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Financial assurances by operators

Posted on: June 14th, 2016
by David Ganje

Business projects involving some type of government oversight are usually regulated because of a project’s significant environmental or property rights impact. The purpose of regulation is to safeguard the public in the event of a problem arising from such a project. End-of life decommissioning, reclamation, contamination are all typical contingency events. Proper planning, evolving around the full life of a proposed project, is key. But government is not always well endowed with the skills of planning and foresight.

No owner, officer or director of a business likes to consider the mortality of a business project. Even more challenging are government regulators who oversee a project. Regulators do not always require good exit planning or end-of-business planning for regulated projects. This shortcoming is shown when one considers a government agency’s duty to require a financially viable exit plan. It might be a mining project, a wind farm or a pipeline. One need only look at existing requirements for decommissioning a project, or for reclaiming the property at the end of the life of a project. By way of example, in four different General Accountability Office public reports over the years, the GAO was critical of several federal agencies ability to set or determine such things as the costs of reclamation for a project.

Bonds, deposit accounts and self-funding are some of the ways that an operator provides its legal obligation for end-of-life financial assurances. These financial submissions are, in my view, often inadequate.

A couple of recent experiences in South Dakota spotlight this problem. A few years back a state-licensed grain warehouse (in the old days we called them grain elevators) by the name of Anderson Seed Company went belly up. Authority for setting bonds was then and is now given to the SD PUC. The bond for Anderson had been set at $100,000. However, $2.6 million in claims were lost. The insolvency of the company resulted in a little over 4 cents on the dollar paid back to those South Dakota parties who lost money in the insolvency. The setting of the bond was inadequate. The payout to the innocent grain sellers/producers was inadequate. The end-of-life planning was not well done. This experience resulted in a change in the law, but that change is itself an incomplete effort at planning project end-of-life contingencies. The second example is the very recent oil well breakdown near the town of Wasta. A drill bit broke part way down an oil well. This break necessitates the plugging of the well to protect aquifers. But the operator has run out of money. The operator was required by the state to put up a nominal bond of $120,000 for each well for which it had obtained a permit. According to a recent news article, the state DENR reported that the bond money was not enough to address this problem. The official stated that the cost could be $2 million because of the broken bit and the 150 feet of drill pipe that remain in the hole about a mile into the earth.

Board members and agency staff are often appointed to their positions because of their expertise and training in geology, law, hydrology, engineering and the like. Agency staff and appointed board members often have expertise dealing with normal board matters including mining permit applications, water rights disputes and similar issues. It is unusual however for even a large agency to have expertise on financial qualification matters that must be designated by the agency and directed to the operator who is then obligated to provide the agency with end-of-project planning or safety assurances. Further, a regulatory system that sets a ‘statutory amount’ for this type of bonding may be too simple a solution.

A state official has stated that we don’t have a “broken system” in South Dakota. That is not the issue. The issue is not whether lots of bonds are liquidated on a regular basis. The whole system is not broken. The issue at hand is, did the called-in bond do what it was supposed to do when an insolvency, bankruptcy or contamination occured?

I have previously put before the public a suggestion that will address some of these problems. This recommendation should be considered by the state legislature. My recommendation: an agency with authority over an operator’s financial assurance requirements shall evaluate in writing all financial assurance proposals using an agency-designated non-party (an outside consultant) with recognized experience on the matter of providing financial assurance. A completed report and recommendation by an outside consultant shall be a condition before granting or maintaining a permit or license. The costs incurred by the agency in contracting with the independent outside consultant shall be paid by the operator.

Op-ed available at the Argus Leader

David Ganje practices law in the area of natural resources, environmental and commercial law in South Dakota and North Dakota. His website is Lexenergy.net

Leaky Laws – Oil Spill Liability in New York

Posted on: May 26th, 2016
by David Ganje

On September 2, 1978 the U.S. Coast Guard discovered evidence of an oil spill entering Newton Creek in Brooklyn. After launching an investigation, the government found over 17 million gallons of petroleum products that had leaked over a period of decades beneath the Greenpoint area, contaminating more than 50 acres of land. Today, new studies put the spill volume up to 30 million gallons. Cleanup began in 1979, but by 2006 only 9 million gallons had been cleaned up – less than a third of the known spill size. Cleanup continues today, with the aid of the federal government. The spill was designated a Superfund site. No one knows how long the leak existed before it was discovered
The relevant question should be how regulated pipeline leaks will be cleaned up, and who will pay for them. Under both Federal and state laws, the party responsible for a leak is the one responsible for cleanup. Usually the operator responsible prefers to take care of the cleanup themselves. Not only does this help soothe public relations problems resulting from a leak, but it helps the operator control the costs. However, a pipeline operator causing a spill may not always be willing or able to clean up a spill. The liable operator could be bankrupt, dissolved, or simply not have the money. The operator responsible for the Greenpoint spill was still in business and capable of footing the bill for their mistakes. This will not always be the case. Not all spills are flashy and obvious. Cleanup should not wait for years of court cases or bureaucratic lethargy. The money for a cleanup must be there, ready to be used.

New York has the NY Environmental Protection and Spill Compensation Fund (“Spill Fund”), established in 1977 to protect the state against petroleum spills. The fund is financed with a tax on petroleum products moving through the state, and any disbursements from the fund to pay for spill remediation is ideally recovered through penalties assigned to the responsible party. Third parties who are damaged by the spill can also file a claim with the Spill Fund and get their damages paid through the Fund, allowing the Fund to add those damages to the remediation it seeks from the responsible party.

This kind of fund is a good start. However, the fund is simply not large enough to handle the kind of oil spills that are possible in this era of pipelines and oil trains. For the 2014-2015 fiscal year, the Spill Fund spent over five million dollars more than it collected, bringing the fund’s total down to twenty-two million dollars. The fund spent thirty-two million that year. The 2015 state budget raised the cap on the Spill Fund from $25 million to $40 million. But even $40 million is not enough to handle the large spills when a company is not around to pay – in fact, $40 million is not even what the fund would be at if the cap had kept pace with inflation.

This is not to say that New York would be alone in a crisis. Both the Coast Guard and the EPA have trust funds in place to help states and the federal government. The Coast Guard’s fund only applies to spills into navigable waters, and cannot apply to cleaning up spills on land. But it would be there to help if the real disaster happened: a lengthy, voluminous spill into one of the many bodies of water in New York State, like the 2013 Enbridge spill in Michigan that cost more than a billion dollars to clean up. EPA maintains their Leaking Underground Storage Tank Fund for spills on land, but that fund is financed with a tax on motor fuel – a tax paid by private citizens, not the companies causing the damages in the first place.

Petroleum spills are not going away. The New York State Spill Hotline receives approximately 16,000 reports of spills each year, and the NY Dept. of Environmental Conservation estimates that approximately 90% of those reports involve petroleum products. Financial assurances for spills must be required before the damage happens, in amounts sufficient to cover the thousands of spills that happen every year. The legislature needs to create a modern statute addressing financial assurances by the operators for pipeline leaks.

Leaky Laws – Oil Spill Liability in North Dakota

Posted on: May 17th, 2016
by David Ganje

Pipelines, even privately owned, are a publically regulated transportation and operating system. The question is not whether pipelines are “essential to our society.” Pipelines are already integral to the country: the US had over 1,700,000 miles of oil and gas pipelines in 2014, and North Dakota had 8,080 miles of pipelines in 2011. When a pipeline leak occurs, it only deflects from the problem at hand to discuss a pipeline’s place in modern society. The media puts its attention on the statements of politicians after a pipeline leak has occurred. Such media attention does address the question of how to manage the risk. Operating systems will malfunction. The process for legally authorizing operating systems should not. To paraphrase Norman Vincent Peale, the problem with most publically regulated systems is that they would rather be ruined by praise than saved by criticism.

In 2013, a pipeline operated by Tesoro Logistics began leaking thousands of barrels of oil into wheat fields. By the time the leak was caught and stopped, over 840,000 gallons of crude oil spilled into North Dakota. Tesoro Logistics originally estimated that the cleanup would take around $4 million. Two years later, the costs have passed $40 million and continue to rise. Oil spills are not going away – as more pipelines are built, spills are only increasing. The relevant question should be how regulated pipeline leaks will be cleaned up, and who will pay for them.

Under both Federal and state laws, the party responsible for a leak is the one responsible for cleanup. Usually a company like Tesoro Logistics prefers to take care of the cleanup itself. Not only does this help soothe public relations problems resulting from a leak, but it helps the operator control the costs. While North Dakota’s Department of Health is supervising the cleanup, Tesoro Logistics manages the contractors for the cleanup. But a pipeline operator causing a spill may not always be willing or able to clean up a spill. The liable operator could be bankrupt, dissolved, or perhaps not have the money. In these cases, clean up cannot wait for years of court cases or bureaucratic lethargy. The money for a cleanup needs to be there, ready to be used.

The state tells us that ‘them what operates a car must financially assure the public against the risk of its operation.’ Thus, the state has mandatory car insurance. North Dakota can require operators to provide financial assurances of their ability to clean up a spill, but the state can only require such insurance after a spill has already happened. The North Dakota Department of Health “may require insurance coverage or other financial assurance for any additional environmental monitoring or remediation that may become necessary on the property…and must require such…when the projected cost of an active monitoring or remediation program exceeds five hundred thousand dollars.” This requirement applies only to “real property contaminated by regulated substance or other pollution or contamination.” In other words, the state can only require financial assurances for land that has already been contaminated. What about money to help before a spill occurs?

North Dakota also maintains the Petroleum Release Compensation Fund. Unfortunately, this fund is not there to help landowners damaged by oil spills – the PRCF is a fund designed to “reimburse an eligible owner or operator for ninety percent of the costs of corrective action.” In other words, the PRCF is a fund to pay back the operators for money they pay cleaning up their mistakes. The PRCF is funded by oil companies, not taxpayers. And landowners can recover from the fund, but only if very specific requirements are met: the pipeline must have complied with all state and federal rules, the Dept. of Health was notified properly, the operator must have already begun paying the costs of corrective action, and the operator must be cooperating fully. Why these requirements? Because the PRCF is not designed to protect landowners and reimburse them for damages – the PRCF is designed to help companies defray expenses. The only reason the PRCF includes the capability to pay landowners for damages is so the pipeline operator won’t have to do it themselves. The PRCF does help encourage companies to come clean and take responsibility for leaks, knowing that they will be paid back from the fund. But the fund does not solve the problem of providing ongoing financial assurance, also referred to commonly as insurance.

The best fund available to aid the state’s immediate spill response is the Hazardous Chemicals Preparedness and Response Fund (HCPPF). This fund is created through an annual fee paid by facilities housing hazardous materials ($25 per hazardous material housed, with a $475 cap) in the state, as well as other appropriations by the legislature. These fees are distributed between the North Dakota Department of Emergency Services and the many Local Emergency Planning Committees, and pay for training, equipment, and disaster relief. This kind of fund is a good start, and ensures that North Dakota has equipment and trained professionals in disaster relief ready to move when a spill is detected. But the limitations on fundraising for the HCPPF means that if a leak like Tesoro Logistic’s occurs, the HCPPF will not be sufficient to manage the cleanup effort – at least, not without taxpayer monies coming from the state to fill the gaps. And landowners should not be forced to pay for oil spills.

This is not to say that North Dakota would be alone in a crisis. Both the Coast Guard and the EPA have trust funds in place to help states and the federal government. But the Coast Guard’s fund only applies to spills into navigable waters, and cannot apply to cleaning up spills on land. Meanwhile, the EPA’s Leaking Underground Storage Tank Fund is funded with a tax on motor fuel – a tax paid by private citizens, not the companies causing the damages in the first place.

A better solution is required to ensure that those who cause the damages pay for it. Waiting until after a spill happens to look for money to fix it cannot be how pipelines are managed. This is especially troublesome when so many spills go undetected for months, like the 3 million gallons of fracking brine that leaked into the Blacktail Creek in 2015; the pipeline had been leaking for over three months before it was detected. The very same pipeline leaked another seven thousand gallons of brine this January. Pipeline spills are not going away. North Dakota reported approximately 1,400 hazardous material release incidents in 2014 alone. Financial assurances for spills must be required before the damage happens, in amounts sufficient to cover the hundreds of spills that happen every year. The legislature needs to create a modern statute addressing financial assurances for pipeline leaks.

David Ganje practices law in the area of natural resources, environmental and commercial law in South Dakota and North Dakota. His website is Lexenergy.net

Letter to the Editor: A South Dakota Water Lottery

Posted on: October 20th, 2014
by David Ganje

Letter to the Editor: A South Dakota Water Lottery

Posted Aberdeen American News, Farm Forum: Monday, October 13, 2014 9:08 am

by David Ganje

While it has yet to come to the attention of the national environmental and natural resources community, the South Dakota state legislature passed a first-in-the-nation law this year in the field of natural resources. The state will use a ‘lottery system’ for the issuance of certain state managed water permits. The water lottery system is combined with a moratorium on water use for identified water bodies managed by the state. Under current South Dakota law, all water within the state’s jurisdiction is property of the people of the state. The right to the use of water may be acquired by private parties and municipalities by a state-managed appropriation procedure. The state has been historically a first in time, first in right state when granting water use rights. South Dakota’s ‘water management’ jurisdiction does not however apply to Indian Country or on federal lands. Water use in South Dakota is authorized when the state Water Management Board grants a private, beneficial use of the state’s water resources. An example of a private use is an irrigation permit. A water use permit is issued either as a new water use or as a vested water right for an existing water use if it predates 1955.

The new water lottery system comes into play in situations where the state Water Board has determined that an existing groundwater source is ‘fully appropriated.’ A water source is fully appropriated when the state rules that no new or further access to the water should be granted because it would prejudice the ability of the water source to recharge to an acceptable level. The lottery system will not apply to open or unappropriated aquifers. The Water Board under the new legislation can accept water permit applications even for a fully appropriated aquifer. A 30 day application time period will also be set for a fully appropriated aquifer by public notice. The notice gives prospective applicants the right to apply under the lottery system. The applications are then placed in a lottery drawing system. The actual method for drawing successful applicants has not yet been implemented but will be announced in the next several weeks. The ‘winning’ applicants will then have to wait under the state’s five-year moratorium on approval of permits in those instances when the state has made a designation of a ‘fully appropriated aquifer.’

A lottery system for resource development permits has been used in the past, but never by a state for access to state managed water. The U.S. Bureau of Land Management used a lottery system for granting oil and gas leases until 1987 but has not used it since. The state, of course, does not call this new law a lottery system. I do. The new unchallenged law describes the lottery system as a procedure in which, “the board shall create a priority list using a random selection process to be determined by the board.” This new lottery system is an effort to cure problems in past experiences when an aquifer is placed in a moratorium. One cannot criticize the conceptual fairness of the new law. The statutes attempt to treat water permit applicants seeking access to a particular aquifer equally by using the “random selection process” in a moratorium scenario. The law itself has some challenges in its language as well as in its untested procedure. It is soon to be implemented by the state Water Board and the S.D. DENR. The new law is a unique effort by the state to deal with natural resources stewardship issues. In that regard the legislature should be applauded. Will the bar of reason support this brave new attempt at fairness? Time will tell.

Tags: Environmental Law, Infrastructure Security, Natural Resources Law, Water Law, Water Regulation, Water Rights, Water Systems Security

Illinois Association of American Water Works Recognizes Ganje’s Water Workshops

Posted on: September 19th, 2014
by David Ganje

Illinois Association of American Water Works Recognizes Ganje’s Water Workshops

The Illinois Section of the American Water Works Association (ISAWWA) has recognized David Ganje of Ganje Law Offices for his recent workshops given for the Association. David Ganje recently presented two specialized workshops to the ISAWWA on the subjects of water law and water security. The Association wrote letters of appreciation to Mr. Ganje for the work and will use the presentations in future workshops.