Underground Injection 

Control (UIC) Class VI

Program

Research and Analysis 

in Support of 

UIC Class VI Program 

Financial Responsibility 

Requirements and Guidance

December 2010
Office of Water (4606M)

EPA 816-R-10-017

December 2010

http://water.epa.gov/drink/
Contents

1. Introduction ............................................................................................................................. 5

2. Summary of April and May 2009 Financial Responsibility Webcast Discussions ................ 6

3. Research and Analysis on Financial Responsibility Instruments ......................................... 15

I. Summary Matrices ............................................................................................................ 16

A. General Financial Considerations ............................................................................... 16

B. Considerations for GS ................................................................................................. 23

II. Research and Preliminary Analysis .................................................................................. 28

A. General Financial Considerations ............................................................................... 28

B. Considerations for GS ................................................................................................. 44

4. Rationale for Financial Responsibility Instrument Selection ............................................... 59

I. Introduction ....................................................................................................................... 59

A. Summary ..................................................................................................................... 59

II. Historical Precedent .......................................................................................................... 60

III. Potential for Instrument Failure ........................................................................................ 60

A. Owner or Operator Failure .......................................................................................... 61

B. Third Party Failure ...................................................................................................... 61

C. Other Factors ............................................................................................................... 61

IV. Resource Implications for the Owner or Operator and the Director ................................. 62

A. Director’s Review and Monitoring ............................................................................. 63

V. Recommendations and Rationale ...................................................................................... 63

A. Trust Funds ................................................................................................................. 65

B. Letters of Credit .......................................................................................................... 65

C. Surety Bonds ............................................................................................................... 66

D. Insurance ..................................................................................................................... 66

E. Escrow Account .......................................................................................................... 66

F. Financial Tests and Corporate Guarantees ................................................................. 66

G. Minimizing Instrument Weakness by Combining Instruments .................................. 67

5. Presentation on Financial Responsibility to Ground Water Protection Council ................... 68

I. Summary of Meeting Discussion ...................................................................................... 68

II. Presentation ....................................................................................................................... 70

6. Director’s Examination of Third Party Stability ................................................................... 74

I. Financial strength requirement based on credit ratings .................................................... 74

A. Credit rating requirements consistent with self-insurance requirements .................... 74

B. Credit rating by any Nationally Recognized Statistical Ratings Organization 

(NRSRO)............................................................................................................................... 75

C. [SELECTED] Hybrid of Option 1 and Option 2 ....................................................... 75

II. Minimum Rating ............................................................................................................... 75

A. [SELECTED] Minimum credit rating using the same option chosen for the credit 

rating requirement ................................................................................................................. 75

B. Broader range of minimum rating options .................................................................. 76

III. Minimum Capitalization ................................................................................................... 76

A. [SELECTED] Financial ratios consistent with the financial ratio test requirements 

for self-insurance .................................................................................................................. 76

B. Specific dollar value capital requirements .................................................................. 76

C. Minimum capital standards prescribed by the appropriate Federal banking agency .. 76

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 2 
D. Successful completion of the new comprehensive stress test for banks ..................... 77

IV. Ability to pass the bond rating when applicable ............................................................... 77

A. Financial ratios consistent with the bond rating test requirements for self-insurance 77

B. Bond rating by any Nationally Recognized Statistical Ratings Organization 

("NRSRO") ........................................................................................................................... 78

C. [SELECTED] Hybrid of Option 1 and Option 2 ....................................................... 78

7. Rationale for the Selection of Self Insurance Requirements ................................................ 79

I. Financial Coverage Criteria .............................................................................................. 80

II. Bond Rating Test .............................................................................................................. 80

III. Financial Ratio Test .......................................................................................................... 81

IV. Corporate Guarantee ......................................................................................................... 82

8. Evaluation of Minimum Tangible Net Worth ....................................................................... 83

Options ...................................................................................................................................... 83

Objective for Setting TNW ................................................................................................... 84

Calibrated Model .................................................................................................................. 85

Results ....................................................................................................................................... 86

Context ...................................................................................................................................... 87

Appendix A: Costs to the Owner or Operator for each Mechanism ......................................... 88

Appendix B. Technical Description of Geologic Sequestration (GS) Financial Responsibility 

(FR) Model.................................................................................................................................... 90

Appendix C. Calibration of GS FR Model Parameters................................................................. 96

Tables and Figures

Table 2.1: Summary of Topics in Webcast Discussion organized by Type of Financial 

Mechanism ...................................................................................................................................... 6

Table 3.1: How is the financial stability of a third party provider determined? ........................... 16

Table 3.2: What weaknesses are associated with the third party’s financial stability 

determination?............................................................................................................................... 17

Table 3.3: Under what conditions are the full estimated costs not covered? Does the mechanism 

manage uncertainty in cost? .......................................................................................................... 18

Table 3.4: What factors drive the costs associated with the securing/maintaining the instrument? 

What is the relative cost of the instrument to the owner or operator? .......................................... 19

Table 3.5: What is the historical use of the instrument? For environmental obligations? ............ 20

Table 3.6: Under what scenario is the instrument best or most commonly utilized? ................... 21

Table 3.7: Which conditions may lead to instrument failure (e.g., cancelation or non-renewal, 

breach of contract, misrepresentation, the agency does not take action)? .................................... 22

Table 3.8: Do states prohibit the use of certain mechanisms? How accessible is the instrument in 

states where GS is likely to take place? ........................................................................................ 23

Table 3.9: What factors make the instrument more/less easy for the Director to review or use? 24

Table 3.10: What is the likely total administrative burden/complexity of the review for the 

Director (i.e., EPA or the state regulator)? ................................................................................... 25

Table 3.11: Which GS phase(s) is the instrument best suited for? ............................................... 26

Table 3.12: For each individual GS phase, can the specific weaknesses of an instrument be 

minimized by combining it with another mechanism? ................................................................. 27

Figure 4.1: GS Project Activities .................................................................................................. 59

Table 4.1: Instruments Best Suited for GS Activities ................................................................... 60

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 3 
Table 4.2: Regulatory Risk, Oversight Effort, and Costs to Owners or Operators ....................... 63

Table 4.3: Instruments Best Suited for GS Activities ................................................................... 65

Table 6.1: Definitions of Financial Coverage Criteria .................................................................. 80

Table 6.2: Explanation of Bond Rating Test ................................................................................ 80

Table 6.3: List of Financial Ratios ................................................................................................ 81

Table 6.4: Explanation of Corporate Guarantee ........................................................................... 82

Figure 8.1: Coverage Criteria and Tests for Qualifying for Self-Insurance ................................. 83

Figure 8.2: Chart of Criteria Thresholds for Self-Insurance ......................................................... 87

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 4 
1. Introduction 

This document provides some of the supporting research and analysis for the financial 

responsibility requirements (40 CFR 146.85) and guidance (EPA 816-D-10-010) for the 

Underground Injection Control (UIC) Class VI Program. It is intended to provide insight for the 

Program’s Directors, Geologic Sequestration (GS) well owners or operators, independent thirdparty providers, and the general public. Financial responsibility requirements are designed to 

ensure that owners or operators have the resources to carry out required GS activities related to 

closing and remediating GS sites if needed, during injection or after wells are plugged, so that 

they do not endanger Underground Sources of Drinking Water (USDWs). These requirements 

are also designed to ensure that the private costs of GS are not passed along to the public. This 

document describes the following research, analysis, and stakeholder input: 

• Summary of Financial Responsibility Webcast Discussions 

• Research and Analysis on Financial Responsibility Instruments 

• Rationale for Financial Responsibility Instrument Selection 

• Presentation on Financial Responsibility to Ground Water Protection Council 

• Rationale for the Selection of Third Party Stability Evaluation Recommendations 

• Rationale for the Selection of Self Insurance Test Requirements 

• Evaluation of Minimum Tangible Net Worth 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 5 
2. Summary of April and May 2009 Financial Responsibility Webcast Discussions 

In April and May 2009, EPA sponsored a series of webcasts on financial responsibility for 

carbon dioxide geologic sequestration (GS) wells. The goal of the series was to encourage 

information sharing on potential financial mechanisms that well owners and operators could use 

to meet the financial responsibility requirements for GS projects. EPA used the information 

gathered through the webcast series to inform its decisions as it developed guidance related to 

financial responsibility for GS wells. The webcasts addressed the following topics: 

• Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements (April 

28, 2009) 

• Insurance (May 20, 2009) 

• Self-Insurance: Financial Test and Corporate Guarantee (May 26, 2009) 

EPA provided the following disclaimer to the webcast participants: 

“The purpose of this public webcast series is information sharing. Views or opinions 

expressed during the presentation belong to the speaker and do not necessarily represent the 

views and opinions of the U.S. EPA.

EPA does not have express authority in the Safe Drinking Water Act to accept and use funds 

for financial assurance. Consequently, the Agency cannot implement some of the financial 

assurance mechanisms described in these webcasts due to the requirement under the 

Miscellaneous Receipt Act to deposit funds EPA receives for the use of the Government into 

the Treasury.” 

The following matrix summarizes the webcast discussions by financial mechanism. 

Table 2.1: Summary of Topics in Webcast Discussion organized by Type of Financial Mechanism 

Strengths 

Availability and applicability to GS based on participant experience

Trust Fund 

· Small operators commonly use them with standby trusts. 

· May be easier to obtain than other instruments. 

· Used regularly and they work fairly well. 

Standby Trusts 

· Two participants said that they are easy to obtain. 

· May require the least amount of money. Costs vary from $900 to $3000 annually. 

· Small operators may commonly use them with trust funds. 

Letter of Credit 

· In areas with many Class II wells, banks may be accustomed to issuing them. 

· Typical for small operators in at least one Region. 

· Three participants said they are frequently used during permitting because they 

are easy for operators to obtain and administer. 

· Work fairly well and are less of a burden for implementation. 

Surety Bond 

· In areas with many Class II wells, banks may be accustomed to issuing surety

bonds. 

· May be used often because they are easy for operators to obtain and administer. 

· Frequently used during permitting. 

· Work fairly well and are less burdensome during implementation. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 6 
Insurance 

· Commercial scale implementation will reassure mainline carriers who fear losses, 

so that they will start to accept risk of GS projects. 

· FutureGen, which was sited but then cancelled, proposed insurance as a financial 

mechanism. Similarly the state of Texas chose insurance, which eliminated the 

issue of which events are covered by which mechanisms. 

· Companies have explored specific insurance avenues in both mutual and 

commercial insurance (Zurich, etc.). 

 · DOE worked with environmental insurers to determine how to manage their risk by 

using environmental markets to fill in gaps of risk management. 

Financial Test 

and Corporate 

Guarantee 

· Self-insurance has been successful in other programs; there is a lack of evidence 

to suggest it should not be an acceptable instrument in the UIC program. 

Appropriateness of instruments for different project phases 

Trust Fund 

· At least one state is considering trust funds for longer-term phases of GS. 

· It makes sense that trust funds would apply to construction and operation, but it is 

not clear that they would apply to closure. 

· Two participants said that for the short term initial phases, trust funds make sense 

but they may not be the best instrument for longer term closure and monitoring 

phases. 

· There could be uncertain long-term applicability if these instruments must be 

drawn upon in 40 or 50 years. 

· It may be more useful to have money in the second phase in the event that 

something occurs. 

· A trust fund would be more appropriate than insurance for closure and postclosure. 

Letter of Credit 

· It makes sense that letters of credit would apply to construction and operation, but 

it is not clear that they would apply to closure. 

· For the short term (initial phases) letters of credit make sense but they may not be 

the best instrument for longer term closure and monitoring phases (two 

participants). 

· Uncertain long-term applicability if these instruments must be drawn upon in 40 or 

50 years. 

· May be more useful to have money in the second phase in the event that 

something occurs. 

· May be difficult over the long term because it may be necessary to deal with two 

different entities. 

Surety Bond 

· At least one state is considering them for early project phases. 

· Although surety bonds are historically thought of as go-to mechanisms for liability 

coverage, the availability of multiple mechanisms could help keep prices down. 

· Surety bonds could apply to construction and operation, but it is not clear that they 

would apply to closure. 

· Uncertain long-term (closure and monitoring) applicability if these instruments must 

be drawn upon in 40 or 50 years. 

· It may be more useful to have money in the second phase in the event that 

something occurs. 

· Surety bonds may be difficult over the long term because of working with two 

different entities. 

· A surety bond would be more appropriate than insurance for closure and postclosure. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 7 
Insurance 

· Differences exist between coverage of liabilities versus performance, as in 

plugging and closure. The proposed rule may fall into the category of 

performance-based liability. 

· When combining an insurance policy with other FA mechanisms like a surety bond 

for a single activity, which mechanism would kick-in first if a GS owner/operator 

fails? 

 · Insurance probably works best for the operational phases of a facility because 

activities are well established. Insurance becomes problematic during site 

closure and post-closure care. 

· Insurance would be a viable option through well construction. 

· The usefulness of insurance depends on the time frame of the project. May be less 

effective during post-closure, but also not ideal during operation. Insurer would 

hopefully remedy the situation of a company going out of business. 

· Insurance could be used successfully during closure period, but has risks during 

construction if the policy is not fully funded. 

· The possible failure of the insurance company is a problem. 

· The insurance timeframe is typically long-term and would pair well with the longterm nature of GS such as final care of a plugged well. 

Financial Test 

and Corporate 

Guarantee 

· A participant suggested that EPA should estimate the risks and costs associated 

with GS wells, such as extreme events. This analysis would help inform what 

size a company needs to be to pass a financial test. 

· With more GS experience there will be more certainty regarding the best financial 

mechanisms. There may be benefits to focusing on near term – first address

plugging then site closure and long-term care (two big unknowns). 

· Self-insurance mechanisms are great while the companies are making money, but 

the economy may not be reliable. 

· Several participants expressed that they have reservations about the use of these 

mechanisms for any phase. 

Other 

· Interest exists in mechanisms for long-term phases. 

· Which issues and events are covered under emergency and remedial response? 

FR is based on events that threaten USDWs. 

· Any mechanisms for GS FR would need to have longevity to outlast the project 

lifespan. 

· There is experience under RCRA to define which mechanisms apply to which 

phase. 

· A forfeiture bond would be more appropriate than insurance for closure and postclosure. 

· One GS project has provided experience through the injection well plugging phase, 

which costs approximately $8 million; costs associated with site care and closure 

are unknown. 

· Different phases of the projects may require different types of instruments – some 

instruments may be applicable to some phases but not others. 

· The different phases of GS projects have not been sufficiently defined to assess 

the applicability of one instrument versus another. 

· The typical time period/longevity of the instrument (and the companies providing 

the instrument) should match the project phase. 

Participants’ assessments of relative strengths of each instrument 

Trust Fund · Third-party mechanisms such as trust funds are acceptable. 

Standby Trusts · Standby trusts are acceptable with letters of credit and surety bonds. 

Letter of Credit · Third-party mechanisms, including letters of credit are acceptable. 

Surety Bond · Surety bonds stand “head and shoulders” above other options. 

· Surety bonds are less inconvenient than letters of credit and trust funds. 

Insurance · Insurance can be categorized into more than two options. Instead of just captive 

and third-party, there are three choices: single, captive, and group. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 8 
Other · Can one mechanism provide more environmental certainty than others? 

· Can EPA determine the relative efficiency of each mechanism? 

Participant Concerns 

Specific requirements of the rule 

Trust Fund · There is concern about the regulatory wording for trust funds. A trust fund should 

be fully funded before it is accepted by EPA. 

Standby Trusts · Standby trusts are only needed for DI programs. 

Letter of Credit · Letters of credit are sometimes tied to a bond. 

Insurance 

· Specific requirements should not be written into the GS rule. Because of the 

economic downturn, insurance companies have suffered losses in investment 

portfolios. 

· Two participants said that specific rules may discourage participation in a down 

market. 

· It is important for underwriters to have the best information possible. 

· EPA should specify the appropriate part(s) of the project cycle where insurance 

may be used. 

Financial Test 

and Corporate 

Guarantee 

· Self-insurance mechanisms need to be available. An adaptive approach would 

solve the unknowns relating to financial assurance. 

· It will be important to get mechanisms in place that share liability to get projects 

moving. 

· Operator should be required to provide results of the financial tests and CFOs

should provide Income and Bank Statements (including where the actual figures 

came from and if they differ from what is published) and attest to their validity. 

· If financial tests are allowed, the criteria should be set conservatively so that only 

the very strongest companies qualify. 

Other 

· Will the final GS rule include the type of detailed FA requirements now spelled out 

for Class I hazardous wells in 40 CFR 144 Subpart F or will guidance provide 

more detail? 

· How long will the proposed post-injection site care requirement be? 

How often are particular instruments used? 

Standby Trusts · They are used less often and may be more typical for small operators who use 

them with surety bonds. 

Surety Bond 

· Often used in DI programs. 

· They are used less often and may be more typical for small operators who use 

them with standby trusts. 

How to prevent fraud and failures? 

Letter of Credit 

· Does U.S. Dept. of Treasury have an approved list for sureties? 

· Regions should resolve situations when a bank changes hands and transfers funds 

from letter of credit to trust. 

· Some EPA regions use Standard and Poor’s and Moody’s but not A.M. Best’s 

surety rating service. 

Surety Bond 

· Bond ratings may not be a good measure due to recent failure of several AAArated companies. However, there may not be a better alternative. 

· At the beginning of the project there needs to be a process in place to manage 

surety bonds. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 9 
Financial Test 

and Corporate 

Guarantee 

· Captive insurance has the potential for “smoke and mirrors.”

· At least one Region has not had a business failure in cases where a Class I or 

Class II UIC owner/operator relied on these mechanisms. 

· A Class I operator in MI used a financial test for FA but the Region did not 

adequately review the financial test and later the company went bankrupt. 

· A Class I operator received a permit in December, and they were bankrupt by the 

following September. 

· Most companies favor the financial test and corporate guarantee, despite their 

problems. 

 · The bond rating test may not update company performance frequently enough. 

· It may be sufficient for net worth to be 6 to 10 times the cost of the phase. 

· Concerns exist about sole reliance on self-insurance. Corporations are often 

complex and may obscure who has responsibility. The recent, collapse of some 

large corporations suggests it’s hard to gauge corporate health. 

Other 

· Two participants asked, “What happens if a company fails?”

· EPA has no plugging funds, whereas some other programs have plugging funds 

that are industry supported. Therefore, if the owner/operator fails, EPA has no 

financial means to plug wells. 

· There are differences in the content of the income statement and what a CPA 

provides. Regulator must work to ensure that the numbers can be duplicated. 

The Form 10-K, for publicly traded companies, is often better than the annual 

report to shareholders. 

Mechanism may be less readily available than others 

Standby Trusts 

· Banks are not always willing to offer these agreements and their availability may 

vary across the nation. 

· Standby trusts are not easy to obtain and typically include additional bank 

charges/fees. 

· Standby trusts can be more problematic and banks may be reluctant to establish 

these agreements. 

· Some operators may not want to pay a fee for an empty account. 

Letter of Credit 

· Two participants noted that they are not as available as they once were. 

· A lack of availability may not hinder large corporations that might be involved in 

GS. 

Surety Bond · Not as available as once were, but more available than letters of credit. 

Insurance 

· It may be worth asking insurers what new types of instruments may become 

available. 

· There is some interest in using gas and electric mutuals for insurance, but mutual 

companies may be reluctant to provide the high levels of coverage that may be 

needed for GS. 

· It is uncertain what insurers will be willing to offer and if insurance is appropriate. 

· There is a limited insurance marketplace. 

· Companies may use captive insurance to manage risk if the market seems too 

expensive (e.g. wants a $100,000 premium for $10,000,000 in coverage). 

· There are currently very few third party mechanisms available for GS. Some 

insurance companies will only insure during the phase where the company is 

making money (i.e., injection). 

· Pooling risk may be a good option, but it can take time for a pool to grow. 

Financial Test 

and Corporate 

Guarantee 

· With limited third party options, it may not work well to eliminate self-insurance as 

an option. 

Mechanism may be less attractive than others due to convenience or applicability 

Trust Fund · Trust funds have high “hassle factor.” 

Letter of Credit · Letters of credit have high “hassle factor.”

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 10 
Surety Bond · When bonds and activities are worth well over a million dollars for wells, it requires 

significant effort every year for evaluation, especially with a change of ownership. 

Financial Test 

and Corporate 

Guarantee 

· States “get stuck” with self-insurance since Federal Law allows it. 

· Financial tests do not accurately reflect company health. 

Other · Trust funds have high “hassle factor.” 

Cancellation of FR policies 

Insurance 

· Other than non-payment of premiums, under what conditions is cancellation 

possible? 

· If the insurer thinks the owner did not disclose all available project information, 

then the policy is void from the beginning. See case with Zurich and EPA. 

· UIC does not have a provision for cancellation with notice for fraud. 

· EPA should reduce the possibility of cancellation. 

· It is important to consider whether the event is covered by insurance and to think 

about who certifies a valid claim. EPA should be careful about what provisions 

are allowed for cancellation, such as only for non-payment of a premium but not 

for bankruptcy. 

Other Considerations 

Use of forms and form language 

Insurance 

· A certificate shows evidence of a policy, but does not ensure conformance to 

regulations. 

· One company has been working with underwriters for 2.5 years. AEGIS & EIM

coverage forms are very broad with the specific language written into the 

policies. It is very important to understand policy coverage (e.g. definition and 

coverage associated with “waste products” could be critical). There is an ongoing 

debate between underwriters and industry; Zurich is developing a paper on this 

topic. 

Financial Test 

and Corporate 

Guarantee 

· ORCR said that they do not specify how companies must prepare their financial 

statements. 

Other 

· Operators should use language from forms that the Region provides. Region 

experience comes from CO2 companies who submitted financial statements. 

· Guidance on specific language to use in mechanisms should be provided. 

· IL uses language from RCRA for UIC. 

Development of guidance 

Trust Fund 

· Two participants said that EPA should develop strong guidance on trust funds. 

· It is necessary to have a good foundation in the regulations and to provide 

guidance that deals with specifics. 

· Two participants said that there should be more guidance on the transfer of 

ownership, including an emphasis on the responsibility of the present operator to 

notify the Region about transfer of ownership. 

 · Two participants said that guidance can expand on what is in the rule, but the 

regulation is also important since it is enforceable.· The rule and guidance need 

to be clear. 

· There is an advantage to having certain elements in the rule. 

· Requirements should be included in the rule. 

· Companies with a bond or trust agreement are held liable until a new company 

steps in. 

· Need to develop FR language for Class II guidance since it is currently lacking. 

Language used in Class I FR is inappropriate for Class II due to differences in 

authority. 

Letter of Credit · EPA should develop strong guidance on letters of credit. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 11 
Surety Bond 

· EPA should develop strong guidance on surety bonds. 

· Companies with a bond or trust agreement are held liable until a new company 

steps in. 

Insurance 

· One issue that may require guidance is specifying who will pay the premium for the 

insurance. Operating companies tend to come and go and insurance companies 

will likely outlive them. 

Financial Test 

and Corporate 

Guarantee 

· Some Regions need to turn to a specialist in their financial mechanism evaluations 

to assure that the information is correct. One Region has an expert who works 

specifically on financial responsibility for Class I wells. 

· The financial statement could leave taxpayers in a vulnerable position. One Region 

has taken enforcement action against companies that failed to meet their 

performance ratio for Class II wells. In such cases, they have worked with an 

outside contractor who was knowledgeable about finance. 

· Reliance on a financial test creates enforcement problems. 

· States often have a need for expert assistance. OECA has provided financial 

assurance training to regions and states, which has been a large undertaking. 

· EPA should consider the multiplier requirement, which may be more protective 

than a set number. 

· Financial statement text should require a paragraph that directly indicates that 

money has been set aside for a particular action, like plugging. This should be 

clearly spelled out in the regulation. 

· The lack of corporate finance expertise within EPA means it would be important for 

corporations to take the lead in ensuring that the information provided to EPA is 

clear and concise. 

Other 

· Will guidance coincide with final promulgation of the GS rule? 

· What types of financial assurance do other countries require? 

· EPA should create guidance that is simple to use, such as a checklist, so that 

operators, banks, surety bond officers, and Regions are aware of the various 

mechanisms. 

· Guidance should be similar to the 1990 Class II well guidance document, as well 

as include a system to determine plugging costs. 

· Guidance should not be modeled too closely on the Class II guidance. Guidance is 

not easily tied to enforcement, and it would be better to have requirements in a 

regulation. 

· Class II guidance could not have same level of detail as the Class I regulations 

regarding FR because of statutory authority constraints. 

Issues regarding pay-in periods 

Trust Fund 

· Pay-in periods are allowed because they give small operators opportunity to 

manage FR over time with limited capital. 

· At least one state is looking at pay-in periods for long-term FR over the life of the 

project. 

Letter of Credit · There is an existing enforcement case involving pay-in period with letter of credit. 

Other 

· Do pay-in periods meet the intent of FR demonstration? 

· Pay-in periods may be appropriate in some situations. FA would be a small portion 

of project cost for large corporations. 

· Is there any experience with failures during the pay-in period? 

· One Region does not allow pay-in periods longer than 2-3 years. They also set 

requirements in an administrative order or other enforcement action. 

Legal Issues 

Letter of Credit · States and EPA do not have legal resources to use letters of credit. 

Insurance · Owners could use a disclosed document endorsement to substantiate which 

documents are disclosed and that they are acceptable to all parties. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 12 
Other 

· Who is the most appropriate signatory for FR? 

· Although corporations are set up to minimize risk, those signing FR papers may 

not be as familiar with risk or GS work as GS project engineers are. 

· With complex corporate structures, EPA needs to ensure the proper legal entity 

has responsibility for providing the financial assurance. 

Costs 

Letter of Credit · Letters of credit can tie up $500,000 to $1,000,000. 

Insurance 

· The applicability of insurance and the costs involved are site-specific. 

· How do underwriters come to decide on the price of a policy and whether they 

have sufficient knowledge of GS to make accurate estimates? 

· There is concern about regulators needing to rely solely on the work of 

underwriters. Regulators have a limited ability to evaluate the appropriateness of 

costs for corrective action, emergency response, and closure. 

Financial Test 

and Corporate 

Guarantee 

· There is concern that large companies would not want to tie up a lot of money in a 

financial mechanism and will instead want to submit financial statements. 

Other · The cost of well plugging should be based on contractor’s cost for remediation. 

Ability of mechanisms to manage risk 

Insurance 

· Utility companies may utilize captive insurance, but they are interested in the ability 

of third party insurance to use the marketplace to absorb some financial risk. 

· There is concern that EPA, rather than states, would end up implementing GS 

programs, potentially leaving the federal government with the risk. 

· Regions without a Class I program do not have experience with insurance. There 

may be problems related to the differences in how underwriters and 

owner/operators view risk and cost parameters. The Agency may need to come 

up with a risk assessment tool. 

· Captive insurance is less reliable, but a standby trust agreement may provide a 

mechanism for the insurer to pay for corrective action in the event of bankruptcy. 

Financial Test 

and Corporate 

Guarantee 

· The financial test and corporate guarantee is a high risk FR mechanism and 

requires a lot of information to provide effective assurance. 

· Two participants said that self-insurance is high risk and even an independent 

third-party analysis is unlikely to provide additional information. Overall, the 

process takes a lot of time. 

Other · There are differences in mechanisms based on the risk covered and the 

willingness of third parties to cover that risk. 

Rating systems and standards 

Trust Fund · The need to constantly monitor the company, plus other complications, indicate 

why trust funds are a simpler approach to demonstrating financial responsibility. 

Letter of Credit 

· The need to constantly monitor the company, plus other complications, indicate 

why letters of credit are a simpler approach to demonstrating financial 

responsibility. 

· The success of letters of credit depend on a company’s relationship with the bank 

and the amount of liquid assets the company has. Letters of credit are secure 

from bankruptcy because they are not part of the companies’ assets. In addition, 

a state-administered fund is more like a risk retention group. 

· The question of appropriateness of bond ratings applies to these instruments. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 13 
Insurance 

· For group insurance, states and the federal government should build off of the IRS’

criteria. · EPA should look at how insurance is financed for various organizations 

– whether it is rated or unrated, and various measurements. · EPA should, at 

least, consider captive insurance. 

· EPA should not propose eligibility requirements for insurers. Participant believes 

the market will drive the selection of financially viable insurers. 

· Even the most stringent or specific criteria would not restrain market forces. In New 

York, where there is a robust insurance commissioner, established criteria have 

not prevented financial problems from occurring. 

· It would be nice for EPA to provide a list of approved insurance providers. 

· Would the list of insurers change based on ratings? This may be one reason that 

this type of list would not be found in the regulations. Insurer’s current financial 

health may not be a predictor of their financial health 50 years from now. 

Financial Test 

and Corporate 

Guarantee 

· Two participants said that a $10 million threshold seems low relative to the size of 

GS projects and what needs to be covered. 

· A $10 million threshold does not even seem sufficient for the well drilling. 

· Even with 10 day notice after bankruptcy proceedings have started, there is very 

little the regulator can do. 

· Third-party methods provide more protection than self-insurance. 

· Financial tests are difficult to conduct on multi-level companies because it may not 

be clear which level of the company is responsible. 

· There is concern about date of financial test vis-à-vis post-injection site care 

timeframe.

· The regulator needs to know the rationale behind a company’s bond rating to know 

whether it is high or low risk. 

· Numbers can be manipulated; passing the ratios may give a sense that a company 

can meet their FR obligations. However, these ratios may not be as secure as 

other mechanisms where money is set aside. 

Other 

· Since the companies pay the rating agencies, the rating agencies may resist giving 

a company a rating below investment-grade. The rating agencies know the 

negative effect that such ratings have on companies. Moreover, ratings tend to 

lag behind the company’s performance if they are close to the threshold. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 14 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 15 

 

3. Research and Analysis on Financial Responsibility Instruments 

This chapter includes two sections. The first section contains matrices summarizing EPA’s 

research and preliminary analysis related to the various financial responsibility instruments. 

Detailed notes are provided in the second section. Both sections address the following questions 

based on comments to the proposed rule; public financial responsibility webcasts held in spring 

2009;1 and publicly available literature, including peer-reviewed journal articles and government 

and non-government reports: 

1. How is the financial responsibility of a third party provider determined? 

2. What weaknesses are associated with the third party’s financial stability 

determination? 

3. Under what conditions are the full estimated costs not covered? Does the mechanism 

manage uncertainty in cost? 

4. What factors drive the costs associated with the securing/maintaining the instrument? 

 What is the relative cost of the instrument to the owner or operator? 

5. What is the historical use of the instrument? For environmental obligations? 

6. Under what scenario is the instrument best or most commonly utilized? 

7. Which conditions may lead to instrument failure (e.g., cancelation or non-renewal, 

breach of contract, misrepresentation, the agency does not take action)? 

8. Do states prohibit the use of certain mechanisms? How accessible is the instrument in 

states where GS is likely to take place? 

9. What factors make the instrument more/less easy for the Director to review or use? 

10. What is the likely total administrative burden/complexity of the review for the 

Director (i.e., EPA or the state agency)? 

11. Which GS phase(s) is the instrument best suited for? 

12. For each individual GS phase, can the specific weakness of an instrument be 

minimized by combining it with another mechanism? 

1

 EPA. 2009. Webcasts on Financial Responsibility Instruments for Geologic Sequestration (GS) Wells. EPA 815-D-09-001. 

(http://www.epa.gov/safewater/uic/pdfs/meetings_uic_summarywebinars_financial_responsibility.pdf). 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 

I. Summary Matrices

The following matrices summarize research and analysis on financial responsibility instruments for geologic seq

A. General Financial Considerations 

Table 3.1: How is the financial stability of a third party provider determined?

Type of third party 

Financial Regulator (Non-environmental)

Non-government Rating 

Relative Ease of Monitoring Third Party Key Consider

Trust Fund 

Banks, savings and loans, credit unions 

State or Federal

Depends on charter type of institution 

Credit rating agency 

Easier 

• Third party 

examined 

• Third party 

Standby Trust 

Letter of Credit 

Surety Bond 

Insurance company 

State or Federal

Listed on Treasury Circular 570 

Harder 

• Third party 

Circular 57

• Third party 

Insurance State Hardest 

• Third party 

examined 

• Third party • Captive in

self-insura

Financial Test 

and Corporate 

Guarantee 

N/A – By definition, no third party is involved 

Escrow Account 

Banks, savings and loans, credit unions 

State or Federal

Depends on charter type of institution 

Credit rating agency 

Easier 

• Third party 

examined 

• Third party 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 

Table 3.2: What weaknesses are associated with the third party’s financial stability determination?

Stability Demonstration’s Relative Ability to Predict Third-party Bankruptcy or Insolvency 

Federal Finance Regulator 

State Finance Regulator 

Non-government Rating Key C

Trust Fund 

Strong 

Variable Review 

Period

Examinations are likely to be infrequent, or based on complaints 

Variable Review 

Period

Examinations are likely to vary by state and be infrequent, or based on complaints 

Variable Review 

Period

Credit rating agencies may be reluctant to lower credit ratings of client companies 

• G

nobe 

• Ac

exdi

• Th

co

Standby Trust 

Letter of Credit 

Surety Bond Strongest 

Annual Review

Institutions reviewed and listed (and unlisted) annually 

Insurance Weak None • C

ris

Financial Test and 

Corporate Guarantee N/A – By definition, no third party is involved 

Escrow Account Strong 

Variable Review Period

Examinations are likely to be infrequent or based on complaints Credit rating agencies may be reluctant to 

lower the credit ratings of client companies 

• Fr

exgo

• Ac

exdi

• Th

co

Examinations are likely to vary by state 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 

Table 3.3: Under what conditions are the full estimated costs not covered? Does the mechanism manage uncertain

Adverse Conditions/Risks Leading to Inadequate Coverage of Estimated Costs Owner/ Key Considerations operator fails 

Investment Risk (Market volatility or mismanagement) 

Third-party Litigation (leading to inadequate funds) 

Cost Underestimation by Owner/ operator 

Policy Exclusions or Payment Limitations Imposed by Third Party 

Trust Fund X X X 

• Owner/operator could become insolvent be• Pay-in period should be short and/or includ

that trust is fully funded 

• Risk level of investment portfolio is importa• If trust fund fully funded at its inception, the

estimation will be adequate 

Standby Trust N/A - Not a stand-alone instrument 

Letter of Credit X 

• Incentive to underestimate costs to lower a• If letter of credit obtained for full amount of 

based on cost estimation will be adequate 

Surety Bond X X 

• Litigation delays have negative effects on e

inadequate funds to cover activities 

• If estimates increase on a surety bond, RCR

up the shortfall 

Insurance X X 

• Incentive to underestimate costs or seek on

lower premiums 

• Drawing on insurance policies may require 

or the bankrupt companies 

• Boilerplate language proposed by Director c• “Cap policies” could guard against expense• UIC Class I requires guarantee that funds a

Financial Test 

and Corporate 

Guarantee 

X X X 

• Only financially strong companies can/shou

mechanism 

• Decision for coverage must be based on hig• Insurance underwriters do risk analysis to d

policy; owner/operator attests to accuracy o

Escrow 

Account X X 

• Analogous to holding funds in low interest a• Investment risk is based on possible misma• If escrow is fully funded at its inception, the

estimation will be adequate 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 

Table 3.4: What factors drive the costs associated with the securing/maintaining the instrument? What is the relat

instrument to the owner or operator?

Fees Collateral/ Deposits Premiums Estimate of Costs as % of Total Cost Logistics of Claim Payment Key Considerations 

Trust Fund X ~2% (total) 

Third party uses fund to meet obligations, otherwise assets returned to the owner/operator after it meets obligations 

• Cost is full cost of environmental obliga

with third-party administration 

• Annual costs determined by pay-in sch

years in one EPA Region) and enforcenecessary 

• Fees vary by institution, fund amount, w

institution used, investment activity, an

Standby 

Trust X No data available 

• Cost is typically an annual fee; fees va

other services from same institution usinvolvement 

Letter of 

Credit X X 1.5 - 2% (annual) 

• Cost based on small percent of face va

interest fees at market rate if credit dra

• Financial health of purchaser determin

deposits required 

• Letter of credit is classified as an accou

include limits to borrowing power 

Surety 

Bond X 0.5 - 15% (total) 

Surety seeks reimbursement from purchaser for claims paid 

• Cost is a function of credit-worthiness o

prequalification 

• Typically, premium paid based on face 

start; premiums often on a sliding scale 

• Each state has provisions for when to r

Insurance X X No data available Typically pay claims for both solvent and insolvent clients 

• Cost is premium established by underw

risks; price reflects greater likelihood a

• May be fee for initial risk assessment 

Financial 

Test and 

Corporate 

Guarantee 

<0.5% (total) 

Ability to fulfill obligations is based on financial health at time payment is needed 

• Cost is limited to securing an accounta

prepared for other purposes 

• Least expensive option for owner/opera

company worth; does not require third-aside 

Escrow 

Account X 1 - 2% (total) 

• Cost is full cost of environmental obliga

with third-party administration 

• Fees paid to third-party administrator to 

managed accounts typically have a min

• Account may accrue interest to cover a

agreement 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 

Table 3.5: What is the historical use of the instrument? For environmental obligations?

Used under RCRA since 1982 (including Class I Hazardous) 

Listed in Class II Guidance 

Other Non-UIC Programs Key Considerations 

Trust Fund X X X 

• Under UIC, funds may be deposited into the 

the term of initial permit or over remaining o(whichever is shorter) 

• EPA has administered trusts under other en

CERCLA 

Standby Trust Not a stand-alone instrument, but historically used with letter of credit and surety bond for Direct Impl

Letter of Credit X X X • Used in some State Revolving Fund program

• Used for other environmental programs 

Surety Bond X X X 

• Used under Surface Mining Coal and Recla• Banks may be accustomed to issuing bonds 

wells 

• Bonds may be used often because they are 

and administer 

• Used regularly in direct implementation prog• Used frequently in permitting 

Insurance X No X 

• Used for environmental risk management si• Not listed in Class II Guidance, but not proh• Nuclear project licensees required to obtain 

liability insurance available on the market, afor “extraordinary nuclear occurrences” 

Financial Test 

and Corporate 

Guarantee 

X X X 

• Used for other environmental programs • Controversial • Historically justified to minimize the sum of c

Escrow Account No No X 

• Used for ground water discharge and waste

MI, and TN; preferred mechanism for MA DEare less secure 

• Magnitude of dollar amount in escrow and ti

likely significantly shorter than for some GS 

• Used in environmental liability court cases • Certificate of Deposit (cash holding similar t

used by MT and MI UIC programs 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 

Table 3.6: Under what scenario is the instrument best or most commonly utilized?

Size of Firm Type of Activity (certain vs. uncertain) Key Considerations 

Trust Fund 

Varies

Small operators benefit from pay-in period 

Certain

Full amount set aside 

• Low uncertainty depends o

monitor payments into the 

Standby Trust Not a stand-alone instrument, but typically used with letter of credit and surety bond for Direct Imp

Letter of Credit 

Varies

Firm must be financially healthy 

Certain and uncertain

In short term, given credit limit not exceeded 

• May be appropriate for com

health/creditworthiness 

• Bank takes risk of project f

may provide deposit/collat

• Risk of shock to creditwort

borrow, but less impact on 

Surety Bond 

Varies

Requires demonstration of significant cash flow which may limit small operators 

Certain

Performs best with known, future obligations 

• For guaranteeing performa• Provider pays if principal c

abandonment) 

• May be available only to p

from closure 

Insurance 

Varies

Cost of policies driven by market and site-specific factors, which will dictate size of participating firms 

Uncertain

Designed for uncertain risks with a known probability of occurring 

• Occurrence policies better 

be filed after end of policy during policy period); not p

• Long-term policy may be d

insurance firm solvency 

• Insurance on certain activi

surety bond 

Financial Test 

and Corporate Guarantee 

Large

Company must have high net worth; financially stable 

Certain and uncertain

High financial assurance risk 

• Evaluation of actual financ• Company net worth must b

exclude under-capitalized stability are key 

• Overall gives less protectiv

Escrow Account 

Varies

Must be able to make onetime payment to account 

Certain

Full amount set aside 

• Typically used (in non-GS 

method to compel buyer to 

• Certificate of Deposit (cash 

account) has been used by 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 

Table 3.7: Which conditions may lead to instrument failure (e.g., cancelation or non-renewal, breach of contract, magency does not take action)?

Owner/ operator Failure 

Failure of Third Party2

Cancellation or Nonrenewal 

Inaccurate Assessment of Owner/operator Health 

Key Considerations 

Trust Fund X3 • Partially fails if not fully funded at time that is need

• Low risk that firm that administers trust could go o

Standby 

Trust X X • May fail if allowed to close (i.e., maintenance fees 

• Low risk that firm that administers trust could go o

Letter of 

Credit X X 

• For Class I hazardous wells under RCRA, letter m

for 1 year minimum, 120 day notice for cancellatio

• Could fail if change of bank ownership could trans

rating for new bank for financial demonstration 

• Not insured by FDIC 

Surety 

Bond X X X 

• Refusal of issuing entity to honor bond requiremen• RCRA requires 120 day notification of cancellation • If too many bonds issued to one corporation, risk m

diversified in terms of reinsurance 

• Inadequate bond ratings and risk of assuror financ

instrument failure 

Insurance X X X 

• Cancellation terms and exclusions typically agreed 

non-payment of premiums, perhaps due to bankru

• May feature exclusions that weaken coverage (e.g• Captive insurance is likely to fail if parent company 

• Class I hazardous wells must contain provision to 

successor owner or operator with consent of insur

Financial 

Test 

and 

Corporate 

Guarantee 

X N/A4 X 

• Failure may be caused by bankruptcy of entity tha

Financial Test 

• Difficult to assess all environmental obligations of • Bond ratings may not be adequate given recent ec• Multilevel companies have complex finances; sub

autonomous from parent companies must put new 

Escrow 

Account X • Partially fails if not fully funded at time that is need

• Low risk that firm that administers trust could go o

2 Including lack of third-party independence from covered activity 3 Primacy states may have the ability to establish individual or pooled trusts, in which case there is no risk of third party failure because the state itself is the trustee 4 Independent auditor could be considered third party 
B. Considerations for GS 

Table 3.8: Do states prohibit the use of certain mechanisms? How accessible is the instrument in states where GS 

place?

Allow Likely to Allow Prohibit Likely Level of Accessibility Key Considerations 

Trust Fund X 

High

Based on firm’s ability to contribute cash or cash equivalents 

• A preferred method for states; s

Standby Trust X Unknown • Must be combined with letter of 

Letter of Credit X 

High

At least one region agrees they are one of most common instruments 

• Not known to be prohibited in st

place: CO, IL, KS, KY, LA, MI, MTX, UT, WA, WV, and WY 

Surety Bond X X 

Medium

Historically available; potentially difficult to secure in future 

• WA specifically allows use for G• May be difficult to secure in futu

risks of unknown obligations; acsite characteristics, or accuracy 

Insurance X 

Some 

prohibit 

captive 

insurance 

for RCRA 

High

Private insurance used in 26 states for environmental risks 

• Not all insurance products availa• Captive insurance is prohibited 

in AL, NY, TX, and VA; allowed 

Financial Test 

and Corporate Guarantee X Some prohibit 

High

Accessible but test must be set at appropriate level 

• At least one state (MT) has ban

demonstrations 

• Some states do not allow use fo

allowed under BLM 3809 regulaadministered by USFS 

• Some firms may meet financial t

for bankruptcy protection 

Escrow Account X Unknown 

• Escrow accounts are typically us

holding money over a short peri

• Some states set maximums on t

can request the money to be he

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 

Table 3.9: What factors make the instrument more/less easy for the Director to review or use?

Instrument Regulated by Financial Industry Regulator 

Relative Level of Effort Required to Review/Use Risks to Director Key Consideratio

Trust Fund X 

Low or Medium Review trust fund balance with cost estimate 

Some vulnerability to insolvency of trustee 

• Liquid assets a• Trust funds are 

federal regulat

• Some primacy 

trustee and estfunds 

Standby Trust N/A - Not a stand-alone instrument Sometimes difficult to obtain 

Letter of Credit X Low Less frequent monitoring 

Litigation to obtain funds 

• Can only be al

purchaser, pro

• Level of effort f

that for long-te

• Automatic rene

burden 

• Reliant on fede

Surety Bond X 

LowMay be more convenient to review and use 

• May be less liq

letters of credit 

Insurance X 

HighComplex evaluation due to different state regulations and lack of transparency 

Variation in quality, eligibility, and transparency of insurance company 

• Owners/operat

factors 

• Company obje

evaluations cobusiness inform

• Insurance polic

regulatory regi

Financial Test 

and Corporate Guarantee X5 High Regular financial monitoring for solvency Corporate financial auditing not an in-house strength of UIC program • Solvency deter

commitment to 

• Option for third

Escrow Account X 

Medium Review bank statements to compare with cost estimate 

Instrument not yet tested for GS project magnitude 

• Some risk of in

on economic c

• MA DEP: instru

letters of credit 

5 Independent auditor is regulated 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 

Table 3.10: What is the likely total administrative burden/complexity of the review for the Director (i.e., EPA or the 

Level of Administrative Burden 

Implementation Steps Needed 

Key Considerations 

Initial 

Demonstration 

Annual Valuation 

Readjustment 

Withdraw 

Termination 

Trust Fund Low Less frequent monitoring X X X X

• Director is unlikely to have challenges accessing funds since funds are 

specific activity 

• Annual valuation/re-adjustment to ensure fund provides total coverage 

pay-in period 

• Lack of monitoring increases risk of funding shortfalls • Some primacy states may be able to act as the trustee and establish i

relative to a third-party trust, this may increase the initial burden but de

Standby 

Trust 

LowLess frequent monitoring X X X

• Initial demonstration to review language and verify that trustee is appro• Must be used with surety bond or letter of credit; account for additiona• Annual valuation needed to ensure funds as standby trust 

Letter of 

Credit 

MediumLess frequent monitoring; potential for re-demonstration and/or negotiation and litigation 

X X X X X

• Annual valuation needed to ensure total coverage • Initial demonstration depends on Director’s review of financial institutio• May be issued for short periods, therefore many opportunities for non-

demonstration if finances fluctuate over time 

• Withdrawal depends on third party; may require negotiation or litigation 

Surety 

Bond 

MediumAnnual evaluation; potential for redemonstration and/or negotiation and litigation 

X X X X X

• Annual valuation needed to ensure bond provides total coverage • Initial demonstration depends on Director’s review of financial institutio• Surety may cancel agreement: potential need for re-demonstration if fl

• Withdrawal depends on third party; may require negotiation or litigation 

Insurance 

HighPolicies complex due to site-specific variations and differences by state 

X X X X X

• Initial demonstration depends on Director’s review of financial institutio

demonstrations to avoid cancellation of policy or if finances fluctuate o

• Withdrawal depends on third party; may require negotiation or litigation • Agency capacity for review 

Financial 

Test and 

Corporate 

Guarantee 

HighEvaluations and reevaluations are frequent and data intensive 

X X X 

• Director must perform initial and annual review of financial condition (e

calculations/ratios) and ensure solvency; may be substantial effort 

• If owner/operator fails to perform obligations, Director may have to neg

• Agency capacity for review 

Escrow 

Account 

MediumNo history of use for large magnitude projects 

X X X X

• Total burden likely to be substantial until history of using escrow with F

• Director, owner/operator, and escrow agent likely to work together to e

appropriate provisions for obligation and timeframe 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 

Corrective Action and Phased Corrective Action 

Injection Well Plugging 

Post-injection Site Care and Site Closure 

Emergency and Remedial Response Key consid

Trust Fund 

Best Fully-funded trust minimizes the risk to the public for well defined activities. Beyond third-party failure and cost escalation, risk is limited to investment portfolio risk (typically low) 

Funds will be available but there may be too little money (public pays) or too much money (inefficient 

use of funds) 

••

Strengtbeing fuestimatMost cobecaus

advanc

Standby 

Trust N/A - Not a stand alone instrument 

Letter of 

Credit 

BestBeyond third-party failure and cost escalation, risk stems from the appropriateness of the defined credit limit 

May be unreliable for longer time periods, 

but some regions have had success over 

periods of time up to 20 years 

Appropriate for emergency and remedial response in construction and operation phases but may be unreliable or unavailable for post injection site careperiod because of uncertainty and risk over long time periods 

•••

Perform is not exRisk of 

pooled 

Risk of for a su

Surety 

Bond 

GoodBeyond third-party failure and cost escalation, risk stems from the appropriateness of the defined credit limit 

Surety providers are unlikely to 

underwrite bonds over longer time 

periods where there is considerable 

uncertainty, however some regions have 

had success over periods of time up to 20 years 

•

•

Perform credit lim

Blankesingle b

risk 

Insurance 

Can be used for either short-term or long-term applications depending 

on the terms of the policy; likely best and most readily available in the 

operational phases because the activities and timeframe are welldefined (operator is making money and can pay premiums) 

BestIdeal for activities with uncertain frequency and costs to diversifying environmental risk and handling the numerous possible scenarios 

•••

Timing prefer to 

and pre

Best ap

Captive self-insu

Financial 

Test and 

Corporate 

Guarantee 

Good, but provides no financial recourse if owner or operator fails

Performs well when used for uncertain and certain risks; however, high financial assurance risk to the public 

••

Equival

instrum

financia

Primary 

is for purespons

Escrow 

Account 

GoodHistorically utilized for well defined short-term costs 

Trust funds may be preferred over the 

mid and long term, funds in escrow would 

likely generate less interest 

Likely to perform poorly when used for uncertain risks; funds do not 

respond to contingencies 

beyond cost estimate 

••

Never uMay no

trust fun

Table 3.11: Which GS phase(s) is the instrument best suited for? 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 

Potentially Effective Combination Weakness 

Minimized Through Combination 

Trust Key Considerations Fund 

Letter of Credit 

Surety Bond Insurance Escrow Account 

Trust Fund X X X 

 Long-term cost 

uncertainty

Associated with emergency and remedial response 

• Trust fund could be used for re

threshold value, then an alternonly when costs exceed the th

• Additional administrative burde

Standby Trust Not considered a stand-alone instrument 

Letter of Credit X X 

Changes in financial 

markets or firm’s credit & long-term cost uncertainty

Affects cost and availability 

• Letter of credit has a fixed valu

exceed that value 

• Trust fund may split up potentia

and site closure; insurance mauncertainty 

• Additional administrative burde

Surety Bond 

(Note differences in 

payment bond vs. 

performance bond) 

X 

Long-term cost 

uncertainty

Associated with emergency and remedial response 

• Surety bond has a fixed value; 

that value 

• Trust fund could be used for re

threshold value, then a paymecosts exceed the threshold 

• Additional administrative burde• Payment bonds, trust funds, l

can be combined for a facility iequal to estimated costs 

• Performance bonds, financia

cannot be combined with other 

Insurance X X 

High premiums

Associated with well-defined activities 

• Firms lower premiums by utiliz

to cover activities up to pre-estcover uncertain costs 

• Provides additional stability an• Additional administrative burde

Financial Test 

and Corporate Guarantee The primary driver for utilizing the financial test and corporate guarantee is to avoid the use of other th

Escrow Account X X X 

 Long-term cost 

uncertainty

Associated with emergency and remedial response 

• Escrow accounts only desirabl• May be desirable to utilize ano

instruments instead of escrow 

Table 3.12: For each individual GS phase, can the specific weaknesses of an instrument be minimized by combinin

mechanism?
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 28 

II. Research and Preliminary Analysis

Notes: 

• All information that can be attributed to a source is cited with a footnote. 

• Analysis is tailored to answer the questions in this matrix, and carries no citations. 

• Information on captive insurance is grouped with third-party insurance. Discussions 

related to captive insurance are called out in bold text. 

A. General Financial Considerations 

1) How is the financial stability of a third-party provider determined? 

Trust Fund & Standby Trust 

• Trust funds and standby trusts are typically provided/administered by regulated financial 

institutions, such as commercial banks, savings and loans, mutual savings banks, credit 

unions, and licensed foreign banks.6

 The financial strength of the trust fund or standby 

trust provider is relatively easy to monitor because oversight is usually already in place.7

The stability of the institutions could be inferred by whether or not the institution (1) is 

regulated and examined by a federal or state agency,8 and (2) is in good standing with its 

respective federal or state financial regulator (depends on state vs. national charter). The 

financial institution’s standing may be inferred by the number (and frequency) of 

enforcement actions taken by the financial regulator. 

Letter of Credit 

• Letters of credit are typically provided by regulated financial institutions, including 

commercial banks, savings and loans, mutual savings banks, credit unions, and licensed 

foreign banks.9 The financial strength of the letter of credit provider is relatively easy to 

monitor because oversight is usually already in place.10 The stability of the institutions 

could be inferred by whether or not the institution (1) is regulated and examined by a 

federal or state agency,11 and (2) is in good standing with its respective federal or state 

regulator (depends on state vs. national charter). The financial institution’s standing may 

be inferred by the number (and frequency) of enforcement actions taken by the financial 

regulator. 

Surety Bond 

• A surety bond is usually issued by an insurance company, however, surety bonds are not 

insurance. The surety becomes liable only when the owner or operator fails to comply 

with requirements.12 The financial strength of the surety bond provider may be relatively 

 

6

 U.S. EPA. 2009. RCRA Subtitle C Financial Assurance Instrument Fact Sheet: Trust Fund. United States Environmental Protection Agency. 

Available online at: http://www.epa.gov/waste/hazard/tsd/td/ldu/financial/documents/tfund-fs.pdf 7

 Boyd, James. 2001. Financial Responsibility for Environmental Obligations: Are Bonding and Assurance Rules Fulfilling Their Promise? 

Resources for the Future. Discussion Paper 01-42. Available online at: http://www.rff.org/documents/RFF-DP-01-42.pdf. 8

 For example, see 40 CFR 144.63(a)(1) or U.S. EPA. 1990. Federal Financial Responsibility Demonstrations for Owners or Operators of Class II 

Oil- and Gas-Related Injection Wells. United States Environmental Protection Agency. EPA 570/9-90-003. Available online at: 

www.epa.gov/R5water/uic/ftp/ffrdooc2.doc 9

 U.S. EPA. 2009. RCRA Subtitle C Financial Assurance Instrument Fact Sheet: Letter of Credit. United States Environmental Protection 

Agency. Available online at: http://www.epa.gov/waste/hazard/tsd/td/ldu/financial/documents/loc-fs.pdf. 10 Boyd. 2001. 

11 For example, see 40 CFR 144.63(d)(1) or U.S. EPA. 1990. 

12 U.S. EPA OIG. 2001. RCRA Financial Assurance for Closure and Post-Closure. 2001-P-007. Available online at 

http://www.epa.gov/oig/reports/2001/finalreport330.pdf. 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 29 

easy to monitor because oversight is usually already in place.13 However, the same 

difficulties in oversight that apply to insurance (e.g., complex finances obscuring credit 

ratings) may apply to surety bonds.14 The stability of these institutions could be inferred 

by whether or not the institution (1) is listed on U.S. Department of the Treasury, Circular 

57015 (consistent with Class I requirements and Class II guidance16) and (2) is in good 

standing with its respective federal or state regulator (depends on state vs. national 

charter). The financial institution’s standing may be inferred by the number (and 

frequency) of enforcement actions taken by the regulator. 

• Circular 570 is published annually and lists firms qualified to write surety bonds, 

provides information on admitted reinsurers, pools and associations, Lloyd's syndicates 

and surety underwriting limitations.17

Insurance 

• Insurance is typically issued by an insurance company. Under Class I Hazardous 

requirements, the insurance company must be “licensed to transact the business of 

insurance, or eligible to provide insurance as an excess or surplus lines insurer, in one or 

more States.”18 The financial strength of insurers may be monitored through credit 

ratings. Companies like A.M. Best and Standard & Poor’s provide in-depth reports and 

ratings such as the Financial Strength Rating to evaluate the financial health of insurance 

companies based on measurements of their ability to pay back claims based on the 

policies and contracts that they hold.19 However, the financial stability of independent 

third-party insurance providers may be difficult to determine because reinsurance or 

fronting may further obscure the financial stability of an insurance policy or provider.20

Financial Test and Corporate Guarantee 

• N/A 

Escrow Account 

• Like trust funds and letters of credit, escrow accounts are typically administered by 

regulated financial institutions, including commercial banks, savings and loans, mutual 

savings banks, credit unions, and licensed foreign banks. The financial strength of these 

institutions is easy to monitor because oversight is usually already in place. The stability 

of these institutions could be inferred by whether or not the institution (1) is regulated 

and examined by a federal or state agency, and (2) is in good standing with its respective 

federal or state regulator (depends on state vs. national charter). The financial 

institution’s standing may be inferred by the number (and frequency) of enforcement 

actions taken by the regulator. 

 

13 Boyd. 2001. 

14 U.S. EPA OIG. 2001. 

15 Department of the Treasury, Circular 570, is available online at: http://www.fms.treas.gov/c570/. 16 For example, see 40 CFR 144.63(b)(1) or U.S. EPA. 1990. Federal Financial Responsibility Demonstrations for Owners or Operators of Class 

II Oil- and Gas-Related Injection Wells. United States Environmental Protection Agency. EPA 570/9-90-003. Available online at: 

www.epa.gov/R5water/uic/ftp/ffrdooc2.doc 17 U.S. EPA. 2009. United States Environmental Protection Agency RCRA Subtitle C Financial Assurance Instrument Fact Sheet: Surety Bond. 

Available online at: http://www.epa.gov/waste/hazard/tsd/td/ldu/financial/documents/sbond-fs.pdf. 18 40 CFR 144.63(e)(1) 

19 Sources available online at: http://www.ambest.com/about/; http://www3.ambest.com/ratings/default.asp; 

http://www.insure.com/articles/interactivetools/ratingslookuptool/sandp/define.jsp; http://www.standardandpoors.com/ratings/insurance/en/us 20 U.S. EPA OIG. 2001. 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 30 

 

21 U.S. EPA. 1996. Subtitle C and D Corporate Financial Test Analysis Issue Paper: Assessment of Financial Assurance Risk of Subtitles C and D 

Corporate Financial Test and Third-Party Financial Assurance Mechanisms. March, 18, 1996. Available online at: 

http://www.epa.gov/osw/nonhaz/municipal/landfill/financial/famc/paper10.pdf. 22 Susan Kendall. 2010. Moody’s Investor Service. Personal communication with Charles Hernick, January 25, 2010. 

23 U.S. EPA. 1996. 

24 U.S. EPA. Unpublished. Notes from EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Trust Funds, Letters of 

Credit, and Surety Bonds with Standby Trust Agreements (April 28, 2009) 

25 Treasury Department. 2009. Department of the Treasury's Listing of Approved Sureties (Department Circular 570). Available online at 

http://www.fms.treas.gov/c570/notes.html. 26 U.S. EPA. Unpublished. Notes from EPA Webcast on Financial Responsibility for Geologic Sequestration Wells: Trust Funds, Letters of 

Credit, and Surety Bonds with Standby Trust Agreements (April 28, 2009) 

2) What weaknesses are associated with the third-party's financial stability 

determination? 

Trust Fund & Standby Trust 

• A trust fund and standby trust may be vulnerable to bankruptcy of the financial institution 

serving as trustee. Limiting acceptable trustees to regulated entities minimizes the risk of 

bankruptcy of the trustee. This reduces the risk of non-payment substantially.21

• Using credit ratings provided by a credit rating agency.22

o Firms are reviewed frequently by credit rating agencies. In recent years, rating 

agencies have made an effort to review institutions seeking credit more 

frequently. 

o No hard and fast rule for how often ratings are done. At a minimum, ratings are 

done every time the institution seeks credit, or every year (or two at the most), 

which ever is more frequent. 

o For institutions seeking credit regularly, this may mean several reviews each year. 

o Although the ratings are public, the reports providing more detail are by 

subscription only. 

Letter of Credit 

• Although bank and saving and loan deposits are covered by federal deposit insurance 

(e.g., escrow account), the courts have explicitly ruled that this coverage does not extend 

to standby letters of credit.23 During the webcast discussion, a participant suggested that 

Regions should resolve situations when a bank changes hands and transfers funds from 

letter of credit to trust.24

Surety Bond 

• A potential weakness associated with the Circular 570 listing for certified surety bonds 

includes annual authorization or listing. Additionally, although underwriting limitations 

for bonds exist, it is possible for these limits to be exceeded by the company if 

reinsurance or co-insurance is used to cover the “excess risk.”25

• During the FR webcasts, a participant noted that A.M. Best's Issuer Credit Rating can be 

used in addition to Standard & Poor’s and Moody’s and stated that bond ratings might 

have historically been a good measure, but now several AAA-rated companies are 

receiving TARP money, so it may not be a good measure anymore. Several webinar 

participants suggested that surety bonds were “head and shoulders” above other financial 

mechanisms, but they also may be less convenient than trust funds and letters of credit.26
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 31 

 

27 U.S. EPA. Unpublished. Notes from EPA Webcast on Financial Responsibility for Geologic Sequestration Wells: Insurance (May 20, 2009). 28 Source online at: http://www.insure.com/articles/interactivetools/ratingslookuptool/sandp/define.jsp 29 U.S. EPA OIG. 2001. 

Insurance 

• Ratings and other measures of financial health of an insurance company will reflect the 

health of the company at the time of the assessment – this determination will lose 

accuracy over time and will need to be revisited periodically.27

• Rating services do not guarantee the financial health of an insurance company nor do 

they address the performance or appropriateness of specific policies for a given purpose. 

They also do not consider deductibles, penalties for cancellation or surrender, timeliness 

of claim payments, or the likeliness of denying claims for reasons such as fraud.28

• During the FR webcasts, a participant noted that the rating agencies know that below 

investment grade ratings (indicating a high credit risk) can have negative consequences 

on financial institutions. Since companies pay the rating agencies, there is some concern 

that the ratings may not always reflect the current company performance accurately 

(potential weakness for all instruments). 

• In the case of captive insurance, in which financial assurance is provided through a 

wholly-owned insurance company subsidiary, the financial stability of the parent firm 

will dictate the ability of the insurance plan to cover necessary remediation costs; this 

poses an unacceptable level of risk. Financial stability of independent third-party 

insurance providers may be difficult to determine. Reinsurance (by the captive) or 

fronting arrangements which transfer risk from a commercial insurer to a captive may 

further obscure the financial stability of a captive insurance policy or provider.29

Financial Test and Corporate Guarantee 

• N/A 

Escrow Account 

• Like a trust fund or letter of credit, an escrow account may be vulnerable to bankruptcy 

of the financial institution providing financial assurance. Limiting financial institutions to 

regulated entities may help minimize the risk of bankruptcy. Additionally, FDIC 

insurance coverage may guarantee that up to $100,000 in funds would be available even 

if the financial institution was insolvent. 

3) Under what conditions are the full estimated costs not covered? How do cost estimates 

inform the establishment/use of the instrument? How well does the mechanism handle 

uncertainty in cost? 

Trust Fund 

• Trust funds are funded with the amount of money estimated to pay for the full cost of 

covered events. If a trust fund is fully funded at its inception, then coverage based on the 

cost estimation will be adequate. Depending on the estimated costs of covered events, 

owners or operators may opt to fund the trust over time through the use of a pay-in 

period. Thus, incompletely funded trusts are relatively common. However, when a payin-period is allowed, if a firm becomes insolvent before a trust is fully funded, the actual 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 32 

 

30 Boyd. 2001. 

31 Boyd. 2001. 

32 U.S. EPA. 1996. 

33 U.S. EPA OIG. 2001. Page 21. 

34 U.S. EPA OIG. 2001. 

35 U.S. EPA. 2009. United States Environmental Protection Agency RCRA Subtitle C Financial Assurance Instrument Fact Sheet: Surety Bond. 

Available online at http://www.epa.gov/waste/hazard/tsd/td/ldu/financial/documents/sbond-fs.pdf 36 U.S. EPA OIG. 2001. Page 19. 

37 Northern Kentucky University and University of Louisville. 2005. Brownfields Insurance for Public Sector-led Development Projects: 

Experience and Methods. http://www.brownfieldstsc.org/pdfs/bf_case_studies_report.pdf 38 U.S. EPA OIG. 2001. 

amount of available coverage will be inadequate.30 Accordingly, shorter term pay-in 

periods are preferable.31

• Investment risks will also impact the ability of the instrument to cover all estimated costs. 

The assurance risk of a trust fund invested with a low risk investment policy (e.g., 

Treasury Bills) is negligible (i.e., virtually assures that at least 100 percent of the invested 

funds will be available when needed). The moderate to high risk investment policy (e.g., 

stocks, futures, and stock or commodity options) poses some degree of assurance risk, but 

the difference is not significant.32 A fully funded trust fund invested conservatively has 

virtually no risk of failure, but this low risk depends heavily on an accurate cost estimate. 

Typically, the major risk is that a trust fund will not be fully funded when the facility 

becomes insolvent.33

Standby Trust 

• N/A. Standby trust funds are not considered stand alone instruments. 

Letter of Credit 

• The amount of credit required for letters of credit depends on the cost estimate of covered 

events. Owners or operators may have an incentive to underestimate costs in order to 

lower the amount of credit they hold as an accounting liability.34

Surety Bond 

• Surety bonds also rely heavily on accurate cost estimates. Under RCRA, if the cost 

estimate increases on a surety bond the Company must either increase the value of the 

bond, or obtain alternate financial assurance mechanisms to make up the shortfall. If the 

estimates decrease, the Regulator may approve a reduction in the face value of the surety 

bond.35 

• The Office of Inspector General (OIG) noted that litigation may result if an insurance 

company acting as the surety refuses to comply with the terms of the bond. The delays 

and resources spent on litigation have negative effects on environmental results, resulting 

in inadequate funds available to pay for both performance of covered activities and any 

litigation fees.36 

Insurance 

• In the process of procuring insurance, owners or operators will typically approach 

potential insurers with information about their site, the coverage they are seeking, and the 

range of pricing they anticipate. Then the insurers will respond to indicate what type of 

policy they are willing to offer to the owner or operator.37 Owners or operators as insured 

entities have an incentive to underestimate costs in order to lower premiums or other 

payments.38 However, at the time that the owner or operator applies for the insurance 

policy, they will often be required to attest to the accuracy of the information that they 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 33 

 

39 Northern Kentucky University and University of Louisville. 2005. 40 U.S. EPA. 2009. Summary of EPA Webinars on Financial Responsibility for Geologic Sequestration Wells. Available online at: 

http://www.epa.gov/safewater/uic/pdfs/meetings_uic_summarywebinars_financial_responsibility.pdf 41 U.S. EPA. 1988. FINANCIAL ASSURANCE. Available online at: 

http://yosemite.epa.gov/osw/rcra.nsf/ea6e50dc6214725285256bf00063269d/e4c040961571e0778525670f006bc76a!OpenDocument. 42 U.S. EPA OIG. 2005. Continued EPA Leadership Will Support State Needs for Information and Guidance on RCRA Financial Assurance. 

Report No. 2005-P-00026. http://www.epa.gov/oig/reports/2005/20050926-2005-P-00026.pdf. 43 Boyd. 2001. 

44 Northern Kentucky University and University of Louisville. 2005. 45 U.S. EPA OIG. 2001. Pages 10-11. 

have provided – any false information or omissions can result in the cancellation of the 

policy by the insurance company. Insurance underwriters will also do their own risk 

analysis (i.e., cost estimation and probability assessment) based on their own experience 

and site-specific characteristics to determine an appropriate cost for a policy.39

• UIC Class I Hazardous Wells: Require that the “face amount” of the policy must equal at 

least the current cost of closure or post-closure, i.e. the policy must guarantee that funds 

will be available for closure or post-closure whenever it occurs. The “face amount” is the 

total amount the insurer is obligated to pay.40

• If an owner or operator runs multiple facilities but insurance does not account for 

multiple facilitates, insurance coverage may not be sufficient to satisfy all activities. For 

example, owners or operators of hazardous waste treatment, storage or disposal facilities 

are required to have liability coverage for accidental occurrences. The amount of 

insurance required is per owner or operator, regardless of the number of facilities 

operated.41

• The regulator’s ability to use funds may be limited by an insurance company’s 

procedures and payment schedule, such as reimbursing the regulator for cleanup costs 

instead of providing direct access to the funds. States have also expressed concern that 

drawing on an insurance policy may require litigation, especially if the facility has been 

abandoned or the company is in bankruptcy.42

• Exclusions may be included to reduce the insurer’s risk exposure and, correspondingly, 

the customer’s cost of coverage. However, these voluntary coverage limitations are 

inappropriate for the purposes of environmental assurance. Coverage limitations, though 

potentially desirable for the customer and insurance provider, undermine the ability to 

recover costs and ensure future environmental obligations. Therefore, many state 

programs rely on the use of boilerplate endorsements that must accompany instruments 

used to demonstrate coverage. These endorsements require the insurer to acknowledge 

the scope of coverages required by regulation and rule-out any coverage limiting 

exclusions.43

• Specific insurance policies called cost cap policies could help to guard the insurer against 

expenses that are beyond the originally estimated costs for the project. Cost cap policies 

can be used for a remediation project where the insured pays for a percentage of the clean 

up costs (called a self-insured retention) and the insurer paying the excess costs.44

Financial Test and Corporate Guarantee 

• EPA OIG discovered cases in which corporations that were successful in a Corporate 

Financial Test in one year later became financially unstable. A firm using the financial 

test to satisfy obligations cannot guarantee it will have funds for closure and post-closure 

in the event that it becomes insolvent. For conducting closure and post-closure, the public 

bears the risk of the firm’s insolvency.45
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 34 

 

46 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

47 Boyd. 2001. 

48 Communication with Jeff Green, Wealth Management Group at Citizens Bank. 49 U.S. EPA OIG. 2001. 

50 U.S. EPA. 1983. Service Charges on Standby Trust Funds. 530-SW-83-001J. Available online at: 

http://yosemite.epa.gov/osw/rcra.nsf/ea6e50dc6214725285256bf00063269d/AB6301907BFC7CC08525670F006BBA6A/$file/12147.pdf. 51 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

52 Boyd. 2001. 

• During the FR webcasts, participants agreed that fully-estimated costs would not be 

covered by self-insurance mechanisms unless financial tests and corporate guarantees are 

based on highly accurate banking information about the companies, and a conservative 

approach to designing the tests should be followed to be sure that only the strongest 

companies are selected to use this mechanism.46

Escrow Account 

• An escrow account, like a trust fund, would be funded with the amount of money 

estimated to pay for the full cost of covered events. Depending on the terms of the 

agreement, an escrow account could be fully funded at its inception, so coverage based 

on the cost estimation would be adequate. While there is some documented risk involved 

with the mismanagement of the escrow funds by a third-party, the investment risk would 

be lower than for a trust fund. Placing the funds in escrow is analogous to placing the 

funds in a low interest (e.g., 0.5%) savings account at a financial institution. 

4) What is the relative cost of the instrument? What factors drive the costs associated with 

the securing/maintaining the instrument? 

Trust Fund 

• Trust funds are funded by the owner or operator and thus are not technically purchased,47

but instead are administered by a third-party. Therefore, the total cost of the trust fund is 

the full cost of the environmental obligation for which financial assurance is being 

demonstrated plus the overhead costs associated with the instrument. Set up costs 

including legal fees may be high.48 

• Trust fund costs may be incurred at one time, or if a pay-in period is allowed, annual 

costs are determined by the pay-in schedule for the fund (until the trust is fully funded).

49

• Trustee’s fees can be expected to vary depending on the specific institution chosen, the 

amount of funds held in trust, the extent to which the owner or operator uses other 

services of the institution, and the extent and type of investment activity and trustee 

involvement.50 

• During the FR webcasts, participants mentioned that smaller operators benefit from trust 

funds with a pay-in period it gives them the opportunity to manage the financial 

requirement over time. Pay-in periods are limited by EPA (2-3 years in one region) and 

enforcement action taken if companies fail to comply.51

• After obligations are fulfilled, trust assets are returned to the firm. It is essential that 

regulators monitor payments into the trust.52
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 35 

 

53 U.S. EPA. 1983. Service Charges on Standby Trust Funds. 530-SW-83-001J. Available online at: 

http://yosemite.epa.gov/osw/rcra.nsf/ea6e50dc6214725285256bf00063269d/AB6301907BFC7CC08525670F006BBA6A/$file/12147.pdf. 54 U.S. EPA. 2009. Notes from Webcasts on Financial Responsibility for Geologic Sequestration Wells. Unpublished notes from April 28, 2009 

webcast. 

55 Boyd. 2001. 

56 Communication with Jeff Green, Wealth Management Group at Citizens Bank. 57 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

58 U.S. EPA OIG. 2001. Page 22. 

59 U.S. EPA. 2009. United States Environmental Protection Agency RCRA Subtitle C Financial Assurance Instrument Fact Sheet: Surety Bond. 

Available online at: http://www.epa.gov/waste/hazard/tsd/td/ldu/financial/documents/sbond-fs.pdf. 60 Communication with Paul Patalano, DeSanctis Insurance Agency. 

Standby Trust 

• Trustee’s fees can be expected to vary depending on the specific institution chosen, the 

amount of funds held in trust, the extent to which the owner or operator uses other 

services of the institution, and the extent and type of investment activity and trustee 

involvement. The operator of a hazardous waste management facility established a letter 

of credit and a stand-by trust fund (containing $1 to keep it active) and the trustee (i.e., 

the bank) then levied a $1,500 per annum service charge on the stand-by trust fund.53

• Standby trust costs vary from $900 - $3,000 per year.54

• Standby trust costs are essentially an annual fee to keep the trust open so that it can be 

utilized when needed. 

Letter of Credit 

• Banks may require collateral or deposits before providing a letter of credit, depending on 

the purchaser’s financial health. Letters of credit are typically priced as a small fraction 

of their face value and are granted for annual terms. Typically, letters of credit are 

automatically extended after one year, subject to the purchaser’s continued good credit 

and adherence to contract terms.55

• The premium for a letter of credit is typically 1.5 to 2 percent; if the loan is drawn on, a 

market interest rate, of approximately 6 to 8%, is applied to the loan.56 

• Letters of credit can require $500,000 to $1,000,000, according to a webcast 

participant.57

• A letter of credit is classified as an accounting liability, and limits the holder’s borrowing 

power.58 Therefore, the relative cost may include more than the actual cost of securing 

the mechanism. 

Surety Bond 

• The cost of obtaining a surety bond is a function of its credit worthiness (or financial 

solvency). The Surety generally places emphasis on prequalification. With either type of 

surety bond, the Surety retains the right to pursue reimbursement from the Company for 

funds paid on its behalf. Similar to a bank with a Letter of Credit, the Surety provides the 

Company with its financial backing. In return for the Surety's guarantee, the Surety 

generally receives a premium based on the face value of the bond.59 The premium is 

typically around 2.5 percent of the contract price, and is based on a sliding scale (e.g., 

2.5% is applied to the first $500,000 of a $1,000,000 surety bond, while 1.5% is applied 

to the remaining $500,000).

60 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 36 

 

61 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09). 

62 Gerard, D, E.J, Wilson. 2008. Journal of Environmental Management 90 (1097-1105). Available online at 

https://www.researchgate.net/journal/0301-4797_Journal_of_Environmental_Management 63 Boyd. 2001. 

64 Boyd. 2001. 

65 U.S. EPA OIG. 2001. 

66 U.S. EPA. Unpublished. Notes from EPA Webcast on Financial Responsibility for Geologic Sequestration Wells: Insurance (May 20, 2009). 

• One participant mentioned that although surety bonds have historically been thought of as 

the go-to mechanisms for liability coverage, the participant offered the opinion that the 

availability of multiple mechanisms could help keep prices down.61

• As compared to insurance, surety bonds or letters of credit provide bonding on the basis 

of credit principles, and a bond’s expenses are covered by a bond premium set by the 

underwriters. Insurance on the other hand, has premiums based on expected payments, so 

if the expected costs for a GS project are unpredictable, then the premiums could be 

insufficient to cover the potential costs, and underwriters could refuse to write the policy 

or else require substantial collateral. For example, hardrock mining premiums are often 1-

5% of the value of the bond with smaller firms having to pay 15-20% more and large 

firms paying less than 1% to obtain a surety bond. TX, CA and IL allow operators to post 

cash, surety bonds or certificates of deposit (CDs) to cover plugging at a cost ranging 

from $4000-$15,000 per well or “blanket” bonds to cover a whole well field up to 50 

wells or so. CA has surety bonds, cash or CDs worth $17 million on 240 bonds since 

January 2004, and 85% used cash to cover 49,153 wells and 502 orphaned wells. Illinois 

used surety bonds, cash, CDs and letters of credit for 32,100 wells of which an estimated 

4,000 were abandoned. Texas used letters of credit, surety bonds and cash for a total $221 

million (5% cash, 32% surety bonds, 63% letters of credit and more are shifting towards 

surety bonds since new state regulations came into effect). Texas has 10,547 orphaned 

wells which may have had to be plugged using bond funds. Each state has its own 

provisions for when to release a bond (i.e., prior to closure or after proof of plugging, 

etc.).

62

• Typically, bonds are used to guarantee performance of a known, future obligation. Bond 

agreements typically assume that the principal bears ultimate responsibility for the loss; 

the bond provider pays only if the principal is unable to do so because of insolvency or 

abandonment. Consequently, bond pricing is primarily a function of the principal’s 

bankruptcy risk, and bonds tend to be priced as a simple percentage of their face value.63

• When bonds are issued to satisfy regulatory obligations, the coverage mandated by the 

regulations defines the bond provider’s obligation. In cases where the regulatory 

requirement and the bond’s language are in conflict, courts tend to favor the regulatory 

definition of coverage. Courts also accord little credence to a surety’s claim of 

misunderstanding a surety agreement.64

Insurance 

• The cost of an insurance policy is driven by the premiums collected by the insuring 

party.65 Premium costs are highly site-specific and depend on the underwriter’s 

assessment of risks. Insurance policies would be developed specifically for each project; 

sites that are better suited for GS would be assessed as having lower risks of failure and 

would be priced accordingly.66
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 37 

 

67 Porter, Winston. 1986. Liability Regulations. EPA. Available online at: 

http://yosemite.epa.gov/osw/rcra.nsf/ea6e50dc6214725285256bf00063269d/1d2a50fa09eea3148525670f006c0081!OpenDocument 68 Boyd. 2001. 

69 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

70 Communication with Jeff Green, Wealth Management Group at Citizens Bank. 71 For example, see 1982 RCRA guidance entitled “Financial Assurance for Closure and Post Closure Guidance Manual” or U.S. EPA. 1990. 72 For example, see 1982 RCRA guidance entitled “Financial Assurance for Closure and Post Closure Guidance Manual” or U.S. EPA. 1990. 

• Insurers generally require a risk assessment prior to issuing a policy. Owners or operators 

generally pay for the risk assessment to be conducted, which can prove to be a financial 

burden for some firms.67

• Insurers typically pay the claims of both solvent and insolvent clients. This means that 

insurance is priced to reflect a greater likelihood and range of possible claims. 

Consequently, insurance is usually priced with much greater sensitivity to the risks 

presented by the insured than other mechanisms such as bonds.68

• During the FR webcasts, a participant expressed concern that with captive insurance

companies were more likely to use “smoke and mirror” tactics to obtain approval because 

they could use company data as proof for their financial stability. 

Financial Test and Corporate Guarantee 

• During the FR webcasts, participants tended to agree that the self-insurance option was 

less expensive for companies because they did not have to tie up money in expensive 

financial mechanisms.69

Escrow Account 

• Like trust funds, escrow accounts are funded by the owner or operator and thus are not 

technically purchased, but instead are administered by a third-party. Therefore, the total 

cost of the escrow account is the full cost of the environmental obligation for which 

financial assurance is being demonstrated plus the overhead costs. Escrow accounts 

typically have a defined administrative cost (included in the escrow agreement) 

associated with the account that is paid to the third-party administrator on an annual 

basis. The costs to establish the account average around $5,000, and some financial 

institutions may have a minimum threshold (e.g., $20,000 for unmanaged, and 

$1,000,000 for managed accounts).

70 Depending on how the account is managed, escrow 

accounts may accrue enough interest to cover administrative costs, but will certainly 

accrue less interest than a trust fund. 

5) What is the historical use of the instrument (e.g., variance in use over time)? For 

environmental obligations? 

Trust Fund 

• Trust funds have been used to demonstrate financial responsibility under RCRA since 

approximately 1982 and have been recommended in guidance for Class II wells since 

1990.71

Standby Trust 

• Standby trust funds are not considered stand alone instruments, but have been used as a 

component of financial responsibility demonstrations under RCRA since approximately 

1982 and have been recommended in guidance for Class II wells since 1990.72
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 38 

 

73 For example, see 1982 RCRA guidance entitled “Financial Assurance for Closure and Post Closure Guidance Manual” or U.S. EPA. 1990. 74 U.S. EPA OIG. 2001. Page 57. 75 Gerard, D, E.J, Wilson. 2008. Journal of Environmental Management 90 (1097-1105). Available online at 

https://www.researchgate.net/journal/0301-4797_Journal_of_Environmental_Management 76 For example, see 1982 RCRA guidance entitled “Financial Assurance for Closure and Post Closure Guidance Manual” or U.S. EPA. 1990. 77 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells. 78 U.S. EPA. Unpublished. Notes from EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Trust Funds, Letters of 

Credit, and Surety Bonds with Standby Trust Agreements (April 28, 2009) 

79 U.S. EPA OIG. 2001. Page 59. 

80 For example, see 1982 RCRA guidance entitled “Financial Assurance for Closure and Post Closure Guidance Manual” or U.S. EPA. 1990. 81 U.S. EPA. 2009. Summary of EPA Webinars on Financial Responsibility for Geologic Sequestration Wells. Available online at: 

http://www.epa.gov/safewater/uic/pdfs/meetings_uic_summarywebinars_financial_responsibility.pdf 82 For example, see 1982 RCRA guidance entitled “Financial Assurance for Closure and Post Closure Guidance Manual” or U.S. EPA. 1990. 83 U.S. EPA OIG. 2001. 

Letter of Credit 

• Letters of credit have been used to demonstrate financial responsibility under RCRA

since approximately 1982 and have been recommended in guidance for Class II wells 

since 1990.73

• Letters of credit are widely used for RCRA financial assurance.74

Surety Bond 

• Bonds are required under the Surface Mining Control and Reclamation Act of 1977 for 

coal mining projects where they are known as reclamation bonds.75

• Surety bonds have been used to demonstrate financial responsibility under RCRA since 

approximately 1982 and have been recommended in guidance for Class II wells since 

1990.76

• In areas with many Class II wells, banks may be accustomed to issuing surety bonds. 

Bonds may be used often because they are easy for operators to obtain and administer. 

They are frequently used during permitting.77

• Surety bonds are used regularly, especially in direct implementation programs.78 Widely 

used for RCRA financial assurance.79

Insurance 

• Insurance has been used to demonstrate financial responsibility under RCRA since 

approximately 1982. However, it was not recommended in guidance for Class II wells in 

1990.80

• Insurance has been used for environmental risk management since the 1957 PriceAnderson Act, which contained financial requirements for nuclear projects. Licensees are 

required to obtain maximum amount of private liability insurance available on the 

market, currently $300 million (or show proof of comparable resources); licensees are 

strictly liable for “extraordinary nuclear occurrences.” 81

Financial Test and Corporate Guarantee 

• Financial tests have been used to demonstrate financial responsibility under RCRA since 

approximately 1982 and have been recommended in guidance for Class II wells since 

1990.82

• Widely used for RCRA financial assurance.83

Escrow Account 

• Escrow accounts have not been used for UIC well financial responsibility in the past, but 

have been used by the courts and by states for two financial responsibility purposes: first, 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 39 

 

84 Communication with Alan Slater of the MA DEP. 

85 Boyd. 2001. 

in many environmental liability court cases, firms have been compelled to provide funds 

to cover remediation costs of their contaminated properties; these funds are often held in 

an escrow account until the remediation can be performed. However, the escrow accounts 

are only active during the remediation period, which would typically be much shorter and 

better defined than some GS phases. Second, escrow accounts have been used by a few 

states (e.g., Massachusetts, Kentucky, and Michigan) as a financial mechanism for 

environmental activities when securing some type of permit. For example, in 

Massachusetts (MA), for a firm to secure a ground water discharge permit, it must secure 

the costs for the immediate repair or replacement of its privately owned wastewater 

treatment facility (e.g., at a mixed use residential/commercial building) in an escrow 

account. The agreement remains in place as long as the firm holds the permit from the 

state (although it is unclear how long this may be). The MA Department of 

Environmental Protection used letters of credit as a financial mechanism for this permit 

program, however due to issues with expiring or lagging letters of credit, the MA DEP 

now uses escrow accounts because they are more secure, and easier to transfer and 

monitor. The state has not yet needed to draw on the accounts as a result of enforcement 

actions.84 

• The firm may also use a trust agreement for a capital reserve account as an alternate 

financial mechanism. As a second example, in Nebraska, the Department of 

Environmental Quality requires that waste tire haulers provide financial assurance for the 

removal, closure, and abatement of waste tires and materials. The waste tire hauler may 

use an escrow account as the financial assurance mechanism. The escrow agreement 

remains in place until the termination of the account by all parties to the agreement, or 

until the firm is no longer required to demonstrate financial responsibility under Nebraska 

law. In either example, the magnitude of the dollar amount in escrow and the time period 

that the funds are in escrow is likely to be significantly shorter than for some GS 

activities. 

6) Under what scenario is the instrument best or most commonly utilized (e.g., size of firm, 

cost, uncertainty)?

Surety Bond 

• Typically, bonds are used to guarantee performance of a known, future obligation. Bond 

agreements typically assume that the principal bears ultimate responsibility for the loss; 

the bond provider pays only if the principal is unable to do so because of insolvency or 

abandonment. Consequently, bond pricing is primarily a function of the principal’s 

bankruptcy risk, and bonds tend to be priced as a simple percentage of their face value.85

Insurance 

• It is in the public interest that the use of claims-made policies (those that provide 

coverage for claims presented to the insured and reported to the insurer during the 

coverage period) be accompanied by additional safeguards to provide assurance over 

long timeframes. For example, regulations may require that the coverage period of a 

claims-made policy be extended beyond the policy’s cancellation date. Occurrence 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 40 

 

86 Boyd. 2001. 

87 Boyd. 2001. 

88 U.S. EPA OIG. 2001. 

89 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

90 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

91 U.S. EPA OIG. 2001. 

policies cover claims arising even after the policy period has ended, providing the cause 

of the claim occurred during the policy period. Insurers like to avoid occurrence 

coverage, as a way to reduce the scale and enhance the predictability of their exposures. 

From the standpoint of public policy, however, occurrence coverage addresses the goals 

of assurance better than claims-made coverage.86

• Uncertain activities (e.g., future ground water contamination) tend to be assured via 

insurance coverage.87

Financial Test and Corporate Guarantee 

• Under RCRA, firms must have a net worth greater than $10 million.88

• During the FR webcasts, participants indicated that a $10 million threshold seemed low 

relative to a GS project for coverage under self-insurance. Many agreed that third-party 

mechanisms provide more protection than self-insurance. Regulators who use selfinsurance have found that additional time is required to regulate due to the need to follow 

details about the company’s financial health, and there are sometimes multi-level 

companies who have different responsibilities within the company regarding selfinsurance. Also, within days of declaring bankruptcy, funds from the company are often 

no longer available to take care of a site. Finally, numbers can be manipulated within a 

company’s record to make them look more financially sound, so accuracy in evaluating 

actual financial strength can be difficult.89 

Escrow Account 

• Escrow accounts are typically used for short-term transactions in real estate, mergers and 

acquisitions, or hard asset loans, to compel the buyer to finalize the transaction. Based on 

current analysis, there is little information available to characterize how an escrow 

account is most commonly utilized for environmental liability or if escrow accounts are 

commonly utilized for long-term transactions. It is expected that a firm would have a 

stronger incentive to use trust funds or bonds, which are likely to accrue more interest 

over time, and be characterized as a “better” long-term investment for the firm. 

7) Under what conditions does the instrument totally fail (e.g., cancelation or non-renewal, 

breach of contract, misrepresentation)? 

Trust Fund 

• During the FR webcasts, a participant suggested that a trust fund must be fully funded to 

be acceptable.90

• EPA OIG recommends that the third party providing financial assurance be financially 

independent from the activity being covered.91
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 41 

 

92 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

93 U.S. EPA OIG. 2001. 

94 Boyd. 2001. 

95 U.S. EPA OIG. 2001. 

96 40 CFR 144.63(5) 

97 U.S. EPA OIG. 2001. RCRA FA review. http://www.epa.gov/oig/reports/2001/finalreport330.pdf 98 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

99 Boyd. 2001. 

100 Boyd. 2001. 101 U.S. EPA OIG. 2001. 

Standby Trust 

• The standby trust may fail if it is allowed to close prior to being funded and is therefore 

not available when needed. 

Letter of Credit 

• A letter of credit could fail when a bank changes ownership and the letter of credit is 

transferred to a trust, but as long as the rating of the new bank is good, the financial 

responsibility demonstration could still be acceptable.92

• If the issuing institution fails, the credit is not available to fund remediation activities. 

Letters of credit are not insured by the FDIC.93

• Designed properly, beneficiaries can draw on the letter of credit if its term is not extended 

and if a replacement form of assurance is not put in place.94 

• EPA OIG recommends that the third party providing financial assurance be financially 

independent from the activity being covered.95

• To avoid instrument failure by cancellation or non-renewal, under RCRA for Class I

hazardous wells, the letter of credit must be irrevocable and issued for a period of at least 

1 year. The letter of credit must provide that the expiration date will be automatically 

extended for a period of at least 1 year unless, at least 120 days before the current 

expiration date, the issuing institution notifies both the owner or operator and the 

Regional Administrator by certified mail of a decision not to extend the expiration date. 

Under the terms of the letter of credit, the 120 days will begin on the date when both the 

owner or operator and the Regional Administrator have received the notice.96

Surety Bond 

• If a surety issues a large number of bonds to facilities in one corporation, the surety bond 

risk might not be adequately diversified in terms of reinsurance.97 A surety bond could 

fail if bond ratings are wrong.98 

• Many bonds are “penal bonds” that authorize the forfeiture of an entire bond amount for 

failure to perform as agreed. As a result, even though the performance failure may have a 

relatively small cost, a larger bond sum can be collected by the government. This is by 

design, however, and is agreed upon mutually by the parties before the fact. Accordingly, 

penal bond collections represent a less worrisome form of confiscation, and more a 

penalty used to motivate compliance with performance standards.99

• Despite regulations that typically guard against the possibility of assuror insolvency by 

requiring U.S. Treasury certification of bond issuers, assurer provider bankruptcies are 

relatively common, and there is no insurance against an assuror’s financial failure.100

• Refusal of issuing entity to honor bond requirements.101
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 42 

 

102 U.S. EPA. 1996. 103 40 CFR 144.63(b)(8) or (c)(8) 104 U.S. EPA. 2009. United States Environmental Protection Agency RCRA Subtitle C Financial Assurance Instrument Fact Sheet: Surety Bond. 

Available online at http://www.epa.gov/waste/hazard/tsd/td/ldu/financial/documents/sbond-fs.pdf 105 U.S. EPA OIG. 2001. 106 Boyd. 2001. 107 40 CFR 144.63(e)(8) 108 U.S. EPA. 2009. Summary of EPA Webinars on Financial Responsibility for Geologic Sequestration Wells. Available online at: 

http://www.epa.gov/safewater/uic/pdfs/meetings_uic_summarywebinars_financial_responsibility.pdf 109 Boyd. 2001. 110 Marcia Williams. 1987. EPA Guidance On Exclusions For Pre-Existing Conditions In RCRA TSDF Insurance Policies. Available online at: 

http://yosemite.epa.gov/osw/rcra.nsf/ea6e50dc6214725285256bf00063269d/bc5ce94e1913f2b88525670f006c1844!OpenDocument

• The overall assurance risk for EPA's surety bond mechanism is a function of the 

assurance risk for all firms and the failure rate for Circular 570 firms. Assurance risk is 

extremely low for firms in any net worth category.102

• To avoid instrument failure by cancellation or non-renewal, under RCRA, the Surety is 

required to notify both the Company and the Regulator by certified mail of its intent to 

cancel the bond. Under the terms of the bond, the surety may cancel the bond by sending 

notice of cancellation by certified mail to the owner or operator and to the Regional 

Administrator. Cancellation may not occur, however, during 120 days beginning on the 

date of the receipt of the notice of cancellation.103

• If the Company fails to provide alternate financial assurance and receive written approval 

of the new mechanism by the Regulator within 90 days, the Regulator can direct the 

Surety to pay up to the amount guaranteed by the bond into the standby trust fund.104 

• EPA OIG recommends that the third party providing financial assurance be financially 

independent from the activity being covered.105

Insurance 

• Instruments should not be easily withdrawn by providers if costly environmental 

problems develop. In most situations, insurers and those insured voluntarily agree on 

cancellation terms and coverage exclusions. For instance, nonpayment of premiums is 

typically grounds for cancellation.106 For Class I Hazardous wells, “the insurer may not 

cancel, terminate, or fail to renew the policy except for failure to pay the premium.” 107

• UIC Class I Hazardous Wells the policy “must contain a provision allowing assignment 

of the policy to a successor owner or operator” that depends on the consent of the 

insurer.108

• One concern associated with insurance is that the policy may feature “exclusions” that 

weaken coverage. For this reason, regulators must carefully verify that policies fully 

cover the kinds of claims subject to assurance requirements.In general, contract law 

offers protections against the use of exclusions that are not voluntarily agreed to by the 

insured or by the beneficiaries of assurance. Misrepresentations of an insurance contract 

by an insurer (e.g., coverage when coverage was in fact excluded) are not tolerated.109

RCRA requires that insurers do not include pre-existing conditions exclusions that would 

invalidate the purpose of the policy and/or are based on suspected rather than known preexisting conditions. Pre-existing conditions exclusions must be specifically based on 

factual information known at the time the contract was entered into.110 

• During the FR webcasts, one concern was that if an insurance company feels that the 

owner/operator did not disclose all of the available information about the project, then the 

policy is void from the beginning. There is a court case involving Zurich North America 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 43 

 

111 U.S. EPA. Unpublished. Notes from EPA Webcast on Financial Responsibility for Geologic Sequestration Wells: Insurance (May 20, 2009) 112 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

113 U.S. EPA OIG. 2001. 114 Boyd. 2001. 115 U.S. EPA OIG. 2001. 116 U.S. EPA OIG. 2001. 117 Boyd. 2001. 118 U.S. EPA OIG. 2001. 119 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

and EPA. UIC does not have a provision for cancellation with notice for fraud.111

Webinar participants indicated that insurance companies can cancel for non-payment of 

premiums, and non-payment would likely occur in the case of bankruptcy112.

• EPA OIG recommends that the third party providing financial assurance be financially 

independent from the activity being covered.113

• Increased attention should be given to the use of captive insurance plans. Although 

captives are entirely appropriate as a risk-reduction tool for firms, they are inappropriate 

as a demonstration of financial assurance because the captive insurer’s financial strength 

is tied to that of the parent company. Thus, unlike a third-party insurer, a captive insurer’s 

ability to absorb claims is weakest when its strength is most needed—upon the 

insolvency of the parent. Some, but not all, assurance programs prohibit the use of 

captives as an assurance instrument. A problem for regulators is that identification of 

captive policies can be difficult because policies do not necessarily specify the insurer’s 

structure.114 Captive insurance will fail if parent company becomes insolvent.115 As

discussed in question #3, Captive insurance is prohibited as a financial assurance 

mechanism under Subtitle C of RCRA in the following states: AL, NY, TX, and VA. It is 

allowed in CA, CT, MO, OH, and WA.116

Financial Test and Corporate Guarantee 

• The problem with corporate guarantees is that there exists no financial instrument 

dedicated to environmental obligations. The degree to which a firm’s assets are obligated 

to other liens or creditors may not be readily apparent. From a bookkeeping standpoint 

alone, it is very difficult to assess all the environmental obligations attached to a single 

firm. Firms often operate multiple facilities with multiple obligations in multiple 

jurisdictions. Adding up all these obligations and accounting for them properly is crucial 

for assessing a firm’s ability to internalize costs years in the future. Environmental 

assurance accounting is a problem not only for regulators untrained in its subtleties, but 

for accountants themselves.117

• Bankruptcy of entity that has passed a Corporate Financial Test.118 

• A participant stated that bond ratings might have been a good measure a year ago, but 

now several AAA-rated companies are receiving TARP money, so it may not be a good 

measure anymore.119

• If a company is bankrupt, some alternative mechanism to pay would be necessary, and 

financial tests are difficult to conduct on multi-level companies because it may not be 

clear which level of the company is responsible. Other drawbacks cited by webcast 

participants included the timeframe and need for updating the test over time. Some 

participants were concerned that if self-insurance (financial test or corporate guarantee) 

was eliminated as an option, the viability of GS may be limited, but self-insurance used 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 44 

 

120 U.S. EPA. Unpublished. Notes from EPA Webcast on Financial Responsibility for Geologic Sequestration Wells: Self-Insurance: Financial 

Test and Corporate Guarantee (May 26, 2009) 

121 U.S. EPA. 1984. Parent Company Guarantee For Newly Independent Company. Available online at: 

http://yosemite.epa.gov/osw/rcra.nsf/ea6e50dc6214725285256bf00063269d/a78bf6cc0672f5e08525670f006bbda8!OpenDocument 122 Based on DOE Regional Carbon Sequestration Partnership (RCSP) sites and other known sites. 123 Kuipers, Jim. 2003. Putting a Price on Pollution – Financial Assurance for Mine Reclamation and Closure. Mineral Policy Center. MPC Issue 

Paper No. 4. March 2003. http://www.earthworksaction.org/pubs/PuttingAPriceOnPollution.pdf 124 Kuipers. 2003

within a framework of industry-wide pooling of resources, could work. A participant 

noted that self-insurance may be sufficient while a company is doing very well 

financially, but if economic times change then failure is a possibility. A participant cited 

a case where a company passed the test and then nine months later went bankrupt. 

Therefore, participants argued that the financial test or corporate guarantee must be 

designed to be very conservative in selecting companies for self-insurance so that only 

the strongest companies are allowed to use self-insurance.120

• If a subsidiary uses a Corporate Guarantee from its parent company to provide RCRA

financial assurance and the subsidiary subsequently becomes autonomous from the parent 

company, the Corporate Guarantee no longer satisfies RCRA financial assurance 

requirements. New financial assurance must be in place at the time the subsidiary 

becomes independent.121

Escrow Account 

• To prevent failure, the third party providing financial assurance through the escrow 

account should be financially independent from the activity being covered. 

B. Considerations for GS 

8) Do states prohibit the use of certain mechanisms? How accessible is the instrument in 

states where GS is likely to take place? 

Trust Fund 

• GS is likely to continue taking place in at least 18 states (AL, AZ, CA, CO, IL, KY, MI, 

MS, MT, NM, ND, OH, TX, UT, VA, WA, WV, and WY).

122 It does not appear that any 

of these states will prohibit the use of trust funds to cover environmental and other risks. 

It seems that this form of assurance (along with other cash /cash equivalents – i.e. letter 

of credit) is a preferred method as it is a very secure and many times is readily 

available.123 

• As trust funds are funded by the Firm itself, they are very accessible if the firm has the 

capital to contribute to cash or cash equivalents. Kuipers (2003) mentions for projects 

with long-term closure costs, forms of cash are the most practical way to assure financial 

responsibility.124
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 45 

 

125 Based on DOE Regional Carbon Sequestration Partnership (RCSP) sites and other known sites. 126 Based on DOE Regional Carbon Sequestration Partnership (RCSP) sites and other known sites. 127 State of Washington. 2008. Proposed Rule (Washington Administrative Code, Chapter 173-218, Underground Injection Control Program) 

Available online at http://www.leg.wa.gov/pub/billinfo/2007-08/Pdf/Bills/Senate%20Bills/6001-s.pdf 128 Kuipers. 2003 129 Based on DOE Regional Carbon Sequestration Partnership (RCSP) sites and other known sites. 130 Source online at: http://www.gao.gov/new.items/d07152.pdf 131 U.S. EPA OIG. 2001. 132 Based on DOE Regional Carbon Sequestration Partnership (RCSP) sites and other known sites. 133 Kuipers. 2003.

Letter of Credit 

• GS is likely to continue taking place in at least 18 states (AL, AZ, CA, CO, IL, KY, MI,

MS, MT, NM, ND, OH, TX, UT, VA, WA, WV, and WY).

125 It does not appear that any 

of these states will prohibit the use of Letters of credit. 

Surety Bond 

• GS is likely to continue taking place in at least 18 states (AL, AZ, CA, CO, IL, KY, MI,

MS, MT, NM, ND, OH, TX, UT, VA, WA, WV, and WY).

126 It does not appear that any 

of these states will prohibit the use of surety. The State of Washington specifically allows 

surety bonds for GS facilities.127 

• Historically, surety bonds have been readily accessible for environmental obligations. 

However, there is a potential due to increased costs and risk of unknown environmental 

obligations, that surety bonds may become more difficult to secure as an assurance 

mechanism. An example of increased difficulty in securing surety bonds is what has 

occurred regarding mining reclamation and that mining reclamation and closure bonds 

are considered high-risk. The increased risk for mining reclamation occurred due to 

uncertainty about bond duration, concerns about enforcement, along with realization that 

cleanup and closure of modern mines is significantly more expensive than initially 

projected.128 There is a potential that access to surety bonds may be limited in certain GS 

situations and may be dependent upon the site characteristics and accuracy of cost 

projections. 

Insurance 

• GS is likely to continue taking place in at least 18 states (AL, AZ, CA, CO, IL, KY, MI,

MS, MT, NM, ND, OH, TX, UT, VA, WA, WV, and WY).

129 It does not appear that any 

of these states will prohibit the use of insurance to cover environmental and other risks. 

For example, private insurance is used in 26 states to cover some of the cost of cleaning 

up leaking underground storage tanks.130 However, not all insurance products will be 

available in every state. 

• Captive insurance is prohibited as RCRA financial assurance in under Subtitle C in the 

following states: AL, NY, TX, and VA. It is allowed in CA, CT, MO, OH, and WA.131

Financial Test and Corporate Guarantee 

• GS is likely to continue taking place in at least 18 states (AL, AZ, CA, CO, IL, KY, MI,

MS, MT, NM, ND, OH, TX, UT, VA, WA, WV, and WY).

132 It does not appear that any 

of these states will prohibit the use of a Corporate Guarantee to cover geologic 

sequestration. Some states do not allow Corporate Guarantees for mining reclamation and 

they are not allowed under the Bureau of Land Management 3809 regulation or on 

federal lands administered by the U.S. Forest Service.133 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 46 

 

134 Kuipers. 2003 135 Mahan, Jeff. RCRA Financial Test and Corporate Guarantee. Department of Toxic Substances Control. Sacramento, California. 

http://www.dtsc.ca.gov/LawsRegsPolicies/Regs/upload/HWMP_FR_FinanTestCorpGuarantee.pdf 136 U.S. EPA OIG. 2001. 137 Boyd. 2001. 138 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

139 Boyd. 2001. 140 U.S. EPA. Unpublished. Notes from EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Trust Funds, Letters of 

Credit, and Surety Bonds with Standby Trust Agreements (April 28, 2009) 

• Financial test and corporate guarantee can be readily accessible as an assurance 

mechanism. However, in some states the financial test amounts to very little support 

documentation and firms have continued to meet financial tests right up to the moment of 

their filing for bankruptcy protection.134 Even though a Corporate Guarantee is accessible 

it doesn’t guarantee the firm will have significant financial resources in the future.135

Escrow Account 

• Because of their use in transactions and for holding money, escrow accounts are not 

likely to be prohibited in any states. However, states have different requirements for the 

maximum value that a lender (for mortgages) can ask to be put in escrow. 

9) What factors make the instrument more/less easy for the regulator to review or use? 

Trust Fund 

• Trust funds are already regulated under state and federal regulatory regimes.136 They are 

liquid assets which potentially make them more attractive to regulators from an ease of 

use viewpoint. Some regulations (i.e., 40 CFR 264.143) stipulate that trustees be only 

those regulated or regularly examined by a federal or state agency. These requirements 

could lessen the trust’s vulnerability to the insolvency of a financial institution acting as 

trustee.137 

Standby Trust 

• Standby trust funds are not considered stand alone instruments, however, see discussion 

on trust funds above. 

Letter of Credit 

• Letters of credit require regulators to spend less time monitoring the company as 

compared to insurance or other options. The success of the letters of credit depends on 

the company’s relationship with the bank and the amount of liquid assets the company 

has138 because a letter of credit can only be altered with the agreement of the purchaser, 

the provider, and the beneficiary. The credit provider does not generally pay out on 

claims. Rather, the purchaser indemnifies the bank, making the bank liable only if the 

purchaser defaults.139 During the initial demonstration, letters of credit are roughly 

equivalent in review complexity compared to bonds or insurance. However, during 

EPA’s FR webcasts, a participant and EFAB member indicated that EPA and States do 

not have legal resources to use letters of credit; he noted that surety bonds are a much 

better choice for that reason.140 

Surety Bond 

• During the FR webcasts, participants noted that when bonds and activities are worth well 

over a million dollars for wells, they require a significant effort every year for evaluation, 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 47 

 

141 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells. Comments by 

instrument. (Version 10-21-09) 

142 U.S. EPA OIG. 2001. 143 Boyd. 2001. 144 U.S. EPA. 2009. United States Environmental Protection Agency RCRA Subtitle C Financial Assurance Instrument Fact Sheet: Surety Bond. 

Available online at http://www.epa.gov/waste/hazard/tsd/td/ldu/financial/documents/sbond-fs.pdf. 145 Unpublished. 2009, Cadmus notes on EPA Environmental Financial Advisory Board Meeting, March 16-17, 2009. 146 U.S. EPA OIG. 2001. 

especially with a change of ownership. In this respect, the mechanism may be less 

attractive compared to others due to convenience or applicability. An EFAB member 

commented that surety bonds stand “head and shoulders” above other options, however, 

surety bonds are more convenient than letters of credit and trust funds.141 

• Surety bonds are usually purchased from an insurance company, but they are not 

insurance. Within RCRA, the surety company becomes liable for closure and postclosure only when the owner or operator fails to comply with closure or post-closure 

requirements.142 Sureties usually pay out on claims only if the purchaser defaults so 

sureties are less liquid than letters of credit or trusts, and the regulator may find that they 

are less easy to use for that reason. Surety bonds may be used often because they are easy 

for owners or operators to obtain and administer, and are frequently used during 

permitting. Under most programs, surety companies must be certified by the U.S. 

Treasury Department to qualify as an acceptable source of assurance. Surety bonds, like 

letter of credit, cannot be cancelled unless prior notice is given to the regulator, and the 

government is the beneficiary of the bond in the event of default by the principal.143 In 

areas with many Class II wells, banks may be accustomed to issuing surety bonds. If the 

regulator wants to draw on the bond for closure and/or post-closure care (as is currently 

applicable to RCRA), the Regulator must send a written notification to the surety that the 

company has failed to perform in accordance with the requirements of the Bond.144 On 

the other hand, the state may have to litigate to obtain the funds. For example, in one 

case, years of litigation took place when an insurance company refused to comply with 

the terms of a performance bond for facility closure. 

Insurance 

• During the FR webcasts, participants noted that insurance companies currently go 

through site-specific consultation and a methodology to estimate costs. Over time, 

insurers gain the ability to perform rigorous cost estimations. However, participants were 

concerned that for GS, insurers would be estimating costs for something that has never 

existed. In a future paper, EFAB will analyze failures and identify what works in the 

field, what works in the insurance industry, and how to handle proprietary business 

information. EFAB intends to give a set of operating principles set forth in a paradigm so 

that it’s mathematically certain that it will work.145 

• Insurance can be difficult to evaluate and monitor146 for a regulator. Since insurance is 

primarily regulated by states, differences in state regulations contribute to the 

complexities regulators would face in evaluating insurance policies. For group insurance, 

states and the federal government could build from IRS criteria based on how insurance 

is financed for various rated and unrated organizations. Since regulators are not privy to 

an insurance company’s site-specific evaluation of its insurance policy objectives, 

regulators may have a difficult time understanding the complexities of what the policy 

will cover. Also, insurance companies may not always provide a transparent policy for 

ease of use and review by a regulator. For example, in NY, a robust insurance 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 48 

 

147 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

148 Boyd. 2001. 149 U.S. EPA OIG. 2001. 150 Boyd. 2001. 

commissioner established criteria that have not prevented financial problems from 

occurring between the insured and insurers. There is another factor that can make 

insurance and other third party FR mechanisms difficult for regulators to use; GS project 

owners and operators will be influenced by market forces in selecting their insurance 

policy, rather than an insurance company’s eligibility criteria, and some insurance 

companies will be better than others. If market forces impact the quality and eligibility of 

an insurance company, then it will be left to regulators to interpret policies and make 

difficult judgment calls on whether the insurance is adequate. This complexity for 

regulators is a drawback of insurance. Even if EPA made a list of qualified insurance 

providers, such a list may not be good for 50 years into the future.147

Financial Test and Corporate Guarantee 

• Financial tests and corporate guarantees are designed to determine whether a company 

has adequate liquid assets to demonstrate financial responsibility. Federal regulations 

(applicable to RCRA) allow financial test requirements to be met for the company by use 

of a corporate guarantee that is provided by a third party company with strong ties 

(corporate parent, sibling company) to the original company. After evaluating the test or 

guarantee, a regulator would need to conduct at least annual updates to try to predict 

whether a company will remain solvent, so regulators would have to take the time 

necessary to evaluate the tests and keep updated in order to predict future problems with 

the company. Self-demonstration requires the government to monitor the firm’s financial 

condition over time. Accordingly, regulators must regularly audit these financial data to 

determine their accuracy and adequacy. Note, however, that corporate financial auditing 

is not a traditional strength of environmental regulators.148 A Corporate Financial Test 

may be difficult to review or use because of “company mergers and acquisitions, 

difficulties in predicting the long-term survivability of individual firms, and evaluating 

financial test submissions from firms with facilities in many states. OIG suggested a 

future national database that could track financial status for the purpose of FR to make it 

easier for regulators to track and to find updated information.”149 Regulating corporate 

guarantees is a daunting task that may involve interpretation, verification, and monitoring 

of the financial tests over time requiring either significant in-house accounting expertise 

or reliance on third-party audits.150

Escrow Account 

• Escrow accounts are relatively secure, while remaining liquid, and would be managed by 

a single bank, making them easy to evaluate. However, there is less incentive for a firm 

to use an escrow account over a trust fund, because the interest accrued over time will be 

limited when compared to a trust fund. Furthermore, escrow accounts have not yet been 

used for environmental liability projects with a magnitude comparable to a GS project. 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 49 

 

151 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells. Comments by 

instrument. (Version 10-21-09) 

152 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells. Comments by 

instrument. (Version 10-21-09) 

153 Communication with Alan Slater, MA DEP. 

10) What is the likely total administrative burden for EPA or the state regulator (e.g., initial 

and/or annual reviews)? What is the complexity of the review? 

Trust Fund 

• Webcast participants indicated that trust funds may have a lower administrative burden 

than other instruments because they do not require that the financial health of the assuring 

entity be monitored constantly.151

• The total administrative burden for a FR demonstration using a trust fund is driven by (1) 

the initial demonstration, (2) monitoring the fund’s valuation during the pay-in-period, if 

it is allowed, (3) ensuring that the fund’s valuation matches revised cost estimates (annual 

valuation and periodic readjustment), and (4) the termination of the trust fund. The initial 

demonstration would require a review of the submitted paperwork, but no review of the 

trustee’s financial condition, as long as the Director is confident in the respective state or 

federal regulator’s review of the third-party. Monitoring the fund’s valuation during the 

pay-in-period is necessary for ensuring that fund provides total coverage for estimated 

costs on the agreed upon schedule. A lack of monitoring would increase the risk of 

funding shortfalls. The burden associated with the termination of the trust fund would be 

a one-time occurrence, taking place either to fulfill unmet obligations, or to reimburse the 

owner or operator. Because funds in a trust are set aside and dedicated to a specific 

activity they are liquid, and the Director is unlikely to have any challenges accessing the 

funds. 

Standby Trust 

• Although standby trust funds are not considered stand alone instruments, when used in 

conjunction with a letter of credit or surety bond the total administrative burden would 

include (1) ensuring the fund’s existence as a standby (annual valuation), and (2) the 

termination of the standby trust. The burden associated with the termination of the trust 

fund would be a one-time occurrence, taking place either to fulfill unmet obligations, or 

to reimburse the owner or operator. 

Letter of Credit 

• Webcast participants said that letters of credit work fairly well and are less of a burden 

for implementation.152

• The MA DEP noted that letters of credit have historically been difficult to review due to 

lags and expirations. The state has since switched to using escrow accounts.153 

• The total administrative burden for a FR demonstration using a letter of credit is driven 

by (1) the initial demonstration, (2) ensuring that the letter of credit’s valuation matches 

revised cost estimates (annual valuation and periodic readjustment), and (3) the return of 

the letter of credit. Because of the letter of credit may be issued for a period as short as 

one year, the creditor has the option not to renew the agreement on an annual basis. For 

long-term obligations associated with GS, the number of opportunities for non-renewal 

may be high and may result in the need for re-demonstrations by the owner or operator if 

their financial condition fluctuates greatly before the environmental obligation is 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 50 

 

154 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells. Comments by 

instrument. (Version 10-21-09) 

155 Marcia Williams. 1987. EPA Guidance On Exclusions For Pre-Existing Conditions In RCRA TSDF Insurance Policies. Available online at: 

http://yosemite.epa.gov/osw/rcra.nsf/ea6e50dc6214725285256bf00063269d/bc5ce94e1913f2b88525670f006c1844!OpenDocument 156 U.S. EPA OIG. 2005. 

fulfilled. The initial demonstration would require a review of the submitted paperwork, 

but no review of the trustee’s financial condition, as long as the Director is confident in 

the respective state or federal regulator’s review of the third-party. The burden associated 

with returning the letter of credit if the owner or operator fulfills its obligations is 

minimal. However, if the Director needs to draw on the letter of credit, the funds come 

from the third-party itself (funds are not set-aside), therefore accessing the funds may 

require negotiation or litigation. 

Surety Bond 

• A webcast participant suggested that surety bonds are less of a burden for implementation 

than other instruments. However, they may be difficult to manage over the long term if 

there are changes in ownership. Also, a bond for a large sum (well over a million dollars) 

can require significant effort every year for evaluation, also in the case of changes in 

ownership.154

• The total administrative burden for a FR demonstration using a surety bond is driven by 

(1) the initial demonstration, (2) ensuring that the bond’s valuation matches revised cost 

estimates (periodic readjustment), and (3) the cancellation of the bond. Because the 

surety has the opportunity to cancel the agreement, there may be a need for redemonstrations by the owner or operator if their financial condition fluctuates greatly 

before the environmental obligation is fulfilled. The initial demonstration would require a 

review of the submitted paperwork, but no review of the trustee’s financial condition, as 

long as the Director is confident in the respective state or federal regulator’s review of the 

third-party. The burden associated with the cancellation of the bond if the owner or 

operator fulfills its obligations is minimal. However, if the Director needs to draw on the 

surety bond, the funds or the completion of obligations come from the third-party itself 

(funds are not set-aside); accessing the funds may require negotiation or litigation. 

Insurance 

• OSW guidance suggests EPA or authorized states conduct periodic reviews of basic 

policy language to ensure that only acceptable pre-existing condition exclusions are 

used.155

• Insurance language can be complex, and regulators may not have the necessary expertise 

to interpret insurance policies.156

• The total administrative burden for a FR demonstration using insurance is driven by (1) 

the initial demonstration, (2) ensuring that the policy’s coverage is adjusted along with 

revised cost estimates (periodic readjustment), and (3) the cancellation or use of 

insurance. The insurance company can cancel the policy; therefore, there may be a need 

for re-demonstrations by the owner or operator if their estimated costs or financial 

condition fluctuates greatly before the environmental obligation is fulfilled. The initial 

demonstration would require a review of the submitted insurance policy, but no review of 

the trustee’s financial condition, as long as the Director is confident in the state 

regulator’s review of the third-party. The burden associated with reviewing the insurance 

policy may be substantive due to variations among policies (i.e., site specific policies, 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 51 

varying requirements by state). The burden associated with the cancellation of the 

insurance policy if the owner or operator fulfills its obligations is minimal. However, if 

the Director needs to draw on the insurance policy, the funds or the completion of 

obligations come from the third-party itself (funds are not set-aside); accessing the funds 

may require negotiation or litigation. 

Financial Test and Corporate Guarantee 

• Corporate financial tests must be reevaluated and re-administered on a particular 

schedule, creating administration costs for regulating agencies and regulated entities.157

• The total administrative burden for a FR demonstration using a financial test is driven by 

(1) the initial demonstration, and (2) annual reevaluations. The initial demonstration 

would require a review of the submitted financial statements and calculation in a direct 

review of the owner or operators financial condition. Therefore, unlike third-party 

mechanisms, it is the Director reviewing the financial condition of the owner or operator 

instead of a third-party. The burden associated with reviewing the owner or operator’s 

financial condition may be substantive to check that financial calculations (ratios) and 

other financial documents (bond ratings, or annual statements) are complete and accurate. 

There is no additional burden if the owner or operator fulfills its obligations. However, if 

the owner or operator fails to perform is obligations the Director can only pursue 

negotiations or litigation necessary to complete the required activities. 

Escrow Account 

• The total administrative burden for a FR demonstration using an escrow account is likely 

to be greater than the burden for trust funds until the instrument has a longer history of 

being used for FR demonstration. The regulator would need to work closely with the 

owner or operator and the escrow agent to ensure that the instrument was established with 

provisions that work for the type of GS activity and timeframe required. 

11) Which GS phase(s) is the instrument best suited for? (Considering short- or long-term 

application) 

Trust Fund 

• The strengths of trust funds are based on a fully-funded trust, which fully insulates the 

risk to the public of the owner or operator failing (for certain environmental activities). 

To the extent there is a pay-in period, these strengths are diminished because the owner 

or operator could fail prior to the trust becoming fully funded. 

• For well-defined activities lacking “environmental risk” (i.e., certain to occur) such as 

well plugging, post-injection site care, and site closure, a fully-funded third-party trust 

minimizes the risk to the public of paying for these activities. As a result, it implies that 

trust funds are the most costly to the owner or operator who must deposit the funds in 

advance and pay for the administrative costs of the trust on an ongoing basis. Risk is 

limited to (1) investment risk (although one can choose the relative riskiness of the trust’s 

investment portfolio), (2) risk from the failure of the trustee firm, and (3) risk of cost 

escalation. 

 

157 U.S. EPA OIG. 2001. 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 52 

 

158 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

159 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

160 U.S. EPA OIG. 2001. 

• For activities with uncertain frequency and costs, such as emergency and remedial 

response, trust funds may perform poorly because the pool of funds in a trust does not 

respond to contingencies outside those embedded into the cost estimate. 

• For activities that continue over the long-term (i.e. post-injection site care, site closure, 

and emergency and remedial responses in the post-injection site care period), trust funds 

are fairly reliable. During the FR webcasts, at least one state planned to use trust funds 

for longer-term phases of GS, and several webcast participants indicated that trust funds 

were less risky than insurance policies that require the owner or operator to continue 

paying premiums in order to continue coverage. 

o However, two webcast participants expressed concern that trust funds may not be 

the best instrument for longer term closure and monitoring phases.158 

• For the case of uncertain long-term activities (i.e. emergency and remedial responses), 

the above analysis of uncertainty and timing can be combined. Funds will be available in 

the trust, but it is likely that there will be too little funds (in which case the public is 

worse off because it must pay for any environmental obligations) or too much money in 

trust (an inefficient use of funds that unnecessarily raises GS costs). 

Standby Trust 

• Standby trusts are not considered stand alone instruments. They are used exclusively for 

the short term fulfillment of environmental obligations. 

Letter of Credit 

• During the FR webcasts, participants discussed the appropriateness of instruments for 

various project phases and noted that letters of credit would apply to construction and 

operation, but probably are not suited for closure or the monitoring phase. It was 

uncertain whether the letter of credit would still be useable after 40 or 50 years.159

• Widely used for RCRA financial assurance during hazardous waste landfill closure and 

post-closure care.160 

• For letters of credit a bank evaluates that an owner or operator is financially strong 

enough for the bank to pay for its obligations in the event of the failure of the owner or 

operator. The administrative burden of determining creditworthiness is paid for by the 

owner or operator (instead of being paid for by the government). Two other features of 

letter of credit are the credit limit (i.e. a limit to what the creditor covers), a fee paid for 

by the owner or operator to obtain this credit backing (a small fraction of the credit limit, 

as well as deposited collateral). Hence, letters of credit are also similar to surety bonds – 

their cost is a function of the credit limit, the financial health of the owner or operator, 

and risks faced by the owner or operator. 

• Letters of credit perform equally well for certain and uncertain environmental activities, 

so long as the credit limit is not exceeded. Importantly, the risk of exceeding the limit is 

not pooled across owners or operators. 

• For activities that continue over the long-term (i.e. post-injection site care, site closure, 

and emergency and remedial responses), letters of credit may be less effective than other 

instruments because they are granted for an annual period, upon which the creditor 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 53 

 

161 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

162 U.S. EPA OIG. 2001. 163 Gerard, D, E.J, Wilson. 2008. Journal of Environmental Management 90 (1097-1105). Available online at 

https://www.researchgate.net/journal/0301-4797_Journal_of_Environmental_Management 164 Boyd. 2001. 

reconsiders extension (although there may be automatic renewal), and the risks of shocks 

to creditworthiness are not pooled across owner or operators. 

Surety Bond 

• During the FR webcasts, participants noted that surety bonds have uncertain long-term 

(closure and monitoring) applicability if these instruments must be drawn upon in 40 or 

50 years. Other participants suggested that a forfeiture bond would be more appropriate 

for long-term care than insurance.161 It is worth noting that surety bonds are widely used 

for RCRA financial assurance when a hazardous waste landfill is active.162

• As time horizons expand, surety providers are unlikely to underwrite bonds over longer

time horizons where there is considerable uncertainty. GS projects that intend to use 

surety bonds should be able to “clearly delineate timeframes and levels of responsibility.” 

Bonding for GS projects is likely to be an effective financial mechanism if transaction 

costs are low and with “well-defined agreements and agreed upon definitions of 

compliance and non-compliance, a high probability of detecting non-compliance, a 

limited number of contracting parties, and a well-defined time horizon for regulatory 

compliance.”163

• A surety company pays-out on its surety bond, up to a certain limit, in the event of failure 

of the owner or operator. Unlike banks offering letters of credit, surety companies are 

more focused on pooling the risk of failure across owners or operators – perhaps through 

the surety company’s purchase of insurance. There can be more investment risk with a 

surety bond than with a trust fund, because the surety company’s investment strategy 

cannot be specified by EPA (unlike for a trust fund); however, because the surety 

company is more risk averse than a bank, the investment risk is lower than a letter of 

credit. 

• Surety bonds perform equally well for certain and uncertain environmental activities – as 

long as their limit is not exceeded. For uncertain environmental activities, surety bonds 

may not handle the numerous scenarios for environmental obligations as well as 

insurance because their structure of contingency payments is different than it is for 

insurance. 

• For activities that continue over the long-term (i.e. post-injection site care, site closure, 

and emergency and remedial responses), surety bonds are as reliable as the surety 

company itself. As a result, surety companies may be reluctant to offer long-term surety 

bonds. 

• Note that blanket bonds, where all of an owner or operator’s sites are covered under a 

single bond (as if it were a single site), are inferior because they do not cover the full 

scale of the owner or operator environmental obligations and hence present a much 

higher risk of the public paying for the owner or operator’s environmental obligations.164 

Insurance 

• For activities with uncertain frequency and costs, such as emergency and remedial 

response, insurance is the ideal instrument for diversifying environmental risk and 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 54 

 

165 Boyd. 2001. 166 Boyd. 2001. 167 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

168 Presentation at the United States Energy Association by Lindene Patton. and Zurich. 2009. The Climate Risk Challenge: The role of insurance 

in pricing climate-related risks. Zurich Financial Services Group. Available online at: http://www.zurich.com/NR/rdonlyres/E2B5B53E-11DB47AF-91E4-01ED6A2BDCA3/0/ClimateRiskChallenge.pdf 169 U.S. EPA. 2009. Notes from Webcasts on Financial Responsibility for Geologic Sequestration Wells. Unpublished notes from May 20, 2009 

Insurance webcast. 

handling the numerous scenarios possible in this GS phase. Moreover, insurance 

companies internalize much of the administrative burden of overseeing owners or 

operators by creating the incentive for reducing uncertain environmental risks due to 

improved technology and/or management.165 

o However, because insurance payments cover the most contingencies, insurance 

policies can be complicated and have a high administrative burden. 

• The biggest issue for insurance is timing. Insurers prefer to restrict the scale, timeframe, 

and predictability of their exposures. For instance, insurers prefer policies that cover 

claims made during the coverage period (preferable the period of time during which the 

owner or operator is paying premiums) and avoid policies that cover claims arising after 

the policy’s coverage period has ended.166 

o Insurance can be used for either short-term or long-term applications depending 

on the terms of the policy. It is expected that shorter terms with finite policies will 

be easier to obtain, while longer-term policies that cover broader areas will be 

more expensive and harder to obtain. 

• During the FR webcasts, participants suggested that insurance probably works best in the 

operational phases of a GS project because the activities and timeframe are well-defined, 

and hopefully, the project is fully covered by insurance thereby lowering risk. However, 

for long-term phases, insurance is less likely to be useful due to either a company going 

out of business or leaving the business at the end of the operational phase.167 

• The insurance company Zurich has developed what they call the Geologic Sequestration 

Financial Assurance plan which covers closure and post-closure costs, and a CCS 

liability plan which covers pollution event liability, business interruption, control of well, 

transmission liability, and geomechanical liability.168

• During the FR webcasts, a participant said that insurance probably works best for the 

operational phases of a facility. During the injection operations, the activities are not 

unusual technological activities (with the exception of sequestering the carbon dioxide). 

According to the participant, insurance becomes problematic during site closure and postclosure care. The participant wondered how an insurer ensures financial responsibility for 

that period of time. He suggested that a forfeiture bond, surety bond, or trust fund would 

be more appropriate. Another participant agreed that insurance would be a viable option 

through well construction.169 

• For well-defined activities lacking “environmental risk” (i.e., certain to occur) such as 

well plugging, post-injection site care, and site closure, insurance may be less appropriate 

because there is no environmental risk to diversify. In effect, insurance on certain 

activities is conceptually similar to a surety bond. 

• Note that captive insurance, where the insurer is an owner or operator’s parent firm. 

However, because the insurance company is not owned by a third party, captive 

insurance inherits the risks of self-insurance. 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 55 

 

170 U.S. EPA. 1996. 171 U.S. EPA. Unpublished. Analysis of Outcomes of EPA Webcasts on Financial Responsibility for Geologic Sequestration Wells: Comments by 

instrument. (Version 10-21-09) 

172 U.S. EPA OIG. 2001. 173 Kuipers 2003, and Boyd. 2001. 

Financial Test and Corporate Guarantee 

• In an EPA analysis of RCRA subtitle C and D corporate financial tests, the estimated 

financial assurance risk to the public (of having to pay for the environmental obligations 

of a owner or operator) is an order of magnitude higher when self-insurance is used than 

when a third party instrument is used.170

• During the FR webcasts, participants stated that self-insurance is good while the 

company is making money, but if the economy slows, or a company fails, then the ability 

to pay for long-term phases may not be adequate.171

• Widely used for both short-term and long-term RCRA financial assurance.172

• Self-insurance FR demonstrations are equivalent to a waiver of third-party instruments 

for large and historically financially stable firms. If the firm’s net worth is large enough 

and its risk of failure low enough, the government effectively guarantees the fulfillment 

of environmental activities in event of the owner or operator’s failure. For this reason, 

self-insurance is a very controversial means for demonstrating financial responsibility. 

• The financial test and corporate guarantee could be used for any or all GS activities and 

phases. The historical justification for self-insurance is to minimize the sum of the costs 

to the public and the costs to industry. Because of the comparatively higher risk, a public 

policy rationale should factor in to the decision to allow self-insurance demonstrations 

GS activities requiring financial responsibility. Therefore, the primary reason to admit 

self-insurance is to promote GS as a matter of public policy. When a self-insured 

company fails the fundamental purpose of FR–ensuring that the polluter pays–is thwarted 

because the public bears the risk of any unfulfilled obligations. 

• Another factor to consider in allowing self-insurance demonstrations for FR is market 

spillover effects. Because only larger low-risk firms qualify for self-insurance, the cost of 

risk-pooled private FR instruments (i.e., insurance) will be much higher because the 

higher risk or smaller firms will be in need of third-party FR instruments. This may 

provide firms utilizing self-insurance with a comparative advantage and may also inhibit 

the development of robust third-party instrument markets, especially in the early years of 

commercial GS activity. 

Escrow Account 

• Escrow accounts perform almost exactly like trust funds and hence similarly suited for 

GS activities.173 The difference between the two FR instruments is that escrow accounts 

have a lower cost to set up, less oversight (trust funds cost more to set up because 

resources are spent on setting up stronger oversight), may not allow a pay-in period, and 

their funds are kept in a highly liquid form (a simple interest bearing account like a 

savings or money market account at a bank) which costs little to oversee but causes 

escrow accounts to generate minimal interest. As a result, escrow accounts are usually 

utilized for short-term transactions in real estate, tax payments, mergers and acquisitions, 

fulfillment of court orders, and for hard-asset loans to serve as a commitment device that 

compels the depositor to not renege on an agreement. In the case of GS, where the 

relative time horizon is measured in decades, a trust fund’s investment strategy is likely 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 56 

 

174 U.S. EPA OIG. 2005. 175 U.S. EPA OIG. 2005. 

to outperform an escrow account in terms of accrued interest. As a result, there may be no 

benefit (or actually greater costs) to using and escrow account instead of a trust fund. 

Therefore, escrow accounts are likely only to be used for the shortest-term activities such 

as phased corrective action or for serving as a temporary account akin to standby trusts. 

12) For each GS phase, can the specific weaknesses of an instrument be minimized by 

combining it with another mechanism? 

Trust Fund 

• Trust funds, letters of credit, surety bonds guaranteeing payment, and insurance can be 

combined for a facility if together their value is at least equal to the closure or postclosure cost estimate. Surety bonds guaranteeing performance, financial tests, and 

corporate guarantees cannot be combined.174

• Trust funds may work most effectively for well-defined activities and phases such as 

corrective action, injection well plugging, and post-injection site care and site closure. 

However, the uncertain frequency and costs associated with emergency and remedial 

response may not match the trust fund’s relatively fixed value (i.e., response activities 

may be more or less than estimated costs) and may occur with an unknown timing. The 

unknown timing of response activities could create problems if the trust is not fully 

funded when response activities are needed. For emergency and remedial response it may 

be possible to combine a trust fund with another third-party mechanism to split up 

potential costs. That is, use the trust fund for response activities up to a pre-established 

value, versus the trust fund plus another third-party instrument for response activities 

costing more than what is available in the trust fund. By pursuing this approach the owner 

or operator uses the trust fund as set-aside financing to cover lower-cost activities, and 

purchases risk assurance (letter of credit, surety bond, insurance) to make up the 

difference for high cost activities. However, from the Director’s perspective, the 

additional burden and complication from reviewing more than one instrument may be 

undesirable. 

Letter of Credit 

• Trust funds, letters of credit, surety bonds guaranteeing payment, and insurance can be 

combined for a facility if together their value is at least equal to the closure or postclosure cost estimate. Surety bonds guaranteeing performance, financial tests, and 

corporate guarantees cannot be combined.175

• Letters of credit may work most effectively for well-defined activities, near term 

activities, and phases such as corrective action or injection well plugging. However, the 

longer-term nature of post-injection site care and site closure and the uncertain frequency 

and costs associated with emergency and remedial response may not match value of the 

letter of credit. Changes in financial markets and changes in the owner or operator’s 

credit rating may affect the cost and availability of letters of credit. For post-injection site 

care and site closure, it may be possible to combine a letter of credit with a trust fund to 

split up potential costs covered by the credit provider (i.e., the bank). This may provide 

additional stability and lower risk from the creditor’s perspective. For response activities, 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 57 

 

176 U.S. EPA OIG. 2005. 177 U.S. EPA OIG. 2005. 

it may be possible to utilize insurance to manage the uncertainty associated with cost. 

However, from the Director’s perspective, the additional burden and complication from 

reviewing more than one instrument may be undesirable. 

Surety Bond 

• Trust funds, letters of credit, surety bonds guaranteeing payment, and insurance can be 

combined for a facility if together their value is at least equal to the closure or postclosure cost estimate. Surety bonds guaranteeing performance, financial tests, and 

corporate guarantees cannot be combined.176

• Surety bonds may work most effectively for well-defined activities and phases such as 

corrective action, injection well plugging, and post-injection site care and site closure. 

However, the uncertain frequency and costs associated emergency and remedial response 

may not match the surety bond’s fixed value (i.e., response activities may be more or less 

than estimated costs). For emergency and remedial response it may be possible to 

combine a surety bond with a trust fund to split up potential costs. That is, use the trust 

fund for response activities up to a pre-established value (that the owner or operator can 

afford to set aside) and then use the surety bond for response activities with more 

predictable costs. By pursuing this approach, the owner or operator uses the trust fund as 

set-aside financing to cover low-cost activities, and purchases a surety bond to make up 

the difference for high cost activities. However, from the Director’s perspective, the 

additional burden and complication from reviewing more than one instrument may be 

undesirable. 

Insurance 

• Trust funds, letters of credit, surety bonds guaranteeing payment, and insurance can be 

combined for a facility if together their value is at least equal to the closure or postclosure cost estimate. Surety bonds guaranteeing performance, financial tests, and 

corporate guarantees cannot be combined.177

• Insurance is likely to be most suitably matched to manage the uncertain frequency and 

costs associated with emergency and remedial response. However, the well-defined 

activities and phases such as corrective action, injection well plugging, and post-injection 

site care and site closure may also be managed by insurance. Owners or operators could 

lower their insurance premium payments by setting money aside in a trust fund or escrow 

account to pay for activities up to a pre-established value (that the owner or operator can 

afford to set aside) and then use insurance to cover remaining costs in the event the owner 

or operator fails to perform. This may provide additional stability and lower risk from the 

insurance company’s perspective. However, from the Director’s perspective, the 

additional burden and complication from reviewing more than one instrument may be 

undesirable. 

Financial Test and Corporate Guarantee 

• N/A. The primary driver for utilizing the financial test and corporate guarantee is to avoid 

the use of the other third-party mechanisms. 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 58 

Escrow Account 

• Escrow accounts may work most effectively for near-term activities and phases such as 

corrective action or emergency and remedial response during injection. The longer time 

periods associated with all other GS phases make escrow accounts a relatively 

undesirable mechanism. Although any of the instruments could be combined with an 

escrow account over the long-term, it may be more desirable from both the perspective of 

the owner or operator, and the regulator, to simply utilize another instrument (or 

combination of third party instruments such as insurance, surety bonds or letters of 

credit). 
4. Rationale for Financial Responsibility Instrument Selection 

I. Introduction

The rule “Federal Requirements Under the Underground Injection Control (UIC) Program for 

Carbon Dioxide (CO2) Geologic Sequestration (GS) Wells” establishes a new Class VI well with 

specific requirements for the underground injection of CO2 for the purpose of GS. The rule 

contains specific provisions for owners or operators of GS wells to demonstrate and maintain 

financial responsibility for corrective action on wells in the Area of Review (AoR), injection 

well plugging, post-injection site care and site closure, and emergency and remedial response. 

Figure 4.1 shows the various phases of a GS project; the activities for which financial 

responsibility must be demonstrated are shown in bold. 

Figure 4.1: GS Project Activities 

*Please note that the timeframes in this exhibit are not to scale. Activities for which financial responsibility must be demonstrated are shown in 

bold. Financial responsibility demonstrations will coincide with permitting (or revisions made after permitting), therefore Area of Review and 

Corrective Action prior to permitting (i.e., prior to well construction) are not activities for which financial responsibility must be demonstrated.

EPA will describe the types of financial instruments that owners or operators can use to meet the 

requirement in GS Class VI Guidance entitled “Financial Responsibility for Class VI Wells.” 

This paper provides EPA’s rationale for making decisions on the financial instruments 

recommended for Class VI financial responsibility demonstrations. The intended audience is GS 

well owners or operators, EPA and state regulators, and the general public. 

A. Summary 

EPA based its decision making with emphasis on USDWs protection on an analysis of (1) the 

potential for instrument failure, and (2) resource implications for owners or operators and 

Directors (see a summary of EPA’s research and preliminary analysis, including input from 

GWPC and EFAB in Appendix A). In its evaluation, EPA considered a broad set of instruments 

for financial responsibility demonstrations: trust funds, letters of credit, surety bonds, insurance 

policies, escrow accounts, and financial tests and corporate guarantees. Based on the analysis of 

these instruments, Table 4.1 indicates the relative suitability of the various financial 

responsibility demonstrations for each project activity. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 59 
Table 4.1: Instruments Best Suited for GS Activities

Corrective Action Injection Well 

Plugging

Post-injection Site 

Care and Site Closure

Emergency and 

Remedial Response 

1. Trust fund 

2. Letter of credit 

3. Surety Bond 

4. Escrow Account 

5. Financial test and 

corporate 

guarantee* 

1. Trust fund 

2. Letter of credit 

3. Surety Bond 

4. Insurance 

5. Financial test and 

corporate 

guarantee* 

1. Trust fund 

2. Insurance 

3. Financial test and 

corporate 

guarantee* 

1. Insurance 

2. Letter of Credit** 

3. Surety Bond** 

4. Financial test and 

corporate guarantee*

*Financial tests and corporate guarantees present the lowest direct costs to owners or operators but the highest risk to the public. Therefore, the 

reason to allow financial responsibility demonstrations utilizing this instrument is to enable GS as a matter of public policy.

**Letters of credit and surety bonds are likely most appropriate for emergency and remedial response during operation phases. 

The sections that follow address the following topics: 

• The historical precedent and context for using trust funds, letters of credit, surety bonds, 

insurance, escrow accounts, and financial tests and corporate guarantees for financial 

responsibility demonstrations. 

• The factors leading to instrument failure, which ultimately result in costs to the public. 

• The resource implications, to the owner or operator and the Director, associated with 

utilizing the financial responsibility instruments. 

• Additional information explaining which instruments EPA recommends for particular GS 

activities and why. 

II. Historical Precedent 

All of the instruments EPA considered have been used previously for financial responsibility 

demonstrations. Several of the instruments have been used in the UIC program for both Class I

and Class II wells. All but insurance and escrow accounts were specifically named in the 

guidance for Class II wells. With the exception of escrow accounts, all of the instruments have 

been used in the Resource Conservation and Recovery Act (RCRA) program since 1982 to 

provide financial assurance for hazardous waste activities, including Class I hazardous wells. 

Although escrow accounts do not have a history of use in the UIC program, certificates of 

deposit have been used by the Montana and Michigan UIC programs and were perceived by the 

states to have similar functionality. Although standby trusts are not considered stand-alone 

instruments, they have historically been combined with letters of credit and surety bonds when 

EPA is the Director instead of a state (i.e., for direct implementation programs) and are discussed 

below in this context. 

III. Potential for Instrument Failure 

EPA understands that all financial responsibility instruments have some risk of failure and 

acknowledges that the purpose of requiring financial responsibility demonstrations is to 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 60 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 61 

 

178 EPA recognizes that primacy states may have the ability to establish individual or pooled trusts, in which case there is no risk of third party 

failure because the state itself is the trustee. 

179 The failure of a third-party audit (i.e., inaccurate audit) could contribute to the collapse of the financial test and corporate guarantee 

instrument. 

minimize the risk that costs will be transferred to the public. Although the extent of the risk 

varies among instruments, adverse conditions resulting from owner or operator failure, market 

volatility, third-party litigation, cost underestimation, and policy exclusions or limits may 

contribute to partial or total instrument failure. With proper implementation, oversight, and 

enforcement at the state and federal levels, instrument failure can be minimized along with the 

associated financial (e.g., clean up or enforcement costs), environmental (e.g., ground water 

contamination), or social (e.g., environmental justice) impacts. 

The total failure of financial responsibility instruments is most likely to occur as a result of 

owner or operator failure and, for third party instruments, the failure of a third party. EPA 

defines owner or operator or third party failure as financial insolvency leading to unfulfilled 

requirements, or the outright abandonment of environmental obligations. 

A. Owner or Operator Failure 

For all instruments except financial tests and corporate guarantees, the risk of instrument failure 

is partially mitigated by the fact that the fund or liability is held by a third party. Therefore, for 

third-party instruments, both the owner or operator and the third party must fail in order for the 

instrument to fail. In contrast, if the owner or operator becomes financially insolvent (e.g., 

bankrupt), then the financial test and corporate guarantee immediately fails. If the trust fund or 

escrow account is not yet fully funded due to a pay-in period, financial insolvency of the owner 

or operator at the onset of the GS project or over time may also lead to a partial instrument 

failure. 

B. Third Party Failure 

Trust funds,178 standby trusts, letters of credit, surety bonds, insurance, and escrow accounts are 

managed or sourced from a third party and are therefore affected by third-party failure.179 This 

failure may occur as a result of bankruptcy of the instrument administrator or issuer, cancellation 

of the account or policy due to non-payment of fees or premiums, or a change in third-party 

ownership. However, EPA notes that third-party failure must coincide with owner or operator 

failure for complete instrument failure to occur. If the third party fails, but the owner or operator 

remains solvent, the owner or operator can secure an instrument from another third party (that is 

acceptable to the Director), thereby minimizing the long term financial risks to the public. 

C. Other Factors 

EPA is aware that accounts and policies for trust funds, standby trusts, letters of credit, insurance 

policies, and escrow accounts may be cancelled in the event that the owner or operator does not 

pay the necessary monthly or annual fees. Furthermore, the third party may terminate an account 

or policy based on changes to the owner or operator’s financial status, or for other reasons. 

Therefore, in the event of cancellation or non-renewal, EPA recommends that the owner or 

operator have a defined period of time to secure a new financial responsibility instrument. This 

can help minimize the probability of cancellation or non-renewal creating breaks in coverage. 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 62 

 

180 Because the costs of the activity are paid for by trust funds and escrow accounts, or the owner or operator is reimbursed, estimated costs are 

paid (i.e., set aside) upfront. However, when demonstrations are made with surety bonds and letters of credit, activity costs are paid for by the 

owner or operator and the secured financial responsibility instrument is only used in the event that the owner or operator cannot complete the 

activity. 

EPA also understands that surety bonds and insurance may fail when the financial health of an 

owner or operator has been inaccurately assessed by the third party. Similarly, financial tests and 

corporate guarantees may fail when the financial health of an owner or operator has been 

inaccurately assessed by the Director. EPA recognizes the difficulty of analyzing the complex 

finances of multi-level firms. 

Considering these factors, EPA recognizes that a combination of financial responsibility 

instruments could be used to limit the risk of instrument failure and potential costs to the public. 

Combining instruments to minimize their weaknesses is discussed in more detail in Section V. 

IV. Resource Implications for the Owner or Operator and the Director

EPA recognizes that all third-party instruments require the owner or operator to pay fees (upfront 

or annual fees) or monthly premiums to secure and maintain the instruments (Table 4.2, total 

cost to company). EPA anticipates that these overhead costs will vary by institution, the amount 

of coverage, and the level of investment activity for instruments like trust funds and escrow 

accounts. Letters of credit may also require a cash or hard asset collateral in addition to the 

premium. Therefore, EPA anticipates that the costs that owners or operators will incur to obtain 

financial assurance will vary by instrument type. For third-party instruments, the costs paid by 

the owner or operator include the overhead cost needed to secure and maintain these instruments 

with the third party. Additionally, the total cost of trust funds and escrow accounts will also 

include the total estimated costs of the GS activity.180 In the case of financial tests and corporate 

guarantees, overhead costs will include only those needed to demonstrate maintained financial 

health. 

In addition to variations in costs, there will be different logistics and processes involved if an 

owner or operator or the Director must access or request funds. In some cases, unused funds may 

be returned to the owner or operator, while in other cases the third party may seek 

reimbursement from the owner or operator. EPA recognizes that logistical aspects of the 

instruments have differing resource implications for the owner or operator and the Director. 
Table 4.2: Regulatory Risk, Oversight Effort, and Costs to Owners or Operators

Total Cost to 

the Company* 

Estimated 

Overhead Cost 

as a Percent of 

Total Cost 

Relative 

Financial Risk 

to the 

Government* 

Oversight and 

Enforcement 

Effort Needed* 

Trust Fund High ~2% (total) Low Medium Low 

Letter of Credit High 1.5 - 2% (annual) Low Low 

Surety Bond Medium High 0.5 - 15% (total) Medium Low Medium Low 

Insurance Medium** No data available Medium Medium 

Financial Test 

and Corporate Guarantee Low <0.5% (total) High High 

Escrow Account High 1 - 2% (total) Low Medium Low 

* Except for information on escrow accounts, relative rankings are based on U.S. GAO. 2005. Environmental Liabilities 

(http://www.gao.gov/new.items/d05658.pdf) and EPA OIG. 2005. Continued EPA Leadership Will Support State Needs for Information and 

Guidance of RCRA Financial Assurance (http://www.epa.gov/oig/reports/2005/20050926-2005-P-00026.pdf). 

** Includes captive insurance, which inherits the risk of self insurance. 

The Director’s goal in reviewing a financial responsibility demonstration is to minimize the risk 

that the instrument will fail and leave the public bearing the costs (Table 4.2, relative financial 

risk to the government). The costs to the Director for an initial review, reevaluations, and 

monitoring will vary among instruments. During the initial review of the financial responsibility 

demonstration, For third-party instruments, the Director should consider the stability of the thirdparty financial institutions to minimize the risk of instrument failure. In the case of financial tests 

and corporate guarantees, the Director needs to evaluate the stability of the owners or operators 

themselves. See Chapter 6 “Director’s Examination of Third Party Stability.” 

A. Director’s Review and Monitoring 

EPA acknowledges that the initial review of the financial responsibility demonstration, 

reevaluations, and monitoring take time, regardless of which instrument is proposed. Trust funds, 

letters of credit, surety bonds, and escrow accounts require the lowest total oversight and 

enforcement burden for the Director. Insurance and financial tests and corporate guarantees have 

the highest levels of administrative burden. Insurance policies will be complex due to sitespecific variations and differences within states. Financial tests and corporate guarantees are 

data-intensive and require frequent evaluations and re-evaluations for solvency. Financial 

auditing and review of financial mechanisms are resource intensive processes that require access 

to specific expertise or training for which additional capacity may need to be developed within 

the UIC program. 

V. Recommendations and Rationale

Considering the characteristics of the instruments and the characteristics of GS project activities, 

some instruments may be better suited for certain GS activities than others. In general, the GS 

activities requiring financial responsibility demonstrations can be characterized as environmental 

obligations that are either relatively well-defined in terms of when they will occur and how much 

they will cost, or uncertain in terms of when (and if) they will occur and how much they will 

cost. The following descriptions characterize GS phases in terms of certainty and sequencing. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 63 
• Corrective action on wells in the AoR, as described at 40 CFR 146.84, presents some 

uncertainty in terms of when it will occur and how much it will cost. Corrective action 

that will occur early in a GS project during the AoR phase will be well-defined. 

However, the extent of future corrective action undertaken during the operational phase 

will depend on subsequent AoR re-evaluations. If the initial AoR delineation proves to be 

inaccurate, additional corrective action may be required that was not considered at the 

onset of the project. While the duration of the operational or injection phase of a GS 

project will vary by site, for the purposes of this discussion, EPA anticipates that 

corrective action will occur within a 20 to 30 year period. 

• Injection well plugging, as described at 40 CFR 146.92, is relatively well-defined in 

terms of when it will occur and how much it will cost. Well plugging occurs later in a GS 

project lifecycle, following the operational phase of injection for either a particular well 

or the project as a whole. EPA anticipates that plugging a well will take place over a 

period of weeks, not years. 

• Post-injection site care and site closure, as described at 40 CFR 146.93, is relatively 

well-defined in terms of when it will occur and how much it will cost. Post-injection site 

care and site closure occur last in the GS lifecycle. For the purpose of determining 

financial assurance, the post-injection site care period will be at least 50 years and site 

closure will occur at the Director’s discretion. 

• Emergency and remedial response activities, as described at 40 CFR 146.94, in contrast 

to the three activities described above, are relatively uncertain in terms of when (and if) 

these activities will occur and how much they will cost. Additionally, the timeframe 

during which these activities may occur over is the longest (i.e., 70 years or more). 

Based on the characteristics of the instruments and the characteristics of GS project activities, 

EPA recommends the following financial instruments as “best” or “good” for Class VI financial 

responsibility demonstrations (Table 4.3). 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 64 
Table 4.3: Instruments Best Suited for GS Activities

Corrective Action 

and Phased 

Corrective Action

Injection Well 

Plugging

Post-injection Site 

Care and Site 

Closure

Emergency and 

Remedial Response

Trust Fund Best May be too little or 

too much money 

Letter of Credit* Best 

May be unreliable 

for longer time 

periods 

(>20 years) Most appropriate for 

ERR during operation 

Surety Bond* Good Best 

May be unavailable 

over longer time 

periods (>20 years) 

Insurance Not ideal for operational phases Best 

Financial Test and 

Corporate Guarantee Good, but provides no financial recourse if owner or operator fails 

Escrow Account Good Trust funds may be preferred over 

the mid and long term 

Likely to perform 

poorly for uncertain 

risks 

*Standby trust is needed in addition to the letter of credit or surety bond if EPA is implementing the program. 

The following subsections provide a brief rationale for the recommended uses of these financial 

instruments based on the characteristics of GS project activities described above, and the 

instrument characteristics summarized in sections III and IV. 

A. Trust Funds 

Trust funds are best suited for corrective action, injection well plugging, and post-injection site 

care and site closure demonstrations. These activities are relatively certain both in terms of 

occurrence and cost. A fully-funded third-party trust represents the lowest the risk to the public 

of paying for these activities. Although the cost of the instrument is essentially the full cost of the 

activity, the owner or operator recovers this cost (in the form of reimbursement) following the 

fulfillment of the activity. In addition, costs to the Director are relatively low. For activities with 

uncertain frequency and costs, such as emergency and remedial response, the trust will likely not 

have the right amount of funds—too little money is a partial failure of the instrument that must 

be borne by the public and too much money represents an inefficient use of funds that 

unnecessarily raises GS costs. 

B. Letters of Credit 

Letters of credit are best suited for corrective action and injection well plugging demonstrations. 

Letters of credit perform equally well for certain and uncertain environmental activities, as long 

as the credit limits are not exceeded. The cost to the owner or operator is a function of the credit 

limit, the financial health of the owner or operator, and risks faced by the owner or operator. 

Costs to the Director are low when automatic renewals take place and no litigation is needed. For 

activities that continue over the long term (i.e., post-injection site care, site closure, and 

emergency and remedial responses), letters of credit may be unreliable because there are more 

opportunities for the third party to cancel the line of credit. Moreover, their application over 

longer time periods (i.e., greater than 20 years) is uncertain. Therefore, letters of credit may not 

be effective for post-injection site care and site closure. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 65 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 66 

 

181 Captive insurance, where the insurer is an owner or operator’s parent or sibling firm, inherits the risks of self-insurance because the insurance 

company is not owned by a third party. Captive insurance is excluded from this discussion. 

C. Surety Bonds 

Surety bonds are good for corrective action and injection well plugging demonstrations. Surety 

bonds perform equally well for certain and uncertain environmental activities—as long as the 

limits are not exceeded. The cost to the owner or operator of a surety bond is greater than a letter 

of credit but less than a trust fund. The cost to the Director may be higher for a performance 

bond than for a payment bond if litigation is required to get the surety to fulfill the activity. For 

activities that continue over the long term (i.e., post-injection site care and site closure, and 

emergency and remedial responses), surety providers are unlikely to underwrite bonds over 

longer time periods where there is considerable uncertainty. 

D. Insurance 

Insurance policies are best suited for emergency and remedial response demonstrations. 

Insurance is the ideal instrument for diversifying environmental risk and handling the numerous 

possible scenarios associated with emergency and remedial response.181 However, because 

insurance policies may cover a wide range of contingencies with wide ranging costs, they can be 

complicated with high administrative burdens. For well-defined activities such as well plugging, 

post-injection site care, and site closure, insurance is less appropriate because there is no 

environmental risk to diversify. 

E. Escrow Account 

Escrow accounts are good for corrective action demonstrations. Escrow accounts perform almost 

exactly like trust funds and hence are just as reliable. The difference between the two financial 

responsibility instruments is that escrow accounts have a lower cost to set up, less oversight 

(trust funds cost more to set up because resources are spent on establishing stronger oversight), 

and their funds are kept in a highly liquid form (a simple interest bearing account like a savings 

or money market account at a bank), which limits risk and the administrative costs but causes 

escrow accounts to generate minimal interest. In the case of GS, where the relative time horizon 

is measured in decades, a trust fund’s investment strategy is likely to outperform an escrow 

account in terms of accrued interest. As a result, there may be greater costs from lost investment 

income and no benefit to using an escrow account instead of a trust fund. Therefore, escrow 

accounts are likely only to be used for the shortest-term activities such as phased corrective 

action or for serving as a temporary account, similar to standby trusts. 

F. Financial Tests and Corporate Guarantees 

Financial tests and corporate guarantees may be useful or “good” for corrective action, injection 

well plugging, post-injection site care and site closure, and emergency and remedial response. 

While offering the lowest cost to owners or operators, self-insurance represents the highest 

financial risk to the public. Additionally, the Director at the state or Regional level may need a 

high level of financial expertise to review the demonstration with confidence. EPA recommends 

that the Director should only accept demonstrations when the risk to the public of the GS owner 

or operator failing is acceptably low. However, EPA may consider the added risk to the public 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 67 

 

182 U.S. EPA OIG. 2005. State support. http://www.epa.gov/oig/reports/2005/20050926-2005-P-00026.pdf

worthwhile to facilitate the realization of broader anticipated public benefits from GS (i.e., 

climate change mitigation, economic development). Ultimately, the Director has discretion over 

what level of financial risk to the public is acceptable. 

G. Minimizing Instrument Weakness by Combining Instruments 

Since many of the instruments used for financial assurance are better suited to certain GS 

activities, EPA has stated that it is possible to combine financial instruments to obtain full 

coverage for all of activities requiring a demonstration. This implies utilizing different 

instruments for different GS activities requiring demonstrations, but it can also mean combining 

instruments for the demonstration for a single activity (e.g., well plugging). EPA recognizes, 

however, that Directors may be reluctant to allow combined demonstrations due to the likely 

additional burden in their review process. In general, trust funds, letters of credit, surety bonds 

guaranteeing payment, and insurance can be combined for an activity if their combined value is 

at least equal to the cost estimate for the respective GS activity. Surety bonds guaranteeing 

performance, financial tests, and corporate guarantees cannot be combined for an activity.

182 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 68 

5. Presentation on Financial Responsibility to Ground Water Protection Council 

On January 27, 2010, a short presentation was used to receive state input on EPA’s initial 

analysis on Financial Responsibility (FR) instruments for Geologic Sequestration (GS) in the 

proposed Class VI UIC well class. A total of 48 participants representing EPA Headquarters and 

Regional offices, and State Underground Injection Control (UIC) programs attended the meeting. 

I. Summary of Meeting Discussion

• EPA stated that the proposed rule specifies a general duty for FR in four phases of a GS 

project. 

• EPA stated that the Office of General Council has encouraged EPA to be as specific as 

possible about which instruments are allowable for FR demonstration and why an 

instrument should not be allowed for a demonstration. The benefit of being specific in the 

rule is that when an instrument is denied later on, the state or EPA has a lower probability 

of being sued for being arbitrary and capricious in its decisions. 

• EPA asked for input on what might cause a FR instrument to fail? 

o A state noted that if the trust fund is administered by a state instead of a bank, it 

reduces the likelihood of failure. In addition to using a state administered trust 

fund to cover anticipated (estimated) costs, the state could collect and set aside 

fees during the permitting process in an emergency fund, to provide an added 

level of financial security for the state. 

o A participant from Montana shared an example of instrument failure: an insurance 

company that posted 15 or 20 surety bonds for UIC wells simply went out of 

business. This resulted in a period of 3 years where several operations in the state 

did not have a FR instrument. Ultimately, the facilities were able to secure bonds 

from another third-party. 

o Montana provided another example of instrument failure, which resulted from the 

use of Certificates of Deposits (CDs). In this case, the well owner or operator 

persuaded the bank to return the money held in the CD without the state’s 

permission. The state did not have any recommendations on how to avoid this 

situation. Indeed, regardless of policies, rules, or regulations, human error may 

inevitably cause the state to bear the cost of cleanup or closure in some cases. 

• A participant recommended that the instrument language could do a better 

job of specifying that funds can only be released upon the Director’s 

authorization. 

• Montana no longer accepts CDs from out-of-state banks. 

o Michigan has faced problems with CDs being returned to the bank. In one 

situation, the state ended up with an orphan well. Generally, the state has 

encountered a number of cases where financial institutions have failed. In these 

cases, alternative instruments were successfully identified and implemented. 

o In an effort to minimize insurance failures, Texas passed a statute allowing FR 

demonstrations with insurance; but since the requirements and language were so 

restrictive, the state has not seen any applications of insurance. 

• EPA asked how suitable are existing FR instruments for GS? 

o Participants noted that some of the instruments may not be available under state 

law. For example, in Montana, financial test and corporate guarantee would not 

be allowed under state law. However, other states do allow the mechanism. 

o In Montana, an owner or operator can keep a cash reserve (CD), which is 

conceptually similar to an escrow account. Montana stated that a benefit of using 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 69 

cash (CD or escrow account) over all other instruments, including a trust fund, is 

that all the state needs to do is say “release the money.” In all other cases, the 

state may need to prove that the obligation has not been fulfilled, and that it must 

be fulfilled. 

o Montana stated that a benefit of a surety bond is that in the event that the state 

says “release the money” the surety has an incentive to pressure the owner or 

operator to fulfill the obligation, so that the state does not have to. 

• Montana stated that pore bonds only apply to underground activities, but 

not above ground cleanup; however, this is outside the scope of the GS 

final rule. 

o In Oregon, a number of instruments will be available. Since the GS program 

crosses agencies, one agency will focus more on FR. 

• A participant from an EPA Region asked if there are any states that can share how they 

administer the financial test. No examples were provided. 

• A participant from Montana emphasized that FR is different for Federal and state 

Directors. Although FR is important for states, EPA should keep in mind that some states 

will be able to collect fees and establish state trusts (individual or pooled trusts), or use 

existing state trusts to fund cleanup when instruments fail. 

• Texas assumes that the future experience with Class VI will be similar to Class I. 

However, the value of the instrument will be very different. The bond may have a face 

value of $10k for Class I well, but that Class VI bond values may be much higher. 

o EPA added that it was asked to consider the experiences from RCRA in its 

decision-making. 

• Montana stated that it is more concerned about the value of the instrument (i.e., value is 

reflective of accurate cost estimates) than the existence of various instruments. 

o EPA added that it is developing guidance to assist with the cost estimation 

process. 

• The states recommended that flexibility be provided to encourage/promote GS projects. 

As many instruments (tools) as possible should be on the table. 

• A participant from Montana added that the state would not object to a ranking of which 

instruments are recommended for which applications. Indeed, guidance specifying how to 

implement each instrument would be beneficial. 
II. Presentation

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 70 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 71 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 72 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 73 
6. Director’s Examination of Third Party Stability 

This chapter describes EPA’s rationale for guidance recommendations on the examination of 

third party stability. Because the failure of the third parties providing trust funds, standby trusts, 

letters of credit, insurance, and escrow accounts may increase the likelihood of instrument 

failure, the stability of the third party should be factored in to the Director’s decision on the 

acceptability of the demonstration. EPA understands that in most cases financial institutions 

acting as third parties are regulated by a non-EPA state or federal regulator (e.g., the U.S. 

Department of the Treasury). For example, the strength of a surety bond provider can be inferred 

by whether or not it is listed on the U.S. Department of the Treasury’s Department Circular No. 

570 as an approved surety. Because the institutions are reviewed and listed (and unlisted) 

annually by the Department of the Treasury, the stability determinations for surety bond 

providers may require the lowest effort. Alternatively, the third party’s standing may be inferred 

by the number (and frequency) of enforcement actions taken by the financial regulator. 

EPA recommends that the third party should also be regularly evaluated by an independent rating 

agency. Similar to the use of bond rating tests for an owner or operator seeking to use the 

financial test and corporate guarantee, bond ratings and credit ratings can be used for third 

parties. Most financial institutions acting as third parties are likely to be evaluated by credit 

rating agencies and have publicly available ratings (although detailed reports explaining the 

rationale for the rating may not be public). Credit ratings are reviewed on a regular basis 

(typically annually or semiannually) and should be available at the owner or operator’s request. 

The GS rule at 40 CFR 146.85(a)(6)(ii) specifies that third-party providers must either 

• Pass financial strength requirements based on credit ratings, or 

• Meet a minimum rating, minimum capitalization, and ability to pass the bond rating when 

applicable. 

In order to provide clear guidelines for owners or operators and the Directors, EPA can make 

recommendations on each component of the Rule requirements: (1) financial strength 

requirement based on credit ratings, (2) minimum rating, (3) minimum capitalization, and (4) 

bond rating. Described below are several options for interpreting each of these requirements. The 

selected option, and the rationale for choosing this option, is also noted for each component. 

I. Financial strength requirement based on credit ratings

A. Credit rating requirements consistent with self-insurance requirements 

For self-insurance, the Rule requires a bond rating in the top four categories of either Standard & 

Poor's (AAA, AA, A or BBB) or Moody's (Aaa, Aa, A, Baa). These ratings categories could also 

be recommended for third-party credit ratings. This maintains a consistent method (and set of 

metrics) for determining any provider’s financial strength and stability. Using the same 

thresholds is a logical choice since the purpose in both cases (self-insurance and third-party 

provider) is the same--minimizing the likelihood that the provider will be unable to meet its 

financial obligations. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 74 
B. Credit rating by any Nationally Recognized Statistical Ratings 

Organization (NRSRO) 

EPA could recommend that third-party providers provide a credit rating of the Xth highest 

category (e.g., 3rd or 4th highest) as determined by any NRSRO. Credit rating thresholds would 

be determined based on a comprehensive analysis of failure rates of firms in each rating category 

offered by each NRSRO. This option provides some potential benefits and weaknesses compared 

to Option A. A potential benefit is that the credit ratings are not limited to just two rating 

agencies (Standard & Poor’s and Moody’s). A potential weakness is that categories may not be 

consistent among rating agencies (i.e., a 4th highest rating from one agency could mean 

“adequate” or “moderate risk” while a 4th highest rating from another agency may mean 

“inadequate” or “substantial risk”). 

C. [SELECTED] Hybrid of Option 1 and Option 2 

In considering the strengths and weaknesses of Options A and B, a hybrid interpretation may be 

desirable, specifying specific rating agencies and their associated recommended ratings. For 

example, EPA could recommend specific rating agencies along with their associated credit 

ratings that correspond to those of Standard & Poor's and Moody's. This provides more 

flexibility than Option A and eliminates the potential weakness mentioned for Option B. 

Rationale: Considering these factors, EPA recommends that owners or operators demonstrate 

that third-party providers have a credit rating in the top four categories from either Standard & 

Poor’s or Moody’s, consistent with the requirement for self-insurance. However, EPA 

acknowledges that greater flexibility can be used for third-party credit ratings. Therefore, at the 

Director’s discretion, the owner or operator may alternately submit a comparable rating from any 

NRSRO as long as the owner or operator can demonstrate the credibility of this rating compared 

to the recommended ratings. 

II. Minimum Rating

A. [SELECTED] Minimum credit rating using the same option chosen for 

the credit rating requirement 

EPA may interpret minimum rating to mean minimum credit rating. The benefits of this option 

are that it is easy to specify in the Guidance and it lessens the number of financial measures that 

Directors must become familiar with. A potential weakness, however, is that this option may 

lead to confusion about when a third-party’s financial stability should be judged based on part 1 

of 40 CFR 146.85(a)(6)(ii) or part 2 (i.e., why require a credit rating or a credit rating plus). 

Rationale: Introducing other types of ratings would require the Director to have a broader 

familiarity with financial metrics in order to evaluate the financial responsibility demonstration. 

Therefore, EPA clarifies that the minimum rating means a minimum credit rating. Furthermore, 

EPA clarifies that third-party providers will be required to meet the credit rating requirement at 

40 CFR 146.85(a)(6)(ii), however, if the Director has concerns about the third-party provider or 

its credit rating, the Director can request additional information to satisfy part 2 of 40 CFR 

146.85(a)(6)(ii) (i.e., minimum rating, minimum capitalization, and bond rating if applicable). 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 75 
B. Broader range of minimum rating options 

In this option, “minimum rating” could be described as an issuer, credit, securities, or financial 

strength rating. Using this broad definition would provide greater flexibility for the third-party 

provider. For example, the provider may have an “acceptable” credit rating, but have a “very 

strong” or “exceptional” financial strength rating and thus would submit the financial strength 

rating instead of the credit rating as an indication of financial stability. Furthermore, the 

difference between parts 1 and 2 of 40 CFR 146.85(a)(6)(ii)would be clarified. Pursuing this 

option would mean that an owner or operator who submits a rating for part 2 of 40 CFR 

146.85(a)(6)(ii) would simply be a making different demonstration of third-party stability. 

III. Minimum Capitalization

A. [SELECTED] Financial ratios consistent with the financial ratio test 

requirements for self-insurance 

EPA could recommend that third-party providers meet the minimum thresholds for the following 

financial ratios: Debt-Equity, Assets-Liabilities, Cash Return on Liabilities, Liquidity, and Net 

Profit. Since these ratios are the required capital thresholds for self-insurance, this option is 

similar to Option A for credit ratings and thus has the same potential benefits and weaknesses. 

Rationale: The rationale for choosing this option is the same as for choosing Option A for credit 

ratings. The Director would be familiar with these ratios because of the self-insurance financial 

tests. Additionally, these ratio thresholds were chosen with GS activities in mind while the 

thresholds in the other options may not be as applicable to GS activities. 

B. Specific dollar value capital requirements 

In choosing this option, minimum capitalization could be specified as meeting capital 

requirements of annual capital, surplus, and undivided profits of at least $[X]. This option is 

more straightforward than Option A and may be easier for third-parties to provide. However, it 

would require targeted research to choose an appropriate threshold value relevant to all potential 

third-party providers and, furthermore, it would require additional rationale for recommending 

thresholds different than those required for self-insurance. 

C. Minimum capital standards prescribed by the appropriate Federal 

banking agency 

The Federal Deposit Insurance Act requires Federal banking agencies to establish minimum 

capital standards for their regulated entities. For example, the Federal Deposit Insurance 

Corporation (FDIC) requires institutions to maintain capital levels that meet both the leverage 

capital ratio requirement and the risk-based capital ratio requirement. The thresholds for these 

requirements are summarized in the table below. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 76 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 77 

 

183 Estrella, A., S. Park, and S. Peristiani. “Capital Ratios and Credit Ratings as Predictors of Bank Failures.” 2002. Federal 

Reserve Bank of New York Working Paper. <http://app.ny.frb.org/research/economists/peristiani/CAPITAL-RATIOS.pdf>. 184 Enrich, D., D. Fitpatrick, and M. Eckbald. “Banks Won Concessions on Tests: Fed Cut Billions Off Some Initial CapitalShortfall Estimates; Tempers Flare at Wells.” WSJ.com. May 9, 2009. 

<http://online.wsj.com/article/SB124182311010302297.html>. 185 Fact Sheet: Financial Stability Plan. U.S. Department of the Treasury. 2009 <http://www.financialstability.gov/docs/factsheet.pdf>. 

186 June Oversight Report: Stress Testing and Shoring Up Bank Capital. Congressional Oversight Panel. June 9, 2009. 

<http://cop.senate.gov/documents/cop-060909-report.pdf>. 187 Bozzo, Albert. “Most Banks Well Capitalized But May Need More, Fed Says.” CNBC.com. April 24, 2009. 

<http://www.cnbc.com/id/30385838/Most_Banks_Well_Capitalized_But_May_Need_More_Fed_Says>.

 Leverage Tier 1 Risk-Based Total Risk-Based 

Well Capitalized >= 5% and >= 6% and >= 10% 

Adequately 

Capitalized 

>= 4% * and >= 4% and >= 8% 

 or a Leverage ratio of = 3% if the bank is rated a composite 1 and is not 

experiencing or anticipating significant growth 

* The “risk-based requirement” includes both Tier 1 Risk-Based ratio and Total Risk-Based Ratio

Institutions that do not meet the minimum thresholds are in violation of FDIC requirements 

because they are considered at risk of insolvency. Potential benefits of using these capital 

standards are that they are well-defined, easily accessible, and the rationale for choosing them is 

easily explained. Potential weaknesses are that although federal thresholds may have been good 

predictors of historical bank failure, recent legislation has been aimed at raising these standards, 

they may still not be as robust as the standards in Options A or B183, 184.

D. Successful completion of the new comprehensive stress test for banks 

This option involves recommending that third-party providers that are banks pass the new stress 

tests conducted by the Department of the Treasury. These tests built upon existing regulatory 

capital requirements to assess whether institutions have adequate capital to see them through 

economic reversals, but were intended to be more transparent than existing requirements in order 

to restore confidence in the banking system. This option has the benefit of considering financial 

stability in more adverse economic conditions. However, potential weaknesses of this option 

include that not all third-party providers will have stress test results (it was only required of 

banking institutions with assets in excess of $100 billion)185, that the stress test considers only 

short-term stability (one year into the future)186, that there have been concerns about political 

interference (by law, bank regulation is to be carried out by the independent banking 

agencies)187, and that the reliability of these tests is not well established (these tests are still a 

new procedure).

IV. Ability to pass the bond rating when applicable

A. Financial ratios consistent with the bond rating test requirements for selfinsurance 

For self-insurance, the Rule requires a bond rating in the top four categories of either Standard & 

Poor's (AAA, AA, A or BBB) or Moody's (Aaa, Aa, A, Baa) for bond ratings. These specific 

ratings could also be recommended for third-party providers. This option parallels Option A for 
credit ratings. It therefore has the same potential benefits and weaknesses of Option A for credit 

ratings. 

B. Bond rating by any Nationally Recognized Statistical Ratings 

Organization ("NRSRO") 

This option is a broader interpretation of the Rule where the Guidance could recommend that the 

third-party provider have a bond rating of the Xth highest category (e.g., 3rd highest or 4th

highest) as determined by any NRSRO. This option parallels Option B for credit ratings. It 

therefore has the same potential benefits and weaknesses of Option B for credit ratings. 

C. [SELECTED] Hybrid of Option 1 and Option 2 

In considering the strengths and weaknesses of Options A and B, it may be desirable to 

recommend a hybrid interpretation, specifying specific rating agencies and their associated 

recommended ratings. This option could be broader than Option A but not as broad as Option B. 

For example, the Guidance could recommend specific rating agencies along with their associated 

credit ratings that correspond to those of Standard & Poor's and Moody's. This provides more 

flexibility than Option A and eliminates the potential weakness mentioned for Option B. 

Rationale: This option was selected for the same reasons that Option C was selected for credit 

ratings. Again, for bond ratings, the Guidance will recommend the self-insurance ratings from 

Standard & Poor’s or Moody’s and will also mention the alternative of a comparable bond rating 

from any NRSRO. The appropriateness of these alternate ratings must be proven by the owners 

or operators and will be evaluated at the Director’s discretion. Furthermore, EPA clarifies that a 

bond rating is only required when it exists (not all third-party providers will have bond ratings). 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 78 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 79 

 

188 Report on Financial Assurance. EFAB. March 2010. Page 6. 189 Report on Financial Assurance. EFAB. March 2010. Page 2. 

7. Rationale for the Selection of Self Insurance Requirements 

This chapter describes EPA’s rationale for the selection of various self-insurance test 

requirements. The self-insurance requirements described at 40 CFR 146.85 are designed to 

ensure that owners or operators have the resources to carry out activities related to closing and 

remediating GS sites if needed during injection or after wells are plugged, so that they do not 

endanger USDWs and to ensure that the private costs of GS are not passed along to the public. 

These self-insurance requirements are based on the historical precedent established by the 

detailed guidance “Federal Financial Responsibility Demonstrations for Owners and Operators 

of Class II Oil- and Gas-Related Injection Wells” (EPA 570/9-90-003) as well as rule 

requirements described at 40 CFR 144.63 for Class I hazardous waste injection wells. 

EPA chose to follow precedents by selecting of self-insurance requirements for Class VI wells so 

that they closely follow Class I hazardous waste well requirements. Additionally, EPA has 

included financial tests from the Guidance for Class II wells that are substantially different from 

the financial tests described at 40 CFR 144.63. For owners or operators selecting the financial 

ratios test option, EPA is requiring owners or operators to exceed all five ratio thresholds to 

ensure the demonstration of their financial health and stability in as many ways as possible. 

EPA’s approach for the selection of self insurance test requirements is also consistent with the 

approached recommended by the Environmental Financial Advisory Board (EFAB). When 

charged with the task of recommending financial assurance mechanisms for the new Class VI

wells, EFAB “recommended use of Class I financial assurance mechanisms [based on their] 

familiarity with, and belief in, the effectiveness of these mechanisms.”188 EPA’s approach with 

regard to the bond rating test is specifically supported by EFABs primary recommendation that 

“the use of independent credit analysis, i.e. credit ratings, is a cost-effective mechanism for 

demonstrating financial assurance and should continue to be an alternative for those companies 

that have investment-grade ratings on their debt.”189
I. Financial Coverage Criteria

Table 6.1: Definitions of Financial Coverage Criteria 

Financial 

Indicators Requirement Rationale 

Net Working 

Capital (NWC) 

NWC must be at least six times the sum of 

the current cost estimates for all required 

GS activities. 

Consistency with 

• Class I Haz Regs at 

40CFR144.63(f)(i)(B) and 

40CFR144.63(f)(ii)(B) 

Total Assets 

Assets in the United States must amount to 

at least 90 percent of total assets, 

or 

at least six times the sum of the current 

cost estimates for all required GS activities. 

Consistency with: 

• Class I Haz Regs at 

40CFR144.63(f)(i)(D) and 

40CFR144.63(f)(ii)(D) 

Tangible Net 

Worth (TNW) 

TNW must be at least six times the sum of 

the current cost estimates for all required 

GS activities. 

Six times threshold is established for 

consistency with: 

• Class I Haz Regs at 

40CFR144.63(f)(i)(B) and 

40CFR144.63(f)(ii)(B) 

II. Bond Rating Test

Table 6.2: Explanation of Bond Rating Test 

Requirement Rationale 

For an owner or operator to pass the financial test, 

EPA recommends that the bond’s rating be one of 

the four highest categories (i.e., AAA, AA, A, or BBB 

for Standard & Poor’s or Aaa, Aa, A, or Baa for 

Moody’s). The owner or operator should also submit 

an annual report of its bond rating. 

Consistency with: 

• Class I Haz Regs at 40CFR144.63(f)(ii)(A) 

• Class II Guidance 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 80 
III. Financial Ratio Test

Table 6.3: List of Financial Ratios

Type of 

Ratio Financial Ratios Threshold Rationale 

DebtEquity Total Liabilities

Net Worth < 2.0 

Consistency with: 

• Class I Haz Regs at 

40CFR144.63(f)(i)(A) 

This diverges from: 

• Long term liabilities to net worth 

threshold recommended in Class II

Guidance. The total liabilities threshold is 

used so that only one debt-equity ratio is 

needed and EPA is not specifying the 

ideal distribution of current vs. long term 

liabilities. 

AssetsLiabilities Current Assets

Current Liabilities > 1.5 

Consistency with: 

• Class I Haz Regs at 

40CFR144.63(f)(i)(A) 

This diverges from: 

• Current liabilities to net worth < 1.0

recommended in Class II Guidance. 

Both the Class I and Class II ratios

include current liabilities (one on the 

numerator, one on the denominator, 

therefore leading to the sign change). 

The current assets to current liabilities is 

used so that a “current” picture is 

created (net worth includes all assets 

e.g., current, long term, etc.). 

Cash 

Return 

on 

Liabilities

(Net Income + Depreciation 

+ Depletion + Amortization)

Total Liabilities 

> 0.10 

Consistency with: 

• Class I Haz Regs at 

40CFR144.63(f)(i)(A) 

• Class II Guidance 

Liquidity 

(Current Assets – Current 

Liabilities)

Total Assets 

> -0.10 

Consistency with: 

• Class II Guidance 

Net Profit Net Profit > 0 Consistency with: 

• Class II Guidance 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 81 
IV. Corporate Guarantee

Table 6.4: Explanation of Corporate Guarantee 

Guidance Text Rationale 

The Director might allow the corporate guarantee if it 

is issued by a parent corporation that owns at least 

50 percent of the subsidiary’s voting stock, has been 

in business for at least 5 years, and has a net worth 

of at least $100 million. 

Consistency with: 

• Class II Guidance, which states: 

o A parent corporation must owns at 

least 50 percent of the subsidiary’s 

voting stock 

o Companies in business less than 

five years or whose net worth is 

less than $1 million may be 

ineligible for use of financial 

statements or blanket coverage 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 82 
8. Evaluation of Minimum Tangible Net Worth 

EPA’s final rule creates a new Class VI well for the geologic sequestration (GS) of carbon 

dioxide. If an owner or operator fails during the life cycle of a GS project, then the project’s 

environmental liabilities could fall to the public. Liabilities could include corrective action on 

wells in the Area of Review (AoR), injection well plugging, post-injection site care, site closure, 

and any emergency and remedial responses. To protect the public from the risk of paying for 

these financial liabilities, the proposed rule contains specific provisions requiring an owner or 

operator to demonstrate and maintain financial responsibility by either securing an instrument 

from an independent third-party or by utilizing self-insurance. Self-insure is available to owners 

or operators who assure the regulator (and the public) that they are unlikely to fail. To 

demonstrate adequate financial responsibility, EPA requires that the self-insuring owner or 

operator meet specific financial coverage criteria and pass either a bond rating test or a financial 

ratio test. The coverage criteria and tests should ensure that owners or operators are unlikely to 

fail and leave the public with a large financial liability. The Director has the discretion to 

approve (or deny) an owner or operator’s bid to use self-insurance as a demonstration of 

financial responsibility. The three coverage criteria and two test options are depicted in Figure 

8.1: 

Figure 8.1: Coverage Criteria and Tests for Qualifying for Self-Insurance 

Under 40 CFR 144.63, the coverage criteria parameters for Class I Hazardous wells were set at: 

k1 = $10M 

k2 = 6 

k3 = 90% 

Although these parameters have applied to Class I Hazardous wells for 30 years, Class VI GS 

wells may require more stringent parameters based on the long time periods and large costs 

associated with GS. The purpose of this analysis is to reevaluate the k1 parameter for the 

minimum tangible net worth (TNW) threshold, explore alternative TNW thresholds, and 

recommend a TNW threshold for Class VI GS Wells. 

Options

In theory, the TNW threshold can be any (non-negative) number, which would yield a continuum 

of policy options. The evaluation of a continuum of policy options would require a proposed 

regulation and it is beyond the scope of this evaluation; therefore we evaluated 3 discrete options 

for the TNW threshold: 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 83 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 84 

 

190 In a March 1996 issue paper on self-insurance developed by ICF for EPA’s Solid Waste program financial tests were justified on the grounds 

of minimizing the sum of the costs to the industry (the overhead cost) and the costs to the public (the risk of failure), without an accounting of the 

transfer of costs from the owner or operator to the public. That analysis was based on two EPA Office of Solid Waste documents: “Background 

Document for Revisions to the Subtitle C Financial Tests For Closure, Post-Closure Care, and Liability Coverage” and “Background Document: 

Subtitle D Financial Tests for Closure, Post-Closure, and Corrective Action”, (40 CFR Part 254 

and 265) and (40 CFR Part 258). The transfer of costs from the owner or operator to the public should not be neglected. Such a transfer inherently 

depletes the natural capital wealth of the public and increases the financial capital wealth of the polluting firm’s owners. In doing so, it cedes 

some of the public’s property right to a clean environment, which completely undercuts the explicit purpose of financial responsibility (ensuring 

that the polluter-pays principle is upheld). 

191 This analysis excludes other criteria for qualifying for self-insurance; these additional criteria would further control the risk of instrument 

failure. 

A. k1 = $0: Drop the TNW criterion 

B. k1 = $10M: Preserve the status quo (i.e., utilize the Class I Hazardous threshold for Class 

VI wells) 

C. k1 = $100M: Increase the status quo by a factor of 10 

Objective for Setting TNW 

By definition, for any particular owner or operator, independent third-party instruments 

always pose a lower risk of failure than self-insurance. This is because when an independent 

third-party instrument is in place, both the independent third party and the owner or operator 

must fail in order for the financial liabilities to be passed onto the public. In contrast, with selfinsurance, only the owner or operator must fail for the financial liabilities to become the public’s 

responsibility. Self-insurance is always riskier to the public, but it remains desirable to owners 

and operators because it is their lowest cost option. Self-insurance can also be desirable to the 

public because it encourages growth of the GS industry by lowering the cost of doing business. 

The TNW criterion, like the other criteria and tests, should not hinder the growth of the GS 

industry by excluding prospective owners or operators for entry and it should not expose the 

public to excessive risk. Therefore, this analysis identifies a TNW value that assures that the 

risk born by the public from a self-insured owner or operator is no greater than the riskiest 

scenario under independent third-party instruments.

190 To determine the appropriate TNW 

value, this report evaluates results from an economic model calibrated to data on GS activities 

and the owners or operators expected to participate.191 
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 85 

 

192 For simplicity, all decisions in the model (e.g. participation in the market, the riskiness of the other profit-making investments in the owner or 

operator’s portfolio of activities, the amount of dividends to offer to shareholders, etc...) are treated as exogenous – occurring outside of the 

model and hence independent of what occurs inside the model. 193 By forcing the owner or operator to pay upfront( in-full) for the 91 years, we circumvent the problem of owners or operators evading liabilities 

falling in the post-operation phase. Like several other assumptions, this simplifying assumption is made to keep the model tractable. In reality, the 

financial assurance of owner or operator owners or operators will be reviewed periodically, owners or operators may be somewhat allowed to pay 

as they go, and financial conditions may dictate a change in instruments or even a complete shutdown in the middle of the operations phase. 194 The risk of leakage into the atmosphere is not explicitly set aside in this model; it is subsumed in the damages from a stochastic GS event. 

Calibrated Model 

Our quantitative model examines the risks to the public under self-insurance against a baseline 

level of acceptable risk. The baseline is the risk to public when the riskiest owner or operator (i.e. 

an undercapitalized owner or operator that can barely afford to enter the industry) uses an 

independent third-party instrument to demonstrate its financial responsibility. A parsimonious 

model was designed to capture the following details: 

• the timing, structure, overhead costs, and failure of independent third-party instruments 

• the magnitude, timing, and uncertainty of environmental liabilities 

• the hazard of financial insolvency and how this changes with the owner or operator’s size 

• the role of tangible net worth in driving an owner or operator into insolvency 

• the effects of environmental liabilities, as well as other leveraging liabilities, on tangible 

net worth and hence on insolvency 

• the stochastic growth of tangible net worth due to the owner or operator’s activities both 

inside and outside of the GS industry 

• the timing and structure of GS operations, as well as the risk and return on GS activities 

• the characteristics of owners or operators (chiefly the distribution of their size and hence 

risk) that will participate in the GS industry 

The model divides time into 91 periods corresponding to 1 year of the pre-operation phase 

during which the owner or operator secures a financial responsibility mechanism, 40 years of the 

operation phase, and 50 years of the post-operation phase during which the owner or operator 

continues monitoring the site and tending to any stochastic GS events (e.g. emergency and 

remedial responses and corrective action). The unit of analysis is the owner or operator.192 The 

return on the owner or operator’s investment in GS is accrued only during the operating phase. 

Stochastic GS events can occur in either of the later periods, certain costs (operational and postoperational) occur in both of the later periods, and the costs of independent third-party financial 

responsibility instruments are paid for in the first period alongside other initial costs.193 During 

each period, there is some risk that stochastic GS events or external shocks (i.e. losses/windfalls 

from the owner or operator’s activities in other markets) will decrease the GS owner or 

operator’s TNW to the point that the owner or operator becomes insolvent. 

To evaluate the model’s chief outputs, an Excel workbook performed hundreds of Monte Carlo 

realizations (scenarios) on every uncertain variable for every year. The model can simulate the 

distribution of its variables, including risk to the public, for each possible TNW. The model 

parameters were empirically calibrated to “realistic” values found during careful research. The 

greatest sources of uncertainty in these model parameters are the stochastic GS events, the 

magnitude of the resulting damages, and the price paid to the owner or operator for each ton 

sequestered.194
Research and Analysis Supporting Financial Responsibility Requirements and Guidance 86 

195 For a trust fund, the owner or operator would be required to pay the current value (i.e. undiscounted) of all liabilities plus administrative 

overhead into a trust. For an insurance contract, the owner or operator could pay only the present value (i.e. discounted) plus the insurer’s markup over actuarial fair cost. 

196 Allowing an owner or operator with $10M in TNW to self-insure would obviously be riskier if that same owner or operator couldn’t even 

afford the independent third-party FR instruments. 

 Results

Over the course of the 91 year span of the model, no more than 1 emergency and remedial 

response events are expected for any single owner or operator. However, based on industry 

failure rate data, only 61% of insurance owners or operators are expected to survive the 91 years 

due to their other liabilities (a compounding of the 0.6% failure rate of insurance companies, a 

hazard which is presumably constant over time). In contrast, just over 97% of trust funds are 

expected to survive the entire 91 years modeled. However, the upfront cost of using trust funds 

as a form of financial responsibility are so high that it is very unlikely that an owner or operator 

would choose to use a trust fund over insurance.195 Consequently, both certain and uncertain 

costs get coverage from third-party insurance providers in this model. The owners or operators 

that survive this 91 year stretch tend to exhibit exponential growth in their tangible net worth and 

their risk steadily falls, along with their expected returns (i.e., their expected growth rate). 

A. k1 = $0: Drop the TNW criterion 

If the GS activity costs for which the owner or operator must demonstrate financial responsibility 

are sufficiently high, then the criterion requiring TNW to exceed 6 times that current cost (k2 = 

6) makes the TNW threshold of $10M used for Class I Hazardous wells irrelevant. For example, 

the current value of costs in our baseline scenario when using independent third-party 

instruments is $48M rendering both the $10M and $100M candidate thresholds irrelevant 

because both are smaller than 6×$48M = $288M. Moreover, all of the owners or operators 

actively involved in demonstration projects have TNW values that are orders of magnitude above 

these candidate thresholds (the smallest has a TNW of just over $2,800M or 28 times the size of 

the larger threshold). However, there are two good reasons for keeping the TNW criterion. First, 

the owners or operators involved in the demonstration projects are the heavily capitalized firms 

that can afford to take a risk on these experimental demonstration projects as part of their 

research and development. But in the future, there may be lightly capitalized owners or operators 

entering the GS market, and such higher-risk firms should not be allowed to self-insure. Second, 

the $48M figure in our baseline scenario is a central estimate, but there is considerable 

uncertainty around that figure. Real costs could vary by orders of magnitude. Hence, depending 

on the actual cost estimates, a $100M or even $10M TNW threshold could separate out lightly 

capitalized owners or operators. 

B. k1 = $10M: Preserve the status quo threshold used by Class I Hazardous wells 

A TNW threshold of $10M results in the public bearing a risk from self-insured owners or 

operators that can be nearly 14 times higher than the risk from owners or operators that have just 

enough capital to afford the independent third-party financial responsibility instruments (which 

cost $2.6M, up-front). Therefore, the threshold of $10M clearly fails to accomplish the purpose 

of financial responsibility because it exposes the public to excess risk in the baseline scenario.196

 
Again, this baseline risk is determined from the riskiest owner or operator that can afford 

independent third-party instruments and is heavily dependent on uncertain cost estimates. 

Likewise, the risk of allowing an owner or operator with $10M in TNW to self-insure also 

depends on this uncertain cost estimate. 

C. k1 = $100M: Increase the status quo by a factor of 10 

A TNW threshold for self-insured owners or operators of $100M results in a risk to the public 

from a self-insured owner or operator that is roughly equal to the baseline risk from an owner or 

operator which is barely able to afford the independent third-party financial responsibility 

instruments (which cost $2.6M, up-front).

197 Therefore, the threshold of $100M should assure 

that the risk born by the public from a self-insured owner or operator is no greater than the 

riskiest scenario where independent third-party instruments are used. As mentioned above, this 

finding is highly sensitive to the cost estimates and should not be taken as a certainty. 

 Context

Although a ten-fold increase in the TNW criterion could be seen as a dramatic increase, it should 

be put in context. The scale of GS operations (as well as the owners or operators likely to run 

them) dwarf the smaller-scale projects for which the $10M TNW criterion was originally set by 

the UIC program 30 years ago. The TNW criterion should be judged by the scale of the cost 

estimate. A TNW criterion of $100M is small in comparison to $288M, which is the TNW value 

equal to six times the cost estimate for covered activities (6 × $48M). Figure 8.2 places the scale 

of $100M in context by comparing the TNW criteria in the space of tangible assets versus total 

liabilities, as well the participants in demonstration projects. 

Figure 8.2: Chart of Criteria Thresholds for Self-Insurance 

*Typical Threshold for Financial Ratio Test – To plot this threshold in this space, we have assumed that 90% of total assets are tangible (and the 

fraction of total assets that are current equals the fraction of total liabilities that are current). The plotted points are the actual (Liabilities,TNW) of 

the GS demonstration owners or operators; their tangible assets range from 88% of their total assets (for RWE DEA Norge and StatoilHydro, 

both headquartered in northern Europe) to 99% of their total assets (for Sonatrach headquartered in Algeria). 

 

197 The limited simulation produces a flat risk profile between $75M and $165M as a result of a finite number of realizations. With a larger 

simulation, that flat interval would narrow, presumably around $100M. 

Research and Analysis Supporting Financial Responsibility Requirements and Guidance 87 
Appendix A: Costs to the Owner or Operator for each Mechanism 88 

 

198 Captive insurance, where the insurer is an owner or operator’s parent or sibling firm, inherits the risks of self-insurance because the insurance 

company is not owned by a third party. Captive insurance is excluded from this discussion. 

Appendix A: Costs to the Owner or Operator for each Mechanism 

Trust fund: Funds must be paid into the trust to cover the total estimated costs of the GS activity. 

Additionally, the owner or operator pays a fee for the administrative services provided by the 

trustee. Overhead costs will be case specific, but are estimated at 2 percent of the total cost of the 

activity. Annual costs will be determined by the trust fund’s pay-in schedule if a pay-in period is 

allowed. 

Letter of credit: The owner or operator pays fees to obtain letters of credit and may be required 

to set aside substantial collateral to secure the instrument. The annual fee for a standby letter of 

credit is estimated at 1.5 to 2 percent of the total cost of the GS activity. If letter of credit is 

utilized, the interest rate is typically at the market rate (prime plus a percentage determined by 

the bank), estimated at 4 to 8 percent. The financial health of the purchaser will determine the 

interest rates, and whether collateral or deposits are required. Letters of credit are also classified 

as an accounting liability, and their relative costs may include limits to borrowing power. 

Additional overhead costs may be incurred to maintain a standby trust, if required. 

Surety bond: The owner or operator pays annual premiums to a surety company and generally is 

required to provide substantial cash collateral. Premiums average 2.5 percent, although the costs 

could range from 0.5 percent to 15 percent of the total cost of the GS activity, depending on the 

financial solvency of the owner or operator and the risk associated with the project’s activities. 

Financial institutions emphasize prequalification. Typically, the premium would be paid based 

on the face value of the bond; premiums are often based on a sliding scale rate and need to be 

paid up front. 

Insurance: Costs for the owner or operator can vary based on the type of insurance.198 Finite or 

fully-funded policies (which resemble trust funds and therefore limit risk to the insurer) present 

higher costs to the owner or operator than do conventional insurance policies. The cost of 

insurance is a premium established by the policy underwriter’s assessment of site-specific risks. 

The price reflects the likelihood of a range of possible claims. Insurance may also have a fee for 

an initial risk assessment. 

Financial Test and Corporate Guarantee: The financial test and the corporate guarantee are the 

lowest-cost options for companies because they do not have to set aside funds for future 

payments or pay fees or premiums to third parties. Therefore, total costs are estimated at less 

than 0.5 percent of the GS activity cost. These instruments are based on an assessment of 

company worth and do not require backing by a third party or the company to set funds aside. 

Escrow account: Funds must be paid into the escrow account to cover the total estimated costs of 

the GS activity. Additionally, the owner or operator pays a fee for the administrative services 

provided by the escrow agent. Fees are estimated at less than 2 percent of the total cost of the 

activity, depending on the amount of money held in escrow. Fees are paid to a third-party 

administrator annually, and depending on how the account is managed (entirely liquid, or some 
Appendix A: Costs to the Owner or Operator for each Mechanism 89 

low-risk investments) it may accrue interest to cover the administrative costs defined in the 

escrow agreement. 
Appendix B. Technical Description of Geologic Sequestration (GS) Financial Responsibility 

(FR) Model 

Core Model

The model divides time into 91 periods corresponding to 1 year of the pre-operation phase 

during which the owner or operator secures a financial responsibility mechanism, 40 years of the 

operation phase during which the firm evens profits from injecting CO2, and 50 years of the postoperation phase during which the owner or operator continues monitoring for an tending to any 

emergency and remedial response (ERR) events. The following table illustrates the timeline: 

Year Phase GS Activities 

Period 0 Pre-operation Securing Financial Assurance 

Instrument(s) 

Period 1 

Operation GS injections, monitoring, responding to 

ERR events 

. 

. 

. 

Period 40 

Period 41 

Well Plugging (year 41 only) 

Post-operation 

Site-care 

(monitoring and responding to ERR 

events) 

. 

. 

. 

Period 90 

At each point in time t, the owner or operator inherits an initial tangible net worth (TNW) of At

from its past activities, in the form of At assets and no liabilities.199 To leverage these assets, the 

owner or operator then borrows additional capital, which shows up as liabilities in the firm’s 

balance sheet: 

The owner or operator invests its assets and its borrowed capital, At + Lt, in productive activities 

that consume the capital in the process. The investment in the productive activity returns 

stochastic revenue: 

 

Appendix B. Technical Description of TNW Model 90 

199 Although we do not explicitly introduce optimization decisions made by firms in this model in order to remain parsimonious, the model is 

consistent with the standard sort of investment model sketched by Hubbard (1998) and presented in corporate finance textbooks (e.g. Tirole 

(2006) or Ross, Westerfield, and Jaffe (2008)). 
Where Pt is the productivity of the capital. The owner or operator will survive only if it remains 

solvent.200 Let St be a binary variable indicating if the owner or operator is solvent at the end of 

period t. The solvency condition is given by: 

Where 1{} is an indicator function equal to 1 when its argument is true and rO is the interest rate 

that lenders charge the owner or operator (which will be made a function of the firm’s credit risk 

below). If the owner or operator’s revenue is sufficient to pay off the principal and interest on its 

liabilities, then the remainder of the firm’s revenue is reinvested as next period’s initial net 

worth: 

Survival is uncertain because the productivity of the owner or operator’s working capital, Pt, is 

stochastic. The distribution of productivity is log-Cauchy, yielding a closed-form for the 

probability of failure:201

Where δ is the median productivity and γ is 1⁄2 of productivity’s interquartile range.202 A critical 

stylized fact for this model to capture is that smaller owners or operators experience productivity 

shocks with a higher median and greater volatility than larger firms.203 In order to make the 

model sufficiently flexible to capture this stylized fact, we let the median and volatility of 

productivity shocks vary with the firm’s size:204

 

200 This solvency condition should be interpreted as a level of tangible net worth below which the firm is unwilling, or unable, to finance a 

continuation of its operations. Instead, bankruptcy is either the better option or the only option. In general, the solvency threshold would depend 

on the transactions costs of bankruptcy, as well as short-term options for financing the cash flow shortage (and these financing options depend on 

a variety of financial variables). 

201 Because a normal distribution is convenient for many models of investment returns, e.g. the classic option-pricing model of Black and Scholes 

(1973), it is often used in models of investment returns and even in models of credit risk, e.g. Hillegeist et al. (2004). However, it is well known 

that the normal’s kurtosis is inadequate for modeling investment returns. In the context of this sort of dynamic model, a sufficiently large 

probability of failure is only possible by giving the normal such a large variance that most firms grow at an implausibly high rate. Following the 

suggestion of Mandlebrot and Hudson (2004), we employ the Cauchy distribution which has much fatter tails while concentrating more 

probability mass around the median. 

202 Note that the central tendency (median) and variability (volatility = IRQ/2) are measured in different units from the normal distribution, for 

which practitioners usually refer to mean and variance. For the Cauchy distribution, the tails are so fat that the mean and variance do not actually 

exist. Although they may appear quite different on the surface, the Cauchy and Normal distributions are closely related. Both the Cauchy and the 

Normal are particular members of a broader parametric class of distributions known as Stable Distributions for which the distributional family is 

closed under convolution. See Nolan (2009) for more on Stable Distributions. 

203 In addition to being a presupposition of there being a TNW requirement for self-insurance, documented empirical evidence of this stylized fact 

dates back at least as far as Hall and Weiss (1967). 

Appendix B. Technical Description of TNW Model 91 

204 Without allowing δ and γ to vary by firm size, the empirical relationship between At and Lt (coupled with the observed survival probabilities 

and growth rates) would rigidly box this model into a corner where it would fail to allow sufficient variation in productivity shocks by firm size. 
Where the second equation comes directly from the Capital Asset Pricing Model (CAPM), rF is 

the long-run rate of return on a “risk-free” asset, rm is the long-run average (across the market) 

rate of return on private capital, and β is the mark-up in the owner or operator’s interest rate due 

to its riskiness relative to the market.205 Describing the relationship between β, γ, and A 

introduces three additional parameters: θ1 describes how volatility changes with the owner or 

operator’s risk factor (its β), θ2 describes the elasticity of β with respect to the firm’s size, and θ3

determines the firm size at which β is 1.206 

Self-Insurance

At time 0, the owner or operator must make a financial responsibility demonstration. If its TNW 

exceeds the minimum threshold, then the owner or operator can use self-insurance to make a 

financial responsibility demonstration that is good enough to cover the lifetime of the site.207 We 

assume that a self-insurance demonstration is (virtually) costless for the firm.208 From period 1 to 

period 40, the owner or operator can inject Q tons per year at a certain cost of Ct<41 with a high 

enough price for the firm to net a “fair rate of return” on that cost outlay at the end of the year 

(i.e., 1 + rm, akin to an electric power utility). 

During these first 40 years, as well as for the next 50 years after that, the owner or operator is 

also responsible for any uncertain costs due to Emergency and Remedial Response (ERR) events 

and Corrective Action (CA) events. We model the uncertain costs due to an ERR event as the 

simple product of the occurrence of an ERR event in that year, MtERR, the scale of damages from 

that event, DERR, relative to expected total discounted costs of the project (CNPV): 

t ERR = ERR tERRCMDU NPV

Let the probability of an ERR event be constant: 

Mt ERR == λ ERR Pr( )1

Let the damages of an ERR event be Beta distributed with mean equal to 80 percent of the owner 

or operator’s estimated total costs and a maximum of 6 times that total cost: 

[ ] ),(6

)6( Pr( }6,0{1 1

1 1

βα βα

α β

Β

− ×∈== −+

− − dd

ERR dd)D

 

205 See French (2003) for the development of a basic variant of the CAPM and the model’s place in the history of economic thought. Campbell, 

Hilscher, and Szilagyi (2008) demonstrate a connection between the stock’s risk, captured by β in the CAPM, and its failure risk. 206 In practice, we will calibrate θ3 so that it is the mean of the logged distribution of firm size across the GS industry, with the assumption that the 

distribution is log normal with mean μ and standard deviation σ. This assumption is standard in the literature on the distribution of firm sizes 

within an industry – see Cabral and Mata (2003). 

207 The TNW requirement is a necessary condition for using self-insurance but not a sufficient condition. There are more conditions, referred to as 

financial tests, which further control the public’s risk exposure due to self-insurance. Likewise, the director has some discretion in allowing thirdparty assurance mechanisms and that is also not included in this simple model. Moreover, these requirements are revisited periodically. However, 

the model becomes increasingly complicated if these details are included. 

Appendix B. Technical Description of TNW Model 92 

208 EPA recognizes that self-insurance is not without cost. Self-insurers may utilize captive insurers or seek other means of diversifying risk that 

are costly. However, the demonstration of self-insurance itself is assumed to be a minor cost. 
Where the parameters (α, β) produce a skewedness in-line with expert judgment, while 

satisfying: 

8.0

)(

6 )( = + = βα

α dE

We model the uncertain costs of CA events as the simple product of the occurrence of a CA 

event that year, MtCA, and a constant cost for that event, ΔCA: 

UtCA Δ= MtCACA

For years 41 through 90, the owner or operator does not earn any revenue from injection but is 

still obligated to pay for certain costs at the site, Ct>40, as well as any costs from ERR events. 

If the owner or operator fails for whatever reason, be it from an exogenous productivity shock or 

an ERR event, then the public must pay for the dissolved firm’s environmental obligations. We 

assume that if an owner or operator fails during years 1 through 40, another operator or owner 

will continue to operate the plant for the remaining operable years.209 The public will not pay for 

post-operation expenses until year 41. The expected discounted risk to the public of a selfinsured owner or operator is given by: 

[ ] )( { } )|0Pr(401)( *1

1 )|(

90

0

ERR tERR NPV CA tCA t t t

t

t

AStCMECMDE

r

SelfDE ⎟ Δ+ >+ = ⎠

⎞ ⎜

⎝

⎛

+ = ∑=

Where D on the left hand side is the expected damages (risks to the public) and r* is the socially 

optimal discount rate, which is necessary in order to sum liabilities that are spaced over time. 

Third-Party Instruments

If the owner or operator’s TNW is beneath the minimum threshold, then it cannot use selfinsurance to make its financial responsibility demonstration. Instead, in period 0, it must 

purchase third-party instruments for demonstrating financial responsibility over the course of the 

lifetime of the site. The simplest third-party instruments to model are those that pay out so long 

as the third-party is solvent, regardless of whether the owner or operator has failed. Hence, we 

use insurance for the uncertain costs due to ERR and CA events as well as for the certain costs in 

the post-operation phase. The cost of these instruments is actuarially fair, plus a percentage 

markup over that actuarial fair cost: 210

[ ] )( { } 401)( 1

1 )1(

90

0

Δ+ >+ ⎟

⎟

⎠

⎞

⎜

⎜

⎝

⎛

+

+= ∑=

tCMECMDE

r

kK ERR tERR NPV CA tCA t

t

t IN

IN

These third-party instrument providers can, themselves, fail. We have modeled the failure of 

third-party instrument providers as a (statistically independent) constant hazard rate over the 

 

209 This assumption lowers the financial risk to the public substantially. Without this assumption the TNW would need to be increased by a factor 

of 10 to equate risk. 

Appendix B. Technical Description of TNW Model 93 

210 This model of insurance is extremely simplified. For instance, the model has no caps on claims, no annual premiums, no copay, no deductible, 

no exceptional clauses, etc. 
horizon of the model. In order for the public to bear the risk, both the third-party instrument 

provider and the owner or operator must fail. Once again, we assume that the public will not pay 

for post-operation expenses until year 41. Hence, the expected discounted risk to the public of an 

owner or operator with a third-party instrument is given by: 

( ) [ ] )()1( { } )|0Pr(401)( *1

1 )3|(

90

0

ERR tERR NPV CA tCA t t t

t

t

t

rd tCMECMDEq AS

r

DE ⎟ − Δ+ >+ = ⎠

⎞ ⎜

⎝

⎛

+ = ∑=

W

here q is the probability of an insurance provider surviving the year. As can be seen from these 

two equations for risk, third-party instruments pose a lower risk than self-insurance for any given 

owner or operator. However, because risk is decreasing in the owner or operator’s size, there 

exists a level of TNW above which the risk to the public is lower than the riskiest firm that can 

afford the cost of third-party instruments. 211

References 

Black, Fischer and Scholes, Myron. 1973. “The Pricing of Options and Corporate Liabilities”. 

The Journal of Political Economy, Vol. 81, No. 3, pp. 637-654. 

Cabral, Luis M. B. and Mata, Jose. 2003. “On the Evolution of the Firm Size Distribution: Facts 

and Theory”. The American Economic Review, Vol. 93, No. 4, pp. 1075-1090. 

Campbell, John Y.; Hilscher, Jens; and Szilagyi, Jan. 2008. “In Search of Distress Risk”. The 

Journal of Finance, Vol. 113, No. 6, pp. 2899-2937. 

French, Craig. 2003. “The Treynor Capital Asset Pricing Model”. Journal of Investment 

Management, Vol. 1, No. 2, pp. 60-72. 

Hall, Marshall and Weiss, Leonard. 1967. “Profitability and Firm Size”. The Review of 

Economics and Statistics, Vol. 49, No. 3, pp. 319-331. 

Hillegeist, Stephen A.; Keating, Elizabeth K.; Cram, Donald P.; and Lundstedt, Kyle G. 2004. 

“Assessing the Probability of Bankruptcy”. Review of Accounting Studies, Vol. 9, pp. 5–34. 

Hubbard, R. Glen . 1998. “Capital-Market Imperfections and Investment”. Journal of Economic 

Literature, Vol. 36, No. 1, pp. 193-225. 

Mandlebrot, Benoit and Hudson, Richard. 2004. The (Mis)behavior of Markets: A Fractal View 

of Risk, Ruin, and Reward. New York: Basic Books. 

Nolan, John P. 2009. “Stable Distributions: Models for Heavy Tailed Data.” Draft available for 

download from the American University Department of Mathematics and Statistics. 

 

Appendix B. Technical Description of TNW Model 94 

211 We should note that this model is quite simplified, by necessity. What it fails to address could potentially alter the recommended TNW 

requirement. For instance, the model does not explicitly model the optimizing decisions made by firms, including the decision to participate in 

GS. Also, many heterogeneous aspects of both GS activities and GS firms have been neglected entirely here. Importantly, the probability of a 

third party’s failure is not likely to be independent of all other shocks. Finally, this model neglects the effect of allowing self-insurance on 

markets: it exacerbates the competitive advantage of larger firms and it skims the third party insurance market’s risk pool of the least risky firms. 
Appendix B. Technical Description of TNW Model 95 

Ross, Stephen A.; Westerfield, Randolph W.; and Jaffe, Jeffrey. 2008. Corporate Finance, 8th

edition. New York: McGraw-Hill/Irwin. 

Tirole, Jean. 2006. The Theory of Corporate Finance. Princeton: Princeton University Press. 
Appendix C. Calibration of GS FR Model Parameters 96 

Appendix C. Calibration of GS FR Model Parameters 

The set of parameters to be calibrated appear in the following table: 

Description Parameter 

Quantity of CO2 sequestered by GS Operation Q 

Certain Costs of GS During Operation (all costs other than 

ERR) Ct<41

Average cost of an ERR event Δ

Expected number of ERR events per site λ

Certain Costs of GS After Operation Ct>40

Price paid per ton of CO2 sequestered by a GS Operation P 

Overhead cost for trust fund κTF

Overhead cost for insurance κIN

Average rate of return in private capital markets rm

Average rate of return on risk free asset rF

Interest rate on trust fund investments rTF

Interest rate used by insurance investments rIN

Socially optimal discount rate r* 

Liabilities as a fraction of Assets, given unitary elasticity b0

Leveraging Elasticity Parameter b1

Insolvency rate for insurance 1-qIN

Insolvency rate for trust funds 1-qTF

Baseline Average Insolvency rate for Owners/Operators 1-qOO

Elasticity of Beta to TNW θ1

Beta Risk Factor θ2

TNW level with unitary Beta Risk Factor θ3

Mean ln(Assets) of owners or operators in Industry μ

Standard Deviation of ln(Assets) of owners or operators in 

Industry σ

Parameter on the stability distribution (2 = normal, 1 = 

Cauchy) α

To describe how these parameters are calibrated, we take them one block at a time. 
Appendix C. Calibration of GS FR Model Parameters 97 

1. Of the first block of parameters, Q, Ct<41, and Ct>40 are taken from the cost model that EPA is 

developing to estimate to impact of the GS rule. 

Description of certain costs: 

Cost Annual Amount (M$) Description 

Certain Costs of GS Before 

Operation (Ct=0) 45.8 One-time costs incurred in the 

pre-orientation phase (year 0). 

Certain Costs of GS During 

Operation (all costs other than 

ERR/CA) (Ct<41) 

4.2 

Average annual costs incurred 

in the operation phase (years 1 

through 40). 

Certain Costs at Well Plugging 

(Ct=40) 0.8 One-time costs incurred in the 

well plugging phase (year 40). 

Certain Costs of GS After 

Operation (Ct>40) 0.8 

Average annual costs incurred 

in the post-operation phase 

(years 41 through 90) 

Source: All certain cost estimates are from the EPA’s “Cost Analysis for the Federal Requirements Under the Underground Injection Control 

Program for Carbon Dioxide Geologic Sequestration Wells” (816-R-10-013). 

Our estimate for P (the price paid per ton of CO2 sequestered during the life of a GS operation) is 

based on a rate of return equal to 7 percent of total capital costs. The rate of return is set so that 

owners or operators get a fair return (equal to rm) on their cost outlays. Given that Q (quantity of 

CO2 sequestered by a GS operation) is equal to 1.8 million tons, P is equal to the quotient of total 

revenue and sequestered tons of CO2: 

P = (1 + rm)K/Q 

Where K is equal to total capital costs. The estimate for Q is taken from the EPA’s cost model. 

Both Δ and λ were increased to reflect our best professional judgment of the full range of 

damages. 

2. The overhead costs of trust funds were taken from the Fall 2009 Tangible Net Worth Issue 

Paper. The overhead costs of insurance were assumed to be the same. 

3. The long-run interest rates come from OMB’s standardized instructions for conducting 

economic analyses. Roughly half are 3%, reflecting the long-run average rate of return on 

treasury bills and the other are 7%, reflecting the long-run average rate of return on private 

capital. 

4. The leveraging parameters (b0,b1) get their values from rounding off an estimation of those 

parameter values for liabilities regressed on assets using the 4 largest firms involved in GS 

demonstration projects (Shell, BP, ExxonMobil, and Chevron) using the data that appears in the 

Fall 2009 Tangible Net Worth Issue Paper. 
Appendix C. Calibration of GS FR Model Parameters 98 

5. The survival probabilities [qIN, qTF, qOO] were taken (respectively) from A.M. Best Financial 

Strength Rated Insurance Company Impairments, a RCRA issue paper, and from The Dun and 

Bradstreet Corporation’s Annual Business Failure Record using the oil and gas industry as a 

proxy for the GS industry. This third probably is not a direct input to the model but gets used in 

the estimation of other model parameters. 

6. Because inspection of publicly available estimates of β for oil firms hovered around 1 (with 

the largest firms being below 1), we set θ3 to μ, the mean of the log of the distribution of firm 

sizes. Both θ1 and θ2 were estimated in a multi-step procedure that also involved estimating μ

and σ. The first step involved centering the prior distribution on the beliefs of the μ and σ

parameters using a method of moments (GMM) matching to the moments for firm failure 

conditional on TNW reported in a RCRA issue paper. In the second step, the prior number of 

firms in the GS industry was centered on the MLE of the number of firms in the industry using 

the 4 largest firms listed in the Fall 2009 TNW Issue Paper as the top 4 order statistics (of draws 

from the log normal distribution using the μ and σ estimates from the initial GMM procedure). 

With flat priors around these center points, Bayesian updating was performed on these prior 

distributions using the 4 order statistic data points. This resulted in our final estimates of μ and σ. 

Given those estimates, we then fitted θ1 and θ2 using a GMM procedure to fit the mean failure 

rate for owners and operators.