# CB O



# TESTIMON Y

Statemen t o f Jan Pau l Acto n Assistant Directo r Natura l Resource s an dCommerc e Divisio n Congressional Budge t

Offic e

o n th e Comprehensiv e Environmenta l Response , Compensation , an dLiability Ac t

befor e th e Subcommitte e o n Superfund , Wast e Control , an dRis k Assessment Committe e o n Environmen t an dPubli c Work s Unite dState s Senat e Apri l 27 , 199 5

NOTIC E Thi s statemen t

i s no t availabl e fo r publi c releas e unti l i t

i s delivere da t 9:0 0 a.m . (EOT) , Thursday , Apri l 27 , 1995 .



### CONGRESSIONA L BUDGE T OFFIC E SECON D AN D D STREETS , S.W . WASHINGTON , D.C . 2051 5Mr . Chairman , Senato r Lautenberg , an dMember s o f th e Subcommittee , I amplease d t o participat e i n you r

revie w o f

th e Superfun dprogram . Th e Congressional Budge t Offic e (CBO ) ha s previousl y explore dman y aspects o f th e Superfun dprogramfo r thi s Committe e an dothers . M y testimony today , however , wil l focu s o n th e likel y effect s o f repealin g th e retroactiv e featur e o f Superfund' s liabilit y system . Proposal s t o eliminat e cleanu p liabilit y fo r lega l activitie s tha t

contribute dt o aSuperfun dproble mbefor e acertai n cutof f dat e ca n tak e man y specifi c forms . T o illustrat e th e se t

o f possibilities , CB O analyze dtw o alternativ e cutof f dates : Januar y 1,1987 , a s use di n some recen t refor mproposals , an dJanuar y 1 , 1981 , base do n th e Decembe r 198 0 passag e o f

th e Superfun dlaw . W e als o considere dth e implication s o f whethe r t o reimburs e liabl e partie s fo r th e cost s o f

cleanu p work

the y conducte d unde r agreement s wit hth e Environmenta l Protectio n Agenc y (EPA) . On e polic y woul dreimburs e liabl e partie s fo r ongoin g cost s incurre dunde r existin g agreements , bu t no t fo r mone y spent

befor e th e chang e i n th e liability system . A secon dalternativ e woul dreimburs e neithe r

ongoin g no r

pas t costs ; athir dwoul dreimburs e both . Proponent s o f

acutof f dat e fo r Superfun dliabilit y wan t t o eliminat e th e perceive dunfairnes s o f

ret reactivity an dt o reduc e o r eliminat e th e "transactio n costs " o f fundin g cleanu p throug haliability-base dsystem . Th e mai n trade-of f implie di n thei r proposal s i s th e los s o f

cleanu p fundin g fro mth e liabl e parties . Makin g u p fo r tha t los s woul drequir e som e combinatio n o f cost savings , increase dfedera l spending , an dreduction s i n th e pac e o f cleanup .Th e desirabilit y o f suc hatrade-of

f hinge s i n part

o n th e siz e o f

th e variou s effects . CBO' s analysi s lead s u s t o th e followin g observation s an destimates :

o Th e liabilit y face db y Superfund' s "potentiall y responsibl e parties " (PRPs ) arise s mostl y fro maction s tha t occurre dbefor e 198 1 an d almos t entirel y fro maction s befor e 1987 . Usin g th e bes t informatio n availabl e abou t

today' s sites , CB O estimate s tha t 7 0 percen t

o f al l Superfun dliability coul daris e fro mpre-198 1 activitie s an d9 5 percen t fro mpre-198 7 activities .

o Transactio n cost s currentl y represen t a n estimate d2 7 percen t

o f al l federa l an dprivat e Superfun dspending . Th e effec t o n thos e cost s o f aliabilit y cutof

f fo r lega l activitie s a t

Superfun dsite s woul ddepen d no t onl y o n th e cutof

f dat e bu t als o o n th e exten t

o f illegal activities , whic hma y b e afacto r

a t one-thir dt o one-hal f

o f nonfedera l sites . Unde r favorabl e conditions , wit hliabilit y repeale dthroug h198 6 an d littl e investigatio n o r

litigatio n abou t

th e legality o f

pas t actions , transactio n cost s woul dfal l dramatically—perhap s b y $ 1 billio n pe r year . Alternatively , witha198 1 cutof f dat e an dfrequen t

question s o f legality , transactio n cost s woul dfal l muc hles s o r eve n increase .o Wherea s an y saving s i n transactio n cost s woul daccru e primaril y t o th e privat e sector , th e governmen t woul dfac e increase dcost s becaus e o f th e shif t i n responsibility fo r

cleanup . Give n tha t

th e cleanu p plan s EP A issue s fo r

eac h sit e ten dt o underestimat e actua l costs , tha t shif t coul damoun t

t o $1. 6 billio n annuall y fo r a198 7 cutof

f o r $1. 3 billio n fo r a198 1 cutoff . B y contrast , th e 199 5 appropriatio n fo r Superfim d wa s $1. 4 billion . Suc hshar p reduction s i n PRP liabilitie s woul dmak e Superfun dlargel y o r

almos t entirel y apubli c work s program .

o Th e issu e o f

reimbursemen t

fo r pas t o r ongoin g PR P cost s pose s difficul t polic y choices . O n th e on e hand , no t providin g reimbursemen t

ma y b e seen b y som e PRP s a s inequitabl e an dma y encourag e individual s t o defe r complyin g wit hfutur e law s an d regulations . O n th e othe r hand , providin g reimbursemen t woul d requir e establishin g criteri afo r acceptabl e documentatio n an d reimbursabl e costs , an dcoul dad da s muc ha s $13. 5 billio n i n federa l outlay s fo r

a198 7 cutof

f o r $9. 9 billio n fo r

a198 1 cutoff . Th e res t o f thi s statemen t

review s Superftind' s curren t liabilit y syste man d discusse s th e basi s fo r

th e estimate s jus t

mentioned .TH E PRESEN T LIABILIT Y SYSTE M

I n enactin g th e Superfun dlaw , formall y th e Comprehensiv e Environmenta l Response , Compensation , an dLiabilit y Ac t (CERCLA) , th e Congres s too k atwo-pronge d approac ht o th e proble mo f wh o shoul dpa y fo r

cleanin g u p site s contaminate dwith hazardou s waste s o r

othe r substances . Th e la w impose dcleanu p liabilit y o n asite' s present owner s an doperators , it s previou s owner s an doperator s fro mperiod s durin g whic hi t receive dhazardou s substances , th e generator s o f suc hsubstances , an dan y waste transporter s responsibl e for choosin g the site . It

als o establishe dthe Superfun d trus t fun dt o financ e response s a t site s fo r whic hth e liabl e partie s lac k sufficien t resource s o r

canno t b e found . Liabilit y unde r

CERCL A i s strict , meanin g tha t care o r negligenc e i s no t

a t issue . I n particular , apart y canno t escap e Superfun dliabilit y b y showin g that it s waste disposa l practice s obeye dal l law s an dregulation s tha t wer e i n forc e at

th e time . Liability i s als o join t

an dseveral , whic hmean s tha t an y part y ca n b e assesse dth e tota l cost s fo r acontaminate dsite (unles s th e party can sho w tha t it s contributio n produce d aseparate , divisibl e result) . Finally , Superfun dliabilit y i s retroactive , applyin g t o action s tha t

occurre dbefor e CERCL A wa s enacte di n Decembe r 1980 .I n administerin g th e Superfun dprogram , EP A can enforc e th e liability o f PRP s i n eithe r o f tw o ways . I t

can hav e the mperformth e necessar y cleanu p directly , unde r governmen t

supervision , o r

i t ca n conduc t

th e cleanu p throug hit s ow n contractor s an dthe n negotiat e o r

su e t o recove

r it s cost s afte r

th e fact . Project s conducte db y th e liabl e partie s ar e calle d"PRP-lead " o r "enforcement-lead" ; thos e initiall y finance db y th e governmen t

ar e calle d"fund-lead. " I n eithe r case , partie s tha t

EP A choose s t o pursu e ma y initiat e "contributio n suits " fo r reimbursemen t

fro mthei r

fello w PRPs .

PRP-Lea dCleanup s Unde r EPA' s "Enforcement-First " Strateg y

Unde r EPA' s "enforcement-first " strategy , adopte di n 1989 , liabl e partie s hav e undertake n th e larg e majorit y o f majo r cleanup s at

Superfun dsites . I n eac ho f th e las t thre e years , PRP s hav e conducte d7 2 percen t t o 7 4 percent

o f th e detaile dengineerin g studie s ("remedia l designs " o r RDs ) an dactua l cleanu p project s ("remedia l actions " o r RAs) . Ove r

thi s period , PRP s hav e als o conducte droughl y one-hal f o f th e site studie s calle dremedia l investigation s an dfeasibilit y studie s (RI/FSs ) an done-quarte r t o one-thir do f

th e "removal " action s (simpler , les s costl y cleanu p efforts) .CB O calculate s tha t PRP-lea dstudie s an dcleanup s hav e supplie dth e equivalen t o f $ 2 billio n pe r

yea r i n additiona l governmen t

spendin g ove r

th e las t fiv e years . EP A estimate s tha t th e valu e o f

PRP work

commitment s ha s bee n clos e t o $1. 4 billio n i n fou r

o f th e las t fiv e years , wit hadi p dow n t o $900 millio n i n 1993 . However , th e agency' s dat ao n fund-lea dcleanup s indicat e tha t fina l cost s ar e actuall y 5 0 percent higher , usin g adollar-weighte daverage , tha n it s origina l estimate s i n th e "record s o f

decision " (RODs) , whic hdocumen t it s choice s o f

cleanu p remedies . Actual cost s t o th e PRP s migh t b e somewhat

les s tha n $ 2 billion . Th e bes t availabl e evidenc e indicate s tha t

th e privat e secto r

ma y b e abl e t o accomplis hcleanu p work a t a1 3 percen t

lowe r cos t tha n th e government , whic himplie s tha t annua l PR P cost s woul db e $1. 7 billion . I n an y case , th e $ 2 billio n figur e represent s th e amoun t o f EP A spendin g avoided . CBO' s calculatio n assume s tha t th e tendenc y o f

ROD s t o understat e th e eventua l scop e o f

require dcleanu p applie s t o PRP-lea da s wel l a s fund-lea dprojects. 1 Tw o fact s buttres s thi s assumption . First , man y PRP-lea dcleanup s ar e precede db y RI/FS s conducte db y EPA , an dther e i s n o reaso n t o believ e tha t thos e RI/FS s ar e an y mor e accurat e tha n th e one s tha t ar e followe db y fund-lea dcleanups . Second , th e limite ddat aavailabl e d o no t sugges t tha t PRP s ar e an y mor e successfu l i n estimatin g th e require dscop e o f

cleanu p wor k

whe n the y conduc t

RI/FS s themselves . A n

1 . Th e estimate s i n th e ROD s fo rth e cost s of RD/R A workrepresen

tnearl y 8 0 percen

tof th e dolla rvalu e of

wor k commitment

s b y PRPs ; mos

tof th e restgoe

s t o RI/FSs , which hav e exhibite d simila rrates of cos tgrowt h subsequen

tt o the initia l estimates .analysi s o f 8 3 publi c an dprivat e cleanup s complete db y 1989 foun dtha t "cleanu p mis

estimatio n i s aproblemaffectin g bothth e privat e secto r an dth e governmen t

equally, " holdin g constan t

suc hothe r

factor s a s th e typ e o f

contaminatio n an dcleanu p method. 2

Transactio n Cost s

I n th e contex t

o f Superftmd , transactio n cost s refe r t o thos e cost s incurre di n assigning , allocating , an ddisputin g responsibilit y fo r cleanu p rathe r

tha n i n contributin g t o cleanu p itself . Suc hcost s ar e importan t becaus e proponent s o f

a liabilit y cutof

f dat e hop e t o eliminat e o r greatl y reduc e them . Federal transactio n cost s fo r Superfun denforcemen t

represen t perhap s $25 0 millio n t o $30 0 millio ni n annua l spending—o r 1 5 percen t

t o 1 8 percen t

o f th e 1994 Superfun dbudget . Estimate s o f nonfedera l transactio n cost s ar e highl y uncertain . Th e bes t availabl e data , however , sugges t t o CB O tha t

PRP s an dinsurer s ma y no w spen do n th e orde r

o f $90 0 millio nannually , whic hwoul drepresen t 3 2 percen t

o f thei r total spending . Combined , thos e figure s yiel da n estimat e o f 2 7 percen t

fo r th e shar e o f tota l transactio n cost s i n overal l Superfun dspending .

2 . B.R . Schroedc

ran d J.B . Hartung. Th e HAZRISK Cleanup Report

(unpublishe d draft, Independen tProjec tAnalysis , Reston , Va, , Februar

y 1991) , p . 47 .Federa l Costs . Mos t Superfun dtransactio n cost s incurre db y th e governmen t ar e eas y t o identify . Th e Superfun denforcemen t budget , roughl y $21 0 millio n i n 1994 , include s th e cost s o f

EP A an dth e Departmen t o f Justic e fo r

identifyin g an dlocatin g PRPs ; recoverin g th e cost s o f fund-lea dprojects ; negotiating , litigating , an dissuin g administrativ e order s fo r PRP-lea dprojects ; an doverseein g PRP-leadRI/FSs . Spendin g o n oversigh t

o f PRP-lea dRD s an dRA s i s tracke dseparatel y an dadd s roughl y $4 0 millio n i n additiona l costs . Th e incrementa l cost s tha t EP A incur s i n th e sit e investigation s i n orde r t o collec t

dat asuitabl e fo r

litigatio n als o coun t

a s transactio n cost s bu t

ar e harde r

t o quantify . Privat e Costs . Muc hmor e uncertaint y surround s th e transactio n cost s tha t PRP s an d insurer s incu r

i n suc hactivitie s a s disputin g liability , negotiatin g settlement s with EPA , litigatin g th e applicabilit y o f insuranc e policies , an dconductin g unofficia l RI/FS s a s achec k

o n EPA' s ow n work . O n th e basi s o f th e availabl e data , CB O estimate s tha t

privat e transactio n cost s ar e currentl y o n th e orde r o f $90 0 millio n pe r year . W e derive dtha t

figur e b y assumin g tha t

bot hPR P an dinsure r

cost s ar e afixe d percentag e marku p o n PR P outlay s fo r cleanups , studies , an dreimbursement s t o EP A an dtha t th e marku p rate s ar e 2 0 percen t t o 2 5 percen t

fo r PRP s (o r equivalently , tha t PR P spen d1 7 percen t

t o 2 0 percen t

o f thei r tota l outlay s o n transactio n costs ) an d 2 4 percen t fo r insurers . Thos e marku p rate s impl y tha t th e shar e o f

transactio n cost s i n tota l private-secto r

spendin g i s 3 1 percen t

t o 3 3 percent .Tha t rang e o f 3 1 percen t

t o 3 3 percen t

i s clos e t o th e 3 6 percen t cite dlas t yea r b y Lloy dDixo n o f

RAN D o n th e basi s o f

dat afro mtw o earlier

studies. 3 Relativ e t o Dixon' s analysis , CB O assume s highe r insure r costs , becaus e o f

difference s i n th e method s use dt o extrapolat e 198 9 data , bu t lowe r PR P costs . Estimate s o f

privat e transactio n cost s i n th e Superfun dprogra mmus t b e interprete dwit hcaution . Some hig hestimate s o f "averag e transaction-cos t shares " ar e base do n simpl e firm-by-firmo r site-by-site average s tha t

d o no t tak e int o accoun t th e dollar s spen t

i n eac hcase . Othe r

estimate s ar e media n value s rathe r tha n tru e averages . Moreover , because , th e dat aar e s o costl y t o collect , som e o f th e availabl e studie s hav e use dsample s tha t probabl y d o no t

represen t th e nationa l whole . Anothe r weaknes s of

man y estimates , includin g CBO's , is thei r relianc e on dat afro msite s tha t hav e no t complete dcleanup . Thos e dat aar e likel y t o overstat e th e ultimat e share o f transactio n cost s becaus e man y categorie s o f suc hcost s ar e front-loaded—tha t is , occurring relativel y earl y i n th e cleanu p process . A n appendi x t o thi s testimon y discusse s th e leadin g studie s o f privat e transactio n cost s i n th e Superfun dprogra man dillustrate s th e variou s problem s encountere di n interpretin g th e availabl e data .

3 . Lloy d S . Dixon , Fixing Superfund: Th e Effect of th e Proposed

Superfund

Reform Ac t

o f 1994 o n Transaction Costs (Sant aMonica , Calif. : RAND , 1994) , p . xvi .Fairnes s Issue s

Superfimd' s liabilit y syste mha s bee n criticize dno t onl y o n th e groun dtha t it s transactio n cost s ar e unacceptabl y hig hbu t als o o n th e basi s tha t

i t i s fundamentall y unfair . Supporter s o f

th e curren t

syste margu e tha t

fairnes s i s serve db y makin g peopl e wh o contribute dt o th e creatio n o f acontaminatio n proble mpa y fo r cleanin g i t up . Opponent s respon dtha t i f th e goal i s t o collec t

fro mthos e wh o benefite d previously , the n th e turnove r o f shareholder s an demployee s a s wel l a s th e wid e diffusio nb y marke t

force s o f th e origina l cos t

saving s fro mloose r

disposa l practice s requir e abroade r

financin g scheme . Critic s als o argu e tha t

th e retroactiv e "pollute r

pays " approac hi s particularl y unfai r t o th e insuranc e industry , whic hdi dno t forese e Superfun dliabilitie s whe n i t price dcoverag e sol di n th e 1960 s an d1970s . The y furthe r argu e tha t

joint-and

several liabilit y add s uncertaint y tha t i s particularl y harmfu l t o smal l businesse s an d tha t i t encourage s majo r

PRP s t o engag e i n unjustifie dcontributio n action s agains t small , innocen t

partie s wh o lac k

th e resource s t o defen dthemselves .

1 0THE EFFECT S O FREPEALIN G LIABILIT Y THROUG H 198 0 O R198 6

Th e effect s o f

repealin g Superfun dliabilit y fo r legal action s tha t

occurre dbefor e a cutof f dat e woul ddepen do n th e dat e chose n an do n th e incidenc e an dsignificanc e o f illega l disposa l activitie s at site s o n th e Nationa l Prioritie s Lis t (NPL) . I f

illega l activit y playe damino r

role , a1987 cutof

f woul deliminat e nearl y al l PRP liability an d th e vas t majorit y o f

federa l an dprivat e transactio n costs . Indeed , i t woul dtur n Superfun dalmos t

totall y int o apubli c work s program . Th e trade-of f woul db e alos s i n cleanu p spendin g tha t

exceed s th e program' s curren t EP A budget . Th e effect s o f a198 1 cutof

f woul db e les s sweeping , particularl y fo r transactio n costs , bu t

the y woul dstil l b e significant . Wit heithe r cutof f date , highe r

level s o f illega l activitie s a t NP Lsite s woul dcu t

int o th e reductio n i n PR P liabilitie s an dsignificantl y reduce—o r conceivabl y reverse—th e saving s i n transactio n costs .

Dat ao n th e Tim e Patter n an dLegalit y o f PR P Activitie s

Dat afro man Augus t

199 3 surve y b y EP A o f

al l o f it s remedia l projec t

manager s (RPMs) , th e regiona l employee s wh o overse e sit e cleanu p efforts , sho w tha t 7 2 percen t o f nonfedera l site s liste do n th e NP Lreceive dn o waste s sinc e 1986 . Th e RPM s als o reporte dtha t 1 4 percen t

o f th e site s includ e post-198 6 waste s an dtha t the y wer e uncertai n abou t th e remainin g 1 4 percent . I n addition , th e surve y aske d

1 1abou t th e presenc e o f

post-197 9 (rather

tha n post-1980 ) wastes . Th e RPM s reporte d tha t 4 3 percen t

o f nonfedera l site s d o no t

includ e post-197 9 wastes , 4 8 percen t do , an d9 percen t

ma y o r ma y not. 4

Th e surve y di dno t

explor e th e tim e distributio n o f waste s at th e site s whos e date s o f operatio n straddl e eithe r o f th e cutof

f dates . EP A i s collectin g tha t informatio n fro mit s regiona l offices ; a t present , however , th e agenc y ha s onl y analyze ddat afro m1 5 suc h sites . I n thi s limite dsampl e o f data , 5 9 percen t

o f th e wast e volum e date s fro m198 1 o r late r an djus t 1 percen t

fro m198 7 o r

later . Eve n i f thos e dat aar e reasonabl y accurat e fo r existin g NP Lsites , on e migh t wonde r abou t thei r applicabilit y t o futur e sites . CB O believe s tha t site s adde dt o th e NP Li n th e res t

o f th e decad e wil l b e simila

r t o curren t

site s i n th e tim e profil e o f thei r waste s an dtherefor e woul db e similarl y affecte db y th e liabilit y cutof f dates . Al l o r nearl y al l o f

thos e site s wil l b e draw n fro mth e se t o f contaminatio n problem s alread y bein g investigate db y EPA , mos t o f whic hwere create dsom e year s ago . Beyon dthi s decade , complianc e wit hregulation s o f th e Resourc e Conservatio n an dRecover y Ac t an dincrease dvigilanc e prompte db y CERCL A are likel y t o kee p th e numbe r o f newl y create dSuperfun dsite s relativel y small , althoug h suc h site s ma y increas e a s a percentag e o f

ne w NP L additions .

4 . I n calculatin g percentage s fro mth e surve y data , CB O exclude dno t onl y th e federall y owne dsite s bu t als o 8 4 so-called orpha n sites . Thos e site s hav e n o PRP s thai ar e financiall y viahl e an dtherefor e mus t rel y o n th e trus t

fun dt o pay fo r cleanup . 1 2Les s informatio n i s availabl e o n th e contributio n o f illegal activitie s t o Superfun dcontaminatio n problems . Th e existin g dat ashe dligh t o n th e percentag e o f site s wher e illega l activitie s ar e afacto r bu t no t o n th e averag e share o f

th e illegal contribution s at

thos e sites . Moreover , th e availabl e site-leve l estimate s vary widely

— fro m1 0 percen t

t o 3 5 percen t

o r eve n 5 3 percent—perhap s i n par t becaus e o f difference s i n definitions . Th e lowe r estimat e o f

1 0 percen t

come s fro mresearcher s at Resource s fo r

th e Future , wh o reviewe dth e description s o f nonfedera l NPL site s i n EPA f s "stat e books " an dfoun dtha t

illega l activit y "wa s th e caus e o f contamination " a t

1 0 percen t

o f th e sites. 5 Th e 3 5 percen t

an d5 3 percen t

figure s com e fro mEPA' s 199 3 survey , whic h aske dRPMs , "I n you r

opinion , wer e sit e activitie s tha t cause dth e contaminatio n illega l at th e time? 1 1 Th e RPM s responde d"definitel y yes " fo r 1 6 percen t

o f th e nonfedera l site s an d"probabl y yes " fo r 1 9 percent , makin g atota l o f 3 5 percent . Th e RPM s wer e "uncertain " abou t anothe r 1 8 percen t

o f th e sites , an dfurthe r investigatio n migh t

sho w tha t

man y o f thos e site s als o involve dillegal activity . Th e explanatio n fo r

th e wid e rang e o f

th e estimate s ma y b e tha t 1 0 percen t

i s abette r estimat e o f

th e fractio n o f

site s fo r whic hillega l activit y wa s th e sol e o r dominan t caus e of contamination , wherea s 35 percen t to 53 percen t

is abette r

rang e

5 . Katherin e N . Probs t

an dPau l R . Portney , Assigning Liability fo r Superfund Cleanups: A n Analysis of

Policy Options (Washington , D.C. : Resource s for th e Future , 1992) , p . 53 . Th e estimat e o f 7 percent use di n amor e recen

t study b y Probst, Portney , an dtw o coauthor s differ s becaus e i t exclude s site s wit honl y asingl e PRP(persona l communication , Katherin e N . Probst , Apri l 11 , 1995) . 1 3fo r th e fractio n o f

site s withillega l contribution s t o th e contaminatio n problem . That hypothesi s canno t

b e confirme da t

present .

Implication s o f

th e Dat afo r

PR P Liabilitie s

Give n th e uncertaint y surroundin g ho w muc hSuperfun dcontaminatio n arise s fro m illega l activity , CB O analyze dscenario s i n whic hsuc hactivity i s afacto r at 1 0 percen t an d3 5 percen t

o f nonfedera l NP L sites , althoughth e actua l percentag e coul dli e abov e o r belo w tha t

range . Exemptin g lega l activitie s throug h198 6 woul dreduc e PR P cleanu p liabilitie s b y a n estimate d9 5 percen t i f illega l contribution s occurre dat 1 0 percen t o f th e sites . Usin g CBO' s estimat e fo r curren t PR P cleanu p spendin g o f roughl y $1. 7 billio npe r

year , tha t 9 5 percen t

reductio n translate s t o adollar figur e o f abou t $1. 6 billio nannuall y (see Tabl e 1) . Wit hth e sam e cutof f dat e bu t illega l activity at 3 5 percen t

o f sites , th e estimate dreductio n i n cleanu p liabilit y i s 8 0 percent t o 9 0 percent , o r

$1. 4 billio n t o $1. 5 billion . A 198 1 liabilit y cutof f yield s estimate d reduction s o f

7 0 percen t

($1. 2 billion ) i f

illega l action s ar e afacto r at 1 0 percen t

o f sites , an d6 0 percen t

t o 7 0 percen t

($1. 0 billio n t o $1. 2 billion ) i f the y occu r

a t 3 5 percen t o f sites .

1 4TABL E 1 . ESTIMATED ANNUA LEFFECT S O FLIABILIT Y CUTOFF S

198 7 Cutoff 198 1 Cutof f Illega l Activitie s at

Illega l Activitie s at

Illega l Activitie s at

Dlega l Activitie s at 1 0 Percen t o f Site s 3 S Percen t

o f Site s 1 0 Percent

o f Site s 3 5 Percent

o f Site s I n Million s I n Million s I n Million s I n Million s In Percen t o f Dollar s In Percent

o f Dollar s In Percent

o f Dollar s In Percent

o f Dollar s Reductio n i n PR P Liability * 9 5 Reductio n i n Federal Enforcemen t Cost s 9 0 Reductio n i n Privat e Transactio n Costs 9 0 Fundin g Gap 6 1,60 0

25 0 1,40 0 t o 80 t o 90 1,50

0 7 0 1,00 0 t o 1,20 0 6 0 t

o 7 0 1,20

0

4 5 t o 5 5 125 t

o 15 0 2 5 t

o 3 5 7 0 t

o 100 1 0 t

o 2 5 3 0 t

o 7 0

n.a . 80 0 6

0 to 7 0 55 0 to 62 5 4 5 t

o 5 5 40 0 t

o 50 0 2 0 t

o 4 0 20 0 t o 35 0 1,45 0 t o 1,10 0 t o 1,60 0 n.a . 1,60

0 n.a . 130

0 n.a . 130

0 SOURCE : Congressiona l Budge t Office . NOTES : PR P = potentiall y responsibl e party ; n.a . * no t applicable . Dolla r estimate s fo r

reduction s i n PR P liability , federa l enforcement costs , an dprivat e transactio n cost s ar e rounded , base do n th e estimate dpercentag e reductions . a . Assume s tha t

PRP cleanup s cost

1 3 percent

les s than thos e don e b y th e Environmenta l Protectio n Agenc y an dtha t EPA' s record s o f decisio n underestimat e actua l cleanu p requirement s b y an averag e o f one-third . b . Ne t o f saving s i n federa l enforcement costs .



### 1 5Thos e figure s deriv e i n par t fro mCB O estimate s tha t roughl y 9 5 percen t

o f al l wast e volum e at

nonfedera l NP L site s predate s 198 7 an d7 0 percen t predate s 1981 . Th e 198 7 estimate i s basedo n th e 7 2 percent o f site s tha t entirel y stoppe dtheir wast e operation s befor e 198 7 (a s show n i n th e RPM data ) an dan assume d8 0 percen t share o f pre-198 7 waste s at

site s tha t straddl e th e cutof

f (les s tha n th e 9 9 percen t

see n in EPA' s limite dsampl e o f 1 5 sites) . The 7 0 percen

t figur e for 198 1 i s base do n linea

r extrapolatio n betwee n th e RP M surve y dat afo r 198 0 an d1987 , whic hsuggest s tha t 4 8 percen t

o f site s hav e onl y pre-198 1 wastes , an do n a4 1 percen t shar e o f suc h waste s at th e othe r 5 2 percen t

o f sites , a s observe di n th e 1 5 straddl e site s analyze d b y EPA . Th e percentag e o f

wast e disposa l befor e acutof f dat e i s no t

th e en do f

th e story , however , unde r

proposal s tha t

retai n liabilit y fo r

action s tha t

wer e illegal a t

th e tim e the y occurred ; henc e th e nee dfo r assumption s abou t

th e prevalenc e o f

illegal contribution s a t

Superfun dsites . I n keepin g wit hth e genera l thrus t o f th e refor m proposal s t o reduc e transactio n cost s an dprivate-secto r burden s perceive da s unfair , th e analysi s assume s tha t

PRP s hel dresponsibl e fo r illega l action s woul db e subjec t t o som e kin do f

proportiona l liabilit y base do n thei r contribution s t o th e contaminatio n problem s a t thei r site s rathe r

tha n t o joint-and-severa l liability. 6

6 . A proportiona l liabilit y scheme thatmaintain s th e currentclasses o f PRPs face s th e questio n o f th e relativ e responsibilit y of site owner

s and operators compared with off-sit e wast e generators and transporters . Specifi c legislativ e guidanc e o n the allocatio n o f

responsibilit

y betwee n on - an d off-sit e partie s woul d hel p kee p transactio n cost s down bu tmigh tlead to unfai r results i n particula rcases. 1 6I n th e cas e o f a198 7 cutof

f an drelativel y fe w site s wit hillegal activity , CB O assume s tha t

EP A woul dchoos e t o dismantl e mos t o f Superfimd' s enforcemen t program , leavin g enoug hresource s t o identif y an dpursu e onl y th e mos t egregiou s illega l pre-cutof

f polluter s an dan y sufficientl y majo r post-cutof

f PRPs . Unde r

that scenario , PRP liabilitie s woul dfal l b y essentiall y th e sam e proportio n a s th e percentag e o f

waste s release dbefor e 1987—namely , 9 5 percent . Becaus e th e othe r

case s woul dleav e man y mor e partie s subjec t t o Superfun d liability , CB O assume s tha t EP A woul dhav e t o maintai n asizabl e enforcemen t progra man dwoul dregularl y attemp t t o enforc e th e liabilit y o f PRP s whos e pre cutof f activitie s wer e illegal . Th e impac t o f suc henforcemen t

effort s o n PR P liabilitie s woul ddepen do n th e averag e share s o f th e illegal waste contribution s an d o n EPA' s succes s rat e i n trackin g dow n th e illega l polluter s an dgettin g mone y o r wor k commitment s fro mthem . Lackin g har ddat ao n thos e factors , CB O use darang e o f reasonabl y lo w an d hig hestimates . Fo r

th e cas e withillega

l activit y a t 1 0 percen t

o f th e sites , th e analysi s assume darang e o f

6 0 percen t

t o 8 0 percen t

a s th e illega l shar e o n th e theor y tha t thos e site s represen t

th e "har dcore " i n whic hillega l activit y wa s th e sol e o r dominan t caus e o f contamination . Fo r

th e case s i n whic hillega l activit y too k plac e at 3 5 percent o f sites , th e assume drang e fo r th e averag e illega l shar e wa s 3 0 percen t t o 7 0 percent . I n al l cases , th e succes s rat e o f EPA' s enforcemen t

effort s wa s assume dt o 1 7li e betwee n 2 5 percen t an d7 5 percent . Combinin g thos e assumptions , plu s dat a indicatin g tha t

site s wit hillega l activit y cos t a n averag e o f

5 percen t les s t o clea n up , yielde dth e estimate dreduction s i n PRP liabilit y (see Tabl e 1) .

Effect s o n Transactio n Cost s

I n th e mos t

favorabl e scenario- a198 7 cutof f an drelativel y littl e illegal activity-CB O estimate s tha t

federa l enforcemen t

cost s woul ddro p b y 9 0 percent . Alternatively , give n a198 1 cutof

f an dillega l activit y a t

3 5 percen t

o f th e sites , th e estimate d reductio n i n enforcemen t cost s i s onl y 1 0 percen t

t o 2 5 percent . Thos e saving s ar e les s tha n proportiona l t o th e reduction s i n PR P liabilitie s i n al l case s an dsubstantiall y les s i n thre e o f

th e four . Th e rang e o f

saving s i n privat e transactio n cost s run s fro m 9 0 percen t

a t th e hig hen dt o 2 0 percen t t o 4 0 percen t

a t th e lo w end . Thos e cost s als o fal l les s sharpl y tha n cleanu p liabilities , althoug hmor e tha n federa l enforcemen t costs . Al l o f

thos e estimate s represen t judgment s b y CB O base do n qualitativ e considerations . Th e precis e numerica l figure s ar e necessaril y somewha t speculative . Highe r level s o f illega l activit y a t

NP L site s tha n thos e assume dher e coul dcaus e federa l an dprivat e transactio n cost s t o ris e rathe r tha n fall .



### 1 8Th e estimate s o f saving s o n enforcemen t

assume tha t

federa l cost s fal l a s site s ar e remove dentirel y fro mth e liabilit y syste mbu t tha t th e cost s d o no t

declin e with reduction s i n th e numbe r o f PRP s a t th e remainin g sites , wher e EP A continue s t o enforc e liabilit y fo r

cleanup . CB O als o assume s tha t asignifican t

enforcemen t progra mincur s som e fixe dcost s annually , suc ha s th e cost s o f ensurin g tha t

al l site samplin g dat aar e o f

litigatio n qualit y i n cas e the y ar e subsequentl y neede dfo r enforcemen t

purposes . Hence , fo r

example , wit ha n estimate d7 0 percen t o f wast e volum e datin g befor e 198 1 bu t jus t 4 8 percen t

o f site s havin g onl y pre-198 1 wastes , CB O expect s tha t

enforcemen t

saving s fro ma198 1 cutof f woul dno t

excee d4 0 percent , eve n withou t

question s abou t

th e legalit y o f

disposa l activities . Finally , th e estimate s assum e tha t

illegalit y o f

PR P action s woul db e costl y fo r th e governmen t t o identify-partl y becaus e o f th e variatio n i n stat e an dloca l laws--an dprov e t o th e satisfactio n o f

PRP s o r th e courts . Privat e transactio n cost s ar e likel y t o b e mor e closel y tie dtha n federa l enforcemen t

cost s t o th e number s o f

PRP s involve di n th e liabilit y system . Exemptin g certai n partie s fro mliabilit y implie s no t onl y tha t thos e partie s sav e o n dispute s with thei r insurers , EPA , an dothe r PRP s bu t

als o tha t th e remainin g partie s hav e fewe r sparrin g partner s i n thei r PR P negotiations . Nevertheless , CB O expect s tha t th e saving s woul db e les s tha n proportiona l becaus e cost s tha t PRP s shar e fo r

negotiatin g withEP A a s agrou p woul dremai n (albei t share damon g fewe r

parties) . Witha198 1 cutoff , anothe r

reaso n fo r

less-than-proportiona l saving s woul db e tha t som e PRP

1 9insure r dispute s coverin g multipl e site s woul dcontinue . B y contrast , a1987 cutof f woul deliminat e essentiall y al l Superfun dtransactio n cost s relate dt o insuranc e coverage , thank s t o change s i npolic y languag e i n th e mid-1980s .

Th e Ga p i n Cleanu p Fundin g

Th e reduction s i n PR P liabilitie s discusse dabov e represen t ashif t i n cleanu p responsibility t o th e federa l Superfund . EP A woul dhav e t o replac e dollar s no t spent b y th e PRP s withsom e combinatio n o f cos t saving s an dincrease dpubli c spendin g i f i t wa s t o maintai n th e curren t pac e o f sit e cleanups . Takin g int o accoun t th e 1 3 percen t advantag e i n efficienc y assume dfo r th e PRP s an dth e abov e saving s i n federa l enforcemen t

costs , CB O estimate s tha t th e remainin g fundin g ga p i n th e fou r scenario s woul db e a s lo w a s $1. 1 billio n t o $1.3 5 billio n (i n th e cas e with a198 1 cutof f an dillega l activit y a t

3 5 percen t

o f sites ) o r a s hig ha s $1. 6 billio n (wit hth e 198 7 cutoff

an dillega l activit y at

1 0 percen t

o f sites) . Some analyst s hav e note dtha t th e unobligate dbalanc e i n th e Superfun dtrus t fon dha s grow n i n recent

year s an dsuggeste dtha t

spendin g o n th e progra mcoul db e increase dwithou t

raisin g th e Superfun dtaxes . Th e balanc e ha s indee dgrown-fro m $0. 9 billio na t

th e beginnin g o f

fisca l year

199 3 (afte r

subtractin g $73 4 millio n fro m arepayabl e advanc e owe dbac k t o th e genera l fund ) t o $ 2 billio n a t th e start o f 1995 . 2 0Unde r th e curren t

budge t rules , however , th e constrain t o n spendin g fo r

discretionar y program s suc ha s Superftin di s no t th e availabilit y o f

ta x revenues , dedicate do r general , bu t

th e annua l budge t

caps . Th e Congres s ca n choos e t o spen dmor e o n Superfund , bu t

i t wil l hav e les s t o spen do n othe r discretionar y program s i f i t doe s so . Cost-savin g change s i n Superfund' s cleanu p methods , suppor t activities , an d administratio n coul dsignificantl y contribut e t o closin g th e fundin g gap , withou t runnin g afou l o f

th e budge t

caps . O f

course , th e valu e o f

particula r

item s i n th e Superfun dbudge t

an dth e merit s o f

changin g th e liabilit y syste mar e separate questions . Programmati c an dbudgetar y change s tha t th e Congres s deem s worthwhil e coul db e enacte dunde r

th e presen t

liabilit y system , wit hth e saving s use dinstea dt o speedthe pac e of

cleanup , increas e federa l spendin g on othe r programs , or

reduc e the deficit. 7 I n som e ways , establishin g a198 1 o r 198 7 liabilit y cutof

f migh t mak e cost cuttin g mor e difficult : som e categorie s o f suppor t activitie s migh t

requir e increase d fundin g t o accommodat e th e estimate dthree

- o r four-fol dincreas e i n th e numbe r o f fund-lea dcleanups .

7 . In principle , suc

h saving ? coul d also b e used t o buy down th e Superfun d taxes . Undercurrentbudgetin g rules , however , the saving s woul d b e counte d underthe discretionary spendin g caps and woul d notdirectl y provid e the necessar y offse ton the pay-as-you-g o scorecard fo rareductio n i n taxes . 2 1REIMBURSEMEN T OPTION S AN D ISSUE S

Th e federa l cost s o f

establishin g acutof

f dat e fo r Superfun dliabilit y woul dals o depen do n th e choic e o f

apolic y o n reimbursemen t fo r pas t o r ongoin g cleanu p cost s spen t b y PRP s unde r

EP A supervision . Ful l reimbursemen t coul dconceivabl y cos t a n additiona l $13. 5 billio n witha198 7 cutoff , relativ e t o n o reimbursement , o r $9. 9 billio n wit ha198 1 cutoff . Actua l costs , however , woul ddepen do n th e level o f documentatio n tha t

PRP s mus t

submi t wit hthei r

reimbursemen t

claims . More restrictiv e reimbursemen t policie s woul dlowe r

th e cost s t o th e federa l governmen t bu t rais e issue s o f

fairnes s an dfutur e incentives . CB O estimate dth e potentia l cost s o f ful l reimbursemen t

a s follows . Th e dollar valu e o f al l PR P cleanu p commitment s throug hfisca l yea r 1994 i s an estimate d $13. 3 billion , whic hequal s th e officia l EP A figur e o f $10. 2 billion , scale du p b y 5 0 percen t (th e averag e erro r

i n th e RO D estimate s o f

cleanu p costs ) an ddow n b y 1 3 percent (th e assume dprivate-secto r cos t advantage). 8 Anothe r

$900 millio n i n costrecover y payment s fro mPRP s t o EP A bring s th e tota l t o $14. 2 billion . Applyin g th e abov e estimate s o f

pre-198 7 an dpre-198 1 liabilit y share s (9 5 percen t an d7 0 percent ) yield s $13. 5 billio n an d$9. 9 billion , respectively .

8 . EPA' s estimat e o f $10. 2 billio n i s i n nomina l dollars , unadjuste d fo rinflation . Fo rsimplicity , CB O assume s tha tth e reimbursemen tschem e woul d exclud e compensatio n fo rinflatio n o rinteres t 2 2Ho w muc ho f thos e eligibl e cost s woul dactuall y b e reimburse dwoul ddepend o n th e ability o f

PRP s t o documen t

thei r expenditures . Th e documentatio n proble m coul db e compounde di f

th e burde n o f

proo f wa s o n PRP s t o sho w tha t th e original action s tha t

mad e the mliabl e fo r

cleanu p cost s wer e legal at th e time . O f

course , th e trade-of f involve di n settin g documentatio n requirement s i s that mor e stringent requirement s preven t

som e legitimat e PRP s fro mgettin g reimburse dan dleadt o highe r administrativ e cost s fo r

bot hPRP s an dth e government , wherea s mor e lenien t requirement s ma y lea dt o paymen t o f fraudulen t

claims . A s a n alternativ e t o ful l reimbursemen t o r n o reimbursement , th e Congres s coul dchoos e t o authoriz e paymen t onl y fo r ne w expense s incurre dunde r existin g PR P wor k

commitments . Suc ha"forward-reimbursement " polic y woul davoi dth e issu e o f documentin g pas t

expenditure s an dwoul dreduc e federa l costs . Estimate s o f th e PR P spendin g ye t

t o occu r o n existin g cleanu p project s ca n b e calculate dusin g spendou t rates , whic hdescrib e th e patter n o f expenditure s ove r

time . A recen t

stud y b y Resource s fo r

th e Futur e an dth e Brooking s Institutio n use dapatter n i n whic h PRP s spen d2. 5 percen t

o f tota l cost s i n eac ho f

th e firs t tw o fisca l year s followin g a cleanu p commitmen t

an d23.7 5 percen t

i n eac ho f

th e nex t fou r years. 9 Applyin g thos e spendou t

rates , CB O estimate s tha t potentia l federa l cost s unde r forwar d reimbursemen t

woul db e $7. 4 billio n wit ha198 7 cutof f an d$5. 2 billio n wit ha198 1

9 . Katherin e N . Probs t an dothers , Footing th e Bill fo r Superfund

Cleanups: Wh o Pays an d How? (Washington , D.C. : Brooking s Institutio n an dResource s fo r th e Future , 1995) , p . 137 . Thi s spendout pattern i s somewha

t slowe r than on e previousl y use db y CB O bu t i s mor e i n keepin g wit hreport s fro mindustr y sources .

2 3cutof f Fo r eithe r cutof f date , th e cost s ar e slightl y mor e tha n hal f o f thos e possibl e unde r apolic y o f

ful l reimbursement . Not e tha t

th e cost s o f

th e forward-reimbursemen t polic y represen t

th e cumulativ e valu e o f

agrac e perio dthat

EP A get s unde r

th e no-reimbursemen t

policy . Withn o reimbursement , th e annua l fundin g ga p discusse dpreviousl y build s u p over atransitio n perio do f

several years , a s PRP s continu e t o pa y fo r cleanu p unde r existin g commitments . Forwar dreimbursemen t eliminate s th e transitio n period , sinc e EP A start s assumin g th e cost s fo r ongoin g PRP cleanup s righ t away . Althoug hful l reimbursemen t i s th e mos t

costl y optio n fo r

th e federa l governmen t

an dma y b e difficul t

t o administer , policie s tha t limi t reimbursement

— whethe r formall y o r

throug hstringen t

documentatio n requirements-hav e potentia l drawback s o f

thei r own . Withou t

ful l reimbursement , som e PRP s ma y fee l tha t the y hav e been unfairl y treate dcompare dwithother s whos e site s wer e discovere dlate r o r wh o chos e t o "li e i n th e weeds " rathe r tha n cooperat e withEPA . Quit e apart fro m th e view s o f

curren t PRPs , th e possibilit y als o exist s tha t individual s o r

firm s subjec t t o controversia l futur e regulation s wil l b e mor e reluctan t t o comply , i f

onl y ou t o f fear s tha t competitor s wh o dela y complianc e wil l gai n a n advantag e b y waitin g ou t achang e i n policy .



### 2 4CONCLUSIO N

I n summary , repealin g Superfun dliabilit y fo r action s befor e acertai n dat e involve s a trade-of f betwee n th e potentia l reduction s i n transactio n cost s an dgain s i n fairnes s o n th e on e han dan dth e difficult y o f replacin g th e curren t

PR P cleanu p spendin g o n th e othe r hand . Tw o factor s tha t

woul daffec t

th e siz e o f

th e variou s effect s an dhenc e th e desirabilit y o f

th e trade-of

f ar e th e differenc e betwee n EPA' s estimate s o f cleanu p cost s an dactua l cost s t o th e PRP s an dth e significanc e o f illega l action s b y Superfun d PRPs . Th e secon dfacto r i s subjec t t o great uncertaint y a t

present . Th e siz e o f

th e effect s woul dals o b e sensitiv e t o Congressiona l polic y choice s regardin g th e cutof

f dat e an dreimbursement . Th e late r th e cutof f date , th e greate r ar e bot hth e saving s i n transactio n cost s an dth e ga p i n cleanu p funding . Th e mor e generou s th e reimbursemen t policy , arguabl y th e mor e fai r th e result s bu t

th e highe r th e cost s t o th e federa l government .



### 2 5APPENDIX : ESTIMATE S O FPRIVAT E

TRANSACTIO N COST S I N TH E SUPERFUN D PROGRA M Superfund' s transactio n cost s hav e bee n controversia l fo r year s an dhav e receive d increasin g attentio n fro mresearcher s an dpolic y analysts . Tw o studie s fro mRAN D an darecen t

stud y fro mth e Genera l Accountin g Offic e (GAO ) provid e valuabl e informatio n o n transactio n cost s i n th e privat e sector . Nonetheless , th e availabl e dat a ar e fa r fro mcomprehensive , an dth e resultin g analyse s mus t b e interprete dwith caution . Thre e particula r factor s tha t

ca n lea dt o misinterpretation s ar e confusio n betwee n simpl e average s o r median s an dtru e dollar-weighte daverages ; th e limitation s o f existin g dat ai n term s o f

comprehensivenes s an daccuracy ; an dth e likelihoo dtha t transactio n cost s ar e front-loade di n th e cleanu p process .

Mai n Finding s o f

th e Leadin g Studie s

Th e firs t RAN D stud y (henceforth , "RAND I") , o f whic hI wa s acoauthor , examine d th e Superfun dexperienc e throug h198 9 o f fiv e larg e industria l firm s an dfou r nationa l insurers . Th e dat ashowe dtransaction-cos t share s o f

1 7 percen t

fo r th e industria l PRP s (excludin g th e cost s at site s wher e afirmha dspen t les s tha n $100,00 0 t o date ) an d8 8 percen t

fo r th e insurers. 1 0

10 . Jan Paul Acton an d Lloy d S . Dixon , Superfandand Transaction Costs (Sant a Monica , Calif : RAND , 1992) . Th e fiv e PR P firm s had spen

t$100,00 0 o rmor

e at73 differentsites , of whic h 4 9 were o n SuperfUnd' s Nationa l Prioritie s Lis tand 24 wer e non-NPLshes being cleaned up unde rSuperfUnd' s removal authorities , stat e cleanu p programs , o rvoluntarily . The averag e 2 6Th e secon dRAN D study , o r "RAND II, " surveye d10 8 smal l an dmedium

sizedfirm s name da s PRP s at 1 8 Superfun dsites . I t

estimate dtha t

transactio n cost s represente d3 2 percen t

o f spendin g b y al l PRP s (surveye dan dnon-surveyed ) at thos e site s throug h1991. 1 1

Th e GA O study , wit hdat ao n th e Superfun dexperience s o f 36 7 large-firm PRPs , ha s th e broades t

coverag e o f

th e three . I t

conclude dtha t

th e media n (no t average ) fir mspen t

approximatel y one-thir do f tota l cost s o n legal expenses. 1 2

Interpretatio n Proble m#1 : Simpl e Average s an dMedian s

A simpl e firm-by-fir mo r

site-by-sit e averag e o f

Superfun dtransactio n cost s ca n b e muc hlarge r

tha n adollar-weighte daverage—th e correc t measur e fo r

describin g th e distributio n o f

tota l spending—becaus e firm s wit hmino r liabilitie s an dthos e involve d a t site s i n th e earl y stage s o f th e cleanu p proces s ma y hav e lo w tota l cost s bu t proportionatel y hig htransactio n costs . Th e RAN D I I data , fo r instance , sho w tha t lookin g separatel y a t

eac ho f th e 11 2 surveye dPRP-sit e pair s yield s a n averag e

transaction-cos

tsliar e fo rtli e NPL site

s alon e was 1 9 percent ; th e shar

e fo ral l sites , includin g those atwhic h afirm had spen t les s than $100,000 , wa s 2 1 percen t 11 . Lloyd S . Dixon , Debora h S . Drezner

, an d Jaines K . Hammht

, Private-SectorCleanup Expenditures an d Transaction Costs a t J 8 Superfund

Sites (SantaMonica , Calif : RAND , 1993) . 12 . Genera ! Accountin g Office , Superfund: Legal Expenses fo rCleanup-Related Activities of

MajorU.S. Corporations (December1994) . 2 7transaction-cos t shar e o f 6 2 percent , althoug hth e dollar-weighte daverage—th e shar e o f suc hcost s i n tota l spending—i s onl y 2 1 percent. 1 3

A repor t fro mth e Nationa l Paint

an dCoating s Associatio n (NPCA ) fall s pre y t o th e confusio n betwee n simpl e an ddollar-weighte daverages . Th e report o n th e NPC A members 1 experience s wit htransactio n cost s says , "Overall , th e respondent s estimate dtha t

7 1 percen t

o f their money spent

o n Superfun ds o far

ha s gon e t o transactio n costs 1 1 (emphasi s added) , bu t th e figur e i s i n fac t

asimpl e averag e o f

th e percentage s reporte db y th e respondin g firms . Th e onl y dollar-weighte daverag e derivabl e fro mth e dat ai s restricte dt o settle dclaims ; tha t figur e i s 3 5 percent. 1 4

Th e GA O stud y illustrate s simila r problem s arisin g fro mth e us e o f median s rathe r tha n averages . Th e media n cos t fo r legal expense s amon g respondin g firm s i n th e stud y wa s roughl y $500,000—meanin g tha t hal f o f th e firm s spent

les s tha n $500,00 0 an dhal f

spen t more—an dth e media n amoun t tha t firm s spen t

o n cleanu p wa s approximatel y $1. 2 million . Sum s o r ratio s o f thos e figure s are no t

meaningful , however , partl y becaus e the y d o no t reflec t ho w muc hmor e o r

les s tha n th e median s tha t firm s o n eithe r

sid e spent . Fo r

example , th e media n response s t o th e question s o n lega l an dcleanu p cost s su mt o $1.6 7 million , 1 2 percen t les s tha n th e $1. 9 millio n

13 . Dixon , Drezner , an d Hammitt, Private-SectorCleanup Expenditures, p . 29 . 14 . Nationa l Pain tan d Coating s Association , NPCA Superfund Survey (Washington, D.C. : NPCA , 1992) . Becaus e of * transcriptio n error

, the figur e fo rsettle d claim s i s give n as 3 8 percen tin th e repor

t 2 8media n respons e t o th e questio n abou t tota l spendin g (legal an dcleanu p cost s together). 1 5

Tw o result s o f

th e stud y le dGA O t o estimat e tha t legal cost s fo r

th e media n respondin g fir mwer e abou t one-thir do f

tota l Superfun dspending , bu t neithe r i s full y adequat e a s asubstitut e fo r adollar-weighte daverage . On e resul t wa s tha t media n lega l an dcleanu p cost s wer e roughl y $500,00 0 an d$ 1 million , respectively . More precis e figure s o f

$484,00 0 an d$1.1 9 millio n yiel datota l o f $1.6 7 millio n an da legal-cos t shar e o f 2 9 percen t

(alternatively , usin g th e $1. 9 millio n media n fo r tota l cost s yield s ashar e o f

2 5 percent) . Again , however , th e mor e importan t proble mwith thi s findin g i s tha t

sum s an dratio s o f

median s ar e no t

themselve s median s an dlac k an y meaningfu l statistica l properties . Th e othe r evidenc e cam e fro madirec t questio n o n th e shar e o f

lega l expense s i n tota l costs ; th e media n respons e (estimate dusin g linea r interpolation ) wa s 3 4 percent . That resul t doe s no t tak e int o accoun t

th e dollar amount s spen t

b y eac hresponden t

an di s therefor e mor e lik e afirm-weighte daverag e tha n adollar-weighte daverage . Th e tru e dollar-weighte daverag e shar e o f legal cost s i n th e GA O dat aca n b e approximate db y assumin g tha t cost s ar e evenl y distribute dwithi n eac hsurve y interva l an dchoosin g a n averag e cos t fo r th e "over $10 0 million " range . I f

th e averag e $10 0

15 . Thes

e calculations ar

e base d on medians derived b y linearinterpolatio n withi n U Kcos tinterval s include d in the survey , GA O use s th e sam e metho d (Superfund: Legal

Expenses, p . 23) . Some of th e 1 2 percen

tdifferenc e coul d conceivabl y arise fro m cost s see n b y respondent

s as belongin g t

o neithe rth e "legal " o r"cleanup " categories , as define d i n th e survey , although th e languag e of

th e repor tsuggest s tha i GA O viewe d th e two categories as encompassing all Superfun d costs .

2 9million-plu s cos t i s assume dt o b e $15 0 million , the n th e approximat e dollar-weighte d share i s 2 5 percen t

usin g th e dat ao n lega

l cost s an dcleanu p cost s o r 2 8 percen t

usin g th e dat ao n lega

l cost s an dtotal costs . Alternatively , i f th e $100 million-plu s averag e i s $20 0 million , the n th e comparabl e estimate s ar e 2 3 percen t an d2 6 percent .

Interpretatio n Proble m#2 : Limitation s o f th e Dat a

Th e cos t involve di n collectin g th e widesprea ddat ao n Superfun dtransactio n cost s ha s confronte dresearcher s withatrade-of f betwee n comprehensivenes s an daccuracy . Wherea s th e GA O stud y ha s th e mos t comprehensiv e dat ao f

th e thre e leadin g studies , it s offsettin g disadvantag e i s tha t respondent s reporte dthei r legal , cleanup , an dtota l cost s onl y i n interva l range s an duse d"persona l knowledg e an dexperience, " rathe r tha n actua l figure s fro mcompan y accountin g systems , a s th e primar y sourc e fo r 3 2 percen t t o 3 6 percen t

o f th e responses . Conversely , th e RAN D studie s wer e conducte do n asmalle r

scale , whic hallowe dmor e detaile dinvestigatio n o f record s bu t sacrifice dbreadt ho f

coverage . Th e uncertai n relevanc e o f th e RAN D I study' s dat ao n larg e firm s fo r

smalle r PRP s wa s ake y motivatio n fo r th e RAN D n study . A s note dabove , RAN D I I surveye dmor e firms-108-bu t restricte dit s attentio n t o jus t 1 8 sites .

3 0CB O believe s tha t th e heav y overrepresentatio n o f site s wit hmor e tha n 5 0 PRP s i n th e RAN D I I stud y ( 9 o f th e 1 8 site s i n th e sample , compare dwithth e expecte d2.6 ) add s asignifican t upwar dbia s t o it s estimate dshare s o f transactio n costs . Tha t

th e 10 8 sample dfirm s represen t onl y 3 percent

o f th e PRP-site pair s involve dat

th e 1 8 site s furthe r

complicate s th e interpretatio n o f th e study' s findings . Th e estimat e o f

3 2 percen t

a s th e shar e o f

transactio n cost s fo r

al l PRP s at

th e site s (compare dwit hth e observe dshare o f 2 1 percent

fo r th e sample dfirms ) resulte dfro m th e us e o f

statistica l bootstrappin g techniques . Thos e technique s canno t full y substitut e fo r

direc t dat ao n th e nonsurveye dfirms , however , an dhenc e th e 3 2 percen t estimat e i s onl y th e mean o f adistributio n o f

possibl e value s o f

th e tru e share o f transactio n costs . B y calculatin g th e "9 0 percen t confidenc e interval, " th e RAN D n author s conclude dtha t

th e tru e shar e ha s a9 0 percen t probabilit y o f

bein g betwee n 2 0 percen t

an d4 4 percent .

Interpretatio n Proble m#3 : Front-Loadin g o f Transactio n Cost s

Many transactio n cost s occu r befor e th e majo r

cleanu p work

begins ; i n othe r

words , transactio n cost s ar e mor e front-loade dtha n cleanu p costs . Accordingly , estimate s o f th e averag e share o f

transactio n cost s basedpartl y o r entirel y o n observation s fro m site s tha t hav e no t finishe dcleanu p ma y overstat e th e ultimat e share .

3 1S o far , RAN D I I i s th e onl y stud y t o try t o extrapolat e fro mdat ao n

midstrea mcost s t o cost s a t completio n o f

cleanup . It s analysi s illustrate s th e front

loadin g problem . Thre e alternativ e set s o f assumption s abou t

cost s remainin g a

t th e 1 8 site s yielde d2 7 percent , 2 5 percent , an d1 9 percen t a s th e poin t

estimate s (wit

h substantia l confidenc e interval s aroun deach ) fo r th e ultimat e shar e o f

transactio n cost s a t thos e sites , compare dwit hth e estimat e o f 3 2 percen t

fo r spendin g throug h 1991 . CB O believe s tha t th e assumption s underlyin g th e lower tw o estimate s ar e mor e plausibl e an dwoul dtherefor e estimat e apercentag e i n th e lo w 20 s fo r th e ultimat e shar e o f

transactio n cost s a t

th e 1 8 site s i n th e study .



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