or local government agencies. The last column of Table 3.1 reports the 90-percent confidence interval for each estimate.2 Panels B and C show that individuals appear to be somewhat more common at generator/transporter (G/T) sites than at owner/operator (O/O) sites. However, the difference is not dramatic, and as illustrated by the 90-percent confidence intervals, is not large relative to the sampling variability. 3.2 DISTRIBUTION OF BUSINESS FIRMS BY SIZE AT NONFEDERAL SUPERFUND SITES In this section we first examine the distribution of firms by annual revenue. We then repeat the analysis for firms classified by number of employees. We could not find a sizable proportion of the business firms in our sample, or were unable to determine their size. We therefore conclude this subsection by developing ranges for the proportion of firms below various size cutoffs based on assumptions on the size distribution of firms with missing data. ____________ 1The data are reweighted using the inverse of the sampling rates in Table B.3. 2Appendix C details the method used for calculating these confidence intervals.

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Table 3.1 Type of PRPs at Nonfederal Superfund Sites

Raw Data Site-PRP Percent Type of PRP Pairs of Total A. All Sites (104 sites in sample) Individual 292 17 Government 56 3 Business firm 1,426 80 Total 1,774 100 B. G/T Sites (51 sites in sample) Individual 268 Government 49 Business firm 1,301 Total 1,618

17 3 80 100

Weighted Percent of Totala Point 90% Confidence Estimate Interval 25 2 73 100

[23,27] [1,3] [71,75]

26 2 72 100

[24,28] [1,3] [70,74]

C. O/O Sites (49 sites in sample) Individual 22 19 19 [13,25] Government 5 4 4 [1,7] Business firm 90 77 77 [71,83] Total 117 100 100 a Weighted to account for variation in sampling rate by number of PRPs at the site. 3.2.1 Distribution of Firms by Annual Revenue Panel A of Table 3.2 reports the breakdown of the business firms at all nonfederal NPL sites in our sample by annual revenue. After reweighting, 24 percent of firms in our sample have annual revenue less than or equal to $3 million. The distribution of firms by annual revenue appears to have a heavy right tail because of the sizable proportion of very large firms. We were unable to find 33 percent of the business firms, and information on annual revenue was unavailable for 12 percent of the firms that we were able to find.3 Panels B and C of Table 3.2 suggest that small firms are more common at G/T sites than at O/O sites. Firms with $3 million or less in annual revenue account for 22 percent of the firms at G/T sites versus 13 percent at the O/O sites. In addition, the analysis below suggests that small firms are more common among the firms that could not be found than among those that could be found, adding to the difference. ____________ 3The “revenue unavailable” category includes firms that were in the Dun and Bradstreet database or we were able to locate but (1) were missing annual revenue in the Dun and Bradstreet data and (2) we were unable to directly contact or were unwilling to provide data on annual revenue.

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Table 3.2 Annual Revenue of Business Firms at Nonfederal Superfund Sites

Raw Data Percent Annual Revenue Site-Firm of ($millions) Pairs Total A. All Sites (104 sites in sample) ≤1 218 15 > 1 and ≤ 3 83 6 (All firms ≤ 3) (301) (21) > 3 and ≤5 42 3 > 5 and ≤ 10 57 4 > 10 and ≤ 100 157 11 > 100 and ≤ 1,000 105 7 > 1,000 277 19 Revenue unavailable 153 11 Firm not found 334 23 Total 1,426 100 B. G/T Sites (51 sites in sample) ≤1 204 > 1 and ≤ 3 81 (All firms ≤ 3) (285) > 3 and ≤5 38 > 5 and ≤ 10 53 > 10 and ≤ 100 140 > 100 and ≤ 1,000 91 > 1,000 232 Revenue unavailable 140 Firm not found 322 Total 1,301

16 6 (22) 3 4 11 7 18 11 25 100

Reweighted Percent of Totala Point Estimate

90% Confidence Interval

18 6 (24) 2 3 8 4 13 12 33 100

[16,20] [4,7] ([21,26]) [2,3] [2,4] [7,10] [3,6] [11,15] [10,14] [30,36]

18 6 (24) 2 3 8 4 13 12 33 100

[16,20] [4,7] ([21,26]) [2,3] [2,4] [7,10] [3,5] [11,14] [10,14] [31,36]

C. O/O Sites (49 sites in sample) ≤1 11 12 12 [6,18] > 1 and ≤ 3 1 1 1 [0,3] (All firms ≤ 3) (12) (13) (13) ([7,19]) > 3 and ≤5 2 2 2 [0,5] > 5 and ≤ 10 4 4 4 [1,8] > 10 and ≤ 100 8 9 8 [4,14] > 100 and ≤ 1,000 11 12 12 [6,18] > 1,000 31 34 38 [26,43] Revenue unavailable 11 12 12 [6,18] Firm not found 11 12 12 [6,18] Total 90 100 100 aReweighted to account for variation in sampling rate by number of PRPs at the site.

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3.2.2 Distribution of Business Firms by Number of Employees Table 3.3 suggests that a liability cutoff at 75 employees will release a higher proportion of firms than a $3 million cutoff. Most firms with $3 million or less in annual revenues have fewer than 75 employees (at least 94 percent of firms with $1 million or less in annual revenues and at least 95 percent of firms with $1 to $3 million), and a good proportion of firms with annual revenue between $3 million and $10 million have fewer than 75 employees. As shown in Panel A of Table 3.4, 31 percent of firms have 75 or fewer employees (compared with 24 percent with $3 million or less in annual revenue). Like the distribution by annual revenue, the distribution of firms by number of employees appears to have a heavy right tail. Also analogous to the results by annual revenues, firms with 75 or fewer employees are more common at G/T sites than O/O sites (see Panels B and C of Table 3.4). 3.2.3 Estimated Proportion of Firms That Are Small As shown above, we were unable to find or determine annual revenue or number of employees for a sizable fraction of the firms in our sample. In this section we use information on volumetric share at a subsample of G/T sites to make inferences about the size of such firms and then to estimate ranges for the proportion of firms that would be released by various liability cutoffs. Table 3.3 Relation Between Number of Employees and Annual Revenue for Business Firms at NPL Sites (percent of firms in annual revenue category) (104 sites, 1,426 site-firm pairs) Number of Employees PRP Annual Revenue ($millions) 1–25 ≤1 91 > 1 and ≤ 3 73 > 3 and ≤ 5 43 > 5 and ≤ 10 18 > 10 and ≤ 100 4 > 100 and ≤ 1,000 0 > 1,000 0 Revenue unavailable 31 Firm not found 0 All site-firm pairs

24

26–75 76–250 3 0 22 1 40 12 42 28 14 43 0 4 0 0 5 2 0 0 7

7

>250 0 2 0 9 37 93 99 5 0 31

Firms Total Employment Not (Number of Unavailable Found Site-Firm Pairs) 6 0 100 (218) 1 0 100 (83) 5 0 100 (42) 4 0 100 (57) 3 0 100 (157) 3 0 100 (105) 1 0 100 (277) 58 0 100 (153) 0 100 100 (334) 8

23

100(1426)

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Table 3.4 Number of Employees for Business Firms at Nonfederal Superfund Sites

Number of Employees A. All Sites (104 sites in sample) 1 to 25 26 to 75 (All firms < 75) 76 to 250 > 250 Number of employees unavailable Firm not found Total B. G/T Sites (51 sites in sample) 1 to 25 26 to 75 (All firms < 75) 76 to 250 > 250 Number of employees unavailable Firm not found Total

Raw Data Site-Firm Percent Pairs of Total

Reweighted Percent of Totala Point 90% Confidence Estimate Interval

341 95 (436) 96 443 117

24 7 (31) 7 31 8

27 5 (32) 5 20 10

[24,29] [4,7] ([25,35]) [4,7] [17,22] [8,11]

334 1,426

23 100

33 100

[31,36]

320 86 (406) 88 375 110

25 7 (32) 7 29 9

27 5 (32) 5 19 10

[24,30] [4,7] ([30,35]) [4,7] [17,21] [8,12]

322 1,301

25 100

34 100

[31,36]

C. O/O Sites (49 sites in sample) 1 to 25 15 17 17 [10,23] 26 to 75 6 7 7 [2,11] (All firms < 75) (21) (24) (24) ([16,31]) 76 to 250 6 7 7 [2,11] > 250 47 52 52 [43,61] Number of employees 5 6 6 [2,10] unavailable Firm not found 11 12 12 [6,18] Total 90 100 100 aReweighted to account for variation in sampling rate by number of PRPs at the site.

Assumptions Used in Calculations. At the 12 G/T sites where we were able to obtain waste-in lists for the generators at the site, we calculated average volumetric share by firmsize category. Table 3.5 shows that, as expected, the largest firms have substantially higher volumetric shares on average than the smaller firms. The low average volumetric share for firms that we could not find (0.05 percent) is similar to those with annual revenue of $10 million

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Table 3.5 Average Volumetric Share Per Generator by Firm Size (12 G/T sites, 404 firms)a

Annual Revenues ($ millions) ≤1 > 1 and ≤ 3 > 3 and ≤ 5 > 5 and ≤ 10 > 10 and ≤ 100 > 100 and ≤ 1,000 > 1,000 All firms with data on annual revenue

Number of Site-Firm Pairs 73 18 10 11 28 24 51

Average Volumetric Share (percent) 0.14 0.05 0.04 0.05 0.32 0.65 0.65

215

0.32

Revenues unavailable 51 0.41 Firm not found 138 0.05 aReweighted to account for variation in sampling rate by the number of PRPs at the site. or less, suggesting that this category is predominantly composed of firms with $10 million or less in annual revenue. In contrast, the average volumetric share for firms that could be found but for which revenue was unavailable (0.41 percent) suggests that these firms are similar in size to those for which size was available (0.32 percent). We use these observations to construct ranges for the proportion of firms that would be released by various liability cutoffs. For the $3 million annual revenue cutoff, we calculate the lower end of the range by assuming that the size distribution of firms that we could not find is the same as that of firms for which annual revenue was available. For the upper end of the range, we assume that all firms we could not find have annual revenue less than or equal to $3 million. In both cases, we assume that size distribution of firms we found but for which revenue was unavailable is the same as that of those for which firm size could be determined. Findings. We estimate that between 44 and 62 percent of firms at all nonfederal NPL sites have annual revenue less than or equal to $3 million (see third row of Table 3.6) and between 56 and 71 percent have fewer than 75 employees. Because the vast majority of PRPs are at G/T sites, the ranges are very similar for G/T sites. The ranges for the proportion of small firms at O/O sites are substantially lower. As discussed in Section 1, some proposals to reform Superfund’s liability scheme release firms with $3 million or less in annual revenue and 75 or fewer employees. Others release firms

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Table 3.6 Percent of Firms Released by Various Liability Cutoffs

Cutoff and Site Type Annual Revenue ≤ $3 million Generator/Transporter Owner/Operator All nonfederal sites Employees ≤ 75 Generator/Transporter Owner/Operator All nonfederal sites

Low Estimate

High Estimate

44 17 44

63 27 62

57 28 56

72 37 71

with $3 million or less in annual revenue or 75 or fewer employees. Because our analysis suggests that most all firms that have 75 or fewer employees also have $3 million or less in annual revenue, the proportion of firms that meet both the revenue and employee requirement will be very close to that for the proportion of firms with $3 million or less in annual revenue. The proportion for firms meeting either the revenue or employee requirement will be very close to that for the proportion of firms with 75 or fewer employees. 3.3.4 Estimated Number of Firms That Are Small A $3-million or a 75-employee cutoff would release a sizable number of PRPs from liability. In Section 2, we estimated that there are 125,700 site-PRP pairs at nonfederal G/T sites and 1,300 site-PRP pairs at nonfederal O/O sites. Applying the ranges in Table 3.6 to these estimates (adjusted by the fraction of PRPs that are businesses) implies that between 40,000 to 57,000 site-PRP pairs at G/T sites and between 200 and 300 site-PRP pairs at O/O sites have $3 million or less in annual revenue. The number of site-PRP pairs with 75 or fewer employees falls between 52,000 and 65,000 at G/T sites and between 300 and 400 at O/O sites. These ranges represent the number of PRPs that potentially would be released from Superfund liability by the different liability cutoffs. The number actually released may be much lower, however, if for example the liability release only applies to cleanup costs that have not yet been incurred.

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4. DISTRIBUTION OF CLEANUP COSTS BY PRP TYPE AND SIZE

In this section we report findings on the cleanup costs potentially shifted to the Trust Fund by releasing small firms from liability. For generators at G/T sites, we calculate volume-based cleanup costs, which are based on a generator’s share of the waste at the site. For other PRPs at G/T sites (owners, operators, and transporters) and the PRPs at O/O sites, we calculate equal-share cleanup costs, which are determined by equally spreading cleanup costs across these PRPs. We then examine the proportion of each that accrues to small firms. We first report findings on the percentage distribution of cleanup costs by PRP type and size at O/O sites. We then turn to the distribution at G/T sites, starting with an analysis of how the relatively small number of sites used in the analysis might bias our findings. Our analysis of the G/T sites continues with the distribution of volume-based cleanup costs by firm size and then turns to the distribution of equal-share cleanup costs at these sites. We make assumptions similar to those in Section 3 for firms that could not be found or for which size information was unavailable to construct ranges for the proportion of cleanup costs borne by small firms. The section concludes by linking estimates of the percentage distribution of the assigned costs with site cleanup costs to produce estimates of the dollar amount of cleanup costs that could potentially be transferred to EPA by releasing small firms from liability. 4.1 DISTRIBUTION OF CLEANUP COSTS AT OWNER-OPERATOR SITES We were able to collect information on expected site cleanup costs and thus analyze the distribution of cleanup costs by firm size at 41 of the 49 O/O sites in our sample. As expected, the subsample of 41 sites appears to be representative of all 49 sites: The average number of PRPs, the average expected cleanup cost, and the distribution of PRPs by type and size are similar at the two sets of sites.1 We first examine the distribution of equal-share cleanup cost by type of PRP and then examine the distribution of equal-share cleanup costs for firms by annual revenue and number of employees. ____________ 1The average number of PRPs is 2.5 and 2.6 at the 41-site sample and 49-site sample, respectively. The average expected ultimate PRP cleanup cost is $8.6 million and $8.1 million, respectively. The distributions by PRP type and firm size for the 41 sites in the tables below are very close to those reported in Section 3.

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4.1.1 Distribution by PRP Type Business firms account for 96 percent of cleanup costs when cleanup costs are distributed equally to all parties at O/O sites (see Panel A of Table 4.1).2 This exceeds the proportion of PRPs that are business firms (77 percent), indicating that business firms are more common at the more expensive sites. The last column of Table 4.1 contains 90% confidence intervals for proportion of PRPs of each type. Appendix C describes the method used to calculate these confidence intervals. 4.1.2 Distribution of Cleanup Costs by Firm Size Panels B and C of Table 4.1 report the distribution of equal-share cleanup costs at O/O sites by firm size. The cleanup costs of small firms at O/O sites are disproportionately small: firms with $3 million or less in annual revenue account for 16 percent of the firms but only 4 percent of the equal-share cleanup costs. The results are not quite as skewed for firms with 75 or fewer employees. The concentration of smaller firms at less expensive O/O sites drives these results. As discussed in Section 2.2.5, equal-share cleanup costs for small firms will likely overstate an allocation based on principles such as the degree of involvement of the party at the site. The estimates here are quite low (e.g., 4 percent for the $3 million cutoff), so the amount that they can be overstated, however, is limited. 4.2 DISTRIBUTION OF CLEANUP COSTS AT GENERATOR/TRANSPORTER SITES Our analysis of the distribution of cleanup costs at G/T sites is based on the 12 G/T sites (of the 51 in our sample) for which we were able to assemble data on volumetric share and expected site cleanup cost. The limited number of sites raises concern about the representativeness of this subsample. There is some evidence that results based on the 12-site sample will overstate the proportion of volume-based cleanup costs attributable to smaller firms. Even though the distribution of PRPs by firm size is similar at the two sets of sites (see bottom rows of Table 4.2), there tend to be more PRPs per site at the 12-site sample (see first row of Table 4.2). In addition, Figure 4.1 suggests a positive relationship between the number of PRPs at a site and the ratio of the combined volumetric share of smaller firms to that of larger firms.3 The ____________ 2The distribution across PRP type is calculated after costs have been summed across sites. This is equivalent to weighting each site by the ratio of its cleanup costs to the combined cleanup costs of the subsample of sites. 3Figure 4.1 plots 11 sites rather than 12 because there were no business firms (only individuals and government agencies) at one of the 12 G/T sites.

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Table 4.1 Distribution of Cleanup Costs at O/O Sites by PRP Type and Size of Business Firm (based on 41 sites)a

PRPs A. PRP Type (N = 97 PRPs) Individuals Government agencies Business firms Total

20 3 77 100

Cleanup Costs Point 90% Confidence Estimate Internal 1 3 96 100

B. Annual Revenue of Business Firms (N = 75 firms) ≤1 15 4 > 1 and ≤ 3 1 <0.1 (All firms ≤3) (16) (4) > 3 and ≤ 5 3 0.5 > 5 and ≤ 10 1 1 > 10 and ≤ 100 8 4 > 100 and ≤ 1,000 12 15 > 1,000 37 59 Revenues unavailable 11 10 Firm not found 12 6 Total 100 100

[0,2] [0,7] [65,100]

[0,10] b

— [0,2] b

[1,7] [1,30] [17,100] [0,22] [0,13]

C. Employees of Business Firms (N = 75 firms) 1 to 25 19 11 [0,23] 26 to 75 7 1 [0,3] (1 to 75) (26) (12) — 76 to 250 4 2 [1,4] > 250 53 76 [38,100] Number of employees 5 4 [0,7] unavailable Firm not found 12 6 [0,12] Total 100 100 a Reweighted to account for sampling rates. bVariance estimate unavailable because there is only one observation.

relationship is bumpy and based on a small number of sites but, combined with the unusually large number of PRPs at the 12-site sample, raises concerns that results based on the 12-site sample may overstate the proportion of volume-based cleanup costs borne by smaller firms. This upward bias is offset to some extent by small generators mistakenly classified as nongenerators, but the net effect of the two biases is unknown.

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Table 4.2 Comparison of Subsample of 12 G/T Sites Used in Cleanup Cost Analysis with the Overall Sample of G/T Sites

Average number of site-PRP pairs

12 Sites Used in Cost Analysis 537

51 G/T Sites 231

Average ultimate PRP cleanup cost ($millions)

21.5

21.3a

Distribution of PRPs by type (percent) Individual Government Business firm (Number of site-PRP pairs)

17 2 81 (677)

26 2 72 (1,618)

Distribution of business firms by annual revenue (percent) ≤ $3 million > $3 million Firm found but revenue unknown Firm not found (Number of site-firm pairs)

23 28 13 35 (573)

24 31 12 33 (1,301)

a Estimates of ultimate PRP cleanup cost were available at 43 of the 51

G/T sites. 4.2.1 Distribution of Cleanup Costs Across Generators at G/T Sites Approximately 84 percent of the nearly 6,500 PRPs at the 12 G/T sites have waste-in data.4 We classify these PRPs as generators and first examine the distribution of volume-based cleanup cost among them. We then turn to the distribution of cleanup costs among the other PRPs (transporters, owners, and operators) at the site. Distribution by PRP Type. Panel A of Table 4.3 reports the percentage distribution of volume-based cleanup cost by type of PRP. Business firms account for 95 percent of volumebased cleanup costs at G/T sites, in excess of the 80 percent of generators at these sites that are business firms. This suggests that releasing generators that are individuals or government agencies from liability at nonfederal Superfund sites and shifting their volume-based cleanup costs to the Trust Fund would not shift a large amount of costs to the Fund. ____________ 4The proportion of PRPs with waste-in data is calculated using the inverse of the sampling rates.

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3.5 3.0

Ratio

2.5 2.0 1.5 1.0 0.5 0.0 1

10

100

1000

10000

Numb er of PRPs at Site (log scale)

Figure 4.1—Ratio of Combined Volumetric Share of Business Firms with $3 Million or Less in Annual Revenues to Combined Volumetric Share of Business Firms with More Than $3 Million in Annual Revenues at 11 G/T Sites Distribution By Firm Size. Table 4.3, Panel B, reports the distribution of volume-based cleanup costs by annual revenue for business firms at the 12 G/T sites. After reweighting, firms with $3 million or less in annual revenue account for 24 percent of the firms but only 11 percent of cleanup costs. Mirroring the results for the distribution of PRPs by annual revenue in Section 3.2.1, the distribution of volume-based cleanup costs by annual revenue appears to have a heavy right tail, with the greatest concentrations among the smallest and largest firms. Sizable proportions of volume-based cleanup costs accrue to firms that we could not find or to firms that we could find but for which annual revenue data were unavailable. We examine below the effect of different assumptions on the distribution of volume-based cleanup costs by firm size within these two groups. Panel C of Table 4.3 reports the distribution of volume-based cleanup at the 12 G/T sites by number of employees. Firms with 75 or fewer employees account for 31 percent of the firms at these sites and 27 percent of the volume-based cleanup costs. The results so far suggest that a $3 million liability cutoff more efficiently targets the smallest contributors (releasing 24 percent of the firms but only 11 percent of the volumetric share), but the issue will be revisited when we consider firms that could not be found or for which size was unavailable.

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Table 4.3 Distribution of Cleanup Costs for Generators at G/T Sites by PRP Type and Firm Size (12 G/T sites)a

PRP Characteristic A. PRP Type (N = 487 PRPs) Individuals Government agencies Business firms Total

Percent of PRPs 19 1 80 100

Cleanup Costs 90% confidence Percent interval 4 0.6 95 100

[3,6] [0,1] [85,100]

B. Annual Revenue of Business Firms (N = 404 firms) ≤1 20 > 1 and ≤ 3 4 (All ≤ 3) (24) > 3 and ≤ 5 2 > 5 and ≤ 10 2 > 10 and ≤ 100 5 > 100 and ≤ 1,000 4 > 1,000 10 Revenues unavailable 13 Firm not found 38

10 1 (11) 0.3 0.5 8 11 32 22 14

[6,15] [0,2] — [0.4, 0.6] [0.3, 0.8] [8,9] [4,17] [24,41] [15,29] [0,30]

All firms

100

100

C. Employees of Business Firms (N = 404 firms) 1 to 25 27 26 to 75 4 (1 to 75) (31) 76 to 250 3 > 250 15 Number of employees 12 unavailable Firm not found 39 Total

100

23 4 (27) 2 50 7

[10,36] [2,5] — [0,4] [29,71] [3,11]

14

[8,21]

100

a Reweighted to account for sampling rates.

4.2.2 Distribution of Cleanup Costs Among Owners, Operators, and Transporters at G/T Sites Table 4.4 reports the distribution of cleanup costs for the PRPs at the 12 G/T sites that were not assigned volumetric shares (owners, operators, and transporters). Cleanup costs are assigned equally to such PRPs at a given site. Comparison of Tables 4.3 and 4.4 suggest that these PRPs tend to be similar in size to the generators at the same sites (20 percent of nongenerators have $3 million or less in annual revenue versus the 24 percent of the generators). However, the proportion of equal-share cleanup costs (20 percent) that accrues to firms with

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Table 4.4 Distribution of Cleanup Costs for Owners and Operators at G/T Sites by PRP Type and Firm Size (12 G/T sites)a

Type of PRP A. PRP Type (N = 190 PRPs) Individuals Government agencies Business firms Total

Percent of PRPs 7 3 89 100

Cleanup Costs 90% Confidence Percent Interval 13 6 80 100

B. Annual Revenue of Business Firms (N = 169 firms) ≤1 10 10 > 1 and ≤ 3 10 10 (All ≤3) (20) (20) > 3 and ≤5 2 1 > 5 and ≤ 10 2 3 > 10 and ≤ 100 12 12 > 100 and ≤ 1000 7 8 > 1,000 26 19 Revenues unavailable 12 11 Firm not found 21 27 All firms

100

C. Employees of Business Firms (N = 169 firms) 1 to 25 22 26 to 75 8 (1 to 75) (30) 76 to 250 5 > 250 38 Number of employees 7 unavailable Firm not found 21 Total

100

[6,22] [4,9] [56,100]

[7,13] [7,12] — [1,2] [2,4] [8,16] [5,11] [14,25] [7,13] [17,36]

100

22 8 (30) 6 31 6

[17,29] [5,11] — [0,14] [28,34] [0,13]

27

[3,51]

100

a Reweighted to account for sampling rates.

$3 million or less in annual revenue is much higher than the proportion of volume-based cleanup costs (11 percent in Table 4.3). 4.2.3 Number of Generators and Non-Generators Released by Liability Exemptions Using the methods in Section 3, our estimate that 84 percent of the PRPs at G/T sites are generators, and the data in Tables 4.3 and 4.4, we calculate the number of generators and non-

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generators at G/T sites that would be released by liability reforms.5 We estimate that between 35,000 and 51,000 generators have $3 million or less in annual revenue and between 5,000 and 7,000 non-generators have annual revenue of $3 million or less. (The range calculated in Section 3.3.4 for generators and non-generators combined at G/T sites was 40,000 to 57,000.) Between 45,000 to 58,000 generators and 6,000 to 8,000 non-generators would be released by a 75-employee cutoff. 4.3 ESTIMATED PROPORTION OF CLEANUP COSTS BORNE BY SMALL FIRMS Assumptions Used in Calculations. For the generators at G/T sites, we use the same assumptions as in Section 3.2.3 for firms that we could not find or for which size-information was unavailable to calculate ranges for the proportion of cleanup costs that accrue to small firms. This seems reasonable given that volume-based costs seem like a good first approximation of an “equitable” distribution of cleanup costs among generators and transporters. We use the same assumptions to calculate a range for the portion of cleanup costs that would be potentially transferred to the Fund at O/O sites. Our estimates of the portion of cleanup cost that accrues to small firms are likely too high, but the lower end of the range produced using this method is already low and thus cannot overstate the cleanup costs shifted to the Fund by a great amount. The situation is more complicated for transporters, owners, and operators at G/T sites. The exaggeration of small-firm cleanup costs introduced by using equal-share cleanup costs is compounded by the possibility that some of the PRPs we currently classify as owners, operators, and transporters (those without volumetric share) may actually turn out to be generators that contributed small amounts of waste to the site that have not yet warranted or perhaps never will warrant quantification. The usual assumptions on the size distributions of firms that could not be found or for which size data were not available result in good-sized estimates of the proportion of cleanup costs accruing to small firms. Such a lower bound seems inappropriately high. In the absence of better information, we use the lower end of the ____________ 5The fractions of PRPs that are firms, reported in Tables 4.3 and 4.4, are adjusted so the ratio of the fractions for generators and non-generators remains unchanged but the implied fraction of generators and non-generators combined that are firms equals the 73 percent found in Section 3. This adjustment reduces the 80 and 89 percent in Table 4.3 and 4.4 to 72 and 80 percent respectively. The proportion of firms that are small is similarly adjusted. This changes the range for generators implied by Table 4.3 (using the same assumptions in Section 3 on firms that could not be found or for which size information was unavailable) from 49–68 percent to 47–67 percent. For non-generators the range falls from 30 to 45 percent (derived from Table 4.4) to 29–44 percent.

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range for owners and operators at O/O sites as the lower end of the range for owners and operators at G/T sites. This will create a wide range, but seems more likely to contain the actual share of non-generator cleanup costs transferred to the Fund if EPA uses concepts that capture the degree of involvement at the site in assigning liability. The wide range reflects our lack of information about the non-generators at G/T sites. Findings. We estimate that between 5 and 10 percent of cleanup costs accrue to firms with $3 million or less in annual revenues and between 13 and 19 percent to firms with 75 or fewer employees at O/O sites (see Table 4.5). The percentages are substantially higher for generators at G/T sites, reflecting the greater incidence of small firms at G/T sites and the positive correlation of volumetric share and firm size. The estimates for owners, operators, and transporters at G/T sites span a wide range, reflecting the lack of information on the relative involvement of non-generators at G/T sites.6 4.4 CLEANUP COSTS POTENTIALLY TRANSFERRED TO EPA BY LIABILITY EXEMPTIONS So far we have focused on the percentage distribution of cleanup costs by type and size of PRP. We now investigate what these percentages imply for the dollar value of cleanup costs transferred to EPA if business firms of different sizes were released from liability and their cleanup costs transferred to EPA. Table 4.5 Proportion of Cleanup Costs Borne by Small Firms

Site Type and Firm-Size Cutoff O/O Sites ≤ $3 million revenue ≤ 75 employees G/T Sites Generators ≤ $3 million revenue ≤ 75 employees Owners, operators, and transporters ≤ $3 million revenue ≤ 75 employees

Low Estimate

High Estimate

5 13

10 19

17 34

29 43

5 13

51 60

____________ 6Using the same assumptions as in Section 3.2.3, the low estimate for the proportion of owners and operators at G/T sites with $3 million or less in annual revenue is 32 percent. The low estimate for firms with 75 or fewer employees is 45 percent.

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Assumptions Used in Calculations. For O/O sites, we apply the estimates in Table 4.5 to the $9.1 billion (see Section 2.2.2) needed to clean up all the nonfederal O/O sites on the NPL, reduced by the proportion of cleanup costs borne by individuals and government agencies.7 At the G/T sites, we alternately assume that 60 and 80 percent of the $27.2 billion needed to clean up G/T sites on the NPL are borne by generators. Based on the results in Table 4.2 and 4.3, we assume that firms pay 95 percent of the volume-based cleanup cost and 80 percent of the equal-share cleanup costs at G/T sites. Findings. Table 4.6 reports ranges for the cleanup costs transferred to EPA when firms of different sizes are released from Superfund liability. Estimates for generators with $3 million or less in annual revenue range from $2.6 billion to $6.0 billion. Estimates for owners, operators, and transporters at G/T sites with $3 million or less in annual revenue range from $0.2 billion to $4.4 billion, resulting in a range of $3.1 billion to $8.9 billion for G/T sites as a whole. The estimates for O/O sites are much lower, reflecting the lower average cleanup cost and lower proportion of small firms at these sites. The combined costs potentially transferred to the Fund at all nonfederal sites range from $3.5 billion to $9.8 billion. Estimates for firms with 75 or fewer employees are several billion dollars higher than those for firms with $3 million or less in annual revenue. ____________ 7As reported in Table 4.1, we estimate that 96 of owner-operator cleanup costs accrue to business firms.

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Table 4.6 Cleanup Costs Potentially Transferred to EPA When Business Firms of Different Sizes Are Released from Liability (billions of dollars)

Type of Sites and PRP Role G/T sites Generators and transporters Owners and operators Total

≤ $3 million revenue Share of G/T Site Costs Paid By Generators 60 percent 80 percent

≤ 75 Employees Share of G/T Site Costs Paid By Generators 60 percent 80 percent

2.6–4.5 0.4–4.4 3.1–8.9

3.5–6.0 0.2–2.2 3.7–8.2

5.2–6.6 1.1–5.2 6.4–11.8

7.0–8.8 0.6–2.6 7.6–11.4

O/O sites

0.4–0.9

0.4–0.9

1.2–1.7

1.2–1.7

All sites

3.5–9.8

4.2–9.1

7.5–13.5

8.7–13.1

The costs actually transferred to EPA by liability reforms would depend on a number of policy decisions and might not be nearly as large as reported in Table 4.6. First, by the end of FY 1998, responsible parties had agreed to perform cleanups worth $15.5 billion and reimburse EPA for $2.4 billion of costs incurred by EPA.8 This amounts to roughly one-half of the $36.3 billion required to clean up all 1,210 nonfederal sites on the NPL. The costs transferred to EPA would thus be roughly one-half of those in Table 4.6 if policymakers decide to apply the liability exemptions only to prospective commitments or reimbursements. Second, EPA has already agreed to pay all or part of the cleanup costs at some sites. For example, EPA does not attempt to recover cleanup costs at sites where no PRPs can be identified (so-called orphan sites) from PRPs at other sites.9 It also has agreed to pay cleanup costs that are the responsibility of now-defunct PRPs (so-called orphan shares) at some sites.10 Through FY 1998, such write-offs amounted to approximately $2.1 billion or 6 percent of the $36.3 total cleanup bill.11 These and any further write-offs will also reduce the totals in Table 4.6. Finally, care must be taken not to double-count the cost of different liability reforms. For example, more-generous policies on orphan shares or liability releases for small-volume ____________ 8U.S. GAO, 1999, pp. 45–46. 9EPA response to questions from Senators Chafee and Smith on cost recovery, provided to author by Chad Littleton of EPA, July 1999. 10Ibid. 11Ibid. EPA’s unrecoverable direct costs (costs that can be attributed directly to a site) through FY 1998 consist of $661 million at orphan sites and $1.5 billion of other write-offs.

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parties (discussed in the next section) would reduce the additional amounts that could be attributed to releasing small business firms.

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5. RELEASING SMALL-VOLUME CONTRIBUTORS FROM SUPERFUND LIABILITY

Some proposals to reform Superfund have called for releasing PRPs that have only played a minor role at the site. These proposals focus on de minimis parties (usually defined as PRPs that generated less than 1 percent of the waste of the site) or de micromis parties (PRPs that generate less than 0.1 percent). In this section we examine the proportion of generators that would be released by such proposals and the proportion of volume-based cleanup costs that would be affected. 5.1 REPRESENTATIVENESS OF DATA USED IN ANALYSIS We base our findings on the 12 G/T sites in our dataset for which we have both volumetric share information and an estimate of expected PRP cleanup costs. The small number of sites for which this information is available raises concerns about the feasibility and cost of implementing this approach (volumetric share data would have to be assembled at a large number of sites) and on the representatives of the findings for all G/T sites. As noted in Section 4.2, there are more PRPs per site at this subsample of sites than at the full set of 51 G/T sites we randomly selected from the NPL. And as illustrated in Figure 5.1, generators with small volumetric shares appear more common at sites with more PRPs. Similarly, Figure 5.2 suggests that the combined volumetric share of PRPs with small volumetric shares is higher at sites with more PRPs. These relationships may cause findings based on the 12site sample to overstate the proportion of generators with small volumetric shares and the share of volume-based cleanup costs attributable to small-volume generators and transporters. Working in the opposite direction, however, is the possible misclassification of some of the smallest volume generators as transporters, owners, and operators. The net effect of these biases is unknown. 5.2 DISTRIBUTION OF VOLUMETRIC SHARE AT G/T SITES Table 5.1 reports the distribution of volumetric share at the 12 G/T sites in our subsample. An amazing 73 percent of the generators have a volumetric share of less than 0.01 percent (less than 1/10,000 of the waste at the site). Only 4 percent of the generators at these sites have volumetric share greater than 1 percent. These results suggest that focusing even on the smallest contributors to Superfund sites will release a large proportion of generators from liability. We combined our estimates that there are 125,700 site-PRP pairs at the G/T sites on the NPL and that 84 percent of the site-PRP pairs at G/T sites are generators with the findings in Table 5.1 to calculate the number of generators that would be released by the different

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100 90 80

Percent

70 60 50 40 30 20 10 0 1

10

100 Numb er of PRPs at Site (log scale)

1000

10000

Figure 5.1—Percent of Sampled Generators with Less Than 1 Percent Volumetric Share at 12 G/T Sites with Waste-In Lists and Site Cleanup Costs

100 90 80

Percent

70 60 50 40 30 20 10 0 1

10

100 Number of PRPs at the Site (log scale)

1000

10000

Figure 5.2—Proportion of Combined Volumetric Share Accruing to PRPs with Less Than 1 Percent Volumetric Share at 12 G/T Sites with Waste-In Lists and Site Cleanup Costs

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Table 5.1 Volumetric Share of Generators

Raw Data Volumetric Share (percent) ≤ 0.01 > 0.01 and ≤ 0.10 > 0.10 and ≤ 1.00 > 1.00

Site-PRP Pairs 292 95 64 36

Percent of Total 60 20 13 7

Reweighted Percent of Totala 90 % Point Confidence Estimate Interval 73 [69,77] 14 [11,17] 9 [7,11] 4 [2,6]

Total 487 100 100 a Reweighted to account for variation in sampling rate by number of PRPs at the site.

volumetric-share cutoffs. We estimate that 77,100, 91,900, and 101,400 site-generators pairs would be released by the 0.01, 0.10, and 1.00 percent cutoffs, respectively. Smaller business firms (firms with lower annual revenues or fewer employees) tend to have smaller volumetric shares than larger firms (see Table 5.2). Proposals to release only de micromis parties would release a substantial proportion of firms with $3 million or less in annual revenues. Such proposals would also release sizable proportions of the largest firms.1 5.3 DISTRIBUTION OF VOLUME-BASED CLEANUP COSTS BY VOLUMETRIC SHARE CATEGORY Table 5.3 shows that although they are large in number, the smallest-volume contributors at the G/T sites in our sample account for a small share of the overall volume-based cleanup costs. Taken together, generators with volumetric shares of 1 percent or less account for 22 percent of the waste at the site even though they constitute approximately 96 percent of the generators at the site. The results are even more skewed for the smaller volumetric-share categories. The percentages in Table 5.3 translate into widely varying amounts that would potentially be transferred to EPA. Using the same assumptions as in Section 4.4 on the portion of site ___________ 1The overlap of small firms and those with small volumetic shares means that the number of PRPs released by exempting both small firms and small-volume contributors is less than the sum of the numbers of firms separately released by the small-size and small-volume exemptions. The same holds true for potential costs to the Trust Fund.

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Table 5.2 Relation Between Volumetric Share and PRP Type and Annual Revenue (PRPs at 12 G/T sites with waste-in and expected cleanup cost data)

Total

Number of Firms

5 13 8

100 100 100

75 8 404

Annual revenue for business firms ($millions) (N = 404 firms) ≤1 70 10 14 7 > 1 and ≤ 3 72 22 0 6 > 3 and ≤ 5 40 40 20 0 > 5 and ≤ 10 36 55 9 0 > 10 and ≤ 100 29 36 29 7 > 100 and ≤ 1,000 33 33 17 17 > 1,000 31 24 25 20 Revenues unknown 57 18 16 10 Firm not found 67 20 10 3

100 100 100 100 100 100 100 100 100

73 18 10 11 28 24 51 51 138

PRP Category PRP type (N = 487 firms) Individuals Government Business firms

All firms

> 0.0 and < 0.01

Proportion of Site-PRP Pairs Volumetric Share ≥ 0.01 ≥ 0.1 and and < 0.1 < 1.0 ≥ 1.0

84 50 56

56

7 25 22

22

4 12 15

15

8

404

Table 5.3 Volume-Based Cleanup Costs by Volumetric Share Category for Generators at 12 G/T Sites (percent)

Volumetric Share (percent) ≤ 0.01 > 0.01 and ≤ 0.10 > 0.10 and ≤ 1.00 > 1.00

Raw Data 0.2 2 12 87

Reweighteda Point 90% Confidence Estimate Interval 0.3 [0,1] 3 [1,4] 19 [10,32] 78 [44,100]

Total 100 100 a Reweighted to account for variation in sampling rate by number of PRPs at the site.

cleanup costs borne by generators at G/T sites, we estimate that $49–$65 million would potentially be transferred to EPA by the 0.01 percent cutoff. The ranges rise to $540–$710 million for a 0.10 percent cutoff and $3.6 to $4.8 billion for the 1 percent cutoff.

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6. EFFECTS OF LIABILITY REFORMS ON THE PRPs THAT REMAIN LIABLE

The previous sections discuss the proportion of PRPs released from liability and the cleanup costs potentially transferred to the Superfund Trust Fund by different reforms of Superfund’s liability scheme. However, they do not examine how the gains would be distributed among the PRPs. Clearly the PRPs released from liability would benefit, and the public, through added Trust Fund outlays, would suffer.1 But what about the larger PRPs that remain? The answer depends fundamentally on how well the measures of cleanup costs used to determine the costs transferred to EPA correspond to what individual PRPs would actually spend on cleanup costs under Superfund’s current liability provisions. In this section we compare the distribution of actual PRP expenditures by firm size at a sample of 18 NPL sites to the proportion of cleanup costs potentially transferred to the Fund by releasing small firms. We first describe our analytic approach and the data on which the analysis is based. We then examine the distribution of actual expenditures by firm size and compare them with the findings in Sections 3 and 4. We conclude the section by discussing what the findings imply for the distribution of gains among PRPs. 6.1 DESCRIPTION OF METHOD AND DATA In 1992, we collected data from 108 business firms at 18 NPL sites to estimate cleanup and transaction costs and the share of transaction costs in total costs (Dixon, Drezner, and Hammitt, 1993). We collected only very crude data on volumetric share, so these data cannot be used to compare actual expenditures with cleanup costs potentially transferred to the Fund at the same set of sites. Here, we indirectly compare the two by comparing the proportion of cleanup costs actually paid by small firms at the 18 sites with the estimate in Section 4 of the proportion of cleanup costs potentially transferred to the fund by releasing small firms from liability. This approach assumes that the distribution of costs that would potentially be transferred to the Fund at the 18 sites is similar to that for the sites used in our analysis in Section 4. We will compare the distribution of firm by size at the 18 sites for which we have actual expenditures with that at the sites examined in Section 4 to give some assurance that the two sets of sites are similar, but the small sample sizes warrant caution. We now briefly describe the sampling approach we used to collect the data from the 108 firms at the 18 sites. More detail is contained in Dixon, Drezner, and Hammitt (1993). ____________ 1Trust Fund outlays will increase only if cleanup liabilities are in fact transferred from PRPs to the Fund.

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The 18 sites were spread across five EPA regions and seven states. We chose the five regions to account for both geographic diversity and possible variation in EPA’s implementation. Because we were interested in total PRP expenditures through 1991, we randomly selected sites in these states and regions in which we had reason to believe there had been substantial private-sector expenditures through 1991.2 We excluded sites that were unrepresentative of most sites on the NPL—for example, notorious sites and extremely diffuse groundwater basins. The 18 sites include a mix of G/T and O/O sites. We then selected 251 business firms from the approximately 3,600 PRPs at the 18 sites. Several features of our sampling strategy are relevant to the current analysis. •

Very large firms are underrepresented. Because we had already collected information on the expenditures of very large firms at NPL sites in a previous study (Acton and Dixon, 1992), we excluded firms we were able to determine had annual revenues over $3 billion when we originally picked the sample.3

•

Firms with larger volumetric shares are overrepresented. We wanted to capture a large share of the overall PRP expenditures at these sites, and initial conversations with the RPMs for these sites indicated that the smallest-volume contributors usually had few or no expenditures. We therefore oversampled business firms with larger volumetric shares when information on volumetric share was available.

•

Sampling rates were higher at sites with fewer PRPs. In order to ensure adequate representation at all 18 sites, our sampling rates were higher at sites with fewer PRPs.

Excluding the largest firms from the study will bias upward estimates of the proportion of firms that are small and the proportion of cleanup costs that accrue to small firms. Oversampling firms with larger volumetric shares will work in the opposite direction because larger firms tend to have larger volumetric shares. Oversampling firms at sites with fewer PRPs will also bias downward estimates of the proportion of small firms because larger firms are more common at sites with fewer PRPs (as exemplified by the higher proportion of larger firms at O/O sites than at G/T sites). The net effect of these biases is unknown, but because ____________ 2Specifically, we selected sites that were not federal facilities, had a Record of Decision for at least one operable unit by September 1990, had total estimated cleanup costs greater than $2 million, and did not contain more than 90 percent municipal waste. 3We chose $3 billion as a cutoff because we wanted to exclude Fortune-100 size firms from the study, and the annual revenue of the smallest Fortune-100 firm was approximately $3 billion in 1991. After picking the sample and collecting the data, we learned that some firms did have annual revenue over $3 billion, and they are included in the data examined here.

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the number of very large firms is small, it seems likely that results based on this sample from the 18 sites will understate the proportions of the smallest firms. Ultimately we were able to collect information from 108 of the 251 PRPs selected.4 The information included site investigation, cleanup, and transaction costs through 1991, history of involvement at the site, 1991 annual revenues, and type of business. 6.2 DISTRIBUTION OF NUMBER OF FIRMS AND ACTUAL CLEANUP EXPENDITURES BY FIRM SIZE AT 18 SITES Table 6.1 shows the distribution of business firms by annual revenue at the 18 study sites. Of the 251 PRPs selected, 18 percent had $10 million or less in annual revenue in 1991.5 Some of the firms that could not be found or that refused to participate are also small. Results from the preceding sections suggest that firms that cannot be found are predominately small. As in previous sections, we alternatively assume that (1) all firms that could not be found are small and (2) that firms that could not be found have the same size distribution as firms for which we have data on annual revenue. We have no compelling reason to think that the refusal to participate in the study is correlated with firm size. Thus, we assume that the size distribution of firms that did not participate in the study is the same as that for those that did. The proportion of firms with annual revenues less than $10 million ranges from 42 to 47 percent when these two sets of assumptions are combined. The distribution of firm size by annual revenue for the firms at this sample of 18 sites is similar to the findings for all NPL sites (G/T and O/O sites combined) in Section 3. The results ____________ 4Nearly one-half of the firms selected declined to participate in the study. Firms declined to participate for various reasons, the most common of which was the time and cost required to assemble information about activities dating back ten years. 5We do not report finer breakdowns for firms with annual revenues of less than $10 million because of the limited sample size.

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Table 6.1 Distribution of Firms in 18-Site Study by Annual Revenue (percent, N = 251) 1991 Annual Revenue ($millions) < 10 ≥ 10 and < 100 ≥ 100 and < 1,000 ≥ 1,000 Firm not found Refused to participate in study

Firms 18 10 6 9 8 49

Total

100

in Panel A of Table 3.2 imply that between 53 and 68 percent of business firms have annual revenue of $10 million or less, similar to the 42 to 47 percent here.6 This similarity gives some confidence that meaningful conclusions can be drawn by comparing the actual expenditures and costs that potentially would be transferred to the Fund at the two sets of sites. Table 6.2 reports average cleanup cost per firm and the percentage distribution of cleanup costs through 1991 for the 108 firms participating in the study. Firms with annual revenues of less than $10 million account for only a tiny proportion—about 1 percent—of expenditures of all participating firms through 1991. Average expenditures through 1991 for firms with annual revenues of at least $1 billion are over 200 times those by firms with annual revenues less than $10 million. As before, we need to consider the expenditures of firms that we could not find or that refused to participate in the study. Even if we assume that all the firms we could not find are small, the proportion of expenditures by small firms changes very little when we make the assumption that the average expenditure of firms we could not find is the same as those of the small firms in the sample.7 If there is no correlation between firm size and willingness to participate, then the distribution of expenditures for the participating firms may be a good estimate for the distribution for all firms. ____________ 6The same assumptions used to calculate a range for the proportion of firms with annual revenue of $3 million or less in Section 3 are used to calculate the range for the proportion with $10 million or less. 7Twenty firms could not be found (8 percent of 251). Assuming average expenditures through 1991 of $32,000 for each adds $640,000 to the expenditures of small firms and all firms combined. The percentage of small firm expenditures increases from 1.1 percent 1.6 percent.

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Table 6.2 Cleanup Expenditures Through 1991 by Firm Annual Revenue

1991 Annual Revenue ($millions) All firms < 10 ≥ 10 and < 100 ≥ 100 and <1,000 ≥ 1,000

Average per Firm ($1000) 14 82 1,905 3,349

Percentage Distribution 1 2 25 72

All firms (N = 108) 985a 100 a In total, the 108 firms spent $106 million in cleanup costs.

The proportion of actual cleanup costs paid by small firms is much different than the proportion of cleanup costs potentially transferred to the Fund by releasing small firms. The findings in Section 4 imply that between 11 and 29 percent of cleanup costs would be potentially transferred to EPA by releasing firms with $10 million or less in annual revenue.8 Here we estimate that only 1 percent of actual cleanup costs is paid by firms with annual revenues of less than $10 million. What could explain this large difference? The difference may be explained in part by biases introduced by different sampling strategies and response rates behind the two sets of data. The difference may also diminish over time as the 18 sites move through the cleanup process, because small firms may pay significant amounts only when targeted in cost recovery actions by larger PRPs later in the cleanup process.9 But the tremendous difference between the two distributions suggests that the actual cleanup expenditures of small firms may never approach the levels suggested by the amounts potentially transferred to EPA. To the extent that this is the case (and remains the case over time), the costs shifted to EPA will overstate the ultimate actual expenditures of small firms. ____________ 8The proportion of cleanup costs potentially shifted to the Fund by releasing firms with $10 million or less in annual revenue is calculated using the same procedures we used in Section 4 for firms with $3 million or less in annual revenue. 9Regression results in Dixon, Drezner, and Hammitt (1993, p. 36), suggest that the actual expenditures of large firms are larger than their volumetric shares would suggest. They found that larger firms spend more on cleanup costs than smaller firms when other site and firm characteristics (including a crude measure of volumetric share) are held constant.

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6.3 IMPLICATIONS FOR DISTRIBUTION OF BENEFITS AMONG PRPs WHEN SMALL OR SMALL-VOLUME PRPs ARE RELEASED FROM LIABILITY The small firms exempted from liability will benefit from the exemption. They are better off because they no longer pay cleanup and transaction costs, but perhaps also because other indirect costs of Superfund liability are eliminated. For example, the cost of credit may be higher for firms involved at Superfund sites.10 In principle, the cleanup costs of PRPs remaining at the site will not change if the cleanup costs transferred to EPA exactly offset the costs that would have been paid by the exempted firms. However, the analysis in this section suggests that small firms may never pay a great deal at Superfund sites. This could be because the costs of pursuing them may be larger than the amount that larger firms could hope to recover, because many of the small firms have gone out of business, or because small firms just cannot pay much. If small firms end up paying relatively little under the current liability system, larger firms could benefit a great deal when a measure of cleanup costs based on equitable or fair shares is used to determine the cleanup costs that are shifted to the Fund. These results also suggest that if the liability reforms do not transfer the cleanup costs of the exempted firms to the Fund, the actual losses to the firms remaining liable would be much less than estimates based on volume-based and equal-share cleanup costs. Whether or not cleanup costs are shifted to the Fund, releasing small firms may also reduce the transaction costs of large firms.11 Transaction costs may be lower if the number of PRPs at the site declines12 and will likely fall as the amount of cleanup costs at stake falls. While there are good arguments that large firms will benefit from transferring the cleanup costs of small firms to the Fund, the effect of transferring the cleanup cost of smallvolume generators to the Fund on larger volume generators that remain liable is ambiguous. This is because small-volume contributors are often larger firms that tend to pay more cleanup costs than their volumetric shares would indicate.13 ____________ 10Garber and Hammitt (1998) found that Superfund liability appears to increase the costs of capital for large firms, although they have yet to find strong evidence of an effect for smaller firms. 11Dixon (1994) estimated that transaction costs at Superfund sites are approximately 55 percent of cleanup costs. 12Evidence on whether transaction costs decline as the number of PRPs fall is mixed. See Dixon, Drezner, and Hammitt (1993, p. xiii). 13Dixon, Drezner, and Hammitt (1993, p. 36) found that transaction costs fall as expected site cleanup costs decline.

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7. SUMMARY AND CONCLUSIONS

Proposals to reform Superfund’s liability provisions include proposals that would release PRPs that are small in size or are only responsible for a small proportion of the waste at the site. Such reforms have sometimes included provisions that would transfer the cleanup costs of parties released from liability to the Superfund Trust Fund. This report attempts to quantify the number of PRPs that would be released, the cleanup costs shifted to the Superfund Trust Fund, and the net costs to those PRPs that remain liable at the site. 7.1 EFFECTS OF PROPOSALS TO RELEASE SMALL BUSINESS FIRMS FROM LIABILITY Table 7.1 summarizes our findings for proposals that would release small business firms from liability. Exempting firms with $3 million or less in annual revenues or releasing firms with 75 or fewer employees releases a substantial fraction of the site-firms pairs at nonfederal Superfund sites but affects a disproportionately small share of the cleanup costs.1 Because there are relatively few PRPs at O/O sites, the cleanup costs are relatively low, and smaller firms are less common than at G/T sites, the number of site-firm pairs and the amount of costs potentially shifted to the Fund by releasing small firms are also relatively low. Exempting firms at O/O sites with $3 million or less in annual revenue would release 200 to 300 site-firm pairs and potentially transfer $400–$900 million to the Fund. This amounts to $1.3–$4.5 million per site-firm pair released. The number of PRPs released by a $3 million cutoff is much greater at G/T sites than at O/O sites, as are the cleanup costs potentially transferred to the Fund. As indicated in Panel A of Table 7.1, between 40,000 and 57,000 site-firm pairs would be released from G/T sites, with the generators at these sites accounting for the vast majority. Estimates for the generator cleanup costs potentially transferred to EPA range from $2.6 billion to $6.0 billion. Estimates for the cleanup costs of the other PRPs at G/T sites range from $0.2 billion to $4.4 billion. Estimates for the cost to the Fund per site-firm pair released run from $51,000 to $169,000 for generators at G/T sites and from $28,000 to $880,000 for owners, operators, and transporters at G/T sites. The wide range for the non-generators reflects the great amount of uncertainty in the cleanup cost accruing to owners, operators, and transporters that are small. ____________ 1All our estimates are for the site-PRP pairs. The percentage of firms released may vary somewhat from the percent for site-PRP pairs because some PRPs appear at multiple sites.

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For generators and non-generators combined, the cost per firm released runs from $54,000 to $222,000. Table 7.1 Summary of Business Firms Released and Cleanup Costs Transferred to EPA by Proposals to Release Small Business Firms from Superfund Liability

A. Annual Revenues ≤ $3 million Percent of site-firm pairs released Number of site-firm pairs released (000s) Generators Owners, operators, transporters Percent of cleanup costs Generators Owners, operators, transporters Cleanup costs potentially transferred to EPA ($billions) Generators Owners, operators, transporters Cost per site-firm released ($1000/site-firm) Generators Owners, operators, transporters B. ≤ 75 employees Percent of site-firm pairs released Number of site-firm pairs released (000s) Generators Owners, operators, transporters Percent of cleanup costs Generators Owners, operators, transporters Cleanup costs potentially transferred to EPA ($billions) Generators Owners, operators, transporters Cost per site-firm released ($1000/site-firm) Generators Owners, operators, transporters

O/O Sites

G/T Sites

All Sites

17–27 0.2–0.3 — —

44–63 40–57 35–51 5–7

44–62 40–58 — —

5–10 — —

— 17–29 5–51

— — —

0.4–0.9 — —

3.1–8.9 2.6–6.0 0.2–4.4

3.5–9.8 — —

1,300–4,500 — —

54–222 51–169 28–880

61–244 — —

28–37 0.3–0.4 — —

57–72 52–65 45–58 6–9

56–71 52–65 — —

13–19 — —

— 34–43 13–60

— —

1.2–1.7 — —

6.4–11.8 5.2–8.8 0.6–5.2

7.5–13.5 — —

3,000–5,700 — —

98–227 90–194 67–867

116–258 — —

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Our approach likely overstates the proportion of cleanup costs that would be attributed to owners and operators at O/O sites and non-generators at G/T sites, based on their degree of involvement with the site. It thus seems sensible to put more weight on the bottom end of their cost range than on the upper end. Even conceding this, though, releasing firms at G/T sites appears far more cost-effective than releasing firms at O/O sites, in terms of cost to the Trust Fund. The costs actually transferred to the Fund by liability reforms may be much lower than the estimates above. Restricting the exemption to new cleanup commitments or expenditures might reduce the totals by as much as half. Continuation of EPA policies to pay the cleanup costs at orphan sites and for some orphan shares at sites where PRPs have been identified will also reduce the totals. To date, however, these expenditures have not been large relative to the total cleanup bill at all nonfederal NPL sites. Panel B of Table 7.1 reports findings for releasing firms with 75 or fewer employees. The number of firms and cleanup costs affected are larger than those for the $3-million annual revenue cutoff, as is the cost per firm released. The difference in the cost per firm released suggests that the $3-million cutoff more effectively targets the business firms that have played the smallest roles at the less expensive sites. Not all PRPs at Superfund sites are business firms, and reforms in Superfund’s liability scheme must consider how to treat individuals and governmental organizations. Our results indicate that 73 percent of the site-PRP pairs at Superfund sites are business firms, 2 percent are government agencies, and the remaining 25 percent appear to be individuals. We do not know how these individuals became connected to the site. Some may have sent household waste to the site, but others may have been associated with business firms at the time of disposal. Many individuals may thus claim to be covered by proposals to release small firms from liability, generating investigation costs and perhaps increasing the percent of site-PRP pairs released. 7.2 EFFECTS OF PROPOSALS TO RELEASE SMALL-VOLUME PRPs FROM LIABILITY Proposals to release PRPs that contributed only a small portion of the waste at a site target generators at G/T sites. Our data suggest that G/T sites account for approximately onehalf of the sites on the NPL, but account for roughly 75 percent of the cleanup costs and all but 1,300 of the 127,000 site-PRP pairs at nonfederal NPL sites. Generators likely account for 84 percent or more of the PRPs at G/T sites and, based on cost allocations to date, somewhere between 60 to 80 percent of the cleanup costs. Thus, even though proposals to release firms by volumetric contribution apply to only a restricted set of PRPs, they affect a substantial

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proportion of the PRPs (at least 85 percent) and cleanup costs (perhaps 50 percent) at NPL sites. Table 7.2 summarizes our findings on the distributions of generators and volume-based cleanup costs by volumetric share at G/T sites. The characteristics of the subsample of sites used in the analysis likely causes our estimates to overstate the proportion of small-volume Table 7.2 Summary of Generators Released and Cleanup Costs Transferred to EPA by Proposals to Release Small-Volume Generators from Superfund Liability

Volumetric Share Site-PRP pairs released Percent Number (1000s) Cleanup Costs Transferred to EPA Percentage Amount ($millions) Cost per site-PRP pair released ($1000/site-PRP pair released)

Volumetric Share Cutoff (percent) ≤0.01 ≤0.1 ≤1 73 77

87 92

96 101

0.3 49–65

3.3 540–710

22.3 3,600–4,800

0.6–0.8

6–8

36–48

generators and the volume-based cleanup costs that accrue to them, but our estimates are probably at least suggestive of the distribution at all G/T sites on the NPL. We find that proposals to release de minimis parties (volumetric share less than 1 percent) or even de micromis (volumetric share less than 0.1 percent) would release the vast majority of generators at the sites in our sample but would affect only a small share of the volume-based cleanup costs. In terms of the cost to the Fund per site-PRP pair released, exempting small-volume contributors from liability appears preferable to releasing firms that are small in size. As shown in the bottom row of Table 7.2, the cost per site-PRP pair released is only $600 to $800 for a 0.01 percent cutoff. Even with a 1.0 percent cutoff, the cost per site-PRP pair released is low relative to those for releasing firms with $3 million in annual revenue or firms with 75 or fewer employees. 7.3 EFFECTS OF LIABILITY REFORMS ON PRPs REMAINING LIABLE AT THE SITES Small firms exempted from liability will clearly benefit, but the benefit to large firms—if any—will depend in part on how the measures of cleanup costs transferred to the Fund

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compare to what small firms would have paid at the site under the current liability system. Our analysis suggests that the amount actually spent by small firms is far less than the amount that would potentially be transferred to the Fund. Whether or not this relationship will persist over time as sites move through the cleanup process and large firms attempt to recover costs from small firms is unknown, but if it does, then large firms would benefit directly from the transfer of small firms’ cleanup costs to the Fund. They may also benefit indirectly through lower transaction costs because of the smaller number of PRPs at the site and the lower amounts at stake. Although there are good arguments that large firms will benefit from the transfer of small firms’ cleanup costs to the Fund, it is ambiguous what effect transferring the cleanup costs of small-volume generators will have on the larger-volume generators that remain liable. This is because small-volume contributors are often larger firms that tend to pay more cleanup costs than their volumetric shares would indicate. 7.4 CONCLUDING COMMENTS The results reported here underscore the uneven distribution of costs and number of parties across nonfederal NPL sites and the uneven distribution of the waste contributions of the PRPs within a site. A small minority of sites account for the majority of costs and PRPs. A small minority of PRPs at a site account for the vast majority of the waste. This unevenness carries over into the distributions by firm size. Proposals to release small firms (annual revenues of $3 million or less, or 75 or fewer employees) would release the majority of business firms but affect a disproportionately small proportion of the waste. Reforms that modify Superfund’s liability scheme should acknowledge and take advantage of these asymmetries. Reforms that modify Superfund’s liability scheme must also acknowledge the costs and feasibility of implementation. It will be difficult to define which PRPs are businesses and which are not and to verify the size of many of them. Waste-in lists have not been assembled at many sites, and the information to do so may simply not be available. Cleanup costs must be divided between generators, transporters, and owner/operators in order to calculate cleanup costs to be transferred to the Trust Fund. Additionally, if transporters, owners, and operators are also to be released, methods for allocating cleanup costs among them must be developed. Limited reforms to a very complicated liability system are likely to themselves be complicated.

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B. SAMPLING DESIGN AND INTEGRATION OF RPM AND SETS DATA

Table B.1 show the number of sites selected and the response rate in each EPA region. Table B.1 Site Selection and Response Rate for Site Survey

Region 1 Region 2 Region 3 Region 4 Region 5 Region 6 Region 7 Region 8 Region 9 Region 10 Total

Nonfederal NPL Sites 78 195 154 149 260 66 56 35 82 51

Sites Selected 13 34 28 26 49 11 9 7 15 8

1,126

Surveys Completed 3 20 15 19 32 4 5 3 5 8

200

Response Rate (percent) 23 59 54 73 65 36 56 43 33 100

114

57

Table B.2 shows the overlap between the PRPs identified by the RPMs and those in EPA’s Site Enforcement Tracking System (SETS). The RPMs named far more PRPs than were found in SETS. This is to be expected because SETS for the most part only lists PRPs that have received general or special notice letters. Table B.2 Number of Site-PRP Pairs at 114 Responding Sites Reported by RPMs and in SETS

In RAND survey Not in RAND survey Total

In SETS 1,528 1,268

Not in SETS 9,143 0

Total 10,671 1,268

2,796

9,143

11,939

The sampling rates at each of the 114 sites in the study are shown in Table B.3. The sample rate decreases as the number of PRPs at the site increases.

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Table B.3 PRP Sampling Rates at 114 Sites Number of PRPs at Site 1–9 10–49 50–199 200–999 ≥1000 Total

Number of PRPs 175 419 736 3,222 7,387 11,939

Number PRPs Sampled 172 309 281 509 503 1,774

Sampling Rate 0.98 0.74 0.38 0.16 0.07 0.15

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C. STATISTICAL METHODS

This appendix describes the method for calculating the 90-percent confidence intervals used in this report. We first detail method used to calculate the confidence interval for the proportion of PRPs that fall into a particular category (for example, the proportion of PRPs that are individuals). Then we describe the method for calculating the confidence interval for the fraction of overall expenditures in a particular category (for example, the proportion of volumebased cleanup costs incurred by business firms). C.1 CONFIDENCE INTERVALS FOR PROPORTION OF PRPs THAT FALL INTO A PARTICULAR CATEGORY Let Pc = weighted percent of observations falling in category c,1 wi = sampling weight on observation i (inverse of sampling rate), and N = the number of observations. Then, from Kish (1995, p. 88) the 90-percent confidence interval for Pc is  N 2 1.645 ± Pc (1 − Pc ) wi   i =1 

∑

 N  wi    i =1 

∑

2

.

C.2 CONFIDENCE INTERVALS FOR PROPORTION OF EXPENDITURES IN A PARTICULAR CATEGORY x where Consider the proportion of expenditures in category c as y x = xc , the expenditures that fall into category c, C

y=

∑x

c

and

c =1

C = the number of different categories.2 Then, from Mood et al. (1982, p. 181), the 90-percent confidence interval for

x is y

___________ 1The weighted percentage of observations falling into category c is calculated using the SAS FREQ procedure with the weight option. 2The expenditures falling into category c and the total expenditures across all categories are calculated using the SAS MEANS procedures with the weight option.

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1.645 ± var ( x y ) where

2

 µ   var ( x ) var ( y ) var ( x )  var ( x y ) =  x   + −2 . 2 2 µ x µ y  µy  µy   µx Note that the numerator of the last term in this equation (var(x)) is usually cov(x,y) in this type of formula. But in this case, cov(x,y) = var(x).

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REFERENCES

Acton, Jan Paul, and Lloyd S. Dixon, Superfund and Transaction Costs: The Experiences of Insurers and Very Large Industrial Firms, RAND, Santa Monica, CA, R-4132-ICJ, 1992. Dixon, Lloyd S., Fixing Superfund: The Impact of the Proposed Superfund Reform Act of 1994 on Transaction Costs, RAND, Santa Monica, CA, MR-445-ICJ, 1994. Dixon, Lloyd S., Deborah S. Drezner, and James K. Hammitt, Private-Sector Cleanup Expenditures and Transaction Costs at 18 Superfund Sites, RAND, Santa Monica, CA, MR-204-EPA/RC, 1993. Dun & Bradstreet, Inc., D&B’s Guide to Information Quality, Dun & Bradstreet Information Services, Form No. 18R-1, 1993. Garber, Steven, and James K. Hammitt, “Risk Premiums for Environmental Liability: Does Superfund Increase the Cost of Capital?” Journal of Environmental Economics and Management, Vol. 36, pp. 267–294, 1998. Inside EPA’s Superfund Report, Inside Washington Publishers, Washington DC, Vol. 12, No. 5, March 4, 1998. Internal Revenue Service, SOI Bulletin, U.S. Department of the Treasury, Publication 1136, Winter 1993–1994. Kish, Leslie, Survey Sampling, John Wiley & Sons, Inc. New York, 1995. Mood, Alexander M., Franklin A. Graybill, and Duane C. Boes, Introduction to the Theory of Statistics, Third Ed., International Student Edition, McGraw-Hill International Book Company, New York, 1982. Probst, Katherine N., Don Fullerton, Robert E. Litan, and Paul R. Portney, Footing the Bill for Superfund Cleanups, The Brookings Institution and Resources for the Future, Washington, DC, 1995. U.S. EPA, Users Guide to the RPM Site Data, Office of Emergency and Remedial Response, Publication 9355.0-54, August 8, 1994. U.S. General Accounting Office, Superfund: Progress Made by EPA and Other Federal Agencies to Resolve Program Management Issues, RCED-99-111, April 1999. U.S. House of Representatives, H.R. 1300, Recycle America’s Land Act of 1999, 106th Congress, 1st Session, March 25, 1999. U.S. Senate, S. 1090, Superfund Program Completion Act of 1999, 106th Congress, 1st Session, May 20, 1999.