[Federal Register Volume 64, Number 117 (Friday, June 18, 1999)]
[Notices]
[Pages 32948-32972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15271]



[[Page 32947]]

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Part III

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Environmental Protection Agency





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Calculation of the Economic Benefit of Noncompliance in EPA's Civil 
Penalty Enforcement Cases; Notice

  Federal Register / Vol. 64, No. 117 / Friday, June 18, 1999 / 
Notices  

[[Page 32948]]



ENVIRONMENTAL PROTECTION AGENCY

[FRL-6361-7]


Calculation of the Economic Benefit of Noncompliance in EPA's 
Civil Penalty Enforcement Cases

AGENCY: Environmental Protection Agency (EPA).

ACTION: Advance notice of proposed action, response to comment, and 
request for additional comment.

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SUMMARY: In a Federal Register Notice on October 9, 1996, the 
Environmental Protection Agency (``EPA'') requested comment on how it 
calculates the economic benefit that regulated entities obtain as a 
result of violating environmental requirements; EPA makes this 
calculation to establish an appropriate penalty for settlement 
purposes. This Notice provides both responses to the public comments 
and advance notice of the changes EPA proposes to make to its benefit 
recapture approach and to its BEN computer model (which is used by EPA 
to calculate economic benefit for purposes of settlement). EPA also 
requests comment on these proposed changes. After the comment period 
closes, the Agency plans to review all of the comments and revise its 
benefit recapture approach as appropriate.

DATES: EPA urges interested parties to comment in writing on its 
proposed changes to the BEN model and to the Agency's benefit recapture 
approach. Comments must be received by EPA at the address below by July 
30, 1999.

ADDRESSES: Written comments should be submitted in triplicate to: U.S. 
Environmental Protection Agency, Office of Enforcement and Compliance 
Assurance, Economic Benefit Docket Clerk, Mail Code 2248-A, 401 M 
Street, SW., Washington, DC 20460, and should reference this docket. 
EPA will maintain a record of all written comments submitted pursuant 
to this Notice. Copies of the comments may be reviewed at the Ariel 
Rios Federal Building, 1200 Pennsylvania Avenue, Washington, DC 20004. 
Persons interested in reviewing the comments must make advance 
arrangements to do so by calling (202) 564-2235.

FOR FURTHER INFORMATION CONTACT: Copies of the BEN computer model and 
the BEN User's Manual may be obtained from the National Technical 
Information Service by calling (800) 553-6847. Callers should request 
order number PB98-500382GEI. Electronic copies of these items are also 
downloadable through the Office of Enforcement and Compliance 
Assurance's World Wide Web site on the Internet (http://www.epa.gov/
oeca/datasys/dsm2.html). Government users (federal, state, or local) 
can also obtain copies of the model and manual through the Agency's 
toll-free enforcement economics helpline at (888) ECONSPT. For further 
information, contact Jonathan Libber, Office of Regulatory Enforcement, 
Multimedia Enforcement Division, at (202) 564-6102, or through 
electronic mail at [email protected].

SUPPLEMENTARY INFORMATION: This Notice is organized as follows:

I. Background

A. Overview

B. EPA Policy and Guidance on Recapturing the Economic Benefit of 
Noncompliance

1. Policy Background
2. BEN Calculates the Economic Benefit From Delayed and Avoided 
Pollution Control Expenditures
3. Current Model Usage and Applicability

C. How a Firm Obtains an Economic Benefit From Delaying or Avoiding 
Compliance Costs

1. The Components of Economic Benefit Measured by the BEN Model
2. Taking Indirect Costs Into Account

II. Proposed Changes

A. Broad Economic Benefit Recapture Issues

1. Alternatives to BEN
2. Illegal Competitive Advantage

B. The BEN Model's Calculation Methodology

1. Investment Tax Credit and Low-Interest Financing
2. Depreciation Method
3. Tax Rates
4. Differences in On-Time and Delay Scenarios
5. Replacement Cycles for Capital Equipment
6. Inflation Treatment
7. Discount Rate
8. Discounting Methodology

C. Improving the BEN Model's User Friendliness

1. Is BEN Too Complex to Operate?
2. Is the Information BEN Needs Difficult or Expensive to Obtain?

III. Response to Comments

A. Broad Economic Benefit Recapture Issues

1. Alternatives to BEN
2. Illegal Competitive Advantage

B. The BEN Model's Calculation Methodology

1. Discount Rate
2. Inflation Rate
3. Other Technical Aspects

C. Improving the BEN Model's User-Friendliness

1. Is BEN Too Complex to Operate?
2. Is the Information BEN Needs Difficult or Expensive to Obtain?
3. Other Issues Affecting Use of BEN

D. General Comments on the Public Comment Process

I. Background

A. Overview

    One of EPA's most important responsibilities is to ensure that 
regulated entities comply with federal environmental laws. These laws--
and their implementing regulations--set minimum standards for 
protecting human health and welfare and for achieving environmental 
protection goals, such as clean air and clean water. EPA upholds these 
laws through vigorous enforcement actions that correct the violations 
and appropriately penalize violators.
    A cornerstone of the EPA's civil penalty program is recapturing the 
economic benefit that a violator may have gained from illegal activity. 
Recapture helps level the economic playing field by preventing 
violators from obtaining an unfair financial advantage over their 
competitors who made the necessary expenditures for environmental 
compliance. Penalties also serve as incentives to protect the 
environment and public health by encouraging the prompt compliance with 
environmental requirements and the adoption of pollution prevention and 
recycling practices. Finally, appropriate penalties help deter future 
violations by both the penalized entity and by similarly situated 
regulatees.
    EPA has promulgated a generic civil penalty policy, as well as 
specific penalty policies tailored to suit the needs of particular 
regulatory programs. For example, one civil penalty policy specifically 
addresses violations of the Clean Water Act. There are usually two 
components to the civil penalties sought by EPA: gravity and economic 
benefit. The gravity component reflects the seriousness of the 
violation and is generally determined through the application of the 
appropriate EPA civil penalty policy.
    The economic benefit component, on the other hand, focuses on the 
violator's economic gain from noncompliance, which may occur in three 
basic ways. The violator can: (1) Delay necessary pollution control 
expenditures; (2) avoid necessary pollution control expenditures; or 
(3) gain an illegal competitive advantage during the period of 
noncompliance. This competitive advantage may occur, for example, if a 
company sells banned products or captures additional market share by 
selling its products at a lower cost than its complying competitors.
    The Agency designed the BEN computer model to calculate--primarily

[[Page 32949]]

for settlement purposes--the economic benefit from these first two 
types of economic gain. BEN may not be appropriate for all cases. The 
EPA's regional offices can use an alternative approach that can produce 
reasonably accurate benefit calculations; however, the Agency believes 
that BEN is by far the best approach available for calculating economic 
benefit derived from delayed and avoided costs. The Agency does not 
have a computer model for calculating the benefit gained from an 
illegal competitive advantage. EPA considers such gains on a case-by-
case basis.

B. EPA Policy and Guidance on Recapturing the Economic Benefit of 
Noncompliance

    Since the BEN computer model's development in 1984, EPA staff have 
used BEN extensively in generating penalty figures for settlement 
purposes that reflect the economic benefit a violator derived from 
delaying or avoiding compliance with environmental statutes.
1. Policy Background
    Calculating a violator's economic benefit using the BEN computer 
model is usually the first step in developing a civil settlement 
penalty figure under the Agency's Policy on Civil Penalties (PT.1-1) 
February 16, 1984, and A Framework for Statute-Specific Approaches to 
Penalty Assessments (PT.1-2) February 16, 1984. The Agency developed 
the BEN computer model to assist in fulfilling one of the main goals of 
the Policy on Civil Penalties: recovery--at a minimum--of the economic 
benefit derived from noncompliance.
    The BEN computer model is a tool that is primarily intended to be 
used in calculating economic benefit for purposes of developing a 
settlement penalty. In presenting economic benefit testimony at 
judicial trial or in an administrative hearing, the Agency relies on an 
expert to provide an independent financial analysis of the economic 
benefit the violator obtained as a result of its violations. This 
independent financial assessment reflects the expert's own analytical 
approach as applied to the particular facts of that case. Use of an 
expert in a trial or hearing allows the parties the opportunity to 
examine more closely the analysis applied to the facts at issue than 
would be possible through reliance solely on a computer model. 
1
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    \1\  EPA designed the BEN model as a flexible tool for use in 
settlement negotiations; it is not used, nor was it ever intended to 
function, as a rule. An expert witness testifying for the government 
may use the new Windows version of BEN in court, but the 
responsibility to determine the economic benefit still resides with 
the expert. That expert may choose to use whatever analytical tool 
(e.g., customized computer spreadsheets, the BEN model, or even a 
calculator) he or she deems appropriate for the particular 
calculations necessary in the case.
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2. BEN Calculates the Economic Benefit From Delayed and Avoided 
Pollution Control Expenditures
    The BEN model is designed to calculate two types of economic 
benefit: those gained from delaying and those gained from avoiding 
required environmental expenditures. Delayed costs can include capital 
investments in pollution control equipment, remediation of 
environmental damages (e.g., removal of unpermitted fill material and 
restore wetlands), or one-time expenditures required to comply with 
environmental regulations (e.g., the cost of setting up a reporting 
system, or purchasing land). Avoided costs include operation and 
maintenance costs and/or other annually recurring costs (e.g., off-site 
disposal of fluids from injection wells). BEN does not calculate the 
third type of economic benefit: that gained from a violator's 
competitive advantage associated with noncompliance.
3. Current Model Usage and Applicability
    The BEN model can be used in all cases that have delayed or avoided 
compliance costs. (The only exception is Clean Air Act Section 120 
enforcement actions, which require the application of a specific 
computer model.) EPA designed BEN to be easy to use for people with 
little or no background in economics, financial analysis, or computers. 
Because the program contains standard values for many of the variables 
needed to calculate the economic benefit, BEN can be run with only a 
small number of inputs from the user. The program also allows the user 
to replace those standard values with user-specific information. Table 
1 below lists the inputs to the BEN model. The optional inputs listed 
in Table 1 are those for which the model has standard default values.
    The BEN model can estimate economic benefit for many types of 
organizations: corporations, partnerships, sole proprietorships, not-
for-profit organizations, and municipalities. The BEN model has two 
sets of standard values: one applies to for-profit business violators, 
and the other applies to not-for-profit organizations. The BEN inputs 
listed in Table 1 are discussed in detail in Chapter 4 of the BEN 
User's Manual for both for-profit and not-for-profit organizations.

Table 1.--Inputs for BEN

Required Inputs

(1) Case Name, Profit Status, and Filing Status.
(2) Capital Investment.
(3) One-Time Nondepreciable Expenditure.
(4) Annual Expenses.
(5) Date of Noncompliance.
(6) Date of Compliance.
(7) Date of Penalty Payment.

Optional Inputs (Standard Values That May Be Modified):

(8) Useful Life of Pollution Control Equipment.
(9) Marginal Income Tax Rate for 1986 and Before.
(10) Marginal Income Tax Rate for 1987 to 1992.
(11) Marginal Income Tax Rate for 1993 and Beyond.
(12) Inflation Rate.
(13) Discount Rate.

C. How a Firm Obtains an Economic Benefit From Delaying or Avoiding 
Compliance Costs

    An organization's compliance with environmental regulations usually 
entails a commitment of financial resources, both initially (in the 
form of a capital investment or one-time expenditure) and over time (in 
the form of continuing, annually recurring costs). These expenditures 
should result in better protection of public health or environmental 
quality, but they are unlikely to yield any direct economic benefit 
(i.e., net gain) to the organization. If these financial resources are 
not used for compliance, then they presumably are invested in projects 
with an expected direct economic benefit to the organization. This 
concept of alternative investment--that is, the amount the violator 
would normally expect to make by not investing in pollution control--is 
the basis for calculating the economic benefit of noncompliance.
    As part of the Civil Penalty Policy, the Agency uses its penalty 
authority to remove or neutralize the economic incentive to violate 
environmental regulations. In the absence of enforcement and 
appropriate penalties, it is usually in an organization's best economic 
interest to delay the commitment of funds for compliance with 
environmental regulations and to avoid certain associated costs, such 
as operation and maintenance expenses.
1. The Components of Economic Benefit Measured by the BEN Model
    A violator may gain economic benefit from either delaying or 
avoiding compliance costs. By delaying

[[Page 32950]]

compliance, the violator can earn a return on the delayed capital 
investment or one-time expenditures required for pollution control 
compliance. In other words, violators have the opportunity to invest 
their funds in projects other than those required to comply with 
environmental regulations. These other investments are ordinarily 
expected to yield a monetary return at the violator's marginal rate of 
return on capital. But environmental expenditures typically yield no 
direct economic benefit. Thus, by delaying compliance, the violator 
benefits by the amount of earnings that could be expected from 
alternative investments.
    A violator can also gain an economic benefit from avoiding 
pollution control costs. Avoided costs typically include the 
continuing, annually recurring costs that a violator would have 
incurred if it had complied with environmental regulations on time 
(e.g., the costs of labor, raw materials, energy, lease payments and 
any other expenditures directly associated with the operation and 
maintenance of the pollution control equipment). Unlike capital 
investments and one-time expenditures that are only postponed, annual 
expenditures are avoided altogether. The resulting benefits to the 
violator are the total avoided annual costs as well as the return that 
could be expected on these avoided costs.
2. Taking Additional Factors Into Account
    EPA's BEN model evaluates economic benefit in terms of the effect 
that delayed or avoided pollution control costs have on an entity's 
cash flows. Cash flow analysis is a standard and widely accepted 
technique for evaluating costs and investments. In essence, cash flow 
calculations focus on the real, ``out-of-pocket'' cash effects 
resulting from an expenditure. Thus, noncash expenditures, such as 
depreciation, are considered only to the extent that they affect cash 
income or expenses. The three additional factors the model considers 
are taxation, inflation, and the time value of money.
    a. After-Tax Cash Flows. The BEN model computes economic benefit in 
after-tax terms to account for certain financial impacts associated 
with environmental expenditures. For example, one important impact of 
these expenditures is a reduction in income tax liability. 
Depreciation, one-time expenditures, and annual costs all effectively 
reduce taxable income and thereby reduce income tax payments. Also, 
depending upon the tax year, the original purchase of equipment might 
have resulted in an investment tax credit. To account for these tax 
effects, BEN calculates the economic benefit using after-tax cash 
flows.
    b. Inflation. Inflation is another factor for which BEN accounts. 
The BEN model initially converts all costs to dollars of the 
noncompliance year and then compares the cost of complying on time with 
the cost of complying late. The model uses the inflation rate to adjust 
the current or future cost of compliance into dollars from the year 
noncompliance began. The BEN User's Manual (see pages 4-27 to 4-29 and 
Appendix A of the manual) contains a more detailed discussion of the 
inflation adjustment.
    c. Time Value of Money. A third factor relates to the timing of the 
cash flows, because cash flows occurring in different years are not 
directly comparable. A basic concept of financial theory is ``present 
value.'' This concept is based on the principle that ``A dollar today 
is worth more than a dollar a year from now,'' because today's dollar 
can be invested immediately to earn a return over the coming year. 
(Alternatively, a dollar last year is worth more than a dollar today 
because investment opportunities existed for last year's dollar.) 
Therefore, the earlier a cost (or benefit) is incurred, the greater its 
economic impact. BEN accounts for this ``time value of money'' effect 
by adjusting all estimated cash flows to their ``present value'' 
equivalents. To accomplish this, BEN first ``discounts'' all cash flows 
back to the noncompliance date, then calculates an initial economic 
benefit as of this date, and finally ``compounds'' the economic benefit 
forward to the penalty payment date. BEN uses a rate that reflects the 
time value of money (known as a discount rate or compounding rate) to 
adjust the cash flows for both discounting and compounding.2 
The selection of the appropriate discounting methodology is a 
significant issue in the BEN model. The BEN User's Manual (see pages 4-
30 to 4-35 and Appendix A of the manual) contains a more detailed 
discussion of the discounting and compounding that BEN performs for its 
present value calculations.
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    \2\ For the sake of simplicity, the Agency generally refers to 
present value adjustments in either direction as ``discounting,'' 
although we acknowledge that a more precise term for adjusting the 
initial economic benefit forward is ``compounding.''
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II. Proposed Changes

    In its October 9, 1996, Federal Register Notice, the Agency sought 
comment on three categories of issues: (1) Broad economic benefit 
recapture questions, (2) the BEN model's calculation methodology and 
assumptions, and (3) the model's user-friendliness.
    First, we invited comment on some fundamental questions that the 
benefit recapture approach has raised: Can an approach both more simple 
and more accurate than BEN measure the economic benefit of delayed and 
avoided pollution control expenditures? How should EPA evaluate the 
economic benefit that companies receive as a result of any illegal 
competitive advantage stemming from noncompliance?
    Second, we invited comment on the BEN model's calculation 
methodology. While the Agency is confident that the BEN model's overall 
approach is theoretically sound, we welcomed constructive and 
documented comment on alternative approaches. In addition, EPA is aware 
of substantial differences of opinion with respect to the basis of some 
of the model's assumptions, particularly with respect to the discount 
rate and inflation rate. EPA requested comment on the BEN model's 
calculation methodology, or any other aspect of the model's assumptions 
or methodology.
    Third, we requested comment on the model's user-friendliness. The 
Agency had heard concerns that the model is too difficult to use, 
particularly regarding BEN's ease of operation and the difficulty of 
obtaining the necessary data. Because EPA had never been presented with 
any concrete evidence in support of these assertions, the Agency wanted 
either to substantiate the problems and address them or to put these 
issues to rest.
    In the following sections, we address the changes that EPA proposes 
to make in each of the areas on which we requested comment.

A. Broad Economic Benefit Recapture Issues

1. Alternatives to BEN
    a. Background. EPA requested comment on whether an approach both 
more simple and more accurate than BEN could measure the economic 
benefit of delayed and avoided pollution control expenditures. EPA 
designed the BEN model to calculate the economic benefit of 
noncompliance in settlement of the vast majority of its civil penalty 
enforcement cases. Although BEN has effectively served this purpose, 
the Agency recognizes that it should be improved or even replaced if a 
better alternative exists or could be developed easily. This concern is 
particularly relevant because an increasing number of state and local

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government enforcement personnel use the BEN model regularly. Any 
alternative approach must meet EPA's policy objective of ensuring that 
violators are put on an even financial footing with those regulated 
entities that comply on time. Alternatives must also be reasonably 
accurate, simple to use, and readily understandable to the vast 
majority of the BEN model's users, as these federal, state and local 
government enforcement officials usually have limited knowledge of 
financial economics or accounting.
    b. Proposed Changes. Many commenters expressed various criticisms 
on different aspects of the BEN model. These criticisms, however, 
focused on suggestions for improving BEN. No commenter proposed an 
alternative approach to a stand-alone computer model that performs net 
present value calculations. Therefore, the Agency plans to continue its 
use of BEN, although it does propose significant revisions (see 
following sections).
2. Illegal Competitive Advantage
    a. Background. Since 1984, EPA's civil penalty policy has 
maintained that any given penalty should be structured, at a minimum, 
to recover the economic benefit a violator has enjoyed as a result of 
its noncompliance. In addition to this economic benefit component, EPA 
assesses a gravity component that reflects the seriousness of the 
violation. This gravity component is designed to ensure that the 
penalty puts the violator in a worse position than those in the 
regulated community who complied with the law. The economic benefit 
component of EPA's civil penalty policy focuses specifically on 
identifying and recovering the gain to a violator in order to remove 
any economic incentive to violate environmental regulations. The policy 
does not address incidental and/or indirect losses or gains to society 
that might result from a violation. For example, consumers may enjoy an 
economic gain if a violator is able to reduce product prices.
    The BEN model calculates the savings from the delayed and avoided 
costs that the violator realizes through its noncompliance and uses 
this measure as a proxy for the total economic gain it accrued. This 
approach represents the lower bound of the total economic gain 
associated with noncompliance. For example, given a new environmental 
standard, if all firms in the market except the violator comply by 
investing in pollution abatement technology, the market price for the 
product will rise to reflect the higher marginal costs borne by the 
producers. The violator has a cost advantage and could (a) charge the 
market price and pocket the avoided costs, (b) charge a lower price 
than its competitors in order to gain market share, or (c) combine 
strategies (a) and (b). BEN is designed to calculate only the delayed 
and avoided costs of noncompliance regardless of which strategy the 
company pursues. BEN, therefore, implicitly assumes that the violator 
follows strategy (a), and does not address the potential market impacts 
associated with the violator's lower marginal costs (i.e., strategy (b) 
or (c)).
    Illegal competitive advantage is an estimate of the total economic 
gain that the violator enjoys in the market as a result of the 
violation. Illegal competitive advantage focuses on how delaying and 
avoiding compliance allows violators to manufacture and sell products 
in the marketplace more cost-effectively, and also examines violators' 
short-term and long-term economic advantages associated with improved 
market position. Note that marginal cost differences are key to illegal 
competitive advantage: if a company's violation affects only fixed 
costs, then BEN can generally capture the entire economic benefit from 
noncompliance. A violator need not demonstrate an intent to improve its 
market position in order for it to enjoy an illegal competitive 
advantage.
    Illegal competitive advantage can occur in a number of different 
ways, including:
    Violator Sells Products at Below Market Price: A violator might be 
able to sell its products at a lower price than its complying 
competitors because it does not incur environmental compliance costs. 
Depending on market conditions (i.e., elasticity of market demand) the 
violator may then secure a bigger share in that particular market, with 
the profit from the extra market share constituting the economic 
benefit. Some key questions are: how do we assess and prove what share 
of the market resulted from underpricing, and how do we determine the 
value of that market share?

    Example: A metal finishing company fails to install pollution 
abatement equipment that would insure compliance with its wastewater 
discharge permit in order to keep costs low. A competitor producing 
the same product for the same market cannot compete with the price 
charged by the metal finisher in noncompliance and, as a result, 
exits the market. The violator now gains market share. BEN will 
capture the violator's delayed and avoided costs while in 
noncompliance, but will not calculate the added profits that the 
violator realizes from its increased market share.
    Example: An auto shop using illegal disposal methods charges the 
same prices as its competitors and spends its avoided costs on 
advertising. It builds a larger customer base than it otherwise 
would have. BEN does not capture the full dimension of economic 
benefit from the auto shop's expanded customer base.

     Violator Sells Products that Were Prohibited by Law: Many 
EPA regulations prohibit the sale of certain products, either 
permanently or until EPA reviews and approves them.3 If the 
violator produces and sells the prohibited product, the violator will 
achieve an economic benefit by: (1) making money directly from the sale 
of the product; and (2) capturing the market for the product, 
particularly if the product is new.

    \3\ Note that this differs from a company that produces an 
approved product through a prohibited process when the final product 
possesses all the same characteristics from the consumer's point of 
view, regardless of the production process (e.g., oil sold from a 
noncompliant underground storage tank, or a metal part finished with 
an illegal coating). The economic benefit in such cases would be 
based on the pollution control costs that the violator delayed and/
or avoided by producing the approved product through the prohibited 
process (e.g., the delayed costs of proper tank inspection or the 
avoided incremental costs of a legal--and presumably more 
expensive--coating).
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    Example: A company mixes overstock of a restricted agricultural 
chemical into one of its ``improved'' popular lawn care products. 
Sales of the product are strong and customer brand identification 
and approval is high. BEN does not calculate the economic benefit 
the company has obtained through its illegal sales of the product 
nor the benefit that will accrue in the future from customer brand 
loyalty.

     Violator Initiates Construction or Operation Prior to 
Government Approval: Some regulatory requirements prohibit construction 
or operation until EPA or another government agency grants a permit. 
When a violator initiates construction or operation prior to this 
approval, it can begin operating earlier than it would have been able 
to had it complied with the law (e.g., if operation begins nine months 
earlier than it should have, the violator can generate sales it should 
not have made and thereby gain a head start in developing its market). 
The violator may be partly motivated by the desire to gain an ``early 
mover'' advantage in a new market. (Note that in many of these cases, 
the violator will obtain governmental approval anyway. In such cases, 
no environmental damage has occurred. A penalty is nevertheless 
necessary, as EPA's policy is designed to maintain incentives to comply 
promptly with regulations.)
    If the violator is operating in a new or rapidly evolving market, 
it may benefit

[[Page 32952]]

from an ``early mover advantage.'' For example, by signing long-term 
supply contracts with buyers at prices lower than from other potential 
entrants (who plan to comply with environmental regulations), the 
violator may forestall competition in the market. An ``early mover'' 
may also benefit by building a customer base before other entrants. If 
decreasing costs are associated with the size or scale of production, 
the ``early mover'' could also enjoy a long-term cost advantage over 
its competitors. Presumably an ``early mover'' could then parlay 
relatively thin profits (or even losses) in the early periods with 
higher profits in later periods.
    One key issue in determining economic benefit is that new 
businesses often expect to lose money in the first few years of 
operation. Thus, if a firm starts operating one year earlier than it 
should have, and EPA examines gross income minus expenses only for that 
first year, then the violator might argue that its economic benefit is 
zero even though this was part of the violator's plan. A more 
appropriate measure of the violator's economic benefit may be the 
difference in the present value of expected cash flow over the life 
cycle of the facility from operating under compliance (i.e., delayed 
opening) and in violation (i.e., actual opening date).

    Example: A telephone cable company needed to obtain a dredging 
permit to lay cable between the mainland and an island. Because of 
competitive pressures to be the first to offer fiber optics cable 
services on the island, the company proceeded on an accelerated 
schedule. Had the company gone through the permitting process, it 
would have been delayed by eight months. A competitor in the same 
market is within eight months of being permitted. One of two 
scenarios is possible here:
    The violating company lays the cable and gains the first mover 
advantage, preventing the other company from being able to enter the 
market profitably. In this case, illegal competitive advantage 
includes both the profits the company receives during its eight 
months of operation that were the result of noncompliance, and also 
any monopoly profits the company enjoys after this time.
    The violating company lays the cable and enters the market with 
other competitors selling the same service. In this case, illegal 
competitive advantage includes the profits the company receives 
during its eight months of operation that were the result of 
noncompliance. In the absence of this company's entrance, the 
remaining companies would have expanded to meet demand and would 
have earned the profits.
    In both of these cases, BEN will not estimate the current and 
future benefits that the company realized from being the first to 
market.

     Violator Operates at Higher Capacity: A firm may be able 
to comply with applicable environmental regulations by maintaining its 
output or throughput below a given threshold level. A violator might 
produce above this threshold level in order to take advantage of high 
product prices. Alternatively, a violator might realize its lowest unit 
production costs at an output level that exceeds the level at which it 
can maintain environmental compliance.

    Example: A paper mill can comply with the terms of its 
wastewater permit as long as its daily output does not exceed 200 
tons per day. In order to reap the benefits of a market surge in 
paper prices, the mill produces an average of 240 tons per day over 
a six-month period. BEN does not capture the profits realized by the 
violator from the additional 40 tons per day produced on average 
over the period of noncompliance.
    Example: A cheese manufacturer is committed to purchase the 
total output of 55 dairy farms through long-term ``take or pay'' 
contracts. Milk production from the farms exceeds the level that the 
manufacturer can process while staying within the regulatory limits 
of its wastewater permit for a three month period. Rather than pay 
for milk that it does not process, the manufacturer chooses to 
operate at a level that causes it to exceed its permit levels. The 
manufacturer enjoyed economies of scale due to noncompliance. That 
is, the manufacturer's production costs of the additional units are 
lower while it is in noncompliance because there is no additional 
cost associated with pollution control.

    In summary, EPA is examining the recovery of illegal competitive 
advantage in cases where the BEN model fails to assess adequately the 
total economic benefit that the violator enjoys as a result of the 
violation. The proper evaluation of illegal competitive advantage in 
EPA policy will involve either identifying the incremental benefit 
enjoyed by the violator and not addressed by the BEN model, or applying 
a different analytic tool than BEN for the entire economic benefit 
calculation.
    b. Proposed Changes. The Agency does not believe that a stand-alone 
computer model analogous to BEN (or an add-on module to BEN) could 
easily and reliably determine the economic benefit from the widely 
varying examples of illegal competitive advantage described above. To 
examine the potential market repercussions of noncompliance clearly 
involves a significantly greater effort than calculating the benefit 
from delayed and avoided costs. Tracing the probable use of the avoided 
cost savings by the violator, investigating the specific conditions of 
the market or markets in which the violator operates, and determining 
the resulting impacts of noncompliance on the market dynamics are all 
usually time-intensive tasks. The Agency proposes to assist enforcement 
staff in measuring economic benefit in such cases by developing a 
module for the BEN model that alerts the user to situations in which 
illegal competitive advantage may be significant and to develop 
guidance to assist enforcement staff in their calculation of illegal 
competitive advantage.
    EPA proposes to have the BEN model query users regarding a series 
of conditions that might characterize situations where significant 
economic benefit from illegal competitive advantage could exist. 
Whenever the user creates a case, the model would prompt the user to 
provide answers to a series of questions. Depending on the user's 
answers to these questions, the model would advise the user to seek 
assistance in assessing the possible existence and magnitude of the 
economic benefit gained from illegal competitive advantage. The 
following questions target certain types of violations that may result 
in illegal competitive advantage. They are designed to require only a 
basic knowledge of the company's products and markets. An example of 
the types of questions to be included in this module (with 
interpretations of positive responses in parentheses) are as follows:
1. Violator Initiates Construction or Operation Prior to Government 
Approval
    a. Did violator's failure to obtain the appropriate review/permits 
allow it to begin production or sales sooner than it should have? (If 
``yes,'' then the violator may have received early mover advantage.)
2. Violator Sells Products Prohibited by Law
    a. Did violator sell prohibited products? (If ``yes,'' then go to 
next question. If ``no,'' then this is not an issue.)
    b. Does the violator plan to continue selling similar products in 
same market after coming into compliance? (If ``yes,'' then possible 
lasting market share effects may result from the illegal action.)
3. Violator Sells Products Below Market Price
    a. Are the required compliance costs significant enough for the 
violator to have been able to undercut its competitors during the 
noncompliance period? (If ``yes,'' then the violator may have 
benefitted from market share gains, as it may have been able to 
undercut its competitors through its price advantage from 
noncompliance.)

[[Page 32953]]

    b. Does violator market products that can develop ``brand loyalty'' 
or high switching costs? (e.g., computer software, service such as auto 
maintenance.) (If ``yes,'' then price advantage could have long-term 
market distribution effects that benefit the violator.)
    c. Has violator developed or marketed new products while in 
noncompliance? (If ``yes,'' than violator may gain ``early mover'' 
market share and discourage competitors by keeping prices low.)
4. Violator Operated at Higher Output
    a. Could the violator have operated within the law cost-effectively 
by reducing its output/throughput to a certain level? (If it could have 
done so, but did not, the violator's gain from the incremental output 
above the level at which it would have been in compliance should be 
examined.)
    EPA seeks comment on these questions and suggestions for other 
questions that would be necessary to assess sufficiently whether the 
economic benefit beyond avoided or delayed costs a violator gains from 
noncompliance are likely to be significant.
    For situations where the model advises the user to assess the 
possible existence and magnitude of the economic benefit gained from 
illegal competitive advantage, EPA proposes to develop a guidance 
document to assist enforcement staff in evaluating illegal competitive 
advantage. The goal of this document is not to provide a fixed approach 
to calculating the economic benefit from illegal competitive advantage. 
Rather, the goal is to educate enforcement staff on the types of 
illegal competitive advantage that may arise in enforcement actions, as 
well as to provide a framework for EPA analysts and outside experts who 
perform the actual calculations. This guidance will eventually be 
incorporated into a revision of the 1984 ``Guidance for Calculating the 
Economic Benefit of Noncompliance for a Civil Penalty Assessment.'' EPA 
proposes the following general outline for the content of the illegal 
competitive advantage guidance document:
1. Definition of Illegal Competitive Advantage
2. Situations in Which Competitive Advantage May Be Significant
    a. The violator has an early mover potential in a changing industry 
(i.e., has opened facility early).
    b. The violator is one of a few members in an industry that 
dominate that particular industry.
    c. The violator has been the low-price producer and gained market 
share during non-compliance.
    d. The violator could have operated within the law cost-effectively 
by reducing its output/throughput to a certain level, but instead 
operated above that level and that conduct made the violator more 
profitable.
3. Situations Where It Is Reasonable To Assess
    What is the appropriate threshold value for use by EPA? (E.g., how 
large does the potential economic benefit beyond avoided or delayed 
cost need to be to warrant EPA's closer scrutiny?)
4. Guidance Principles
    EPA needs to keep information collection and analysis as simple and 
quick as possible.
5. Avoiding Potential Double Counting
    a. Use of an integrated approach that constructs compliance on time 
and delay compliance scenarios, incorporating the relevant cash flows 
from delayed/avoided compliance costs and illegal competitive 
advantage.
    b. Potential for recapture of both the benefits from savings and 
illegal competitive advantage in cases where the economic benefit from 
illegal competitive advantage is additive to the traditional BEN 
analysis.
    c. Cases in which either the traditional BEN analysis or the 
illegal competitive advantage analysis drops out of the economic 
benefit calculation.
    EPA seeks comment on the suggested approach and outline for this 
guidance document.

B. The BEN Model's Calculation Methodology

    Over the years, the BEN model has received criticism for alleged 
flaws in its calculation methodology. The two issues with the greatest 
potential impact on economic benefit estimates involve the model's 
discount rate and its inflation rate. The Agency requested substantive 
and constructive comments on how the BEN model handles these two 
issues. In addition, EPA invited comment on all aspects of BEN's 
calculation methodology. The Agency asked commenters to address whether 
their proposed changes would add any complexity to the computer model, 
and if so, why the benefit of the change justified the added 
complexity.
1. Investment Tax Credit and Low-Interest Financing
    a. Background. Economic benefit calculations for cases with 
noncompliance dates prior to the mid-1980s must account for two 
important tax-code effects: the investment tax credit (ITC) and low-
interest financing (LIF).
    Prior to 1986, the Federal government allowed companies an ITC on 
capital investments. 4 The ITC effectively reduced the 
after-tax cost of a capital investment. Complicated--and changing--
rules governed the depreciation basis for a capital investment with an 
associated ITC.
---------------------------------------------------------------------------

    \4\ Note that this and other tax-related adjustments are 
irrelevant for municipalities and other not-for-profit entities 
because their marginal tax rate is equal to zero.
---------------------------------------------------------------------------

    BEN accounts for the ITC that was available on projects completed 
before January 1, 1986, but does not do so for the transition years of 
1986 and 1987. The transitional rules allowed companies to obtain an 
ITC for projects completed after December 31, 1985, if the project met 
one of three criteria regarding the level of planning and construction 
that had occurred by that date. 5 Because the allowance of 
the ITC in these years was far from automatic (although still 
possible), BEN warns the user about this issue if the noncompliance 
date is between January 1, 1986, and June 30, 1987. If further research 
and analysis shows that the granting of an ITC was likely in a 
particular case, then a financial analyst can adjust the BEN result 
through an ``off-line'' calculation.
---------------------------------------------------------------------------

    \5\ The criteria are: ``1. It is constructed, reconstructed, or 
acquired under a written contract binding on December 31, 1985; 2. 
it is constructed or reconstructed by the taxpayer, construction was 
begun by December 31, 1985, and the lesser of $1 million or five 
percent of the cost was incurred or committed by December 31, 1985; 
or 3. it is an equipped building or plant facility, construction was 
begun by December 31, 1985, under a written specific plan, and more 
than one-half of its cost was incurred or committed by December 31, 
1985.'' (Commerce Clearing House, Inc., Explanation of Tax Reform 
Act of 1986, page 328.)
---------------------------------------------------------------------------

    Prior to 1987, LIF was available for a business's investment in 
pollution control. An earlier version of the BEN model included a 
variable that accounted for LIF. The 1993 version removed this variable 
because it was relevant only for cases with noncompliance dates before 
1987. BEN issues a warning to the user about LIF if the noncompliance 
date is before January 1, 1987. If further research and analysis show 
that LIF was probably available in a particular case, then a financial 
analyst can adjust the BEN result through an off-line calculation.
    b. Proposed Changes. As a few commenters suggested, EPA could 
revise the BEN model to allow an option for ITCs during the 1986-87 
transition years, as well as to account for LIF in years prior to 1987. 
These revisions

[[Page 32954]]

would, however, add considerable complexity to the model. Furthermore, 
the Agency did not receive any comments documenting recent instances in 
which an off-line calculation was necessary to account for ITCs or LIF. 
This is not surprising--EPA Headquarters has received only one call in 
the last two years in response to the BEN model's current warning about 
LIF. Furthermore, the already low likelihood of the need to account for 
ITCs or LIF continues to decline with the passage of time, as EPA is 
not likely to see many enforcement actions now in the late-1990s for 
violations that began in the early to mid-1980s.
    EPA instead proposes that the revised BEN model not accept 
noncompliance dates before July 1, 1987. This will ensure that BEN's 
omission of ITCs and LIF is not leading to incorrect economic benefit 
estimates in instances where users do not heed the current model's 
current warning. EPA will provide assistance in performing the 
necessary calculations for cases that actually involve noncompliance 
dates before July 1, 1987.
    The Agency welcomes comment on this proposed change. We are 
particularly interested in how often BEN users have recently analyzed 
cases with noncompliance dates before July 1, 1987, and how often they 
anticipate doing so after June of 1999, the expected introduction of 
the revised BEN model.
2. Depreciation Method
    a. Background. The BEN model calculates depreciation for capital 
investments, as the tax deduction for accounting depreciation charges 
provides a real after-tax positive cash flow to businesses.6 
BEN calculates depreciation using a five-year straight-line methodology 
for capital investments made before January 1, 1987, and a seven-year 
Modified Accelerated Cost Recovery System for capital investments made 
after January 1, 1987. These assumptions represent the most rapid 
depreciation periods available for typical pollution control 
investments, thereby producing the positive depreciation cash flow 
effects as early as possible. These particular depreciation methods 
generally result in a conservative economic benefit calculation (i.e., 
lower than would otherwise be calculated) because they minimize out-of-
pocket costs to the violator. Therefore, BEN is often producing 
economic benefit figures that are very conservative.7
---------------------------------------------------------------------------

    \6\ The IRS does not allow companies to write off completely a 
capital investment in the year of purchase. Companies must spread 
the expense of the investment over several years using the 
appropriate depreciation schedule.
    \7\ The IRS requires that many types of pollution control 
equipment be depreciated over a longer period than assumed in the 
BEN model. Were EPA to tailor the depreciation to account for that 
longer period, the result would be a higher economic benefit 
calculation.
---------------------------------------------------------------------------

    For capital equipment that has a very short useful life, the 
selection of alternative depreciation schedules might be available and 
also more beneficial to a business. In unusual cases where the violator 
can demonstrate that an alternative depreciation schedule would be both 
available and beneficial, then more detailed calculations by a 
financial analyst in lieu of the BEN model are necessary.
    b. Proposed Changes. A revised BEN model could conceivably allow 
users the option of assuming an alternative depreciation schedule, but 
we believe the drawbacks of the added complexity and potential user 
confusion outweigh the gains from addressing a rare circumstance. The 
Agency welcomes feedback from BEN users on how often violators have 
asserted that a different depreciation schedule would be both available 
and beneficial, and how often off-line calculations have been 
necessary.
3. Tax Rates
    a. Background. BEN uses three marginal tax rates: a rate for 1986 
and before, one for 1987 through 1992, and one for 1993 and beyond. 
Users can accept the standard values--which incorporate national 
averages of state tax rates--or modify the inputs to reflect specific 
state values.8
---------------------------------------------------------------------------

    \8\ Users might also wish to modify the tax rates to reflect a 
business whose low net income entails a tax bracket other than the 
highest one assumed in the standard values. Note though that BEN's 
assumption of the highest marginal tax rate produces a lower 
economic benefit estimate (because a higher tax rate decreases the 
after-tax value of the compliance costs).
---------------------------------------------------------------------------

    b. Proposed Changes. EPA proposes that the revised BEN model 
require the user to enter the state in which the violator is located. 
The model will then automatically reference an internal database of 
state tax rates and perform the necessary calculations for the 
violator's combined federal and state tax rate.9 EPA also 
proposes that BEN calculate the tax rate for each separate year of 
noncompliance, to allow for annual changes in the relevant state tax 
rate (even when the federal rate remains constant). Users will have the 
additional option of entering year-by-year combined federal and state 
rates in a spreadsheet-like format.10
---------------------------------------------------------------------------

    \9\ The model will also offer the option of the national average 
of all the state tax rates for cases in which it is unclear to what 
state the violator pays taxes.
    \10\ This option would allow users to account for--among other 
situations--a company whose profitability (and hence tax bracket) 
was highly variable over different years. (As noted before, BEN's 
assumption of the highest marginal tax rate throughout the 
noncompliance period results in a lower economic benefit estimate.) 
This option could allow users to account for the 1987 transition 
year in the federal tax rate change, but this is a moot point if the 
BEN model is changed (as proposed in a previous section) to require 
noncompliance dates after June 30, 1987.
---------------------------------------------------------------------------

    Although these options may sound complex, the only data required of 
the user would be the violator's state. The other screens for 
additional data entry and modification would appear only to those users 
who selected such advanced options. The Agency welcomes comments on the 
added flexibility and applicability that would result from these 
proposed changes.
4. Differences in On-Time and Delay Scenarios
    a. Background. The BEN model assumes that the violator would have 
used the same technology and approach in the hypothetical on-time 
compliance as it did in the actual delayed compliance scenario. The 
only allowed differences are in the two scenarios' exact costs of 
compliance, which BEN's inflation rate adjusts automatically. But 
technological, legal, or other relevant changes between the on-time and 
delay scenarios can conceivably alter the components of the compliance 
scenarios, increasing or decreasing the compliance costs by a rate 
other than general price inflation. Where the delay case costs are 
substantially less than the on-time case costs (e.g., a technological 
breakthrough in control equipment), BEN will understate the benefit. 
Where the delay costs are substantially higher (e.g., regulations 
become more strict, but with ``grandfather'' clauses for already-
compliant firms), BEN will overstate the benefit.
    Where the on-time and delay compliance scenarios are significantly 
different, BEN's normal assumption of two identical scenarios is 
inappropriate. More sophisticated calculations are 
necessary.11
---------------------------------------------------------------------------

    \11\ A similar problem arises when no technologically feasible 
method of compliance is available. In that case, the only possible 
compliance method is to cease all production, with the economic 
benefit calculation requiring a lost-profits approach, which is 
beyond the scope of the BEN model.
---------------------------------------------------------------------------

    b. Proposed Changes. Modifying BEN to accommodate such 
circumstances is possible, and we believe the gains from the model's 
consequently enhanced applicability outweigh the drawbacks of the added 
complexity and potential user

[[Page 32955]]

confusion. EPA, therefore, proposes to change the BEN model to allow 
users to enter separate on-time and delayed compliance costs.
    It should be noted that the standard operation of the model would 
still entail only a single compliance scenario, and the other screens 
for additional data entry and modification would appear only to those 
users who select such advanced options. The availability of more 
advanced options would also enhance the model's ability to account for 
such atypical situations such as valid pre-compliance expenditures and 
credits for salvaged capital equipment, thus decreasing the need for 
off-line calculations. The Agency welcomes comments on this proposed 
change and how significantly it will enhance the model's flexibility 
and applicability.
5. Replacement Cycles for Capital Equipment
    a. Background. One of the three types of compliance costs BEN 
analyzes is the capital investment, which represents depreciable 
pollution control equipment. As the name implies, depreciable equipment 
wears out with usage and the passage of time. BEN, therefore, asks the 
user if the violator will need to replace the equipment at some point 
in the future. If the user specifies that the investment in capital 
equipment is recurring, then the user can accept the standard value of 
15 years for the useful life of the capital equipment, or enter another 
value.
    If the cost of capital equipment is recurring, then a violator 
receives more than one benefit from delaying the purchase of capital 
equipment. The violator first receives a benefit from delaying the 
purchase of the initial capital equipment, and then receives further 
benefits from delaying the purchase of the replacement capital 
equipment for each future recurring cycle.
    b. Proposed Changes. Some commenters stated that BEN's option of 
recurring capital equipment replacement cycles is ``speculative,'' as 
these cycles have yet to occur in the typical case. Although BEN makes 
an assumption about the future, this assumption is essentially a 
baseline one: BEN assumes that future pollution control requirements 
will be neither more stringent nor more lax than current requirements, 
and that the cost of the replacement equipment will increase by no more 
and no less than the projected rate of inflation. Therefore, the Agency 
proposes to keep the option of replacement cycles.
    Some commenters argued that BEN should not offer infinitely 
recurring replacement cycles. The modeling of infinite cycles might at 
first seem excessive, but all future costs are ``discounted'' back to 
their present values (see following sections for an explanation of 
discounting). The result is that any cycle after the first one 
typically has a negligible impact upon the economic benefit estimate. 
Therefore, the Agency proposes that the revised BEN model use a default 
value of one replacement cycle, and offer users a choice of anywhere 
from zero to five replacement cycles. This approach is in contrast to 
the current choice of zero or infinite replacement cycles, with no 
intermediate option.
6. Inflation Treatment
    a. Background. The first step in the economic benefit calculation 
is to determine the compliance costs--for both the on-time and delay 
scenarios--as of the year in which they were actually incurred (or 
should have been incurred). Therefore, BEN adjusts the compliance costs 
from the date they were estimated to the date the costs will be 
incurred to account for the effects of inflation.
    To adjust for inflation, BEN currently uses a standard-value rate 
calculated from the appropriate ten years of monthly inflation data 
from the Plant Cost Index (PCI) in the magazine Chemical Engineering. 
This simple inflation rate adjusts the initial compliance cost 
estimates, both back in time into noncompliance- and compliance-year 
dollars, and then forward in time into future-year dollars (typically 
for capital equipment replacement cycles). The PCI is particularly 
appropriate for adjusting the costs for inflation that are typically 
associated with pollution control technology.
    b. Proposed Changes. Despite the Agency's specific request for 
comment on BEN's inflation adjustment, we received almost none. The 
issues that the few commenters did raise were:
    (1) The use of a single inflation rate for both actual and 
projected inflation,
    (2) The basis for the actual inflation rate, and
    (3) The basis for the projected inflation rate.
    The Agency proposes to change the BEN model to allow two separate 
inflation adjustments. One adjustment would be for cash flows incurred 
during the period of historical noncompliance, and then a separate rate 
for projected inflation which would adjust for future replacement 
cycles (and other future compliance costs in cases where the violator 
has not yet come into compliance).
    For actual historical inflation, the Agency proposes that BEN 
adjust each cash flow from the date of the cost estimate to the date on 
which it is incurred by referencing a look-up table of cost index 
values.12 The default cost index would be the PCI. This 
particular index may not be appropriate for every single case, but we 
have yet to encounter any other cost index that would form a better 
basis for a standard value. EPA also proposes that the revised BEN 
model allow the user to select from multiple look-up tables 
representing different cost indices--including the Building Cost Index, 
Construction Cost Index, Consumer Price Index, and the Employment Cost 
Index--and the option of selecting different indices for different 
compliance components.13 The user would also be able to 
override BEN's inflation adjustments for the capital investment and 
one-time nondepreciable expenditure, and instead enter separate 
estimates for these compliance costs as of the noncompliance date, 
compliance date, and the initial recurring cycle start dates. This 
customized data entry could represent another alternative cost index, 
case-specific inflation assumptions, or entirely different actions for 
on-time and delayed compliance.
---------------------------------------------------------------------------

    \12\ The model would not apply an explicit inflation rate, 
although an annualized rate could be imputed from the model's data. 
For example, suppose a $200 cost estimate from 1991 must be adjusted 
for inflation to the same day in 1992. The 1991 cost index value is 
100, whereas the 1992 index value is 103. The calculation the model 
performs is $200  x  103/100 = $206 (i.e., multiplying the original 
cost estimate by the ratio of the cost index values from the date on 
which the cost is actually incurred, and the date on which the 
estimate is made). The index change from 1991 to 1992 does represent 
an annual inflation rate of three percent (i.e., 103/100 = 1.03-1 = 
0.03), although the model would not directly apply this rate. The 
calculation that uses the ratio of the index values is both more 
precise and more simple than calculating multiple annual inflation 
rates over different periods for historical costs.
    \13\ See the following table, Different Cost Indicies.

[[Page 32956]]



                         Different Cost Indicies
------------------------------------------------------------------------
 Abbreviation and full name        Description      Typical applications
------------------------------------------------------------------------
BCI--Building Cost Index....  Building costs;       General construction
                               based on 1.128 tons   costs, especially
                               Portland cement,      structures.
                               1,088 bd. ft. 2x4
                               lumber, 68.38 hrs.
                               skilled labor.
BEN--Current BEN model's      Average of PCI's      Replication of
 constant inflation rate.      last 10 years;        results from
                               i.e., a constant      current BEN model.
                               1.8% increase each
                               year.
CCI--Construction Cost Index  Construction costs;   General construction
                               same as BCI, except   projects,
                               200 hrs. common       especially where
                               labor.                labor costs are a
                                                     high proportion of
                                                     total costs.
CPI--Consumer Price Index...  Representative        Compliance involves
                               consumer goods.       use of consumer
                                                     goods.
ECIM--Employment Cost Index:  Employment costs for  One-time
 Manufacturing.                the manufacturing     nondepreciable
                               industry.             expenditures or
                                                     annual costs;
                                                     mainly labor costs.
ECI--Employment Cost........  Employment costs for  Same as ECIM, except
W--Index: White Collar......   white collar labor.   pro-fessional labor
                                                     (e.g., permits).
PCI--Plant Cost Index.......  Plant equipment       Standard value.
                               costs.
------------------------------------------------------------------------

    The Agency welcomes suggestions for other cost indices that the BEN 
model should offer. Commenters' suggestions should not merely list 
various indices, but also provide a sufficient rationale for the 
inclusion of each index, including its components, relevance to 
pollution control costs, and both historical and future availability.
    For projected future inflation, the Agency proposes that the model 
use a simple, uniform rate. The model will provide a separate standard 
value for each cost index. (As explained above, users will be able to 
override the entire inflation adjustments for the capital investment 
and one-time nondepreciable expenditures as of the initial recurring 
cycle start date, as well as any compliance dates that are expected to 
occur in the near future.) The model will also use a separate projected 
inflation rate for additional recurring cycles, and allow the user to 
specify an alternative value for this rate.
    The Agency proposes using a projected value for each index. (This 
is a more sophisticated approach than the DOS version of BEN.) However, 
because published forecasts are generally not available for specialized 
cost indices, we propose to start with an average of published 
forecasts for the Consumer Price Index (CPI) because such forecasts are 
widely available. We would then multiply the average CPI projection by 
the ratio of the CPIs to the relevant cost index's respective ten-year 
historical averages. Each of the alternative indices would have its own 
default future inflation rate, calculated in a similar manner. (Note 
that the user would not perform this calculation, nor would the model; 
instead, the Agency would perform the calculations each year to update 
the standard value, and the model would contain a single, simple 
projected inflation rate.) We welcome suggestions for other methods of 
calculating a projected future inflation rate.
    The standard operation of the model would still entail absolutely 
no input whatsoever from the user who is satisfied with BEN's default 
values. The other screens for additional data entry and modification 
would appear only to those users who selected more advanced options. 
EPA welcomes comment from BEN users on whether the proposed changes 
will enhance the model's accuracy, flexibility, and adaptability.
7. Discount Rate
    a. Background. Once the compliance cost estimates are adjusted for 
inflation, and then for taxation, the BEN model must adjust these 
after-tax cash flows to a common present value as of the date of 
noncompliance. The difference between the two present values (of the 
on-time and delay scenarios) is the initial economic benefit as of the 
noncompliance date. BEN then compounds this initial economic benefit 
forward from the noncompliance date to the penalty payment date to 
determine the final economic benefit. A single rate to adjust all 
present values both backward and forward in time.14 This 
section addresses only the calculation of BEN's standard value for this 
single discount rate, which is currently based upon a ten-year after-
tax weighted average cost of capital (WACC), with the inputs 
representing averages across all industries.15
---------------------------------------------------------------------------

    \14\ The Agency received many comments on the use of a single 
rate as opposed to two different rates. The Notice addresses this 
issue in section B(8), Discounting Methodology.
    \15\ The discount rate standard value for not-for-profits is 
based upon municipal bond yields, averaged across the four 
investment-quality ratings of Aaa, Aa, A, and Baa. The only comment 
EPA received on the not-for-profit discount rate was a suggestion 
that municipal economic benefit be calculated using a discount rate 
for private entities that perform similar functions (e.g., on a 
municipal Clean Water Act case, the discount rate would be the 
average WACC for privately owned wastewater treatment plants). 
However, because the Agency is trying to calculate the economic 
benefit that the municipality and its residents or rate payers have 
actually gained, the Agency prefers to use an estimation of the 
municipal government's opportunity cost of financing projects, which 
is equal to the interest rate on the municipality's bonds. This debt 
rate--which forms the basis for the BEN model's not-for-profit 
standard value discount rate--will almost always be substantially 
lower than the private-sector-equivalent cost of capital.
---------------------------------------------------------------------------

    The WACC is the average of the cost of debt and the cost of equity, 
weighted by the portions of debt and equity out of total financing. The 
WACC is first calculated for each year, and then these annual values 
are averaged over the most recent ten-year period. The (after-tax) cost 
of debt is the average return on corporate bonds averaged across all 
industries, and then multiplied by one minus the average corporate tax 
rate (state and federal combined). The cost of equity is based upon the 
widely used Capital Asset Pricing Model (CAPM), and is equal to a risk-
free rate component plus the expected equity risk premium (i.e., the 
difference of the arithmetic means of stock market returns and risk-
free rates since 1926).
    b. Proposed Changes. We propose that the BEN model automatically 
tailor the standard value discount rate to the period from the 
noncompliance date to the penalty payment date.16 The 
standard value will reference a look-up table, averaging the annual 
values over the relevant years. Each individual annual calculation will 
be similar to the standard value's current methodology, as displayed in 
Exhibit 4-7 of the BEN User's Manual.17
---------------------------------------------------------------------------

    \16\ Although the following discussion focuses on the for-profit 
discount rate, the tailoring of the discount rate to the relevant 
time period would also apply to not-for-profit cases.
    \17\ We propose two minor changes to the annual calculation of 
the WACC. First, we propose replacing the standard value that 
currently applies the most recent figure for the expected equity 
risk premium to all prior years' calculations. Instead, each year's 
calculation will employ the figure that was actually available in 
that year.
    Second, we propose altering the horizon for the equity risk 
premium. The standard value currently combines the long-term 
Treasury security rate with the long-horizon equity risk premium, 
the latter being equal to the difference of the arithmetic means of 
stock market returns and the corresponding-maturity risk-free rate. 
Because the WACC calculation combines the equity risk premium with 
the risk-free rate of the same maturity that is used initially to 
calculate the premium, the issue of which horizon premium to use is 
largely moot. (The expected deviations of the resulting WACC will 
thereby be both small and nonsystematic.) We propose to switch to 
the intermediate-horizon risk premium (and the corresponding risk-
free rate) as a simple compromise between the long-horizon and 
short-horizon.

---------------------------------------------------------------------------

[[Page 32957]]

    The model will also perform additional customizing automatically, 
or with minimal input from the user. Because we have already proposed 
that BEN have an input for the violator's state (thereby customizing 
the tax rate for compliance costs), we propose using that same 
customized tax rate for the after-tax debt cost component of the WACC. 
The model will even select the individual tax rate if the company is 
not organized as a C-corporation (as profits and losses from S-
corporations, partnerships, and sole proprietorships flow through the 
owners' individual tax returns).
    The standard operation of the model would still entail absolutely 
no input whatsoever from the user who is satisfied with BEN's default 
values. The other screens for additional data entry and modification 
would appear only to those users who selected such advanced options. 
EPA welcomes comment from BEN users on how the proposed changes will 
enhance the model's accuracy, flexibility, and adaptability.
8. Discounting Methodology
    a. Background. As stated in the previous section, once the 
compliance cost estimates are adjusted for inflation, and then for 
taxation, the BEN model must adjust these after-tax cash flows to a 
common present value as of the noncompliance date. The difference 
between the two present values (of the on-time and delay scenarios) is 
the initial economic benefit as of the noncompliance date. BEN then 
compounds this initial economic benefit forward from the noncompliance 
date to the penalty payment date in order to determine the final 
economic benefit. BEN uses a single interest rate to adjust all present 
values both backward and forward in time. Because BEN uses the same 
rate for going both backward and forward, this calculation is 
computationally equivalent to bringing all cash flows--both past and 
future--directly to the penalty payment date at the WACC rate.
    The comments fell into three categories. Some thought the WACC rate 
was too high and especially that the compounding part of the 
calculation should be based on a risk-free rate. Some agreed with EPA's 
approach. Others commented that EPA's discount rate was too low and 
should instead be based on financing pollution control investments with 
100% equity.
    Several commenters claimed that BEN's use of a WACC-based rate in 
all parts of the benefit calculation yielded inappropriately high 
economic benefit calculations. They claimed that future cash flows 
represent uncertainty and risk, while past cash flows are known, 
certain and riskless. Thus, they generally agreed that discounting 
future cash flows should be done with a WACC-based rate or some other 
risk-free rate, but felt that compounding past cash flows forward 
should be done with a riskless rate. They cited selected academic 
literature from economic and financial analysis of commercial damages 
in torts cases, proposing two alternative methodologies:

     (A) Use BEN's intermediate figure for the economic 
benefit as of the noncompliance date (i.e., bring all cash flows, 
irrespective of when they occur, back to the noncompliance date at a 
rate reflecting risk), but then bring this intermediate economic 
benefit figure forward to the penalty payment date at a risk-free 
rate.
     (B) From the perspective of the penalty payment date, 
bring all future cash flows back in time at a rate reflecting risk 
(e.g., the WACC) and bring all past cash flows forward in time at a 
risk-free rate (e.g., the after-tax return on short-term U.S. 
Treasury securities).

    Both of these methodologies produce significantly lower economic 
benefit estimates than the BEN model. A range for the magnitude of the 
typical differences is difficult to provide because of the many 
different types of cases, but alternative B will often produce negative 
economic benefit estimates for the capital investment portion of the 
compliance scenario.
    The second group of commenters agreed that the WACC was appropriate 
for discounting all future costs back to the noncompliance date, and 
then compounding the initial economic benefit forward to the penalty 
payment date.18 The third group commented that BEN's use of 
the WACC is incorrect and leads to economic benefit estimates that are 
too low. These commenters instead favored a company's higher cost of 
equity capital, rather than the weighted average of the relatively 
higher-cost equity capital and the relatively lower-cost debt capital. 
Their rationale was that excess returns flow to a company's equity 
holders, not to a mixture of its debt and equity owners.
---------------------------------------------------------------------------

    \18\ One commenter agreed with compounding the initial benefit 
forward at the WACC rate, but only to the compliance date, after 
which a lower compounding rate would be appropriate. His rationale 
was that a company then must set aside specific funds to pay a 
penalty; therefore, the economic benefit estimate should be 
compounded either at the actual interest rate on an escrow account 
or at the company's debt rate (which reflects its risk of going out 
of business, resulting in an inability to pay a penalty).
---------------------------------------------------------------------------

    b. Proposed Changes. Although both the conceptual bases and results 
of the two risk-free rate methodologies contradict each other, they 
share a similar rationale: cash flows that have yet to occur in the 
future are uncertain and risky, whereas cash flows that have occurred 
in the past are certain and riskless. These methodologies, therefore, 
apply to future cash flows a rate that includes a risk premium (e.g., a 
company's WACC or some other risk-adjusted rate) and apply to past cash 
flows a risk-free rate (e.g., the return on short-term Treasury 
securities). As discussed below, the Agency believes that even if this 
approach were justified in the context of calculating damages owed to 
plaintiffs in certain types of tort cases, it is entirely inappropriate 
in economic benefit calculations for enforcement actions. The goal in 
the tort damages approach is to make the plaintiff whole by 
compensating him for his losses. The fundamentally different goal in 
enforcement actions is to deter future violations by both the defendant 
we are suing and by other similar situated defendants.
    By contrast, the third approach to calculating interest rates 
advocates the use of an equity-based discount rate. This approach is 
more reasonable than the risk-free rate alternatives. Not only is it 
more persuasive, but there have been several court decisions that 
adopted an equity-based discount rate and rejected a risk free rate 
approach. Nevertheless, the Agency still believes that using the WACC 
throughout all aspects of the calculation is the most reasonable and 
preferable approach.
    (i) Risk-Free Rate Forward: Theoretical Issues. The goal in a tort 
action is to make the plaintiff ``whole.'' The settlement or court 
determination ultimately should place the plaintiff in the same 
financial position as if the wrong had not occurred. The first step in 
such a case is to calculate the necessary compensation at the time of 
the actual wrong. The next step is to adjust the compensation 
calculated at the time of the actual wrong to the time

[[Page 32958]]

at which such compensation is to be made. Certain authors writing about 
tort damages have advocated bringing such compensation forward at a 
risk-free rate.19 Otherwise, the plaintiff would be 
``having-its-cake-and-eating-it-too'': the initial compensation has 
essentially been invested at the time of the actual wrong at a rate 
reflecting risk taking, yet the plaintiff is now granted the 
compensation which grew at that rate, without ever bearing the 
accompanying risk. (In contrast, the regular investor would have made 
the investment and then had to stand by nervously as the investment's 
value either grew or fell). Some commenters thought BEN should employ 
such a risk-free rate approach.
---------------------------------------------------------------------------

    \19\ No consensus exists, however, and many other authors have 
advocated other approaches. Judges in tort cases have arrived at 
rulings that mandate many different rates, with many different 
values and rationales.
---------------------------------------------------------------------------

    While the appropriate focus in a tort damage action is on 
compensating the victim (i.e., plaintiff), this is not appropriate in 
an enforcement action. The enforcement agency is not suing for damages 
it has suffered. The goal is not to make the plaintiff whole (i.e., to 
restore to it the amount by which it was damaged). The goal of the 
economic portion of a civil penalty is to return the defendant to the 
position it would have been in had it complied, and thus disgorge from 
it the amount it wrongfully gained. If civil penalties, composed of the 
economic benefit and gravity components, effectively allow the violator 
to gain an economic advantage from its violations, other companies will 
see an advantage in similar noncompliance. This is a fundamentally 
different perspective from a tort case, and demands a fundamentally 
different view of discounting.
    The appropriate discount rate for economic benefit calculations is 
a company's opportunity cost of capital, reflecting the financing costs 
for pollution control investments or the value of investment 
opportunities foregone because of pollution control purchases. The 
opportunity cost of capital is the incremental expected rate of return 
a company must earn to pay back its lenders (i.e., bond holders) and 
owners (i.e., stockholders), which is the weighted-average cost of 
capital (WACC).
    The risk-free rate methodologies use short-term U.S. Treasury bill 
rates that are unrelated to a company's opportunity cost of capital. 
Only the Treasury of the United States of America is able to borrow at 
the U.S. Treasury bill rate.20 Companies lack the advantage 
of such low financing rates. To finance additional projects, they must 
either issue debt at higher interest rates, and/or issue equity, which 
requires returns of even higher rates.
---------------------------------------------------------------------------

    \20\ This is a very favorable rate, because of the U.S. 
Treasury's over two-century default-free record, its ability to 
create money, and also the state tax-free status of its debt 
instruments.
---------------------------------------------------------------------------

    Applying the risk-free rate to a company's cash flows presumes an 
unattainably low borrowing rate and an insufficient return on 
investments. (With the exception of mutual funds, a company whose main 
business was investing in T-bills would not be in business for very 
long.) The true opportunity cost of capital for a company far exceeds 
the T-bill rate. The risk-free rate will therefore systematically 
understate the economic benefit of pollution control noncompliance. 
Penalties based solely on economic benefit calculated with a T-bill 
rate would allow a defendant to retain a potentially substantial gain. 
Because of the precedent of this retained gain, other regulated 
companies might see an economic advantage in similar noncompliance, and 
the penalties based on a risk-free rate approach will fail to deter 
potential violators.
    (ii) Risk-Free Rate Forward: Practical Implications. Not only are 
the theoretical underpinnings of the risk-free rate forward 
methodologies flawed, but their practical implications are also 
troubling. Specifically, the use of the risk-free rate fails to achieve 
the overriding goal of economic benefit recapture: to make the violator 
financially indifferent between compliance and noncompliance, which in 
turn constitutes a critically important element of 
deterrence.21 An example helps to illustrate this point.
---------------------------------------------------------------------------

    \21\ Because benefit recapture by itself merely makes the 
violator indifferent between compliance and noncompliance, only a 
total penalty amount that exceeds the economic benefit (by 
incorporating a gravity component) can achieve actual deterrence. 
Therefore, a civil penalty should always be at least equal to the 
economic benefit calculation plus some non-trivial gravity 
component.
---------------------------------------------------------------------------

    Suppose a company is deciding whether to purchase pollution control 
equipment this year (i.e., 1999), or to wait until the same month in 
the next year (i.e., 2000). The company is not necessarily 
contemplating a willful violation of the law--perhaps the law's 
interpretation is unclear, and the company would like to know the 
financial consequences of not purchasing the equipment, and then later 
being found to be in noncompliance. The company, therefore, wants to 
know how much better or worse off it will be by delaying the purchase 
one year.
    The company performs three sets of economic benefit calculations. 
First, it calculates the economic benefit as of the present time (e.g., 
June 1999). This lets the company know how much better off it will be 
by delaying the purchase (i.e., until June 2000), in the absence of any 
penalty. Second, it calculates the economic benefit as of one year 
later (i.e., June 2000, when it would otherwise purchase the equipment, 
and also pay any penalty), and then discounts the calculated economic 
benefit back to the present (i.e., June 1999). This lets the company 
know the present value of any economic benefit based penalty that is 
calculated and paid the following year in 2000. Third, it subtracts the 
second result from the first result to determine the net amount by 
which it is better or worse off (i.e., the economic benefit of its 
noncompliance, minus the present discounted value of the economic-
benefit-based penalty it can expect to pay in 2000).
    The first economic benefit calculation yields the same result 
regardless of which economic benefit methodology is used, because all 
the cash flows occur in the future.22 In this example, the 
only compliance measure is a one-time capital investment of $10 
million.23 The company calculates that it is financially 
better off now in 1999 by $494,314 from a projected one-year compliance 
delay.
---------------------------------------------------------------------------

    \22\ The results might be slightly different depending on what 
``risk-adjusted rate'' the risk-free rate forward methodologies use 
for the future cash flows in their calculations. Different 
practitioners have used different ``risk-adjusted rates'' in 
different cases, including the same WACC-based discount rate that 
the BEN model uses. Therefore, for the purposes of the examples that 
follow, we assume that the alternative methodologies also use the 
WACC for future cash flows. If, instead, they were to use a 
different rate, the exact figures for the results would be slightly 
different, but the overall implications would remain the same.
    \23\ Other inputs include a 40-percent tax rate, 2.2-percent 
inflation rate, and 10-percent discount rate.
---------------------------------------------------------------------------

    The company also needs to know how much better off it will be on 
net should the enforcement agency assess a penalty in 2000 equal to the 
calculated economic benefit from its delayed compliance. Assuming that 
the agency uses BEN, the economic benefit is brought forward one year 
by an estimate of the company's WACC (in this case 10 percent), so the 
economic-benefit-based portion of the penalty the company will pay is 
$543,745.24 But because the company will pay the penalty a 
year in

[[Page 32959]]

the future, it must discount that amount back to the present. If it 
discounts the penalty at the same rate that BEN used to compound the 
penalty forward to the penalty payment date, the present discounted 
value of the future penalty will always be equal to the economic 
benefit the company calculates for itself (in this case, $494,314). The 
company can therefore expect to have any economic benefit disgorged 
from itself, which makes the company financially indifferent between 
compliance and noncompliance. The column in the exhibit below labeled 
``BEN''summarizes these calculations.
---------------------------------------------------------------------------

    \24\ Because the time between the noncompliance date and the 
penalty payment is only one year, the compounding takes the form of 
simply multiplying the initial economic benefit by the sum of one 
plus the discount/compound rate (i.e., $494,314  x  (1 + 0.10) = 
$543,745).

----------------------------------------------------------------------------------------------------------------
                        Economic benefit                                BEN       Alternative  A  Alternative  B
----------------------------------------------------------------------------------------------------------------
1. Penalty Payment Date of 6/1/1999.............................        $494,314        $494,314        $494,314
2a. Penalty Payment Date of 6/1/2000............................         543,745         507,166       (175,797)
2b. Result 2a discounted back to 6/1/1999.......................         494,314         461,060               0
3. Net Result (i.e., 1-2b)......................................               0          33,254         494,314
----------------------------------------------------------------------------------------------------------------

    Perhaps, however, the enforcement agency uses one of the 
alternative methodologies. Under alternative A, as described in Section 
II B(8)(a), above, the initial economic benefit as of the noncompliance 
date is calculated with BEN, but is then compounded forward at the 
after-tax risk-free rate. In this case, compounding the initial 
economic benefit forward from 1999 to 2000 at an illustrative risk-free 
rate of 2.6 percent yields $507,166. The company discounts this future 
penalty back to the present (i.e., 1999) at its WACC, and arrives at 
$461,060.25 Because this is less than the current economic 
benefit of $494,314, the company realizes a net gain of $33,254. This 
approach fails to make the company indifferent between compliance and 
noncompliance and, in the absence of any additional gravity-based 
penalty components, the company will have an incentive to delay 
compliance.
---------------------------------------------------------------------------

    \25\ Even if the company were to discount the future penalty 
back at a rate lower than its WACC, this rate would still exceed the 
risk-free rate that alternative A uses to compound the economic 
benefit forward, and therefore the discounted future penalty would 
still exceed the currently calculated economic benefit.
---------------------------------------------------------------------------

    If the enforcement agency instead uses alternative B, as described 
in Section II B(8)(a), the economic benefit as expected to be 
calculated a year from now in 2000 is a negative $175,797.26 
The company realizes that an enforcement agency using this approach 
will conclude a year from now in 2000 that no economic benefit has been 
gained, and therefore the economic benefit-based portion of the penalty 
will be zero. But the company currently calculates its economic benefit 
in 1999 to be a positive $494,314. At the time of initial noncompliance 
in 1999, the company concludes that delaying the equipment purchase 
will result in an economic gain, but that it will never have to pay any 
economic-benefit-based portion of the penalty. Once again, a risk-free 
approach fails to make the company indifferent between compliance and 
noncompliance and, therefore, in the absence of any additional gravity-
based penalty components, the company will have a significant incentive 
to delay compliance.
---------------------------------------------------------------------------

    \26\ A negative economic benefit result for the capital 
investment portion of compliance is typical for alternative B. In 
many recent cases, practitioners implementing this approach have 
arrived at negative economic benefit results for delayed capital 
investments, despite no changes in technological or legal 
requirements over time between the dates of noncompliance and 
compliance. Applying the combination of an extremely low risk-free 
rate for past cash flows and a higher risk-adjusted rate for future 
cash flows to delayed capital investments (with their past cash 
outflows for the actual investment and their future cash inflows for 
depreciation tax shields) can produce aberrant results that defy 
common sense. These perverse negative economic benefit estimates do 
not reflect any real economic losses because of the expenditure 
delay. Furthermore, even if the parameters in this example were 
different, the economic benefit--although perhaps positive--would 
still be much smaller than even under alternative A, and would 
similarly fail to make the company indifferent between compliance 
and noncompliance.
---------------------------------------------------------------------------

    (iii) Equity Rate Approach. By contrast, an approach that employs a 
company's equity rate focuses solely on the company's equity owners, as 
opposed to its other stakeholders (who hold the company's debt). 
Because the company's cost of equity capital will always exceed or at 
least be equal to a company's WACC, the economic benefit estimate--with 
all other assumptions held constant--will be higher or at least the 
same.27 While the Agency believes that a reasonable argument 
supports the use of equity, we nevertheless prefer the WACC, because it 
better represents firms' total capital structures and their own typical 
business decision-making practices.
---------------------------------------------------------------------------

    \27\ The WACC will equal the equity cost of capital if the 
company has no long-term debt. Note also that an economic benefit 
calculation using the equity rate should first net out any cash 
flows attributable to debt financing, as the focus in such a 
calculation is on the returns to the company's equity holders only.
---------------------------------------------------------------------------

    (iv) Proposed Change: Use WACC, Except for a Possible Early Penalty 
Payment. For the above reasons, the Agency believes that the current 
basic discounting methodology is appropriate and should not be changed, 
with one exception: If a company pays to the United States the benefit 
portion of the penalty while the case is still in litigation, EPA will 
cut off the compounding rate at the date of payment. Thus, there will 
no longer be any dispute in that case over the appropriate compounding 
rate from the date of payment into the future. In appropriate cases, 
the United States may consider allowing the violator to escrow funds 
for the economic benefit portion of the penalty demand (whether at the 
compliance date or at any other time). Then, when EPA runs the BEN 
model, it will use the date the funds were escrowed as the penalty 
payment date. The violator would have to furnish proof that it 
established the escrow account, as well as placed on the account 
appropriate restrictions (e.g., all accrued interest would go to the 
Agency).28 In cases where the period from the initial 
noncompliance date to the escrow date is short, this will eliminate 
much of the deviation in results between the competing economic benefit 
methodologies. We propose that BEN incorporate this guidance into its 
on-line help system and user's manual.
---------------------------------------------------------------------------

    \28\ Should the escrowed amount exceed the benefit component, 
then the interest on the amount that exceeded the economic benefit 
component would accrue to the violator.
---------------------------------------------------------------------------

C. Improving the BEN Model's User Friendliness

    EPA understands that some users find the BEN model difficult to 
use. While that has not been EPA's experience, the Agency expressed its 
interest in learning of any difficulties users encountered when running 
the model. The Agency particularly requested suggestions for realistic 
alternatives that would preserve the model's degree of precision.

[[Page 32960]]

1. Is BEN Too Complex To Operate?
    a. Background. EPA invited comments on whether any aspect of BEN's 
operation or the BEN User's Manual is too complex. Although the Agency 
designed BEN to be straightforward and easy to use, we welcomed any 
suggestions to make the model and manual easier to use without 
compromising BEN's degree of precision.
    b. Proposed Changes. Many commenters thought that although the BEN 
model is generally easy to use, certain aspects of its operation are 
cumbersome. These concerns largely stem from the model's original 
programming for a mainframe computer environment and its current 
existence in the DOS operating environment. Because nearly all computer 
users are now accustomed to the WindowsTM operating 
environment, the Agency proposes to reprogram the model for 
WindowsTM. The switch to the WindowsTM operating 
environment should make basic data entry and runs much easier to 
perform, as well as allow the addition of various advanced features 
without burdening the user with additional complexity.
    Furthermore, EPA has now established a toll-free helpline for 
federal, state, and local government enforcement staff who need 
additional assistance in using the BEN model. The helpline provides 
federal, state, and local environmental enforcement agencies with 
advice regarding financial issues that impact enforcement cases. The 
main types of inquiries EPA is addressing with this helpline are:

     The calculation of a violator's economic benefit from 
noncompliance;
     The evaluation of a violator's claim that it cannot 
afford to comply, clean up, or pay a civil penalty, and the 
application of the three computer models--ABEL, INDIPAY, and MUNIPAY 
29--that address these issues; and
---------------------------------------------------------------------------

    \29\ ABEL, INDIPAY and MUNIPAY evaluate inability to pay claims 
from for-profit entities, individuals and municipalities, 
respectively.
---------------------------------------------------------------------------

     The calculation of the after-tax net present value of a 
supplemental environmental project, and the application of the 
computer model--PROJECT 30--that addresses this issue.

    \30\ As most supplemental environmental projects (SEP's) are tax 
deductible and completed long after the cases are settled, any 
stated SEP cost is usually far above the actual cost to the 
violator. PROJECT determines a violator's actual out-of-pocket costs 
for a SEP.
---------------------------------------------------------------------------

Callers can obtain copies of the BEN model and BEN User's Manual, 
copies of the previously mentioned other key models, as well as 
relevant policies and guidance documents. In addition, callers can 
obtain advice on how to access training courses on the models and 
related subjects. Inquiries regarding the interpretation of federal 
statutes and EPA policies will be referred to the EPA, as will 
inquiries from non-governmental employees.
    The toll-free helpline phone number is 888-ECONSPT (326-6778), and 
is staffed by a contractor, Industrial Economics, Incorporated, located 
in Cambridge, Massachusetts. The helpline is in operation from 8:00 AM 
to 6:00 PM Eastern time and will accept voice mail messages when it is 
not in operation. In addition, the contractor is providing a companion 
e-mail address: [email protected]. When requesting help, enforcement 
staff should identify the government entity for which they are working.
2. Is the Information BEN Needs Difficult or Expensive To Obtain?
    a. Background. One of the main breakthroughs BEN achieved over its 
predecessor model was its streamlining of the data needed to operate 
the model. While the model requires a minimum of seven and a maximum of 
only eighteen pieces of data, some users apparently feel the data is 
difficult to obtain. This has not been EPA's experience, as most (if 
not all) of the required data inputs are based on facts that are 
already or should be known to the litigation team as the data are 
important to other parts of the settlement. Nevertheless, the Agency 
welcomed any suggestions on how to make this data easier to obtain as 
long as we can still preserve the model's degree of precision.
    b. Proposed Changes.--The Agency received a wide range of responses 
on this issue. Most users thought the necessary data was easy to 
obtain; others thought it was prohibitively difficult to obtain. EPA 
did not receive any specific suggestions on how to streamline the 
model's data requirements even further. The Agency did receive 
suggestions that the BEN model incorporate some basic, generic 
compliance data.
    The Agency is in the process of developing a computerized data base 
for RCRA compliance costs, based on the current RCRA compliance cost 
handbook. This data base should enable the user to look up the 
appropriate RCRA compliance costs easily, and then use them in the BEN 
model to calculate an economic benefit figure. Although this database 
will not be a substitute for case-specific data, it will at least 
provide a starting point and a reasonably accurate estimate when a 
violator refuses to provide any detailed cost information. The Agency 
welcomes comment on which statutes would benefit the most from similar 
databases, and what specific compliance components most often need cost 
estimates.
    Also, as noted at end of Section II C (1) (b), above, EPA has 
established a toll-free helpline to provide assistance to government 
enforcement personnel regarding financial economics issues in 
environmental enforcement cases. Helpline staff can provide suggestions 
on how to obtain the necessary data to run the BEN model.

III. Response to Comments

A. Broad Economic Benefit Recapture Issues

1. Alternatives to BEN
    Comment: One commenter stated that the BEN result should be 
adjusted for the violator's probability of detection and prosecution.
    Response: The commenter's suggestion that the penalty should be 
multiplied by the inverse of the chance of detection and prosecution 
finds solid support in the literature on deterrence and economics. In 
brief, the theory underlying the comment is that a reasonable economic 
actor will weigh its willingness to violate against the size of the 
penalty that will be assessed, multiplied by the inverse chance of 
getting caught. For instance, if preventing a violation would cost a 
person $100, and the penalty that would be assessed if the person is 
prosecuted is $200, then the person will elect to violate, all other 
things being equal, unless the chance of getting caught is at least 
50%. Nonetheless, despite the validity of the commenter's premise, the 
comment is beyond the scope of the current public notice. The Agency 
has asked for comments only on the method for calculating economic 
benefit, not on the broader deterrent effect of penalties generally.
    Comment: One commenter thought BEN understates the economic benefit 
of noncompliance because the model defines benefit as the income earned 
from investing the funds that otherwise would have been used to pay 
compliance costs. The real economic benefit, according to the 
commenter, is the producer's surplus obtained during the noncompliance 
period. The commenter proposed that EPA obtain estimates of how people 
value pollution reductions to estimate a demand curve from which to 
determine the supply-demand framework facing the violator.
    Response: This comment misunderstands the Agency's task, which is 
to calculate the economic benefit that an individual firm has

[[Page 32961]]

gained (whether from mere delay of compliance costs or larger issues of 
market share gains), not the benefit the society gains from pollution 
level changes. The commenter might also be confusing the economic 
benefit to the violator (which the Agency is trying to measure) with 
the monetized value of environmental damages that result from 
noncompliance (which in this context the Agency is not trying to 
measure).
2. Illegal Competitive Advantage
    Comment: One commenter maintained that if EPA decides to pursue 
illegal competitive advantage (that is, focusing on issues such as 
illegal profits or market share), then it must establish the 
appropriate analytic tools that conform to both mainstream financial 
and economic theory (considering items such as price effects, 
elasticities, and economies of scale), while keeping BEN relatively 
user-friendly.
    Response: The Agency generally agrees with these sentiments. 
Nevertheless, keeping BEN relatively user friendly is a nonissue as the 
model cannot be modified to calculate a benefit based upon illegal 
competitive advantage.
    Comment: Several commenters thought that revenues from the sale of 
prohibited products were too complicated to include in the BEN model.
    Response: The Agency believes that the concept of capturing the 
revenues or profits from the sale of prohibited products is relatively 
uncomplicated. Nevertheless, the Agency agrees that it could not modify 
the BEN model to perform this calculation and remain sufficiently user-
friendly for its intended audience. Therefore, the Agency is proposing 
guidance to address this question as well as the other illegal 
competitive advantage questions. In addition, the Agency is proposing 
adding some questions to the BEN model to alert users to these issues.
    Comment: One commenter stated that if the prohibited product is the 
only product produced by a company, then the after-tax net profit is 
the best measure of the economic benefit of noncompliance. If the 
prohibited product is one of several produced, then one should allocate 
the costs and revenues among the products to determine the profit per 
product. In this case, the commenter concluded, the after-tax profit on 
only those products that are prohibited should be included in the 
economic benefit of noncompliance.
    Response: The Agency agrees that one factor which it should 
consider is whether the company is a single-product company or a multi-
product company in recapturing any benefit from producing a prohibited 
product. However, a clear distinction does not always exist between 
products, product lines, or even companies and divisions within 
corporations. Where possible in such cases, the analyst may have to 
evaluate several similar products and make a reasonable judgment 
regarding the per-unit or per-division after-tax profits that were 
unlawfully gained.
    Comment: One commenter thought that to calculate the benefit a 
violator gains from selling illegal products, one should calculate the 
net profit gained by sales of that product, augmented by interest and 
discounted over time. According to this commenter, net profit equals 
gross profit less the proportion of gross expenses and overhead 
attributed to sales of that product, which BEN can already calculate.
    Response: The Agency is in agreement that this is a conceptually 
valid method for calculating the economic benefit from the sale of an 
illegal product. But the correct allocation of incremental overhead to 
a specific product is a difficult task, and one for which the BEN model 
is irrelevant.
    Comment: Several commenters thought that the benefit of 
noncompliance in cases in which losses are reported in the first year 
of the business's operation is too complicated for the BEN model to 
address. Another commenter thought that the benefit in such cases 
equals the future tax benefit received from these net operating losses. 
However, because the business may choose not to apply these losses for 
some time, it is difficult to calculate.
    Response: The Agency agrees that the BEN model is unable to address 
the situation in which start-up costs lead to initial losses, even 
though future profits may be significant.
    Comment: One commenter thought another kind of benefit that EPA 
does not recognize is ``advantage of risk,'' which is the benefit a 
company gains by putting off expenses in the hopes that future events 
will render the expenses unnecessary.
    Response: EPA already addresses this advantage: the economic 
benefit calculation can reflect whether events after the noncompliance 
date (NCD) have rendered the expenses unnecessary. In such a situation, 
it is necessary to analyze the expenses the company has not merely 
delayed, but instead has avoided entirely (which increases the 
resulting benefit). The current BEN model requires an off-line 
calculation to arrive at the correct result, although the revised BEN 
model may be able to add flexibility to perform such a calculation 
internally.
    Comment: Several commenters thought that the issue of competitive 
advantage cannot be adequately calculated in terms of an economic 
benefit penalty. For example, one person noted that a given market edge 
may grow over the years, or may be the deciding factor determining 
whether the violator could stay in business, making it difficult to 
calculate a benefit figure. Others noted that BEN is inapplicable to 
cases involving illegal market share gains from violating concentration 
limits or cap limits in permits. Another suggested that EPA should 
develop a protocol or give more guidance for illegal competitive 
advantage cases, including source-specific factors agencies could use 
to calculate illegal profits or market share gained.
    Response: The Agency agrees that there are a number of complex 
factors to consider in many analyses of illegal competitive advantage. 
The Agency plans to issue guidance that will aid analysts in such 
situations.
    Comment: One commenter noted that EPA should develop a punitive 
penalty to discourage violators from achieving a competitive advantage, 
instead of trying to determine the economic benefit from competitive 
advantage. Similarly, one person thought that the profit associated 
with illegal competitive advantage should be a non-negotiable portion 
of the gravity component of a penalty. Another person thought that when 
illegal competitive advantage has been proven, companies should be 
financially punished to a point at which they are worse off (not equal 
to) their industrial counterparts.
    Response: The total penalty comprises two components: economic 
benefit and the gravity (of the violation). The recapture of economic 
benefit is designed to place all firms on a ``level playing field'' so 
that no firm can benefit by avoiding or delaying the necessary 
compliance expenditures. It is not punitive in nature, but rather is 
``no-fault.'' Competitive advantage is a component of economic benefit, 
and, therefore, should be analyzed in a ``no-fault'' framework. But the 
presence of competitive advantage could indicate the existence of 
certain other factors (e.g., recalcitrance) that can enter into the 
gravity calculation. Once the full economic benefit is recaptured, the 
Agency then imposes a significant gravity component to ensure that the 
violator will be worse off than its competitors.
    Comment: A few commenters asserted that the competitive advantage 
gained by delaying or avoiding compliance

[[Page 32962]]

costs does not exist after collecting a penalty equal to the BEN-
calculated economic benefit. For example, the disadvantages of 
``predatory'' underpricing by a company of its products may outweigh 
the temporarily enhanced market share. Therefore, pursuing illegal 
competitive advantage would be a form of double recovery. Another 
commenter stated that ``lost profits'' and ``illegal competitive 
advantage'' measure the same thing (i.e., the economic benefit from 
noncompliance), and that EPA is not authorized to collect both.
    Response: The apparent disagreement would again appear to stem from 
wording issues. EPA does not intend to ``double count'' economic 
benefit, but instead seeks different conceptual terms to approach 
economic benefit calculations in different situations. As stated 
previously, EPA's intention is to determine fairly what economic 
benefit is, and then recapture it as part of an overall penalty, 
including a significant gravity component reflecting the seriousness of 
the violation. Alternative approaches such as calculating illegal 
competitive advantage are meant to add flexibility and are not 
necessarily additive. Nevertheless, should EPA determine that it needs 
to consider both types of economic benefit in a particular case, it 
will do so. Predatory pricing may sometimes be counterproductive, but 
in certain situations the enhanced market share may constitute an 
addition to the economic benefit.
    Comment: One commenter stated that any marginally increased 
deterrent effect from trying to capture any illegal competitive 
advantage would be more than offset by the complications and 
controversy involved in performing such a calculation. Similarly, some 
commenters asserted that because evidence suggests that the BEN model 
is meeting its goal of deterring noncompliance, adding new 
complications to the model is not justified. Others warned that adding 
another dimension of economic benefit to measure would make BEN less 
attractive for states to use, decreasing the usage of BEN in even 
simpler cases.
    Response: Measuring illegal competitive advantage may add 
complexity to the economic benefit calculation. In some cases it may be 
worth dealing with the additional complexity if there is only a small 
increase in economic benefit. In other cases, however, the presence of 
significant illegal competitive advantage will cause the BEN model to 
miss most of the economic benefit, and therefore the additional efforts 
are necessary.
    Comment: One commenter contended that EPA's ``illegal competitive 
advantage'' proposal is driven at least in part by a desire to avoid 
any possible reductions in fines resulting from proposed changes to the 
BEN model.
    Response: EPA's goal since the establishment of the benefit 
recapture requirement has been to determine accurately--within reason--
the violator's economic benefit of noncompliance from all sources, 
including illegal competitive advantage. In pursuing that goal, EPA has 
never reached its various decisions on modifying the BEN model based on 
keeping annual penalty assessments at a certain level. If that were the 
case, EPA would never have changed its discount rate assumptions from 
the equity cost of capital to the weighted average cost of capital 
(WACC), which--all else being equal--would lower penalty assessments. 
With regard to illegal competitive advantage, EPA is concerned that its 
penalty assessments are missing a major component of economic benefit 
by ignoring illegal competitive advantage. Therefore, EPA is committed 
to calculating the benefit from illegal competitive advantage in 
appropriate cases regardless of what other modifications are made to 
the BEN model.
    Comment: One commenter expressed the view that all illegal 
competitive advantage situations cannot be grouped under the heading of 
``illegal competitive advantage,'' and noted that removing such an 
advantage is only one reason for the economic benefit component of the 
penalty. The commenter further noted that a violator can receive an 
economic benefit even without competitive advantage; i.e., when all the 
firms in an industry are simultaneously out of compliance.
    Response: The Agency believes that any apparent disagreement on 
this issue stems mainly from wording issues. The Agency agrees that 
many different types of economic benefit exist outside of avoided and 
delayed pollution control expenditures, but uses the term ``illegal 
competitive advantage'' as a convenient catch-all. The Agency also 
agrees that economic benefit can exist even if all firms in an industry 
are not in compliance.

B. The BEN Model's Calculation Methodology

1. Discount Rate
    Comment: Several commenters stated that the discount rate for 
future cash flows and the compounding rate for past cash flows (i.e., 
the rate at which the initial economic benefit as of the noncompliance 
date (NCD) is brought forward to the penalty payment date (PPD)) should 
continue to be the same. One person noted that using a discount rate 
that is larger than the compounding rate would underestimate economic 
benefit. One commenter stated that the reason the weighted average cost 
of capital (WACC) is the appropriate rate to use as the for-profit 
entity discount rate is that it represents the fairest and most 
realistic rate available. Several commenters similarly stated that the 
WACC should be used for both compounding and discounting, if the EPA 
wants to ensure that companies do not profit from the additional funds 
available through noncompliance, as the WACC accurately reflects the 
opportunity return of alternative investments.
    Response: EPA agrees with these positions, as the WACC is the 
minimum rate that one would expect companies to return to their 
investors in order for those companies to continue to operate in their 
current lines of business.
    Comment: Some of the commenters expressed concern that the BEN 
model is essentially flawed by using only one rate--the WACC--for both 
discounting future cash flows (back to the NCD) and compounding the 
initial economic benefit (from the NCD to the PPD). These commenters 
contended that a proper calculation should use two different rates.
    Response: The Agency believes that using one rate for compounding 
and discounting cash flows is soundly based in financial and economic 
theory. (See Section II.B(8) above.) The use of one rate also maintains 
an internal consistency within each cash flow that using two different 
rates could not achieve. For example, assume that a $100 after-tax cash 
flow was incurred a year after NCD. These commenters would advocate 
discounting the $100 back to the NCD at a rate of, for example, 10 
percent, which would give the cash flow a present value of 
approximately $91 as of the NCD. But the commenters would then compound 
the $91 forward to the PPD at a lower rate of, for example, 4 percent. 
The resulting cash flow would have a present value of approximately $95 
as of one year after the NCD (as it is brought forward to the PPD), 
even though the actual cash flow as of that time was really $100. This 
result is clearly inconsistent with reality and common sense. (This is 
an entirely different situation than one in which the violator is 
already in compliance and has either paid the benefit portion to the 
United States or escrowed (at the discretion of the government) funds 
for the economic

[[Page 32963]]

benefit portion of the penalty demand. If the benefit portion is paid, 
then the benefit portion will immediately cease accruing any interest. 
In the escrow situation, the economic benefit portion will accrue 
interest at the escrow fund's interest rate, but all the interest will 
accrue to the United States. In either situation, when EPA runs the BEN 
model it should use the date the funds were paid or escrowed as the 
penalty payment date.)
    Comment: Several commenters stated that the compounding rate should 
account only for the ``time value of money,'' and that the after-tax 
risk-free rate is the correct rate to use. They further contended that 
since no risk is borne by shifting the net economic benefit forward in 
time, BEN's use of the company's WACC is wrong because it reflects a 
risk premium. Another commenter similarly stated that noncompliance, 
while representing a benefit to the firm, is essentially a new project 
deserving its own project-specific cost of capital, which is equal to 
the risk-free rate or the company's debt rate (which reflects its risk 
of going out of business and hence its inability to pay a penalty).
    Response: The process of recapturing the economic benefit of 
noncompliance is not merely an exercise in moving disembodied cash 
flows through time to account for the time value of money. Bringing 
cash flows forward in time (compounding) at a risk-free rate fails to 
capture the reasonable benefit the company could earn from alternative 
internal or external investments. The Agency believes that using a 
risk-free rate would fail to make the violator indifferent to 
noncompliance.
    Comment: One commenter stated that using the equity cost of capital 
to determine the correct compounding rate lacks support within the 
mainstream of modern financial theory. Several commenters alternatively 
argued that the cost of equity was the best rate for bringing the 
economic benefit forward in time, because excess funds available from 
noncompliance have a very wide investment opportunity horizon that is 
best reflected in the equity market rates. Another commenter stated 
that using equity was preferable because it is simple, fair, easily 
calculated, and not as prone to a ``battle of the experts'' as is the 
WACC.
    Response: The Agency believes that the use of WACC best captures a 
violator's benefit. Nevertheless, the Agency also believes that a 
reasonable argument supports the use of equity, as the equity rate 
reflects the economic benefit earned by the company's equity owners. 
The Agency disagrees that using equity would significantly diminish the 
contentiousness surrounding expert witness analysis in negotiation. If 
anything, it would probably make it even greater.
    Comment: Several commenters asserted that future cash flows should 
be discounted at an after-tax risk-adjusted rate that is less than a 
company's WACC, because capital investment in pollution control 
equipment usually involves a lower degree of risk than in other capital 
investment projects.
    Response: Because investments in pollution control equipment allow 
a company to remain in business, they are essentially investments in 
the company as a whole. Therefore, these types of investments have the 
same degree of risk as other capital investment projects and are 
financed at the company's overall cost of capital (i.e., the WACC).
    Comment: One commenter thought the default discount rate is too 
general and results in incorrect economic benefit results. The 
commenter thought that EPA should instead require a case-specific input 
for the discount rate. Another commenter thought that while default 
values are sufficiently accurate for most cases, BEN could be improved 
by adding an option that allows the user inputting current and 
historical data to calculate a discount rate specific to the time 
period during which noncompliance occurred.
    Response: The model's default rates (for the discount rate and 
certain other inputs) allow enforcement staff with little knowledge of 
financial economics to perform reasonably accurate analyses. This is 
one of BEN's significant improvements upon its predecessor (CIVPEN), 
whose many required inputs limited its applicability and utility. In 
the vast majority of cases, the default rates do not differ 
significantly from case-specific inputs, and EPA is always open to 
good-faith efforts by a violator to supply case-specific inputs. 
Furthermore, the revised BEN model for the Windows operating 
environment will incorporate look-up data tables that will be able to 
provide more tailored default rates without any input from users.
    Comment: One commenter stated that the initial economic benefit 
should be brought forward from NCD to the compliance date (CD) at the 
WACC, and then from the CD to the PPD at the debt cost of capital. 
Another commenter proposed a lower compounding rate based on the 
violator's actual after-tax rate of return on funds in a dedicated 
escrow account--if the violator has actually set aside such funds for a 
penalty payment.
    Response: The Agency fully agrees with using the lower rate, but 
only if the violator has actually escrowed such funds. Because such 
instances seem to be extremely rare, the Agency does not believe the 
economic benefit should automatically be brought forward from the 
compliance date at the lower rate. Instead, if a company escrows funds 
for the economic benefit portion of the penalty demand (whether at the 
compliance date or at any other time), then when EPA runs the BEN 
model, it will use the date the funds were escrowed as the penalty 
payment date. Once the government approved of the arrangement, the 
violator would have to furnish proof that it established the escrow 
account, as well as placed on the account appropriate restrictions 
(e.g., all accrued interest would go to the Agency, except for any 
interest that is attributable to escrowed amounts in excess of the 
benefit component). In cases where the period from the initial 
noncompliance date to the escrow date is short, this approach will 
eliminate much of the deviation in results between the competing 
economic benefit methodologies. We propose that BEN incorporate this 
guidance into its on-line help system and user's manual.
    Comment: One commenter made the point that choosing an appropriate 
``interest rate'' was very important, and it was not clear from the 
Federal Register notice that EPA was soliciting comments specifically 
on this issue.
    Response: This seems to be a misunderstanding caused by word 
choice, as the Agency's request for comment on the ``discount rate'' 
issue is intended to encompass both the rate used to bring future cash 
flows back in time, and the ``compounding'' or ``interest'' rate used 
to go forward from the NCD to the PPD.
    Comment: A few commenters stated that the tort law literature 
suggests rates for bringing the initial economic benefit forward in 
time from the NCD to the PPD.
    Response: The goal in a tort action is to make the plaintiff 
``whole.'' In a tort action, the settlement or court determination 
should place the plaintiff in the same position as if the ``wrong'' had 
not occurred. The first step in such a case is to calculate the 
necessary compensation at the time of the actual wrong. The next step 
is to adjust the compensation calculated at the time of the actual 
wrong to the time at which such compensation is to be made. This 
requires compounding and the issue then becomes: what is the 
appropriate compounding rate to use to make the plaintiff ``whole''? 
This is sometimes a risk-free rate or a corporate debt rate. On

[[Page 32964]]

the other hand, in an environmental enforcement action the Agency is 
not suing for damages it has suffered. The goal is not to make the 
plaintiff whole, restoring to it the amount by which it was damaged. 
Rather, the goal is to return the defendant to the position it would 
have been in had it complied, and thus disgorge from it the amount it 
wrongfully gained. This is a fundamentally different perspective from a 
tort case and demands a fundamentally different view of compounding the 
initial economic benefit forward to the penalty payment date. The 
literature from tort law is not relevant.
    Comment: Another commenter stated that moving all cash flows 
directly to the PPD--as opposed to first moving them back to the NCD 
and then forward to the PPD--was a way of avoiding moving the same 
funds through time at two different rates.
    Response: This approach would eliminate the advantage of being able 
to see the initial economic benefit as of the NCD, which can provide 
insight into the violator's decision making. In any event, the BEN 
model itself uses the same rate to move cash flows back to the NCD and 
to move the initial economic benefit forward to the PPD. Adopting this 
approach would not change the end result.
    Comment: A commenter stated that the theoretically correct 
discounting method would be first to discount back to the NCD the 
expected cash flows for the on-time compliance case (including the 
depreciation tax shields that occur after the NCD, as well as the 
annual costs that are avoided under the delayed-compliance scenario), 
and then to compound these cash flows forward to the PPD. The commenter 
further stated that cash flows for the delayed compliance case should 
be discounted back to the compliance date (i.e., the beginning date of 
that delayed-case set of cash flows), before similarly compounding them 
forward to the PPD. The difference between the two present values as of 
the PPD would be the economic benefit.
    Response: The Agency believes the BEN model's current approach is 
theoretically correct; i.e., the cash flows for both the on-time and 
delay scenarios should be discounted back to the NCD to calculate the 
initial benefit as of the NCD, and then brought forward to the PPD. The 
calculation for the initial economic benefit as of the NCD can be 
thought of from the violator's viewpoint at the time of the NCD, 
weighing the options of on-time compliance and delayed compliance. 
Therefore, the violator is looking forward at the two sets of cash 
flows, implicitly discounting both sets back to the ``present'' (i.e., 
the NCD). Nevertheless, with identical discounting and compounding 
rates, this approach yields exactly the same result as the BEN model.
    Comment: One commenter advocated calculating the economic benefit 
for municipalities by using a discount rate for private entities that 
perform similar functions (e.g., on a municipal Clean Water Act case, 
the discount rate would be the average WACC for privately owned 
wastewater treatment plants).
    Response: In municipal cases, the Agency is trying to calculate the 
economic benefit that the municipality and its residents or rate payers 
have actually gained. Therefore, the Agency prefers to use an 
estimation of the municipal government's opportunity cost of financing 
projects, which is equal to the interest rate on the municipality's 
bonds. This debt rate--which forms the basis for the BEN model's not-
for-profit standard value discount rate--will almost always be 
substantially lower than the private-sector-equivalent cost of capital.
    Comment: One commenter argued that smaller firms have higher 
capital costs and as a result should reflect a higher economic benefit.
    Response: The BEN standard value discount rate is based upon the 
typical large firm's WACC. Although this rate is reasonable for most 
cases, BEN allows the user to enter a different value for cases in 
which the specific values may differ significantly, whether because a 
small firm has a higher cost of capital or for some other reason. 
Significant evidence exists that small companies on average have higher 
returns than larger ones, but EPA has conservatively decided to base 
its standard value discount rate on large companies, instead of on 
small firms' higher (by about two percentage points) discount rate. For 
small firms, application of this generic WACC rate yields a benefit 
number that is smaller than it would otherwise be and thus is 
particularly conservative in regard to small firms. (For a detailed 
discussion of this issue, see the Ibbotson Associates Stocks, Bonds, 
Bills, and Inflation annual yearbooks, in particular Chapter 7, ``Firm 
Size and Return.'')
2. Inflation Rate
    Comment: One commenter thought BEN suffers from three inflation 
rate defects: (1) it uses the same rate for past and future time 
periods; (2) it uses a 10-year average rather than the actual rate 
during noncompliance; and (3) it relies on the McGraw-Hill Chemical 
Engineering Plant Cost Index (PCI) to the exclusion of all other 
relevant inflation indices. A few commenters similarly thought that BEN 
could be improved by establishing subroutines or look-up tables that 
allow inputting current and historical inflation rate data to calculate 
a rate specific to the time period during which noncompliance occurred.
    Response: The Agency proposes to address these three concerns in 
the revised BEN model. First, the model will use a separate projected 
inflation rate for compliance costs occurring in the future. Second, 
BEN will use look-up tables (without requiring any input from the user) 
of cost indices for actual historical inflation. Third, users will have 
the option to reference cost indices other than the default PCI for 
cases in which compliance costs merit a different index.
3. Other Technical Aspects
    Comment: One commenter thought BEN incorrectly changes the tax 
rates on July 1 instead of on January 1. This individual felt that if 
this is not changed, the BEN manual should explain why this convention 
is used.
    Response: This is not in fact what BEN does. The Agency believes 
that the commenter's attempt to replicate BEN's calculations may have 
been thrown off by BEN's use of the mid-point of each year to calculate 
the present value of annual costs and depreciation tax shields (with 
each year starting at month of the NCD).
    Comment: One person commented that BEN does not account for 
investment tax credits (ITCs) for capital investments after 1985, even 
though ITCs were still available for certain types of projects in 1986 
and 1987.
    Response: Given how rare these circumstances are, the Agency 
believes that the BEN model's current warning about this issue (and the 
consequent need to consult a financial analyst for the necessary off-
line calculations) is sufficient. Nevertheless, the Agency proposes 
that the revised BEN model not accept noncompliance dates before July 
1, 1987. This will ensure that BEN's omission of ITCs--and also low-
interest financing (LIF)--is not leading to incorrect economic benefit 
estimates in instances where users do not heed the current model's 
current warning. EPA will provide assistance in performing the 
necessary calculations for cases that involve noncompliance dates 
before July 1, 1987.
    Comment: One person thought that EPA had not adjusted the standard 
values in BEN for more than two years,

[[Page 32965]]

even though they should be updated regularly.
    Response: The Agency updates the standard values every year and 
encourages users to download the most current model version from its 
Internet site, at http://es.epa.gov/oeca.
    Comment: One commenter stated that using BEN is inappropriate in 
instances in which the violator achieves compliance by using a 
different production method or by simply submitting the proper 
paperwork. Similarly, another commenter noted that BEN should have the 
flexibility to incorporate changes in technology between the on-time 
and delayed compliance scenarios, taking into account the lowest total 
cost of compliance as of the compliance date, rather than the actual 
cost incurred. One commenter stated that changing pollution 
technologies are inconsistent with the recapture of economic benefit 
based solely on the BEN model (regardless of the discount or inflation 
rate used). Another commenter stressed that more of the structure of 
the model and circumstances of the noncompliance scenario need to be 
taken into account, which cannot be addressed by just changing input 
values.
    Response: If the violator eventually came into compliance using 
significantly different methods than would have been required had it 
complied on-time (i.e., if the compliance components and costs for the 
on-time scenario differ from those for the delay scenario by more than 
just the inflation rate), then the current BEN model lacks the 
flexibility to analyze such a situation without assistance from a 
financial analyst, who would perform the necessary off-line 
calculations. The Agency hopes that the revised BEN model for the 
WindowsTM operating environment will be able to offer such 
flexibility without additional complexity.
    Comment: One commenter thought that BEN is not applicable to not-
for-profit entities.
    Response: This commenter appears to be misinformed, as BEN offers 
the user the option of selecting not-for-profit status, which then sets 
the tax rate to zero and the discount rate to the cost of municipal 
debt.
    Comment: One commenter argued that minor infractions should not be 
considered when determining the dates of noncompliance and compliance--
only significant violations should signal the noncompliance date. 
Similarly, as soon as the facility has remedied the vast majority of 
its violations, the period of noncompliance should be considered over.
    Response: The Agency disagrees. The appropriate noncompliance and 
compliance dates for an economic benefit analysis are usually the same 
as their legal counterparts. The noncompliance date is when the 
violator should have incurred the costs necessary for compliance, and 
the compliance date is when the violator actually incurred such costs 
(typically, when compliance is achieved). The significance of the 
violations is irrelevant: what matters is when the company should have 
spent the money necessary for compliance, and when--by contrast--it 
actually did spend such money. There are some situations in which the 
noncompliance date may have different legal and economic meanings, such 
as when the first instance of noncompliance occurred prior to the 
statute of limitations cutoff. For purposes of settlement, the 
enforcement team may choose to use the statute of limitations date as 
the noncompliance date even though this means the actual economic 
benefit that has accrued to the violator may substantially exceed the 
economic benefit that the enforcement team calculates. Nevertheless, 
EPA believes that a very strong argument can be and should be made for 
using the actual noncompliance date and not the statute of limitations 
date. Economic benefit is a factor for consideration in imposing a 
civil penalty, and a trier of fact should not be precluded from 
considering the violator's entire economic gain from its violations. In 
these situations, the statute of limitations would serve to limit the 
maximum size of the civil penalty.
    Comment: One person stated that unless the penalty is paid over a 
long period of time through several installments, no additional charges 
should accrue if the penalty is paid within 90 days of the date when 
the parties agree to the payment. The commenter also noted that the 
regulator should act quickly to propose an amount and immediately make 
the violator aware of the possibility of further compounding the 
penalty if the payment date is pushed back.
    Response: Once final settlement is reached, the payment date and 
the rate at which the penalty should be compounded if not paid on time 
are debt collection issues and not relevant to the economic benefit 
analysis. In contrast, the payment date selected for a benefit analysis 
is a relevant consideration. Here, the Agency agrees and encourages 
enforcement staff to make violators aware early in negotiations that 
the later the penalty payment date, the higher the benefit number. 
Nevertheless, there is no legal obligation on the enforcement staff to 
do so.
    Comment: One person felt that because BEN, by design, can only 
calculate an ``estimate,'' it cannot create values that should be used 
as hard and fast penalties.
    Response: Any calculation of economic benefit is by necessity an 
estimate, as one can never determine economic benefit as precisely as, 
say, determining the money a bank robber stole (i.e., a violator's 
financial statements have no line item for ``economic benefit from 
pollution control noncompliance.'') The Agency believes that BEN is 
sufficiently accurate for its intended purpose. Furthermore, the 
economic benefit is only one component of the penalty, to which is 
added the gravity component.
    Comment: One person suggested that a list of common environmental 
expenditures that are known to be tax-deductible (e.g., engineering 
costs for permits) would be helpful to those with little or no 
knowledge of this area.
    Response: While the EPA does not give tax advice, the Agency 
understands that virtually all environmental compliance expenditures 
are tax-deductible, except for land.31 Enforcement staff 
using BEN can always check with the IRS for confirmation of case-
specific items.
---------------------------------------------------------------------------

    \31\ Penalties are almost never deductible. (The only area where 
they are deductible is where the ``penalty'' is compensating the 
government entity harmed by the violation, but this is rarely an 
issue in the benefit context.)
---------------------------------------------------------------------------

    Comment: One state agency thought it could not use BEN to evaluate 
a company that failed to install a piece of control equipment that was 
required for only a three-year period. (The equipment in this 
particular case was a condenser.) Thus, the company avoided the 
equipment cost entirely, but if the company had incurred the cost, then 
the equipment would have commanded a resale value after three years.
    Response: In the vast majority of cases, the equipment is installed 
and operated by the firm for its entire useful life. BEN assumes there 
is no resale value since the equipment has no useful life left and/or 
is not worth moving to a new site. In a temporary use situation, off-
line calculations are necessary. A user in this situation should 
consult Appendix B in the BEN User's Manual to determine the economic 
benefit from an avoided capital investment, and then subtract from that 
the resale value (or salvage value) of the condenser once it no longer 
would have been needed. Alternatively, the equipment's lease cost (if 
such a lease is feasible, and the data

[[Page 32966]]

is available) could be entered as an annual cost.
    Comment: One commenter stated that BEN should stress 
``incremental'' operating and maintenance (O & M) costs (i.e., the 
additional costs necessary for compliance, over and above the costs the 
company would otherwise incur in the absence of compliance).
    Response: BEN already stresses this; for example, the ``help'' 
statement option that is available when entering annual costs states, 
``The annual expense is an estimate of average annual incremental costs 
of operating or maintaining required environmental control measures.''
    Comment: One group of commenters stated that the analysis of the 
on-time case must be based on the compliance alternative that would 
have been chosen from a rational business decision perspective, meaning 
the compliance option with the lowest ex ante net present value of 
total cost to the company. They further stated that no rational 
business would spend more than this amount to achieve compliance. 
Another group argued that the economic benefit calculation should be 
adjusted for compliance costs that go beyond the regulatory effort, and 
that companies should not be penalized for implementing ``Cadillac'' 
remedies when trying to be good environmental stewards. They commented 
that companies will have no incentive to move ``beyond compliance'' if 
the BEN model continues to calculate economic benefit based on the more 
expensive control option chosen by the company.
    Response: The Agency agrees that regulatees will generally select 
the compliance option that has the lowest cost. However, this 
assumption is only a starting point and does not always hold true; 
therefore, case-specific information must be examined. Regulatees may 
choose more expensive compliance options because they will ultimately 
work better with existing equipment and, consequently, a seemingly more 
expensive outlay will ultimately entail lower total costs. 
Alternatively, a lower quote from one vendor may not be as reliable or 
realistic as a higher quote from another vendor. The Agency generally 
agrees, nevertheless, that the compliance costs for the BEN inputs 
should not include additional costs expended in an effort to go beyond 
minimum compliance. The Agency also cautions enforcement staff to 
scrutinize such claims closely as the more expensive approach is often 
undertaken because that was the minimum that a rational business would 
take for the regulatory requirements at issue.
    Comment: A few individuals thought that in cases where a violator 
ineffectively spends significant resources trying to achieve 
compliance, or where funds are spent on other unprofitable ventures, 
the company's economic benefit of noncompliance is smaller than that 
estimated by BEN. This result occurs because BEN assumes that all 
resources not spent on achieving compliance are spent on alternative 
profitable ventures. One commenter noted that not allowing credits for 
unsuccessful compliance implementation is not an economic decision, but 
simply a bad policy decision by EPA. Similarly, one group stated that 
denial of credit for failed precompliance expenditures ``sends a clear 
message'' that mitigation of pollution problems has no value. Some 
commenters stated that a way should exist to account for ``good faith'' 
yet unsuccessful attempts at compliance. In contrast, other commenters 
argued that no adjustment or credit for costs of compliance efforts 
that eventually fail should be given. One reason given was that the 
entire regulated community faced a similar set of challenges in 
achieving compliance by the required date; another reason given was 
that ineffective compliance methods should be treated as delaying 
tactics.
    Response: The current BEN User's Manual (1993 edition) provides an 
explanation of the Agency viewpoint, which is that credit may be given 
for unsuccessful yet good-faith efforts to comply, as opposed to 
purported compliance actions that in fact had other motives. 
Nevertheless, the decision as to what constitutes such a good-faith 
efforts can be made only on a case-specific basis.
    Comment: One commenter stated that the EPA could provide more 
guidance on the subject of compliance credits. The commenter suggested 
that to provide the correct incentives, EPA should not grant credit 
unless ``compelling evidence'' was present that the noncompliant firm 
had reason to believe that its effort and costs would actually bring it 
into compliance. Another commenter echoed the sentiment that a case-by-
case determination is required.
    Response: The Agency will try to elaborate more on its guidance in 
future versions of the BEN User's Manual, but the determination in each 
case still requires the judgment of the enforcement staff.
    Comment: One commenter provided reports from actual cases in which 
he had calculated a negative economic benefit, typically because the 
violator's avoidance and/or delay of pollution control expenditures had 
ramifications that resulted in economic losses.
    Response: The Agency recognizes that economic benefit can be 
negative--in both theory and practice. Enforcement staff must 
scrutinize such claims very carefully because violators generally do 
not avoid or delay pollution control expenditures when making such 
expenditures are in the violators' best financial interests. Critical 
factors in such a case may be the various assumptions for hypothetical 
transactions, the postulated sequence of events, and the relevance of 
claimed environmental expenditures to the statute at issue. 
Furthermore, there are limits as to what the Agency will consider in 
this regard.
    Comment: A few commenters made the point that BEN does not take 
into account different types of compliance credits, such as those for 
increased production, reduced operating costs, or recycling in the 
production process.
    Response: The Agency's position is that the economic benefit 
component of the penalty should not be adjusted for any supplemental 
environmental projects that the violator elects to undertake, which can 
instead mitigate the gravity portion of a proposed penalty. If the 
commenter is referring to the cost savings from compliance 
expenditures, then BEN will accept negative entries for annual costs. 
For example, suppose a $1 million capital investment will require 
annual operation and maintenance costs of $100,000, but at the same 
time will entail annual savings of $200,000. In that case, the BEN user 
can enter $1 million for the capital cost estimate, but a negative 
$100,000 for the annual cost estimate. The BEN User's Manual provides 
further guidance and examples for this issue.
    Comment: One commenter expressed the idea that BEN could be 
adjusted to take into account market-based pollution control 
strategies, such as a permit system or pollution taxes.
    Response: For atypical cases that involve noncompliance under an 
incentive-based pollution control system, a relatively simple computer 
model such as BEN is generally not sufficient, and the assistance of a 
financial analyst is necessary.
    Comment: Several commenters noted that the BEN model uses inputs 
that are a mixture of both ex ante (i.e., known only at the time of 
initial noncompliance) and ex post (i.e., known only now that the 
calculation is being performed). Several of the commenters stated that 
BEN should use an ex ante view for the cost inputs, although others 
felt an ex post view was

[[Page 32967]]

appropriate. Still another commenter saw little value in the ex ante/ex 
post distinction, and felt that virtually all models use a combination 
of ex ante and ex post data.
    Response: A pure ex ante approach is generally impractical because 
it would require ignoring all information (e.g., tax rate changes, 
inflation data) that has become known since the date of initial 
noncompliance. Therefore, BEN uses ex post data as an approximation of 
ex ante expectations. The Agency also agrees that the entire ex ante/ex 
post distinction is not very important.
    Comment: One commenter stated that the EPA should ``affirmatively 
indicate'' that specific input values are preferred over the BEN 
default values. He also stated that BEN needs to reflect the plant-
specific financial information within the context of complex 
corporations. This idea was echoed by another commenter who stated that 
if a firm has two specific lines of business, then each line will have 
its own cost of capital and, therefore, the discount rate should be 
division-specific. However, another commenter stated that the use of 
the WACC to discount future cash flows was in most cases appropriate 
and constituted a harmless approximation.
    Response: Specific input values are generally preferred, although 
the basis for their calculation must be in accordance with the general 
principles of the BEN standard values (e.g., WACC for discount rate 
with for-profit entities, marginal tax rates, etc.). However, the 
effort required for their calculation may not always be worth the 
additional accuracy gained. The Agency agrees that, where practical, 
discount rates should ideally be tailored to specific lines of 
businesses, although often these separate lines are sufficiently 
similar so that a company-wide rate can be used, especially if 
calculating a line-specific discount rate will entail further 
complications and inaccuracies.
    Comment: One commenter stated that the BEN model should use a 20-
year pollution control capital replacement cycle with a finite facility 
or process lifetime, instead of infinitely recurring future replacement 
cycles. One commenter thought the use of an infinite number of cycles 
was speculative.
    Response: BEN uses a 15-year capital replacement cycle default 
value, but the user has the option to enter another value, such as 20. 
The user must also specify whether the capital investment is one-time, 
or whether future replacement cycles will occur. Even if the user 
chooses an infinite number of replacement cycles, the discounting of 
future cycles means that only the first several replacement cycles 
typically have any noticeable effect upon the economic benefit result. 
Furthermore, although BEN is making an assumption about the future, 
this assumption is essentially a baseline one and hardly speculative: 
BEN assumes that future pollution control requirements will be neither 
more stringent nor more lax than current requirements, and that the 
cost of the replacement equipment will increase by no more and no less 
than the projected rate of inflation. But because the additional cycles 
after the first several have almost no impact upon the economic benefit 
result, the Agency plans to modify the BEN model to incorporate a 
default value of two replacement cycles, with the option for the user 
to specify anywhere from zero to five replacement cycles.
    Comment: One commenter expressed the opinion that BEN should use an 
average marginal corporate tax rate in lieu of the highest marginal 
corporate tax rate. By contrast, a few commenters asserted that EPA 
appears to have picked the rates for the BEN model that will produce 
the highest economic benefit. Another commenter felt the inputs and 
structure of BEN do not capture the ``real world.''
    Response: The BEN model, like any other financial economics model, 
is designed to capture the essence of the ``real world'' by use of 
simplifying assumptions that produce a reasonable approximation of the 
violator's economic benefit. The Agency believes that its default rates 
are reasonable approximations and are appropriate to use in most cases. 
The BEN standard values are nevertheless only a default, and the user 
is free to enter any value. Regarding the tax rate, in most cases the 
highest marginal rate applies, which is why such a rate is the basis 
for the default value. Note that the use of the highest marginal rate 
is highly conservative in that it lowers the after-tax cost of 
compliance to the greatest extent possible, and as a result produces a 
lower economic benefit estimate than would a lower marginal tax rate.
    Comment: One commenter stated that BEN's replacement cycle 
assumptions should be consistent with those of the PROJECT model (which 
calculates the after-tax net present value of a supplemental 
environmental project).
    Response: The replacement cycle assumptions used in BEN and PROJECT 
are based on different conditions. BEN assumes that the violator will 
have to replace the capital equipment in the future, because the 
equipment's operation is mandated by law. PROJECT, by contrast, gives 
no credit for future replacement cycles because the capital equipment 
purchased as part of the supplemental project is by definition not 
required by law; it has been put in place for penalty mitigation, with 
no law or agreement mandating future replacement. Investment in SEP 
equipment carries no guarantee that the violator will be replace it 
after its useful life.
    Comment: One commenter noted that EPA should recognize that in some 
situations no technologically feasible means of compliance may exist.
    Response: One means of compliance always exists: shutdown. The 
economic benefit in this situation is the illegal profits the violator 
gained during the period of noncompliance (i.e., when operations should 
not have occurred).
    Comment: One commenter maintained that the EPA should recognize 
that when it changes the interpretation of a rule, newly noncompliant 
companies have gained no past economic benefit. Similarly, another 
commenter stated that there should be no recovery of economic benefit 
when an entire industry misinterprets EPA's rule.
    Response: Economic benefit is ``no fault'' in nature: a company 
need not have deliberately violated the law, or even have been aware of 
its violation, to gain economic benefit. If a company should have been 
in compliance, but was not, then it is better off economically for not 
having complied--whether determined prospectively or retroactively. 
Furthermore, if any entire industry has been in noncompliance, then all 
of the firms in that industry have gained an economic benefit.
    Comment: One commenter claimed that BEN should not be applied to 
regulated utilities.
    Response: The Agency disagrees with this comment and believes that 
the BEN model applies to regulated utilities without regard to 
arguments that they would have received higher rates from their 
ratepayers had they complied on time. Whether and how a business 
recoups its pollution control expenditures is not part of the benefit 
calculation for for-profit entities and generally should not be 
considered in benefit calculations for regulated utilities.
    Comment: One commenter noted that alternative depreciation 
schedules should be allowed when pollution control costs can be 
verified.
    Response: If a company has in fact used a depreciation schedule 
other than the depreciation schedule that BEN uses, then a financial 
analyst can perform the necessary off-line calculations to supplement 
or substitute for the BEN model's results.

[[Page 32968]]

C. Improving the BEN Model's User-Friendliness

1. Is BEN Too Complex To Operate?
    Comment: Several commenters thought that the BEN model is easy to 
use and understand, and that it should be kept that way.
    Response: The Agency believes that BEN represents a proper balance 
between ease of operation and accuracy in calculation, and will try to 
ensure that any future enhancements preserve this balance.
    Comment: One commenter suggested that to improve user friendliness, 
EPA should make the model and manual readily available to the public. 
Another commenter expressed the difficulty he had in downloading the 
BEN model and user's manual from the electronic bulletin board system. 
He also had a difficult time obtaining these materials from the EPA 
regional library. Another commenter noted that both the model and 
manual were available from the National Technical Information Service 
(NTIS).
    Response: The Agency is aware of the difficulty of downloading 
large documents such as the BEN User's Manual and will try to rectify 
this in the future, as well as to improve the printed quality of the 
downloaded document. The easiest way to obtain the model is through the 
Office of Enforcement and Compliance Assurance's World Wide Web site on 
the Internet (http://www.epa.gov/oeca/datasys/dsm2.html).
    Government users can also obtain the model and manual (for BEN and 
other applications) via the newly created enforcement economics 
helpline: 888-ECON-SPT (326-6778), which is staffed by a contractor, 
Industrial Economics, Incorporated, located in Cambridge, 
Massachusetts. The helpline is in operation from 8:00 AM to 6:00 PM 
Eastern time and will accept voice-mail messages when it is not in 
operation. In addition, the contractor is providing a companion e-mail 
address for this helpline: [email protected]. The helpline is 
strictly limited to providing advice to federal, state, and local 
environmental enforcement agencies regarding financial issues that 
impact enforcement cases. Callers will also be able to obtain advice on 
how to access training courses on the models and related subjects. EPA 
feels that many of the public comments it received from state and local 
government enforcement agencies could have been addressed easily and 
quickly with a call to the helpline. Inquiries regarding the 
interpretation of federal statutes and EPA polices, will be referred to 
EPA, as will inquiries from non-governmental employees. Non-government 
users can obtain the models and user's manuals from NTIS at 800-553-
6847. (NTIS packages each model and its user's manual together; 
requesters will also need the following publication numbers--BEN: PB 
98-500382GEI; ABEL: PB 99-500357GEI; CASHOUT: PB 98-500390GEI; PROJECT: 
PB 98-500408GEI; INDIPAY: PB 99-500407GEI; and MUNIPAY: PB 99-
500415GEI.)
    Comment: One commenter stated that BEN could be used without the 
manual, although this made the application more difficult.
    Response: The Agency agrees, and also reminds users that the model 
provides significant on-line help, both in the introductory statement 
and by allowing the user to enter ``HELP'' at each prompt.
    Comment: One commenter thought that increasing the flexibility of 
BEN could result in a less accurate measure of the economic benefit 
(i.e., too wide a dispersion of many economic benefit values). Another 
commenter expressed the view that increasing the flexibility of BEN 
would also increase the complexity of using BEN, which in turn would 
preclude some states from calculating economic benefit.
    Response: The Agency does not feel that the added flexibility will 
make BEN any less accurate, although it does agree that the potential 
for added complexity must be considered when adding flexibility to the 
BEN model.
    Comment: Many commenters suggested that in order to improve user-
friendliness, EPA should use a Windows-type format. One commenter 
suggested that an interactive format for BEN could be based on some 
commercially published financial or tax programs, which have a 
``Wizard''-type guidance feature; another suggested that BEN should use 
a format for common spreadsheet software. Although, one commenter 
stated that although point-and-click Windows-type features and the 
ability to move between data entry fields freely would improve the 
model, it might not be worthwhile to scrap all the original code. 
Various commenters also suggested that the model should:
     Allow users to add headings and explanatory text to the 
BEN output;
     Calculate avoided costs without the need for a hand-held 
calculator;
     Allow printing of individual BEN runs, make printing more 
straightforward, and print each result on its own sheet of paper;
     Accept data in a table format for cases in which each 
month must be entered in a separate run;
     Prompt the user about whether to use the standard 
[default] or state-specific values;
     Accept other than the capital letters ``Y'' and ``N'' for 
yes and no answers;
     Save model inputs electronically for future use;
     Modify instructions for printing the output-- 
``positioning the paper'' seems irrelevant; and
     Allow the user to exit the model in the middle of a run.
    Response: The Agency plans to reprogram the model for the Windows 
operating environment, which should address most of these concerns. 
(The Agency will still maintain the current DOS-based version for a 
time.) An actual spreadsheet may confuse many users, although the 
Windows-based model will incorporate many spreadsheet-type features.
2. Is the Information BEN Needs Difficult or Expensive To Obtain?
    Comment: One commenter thought that although BEN is a very 
effective tool for cases in which the violator must install pollution 
control equipment or perform similar actions to achieve compliance, it 
is less effective when compliance comprises administrative activities. 
The commenter explained that this is primarily because of the 
difficulty of obtaining cost figures for such activities, and suggested 
that BEN have a subroutine for such cases that provides default cost 
values.
    Response: The Agency understands that cost data can be difficult to 
obtain for certain cases. But if the violator has already come into 
compliance, then an estimate of its actual costs should be available. 
The Agency has begun developing a computerized RCRA compliance cost 
database which will complement the revised version of the BEN model.
    Comment: While some users felt that inputs for BEN are readily 
available, others found that inputs are difficult to obtain when 
violators are uncooperative.
    Response: In such situations, enforcement staff should use the 
discovery process to obtain the necessary information, whether through 
interrogatories, depositions, requests for production, or other legal 
processes. Another approach is to contact state or federal experts 
familiar with the regulatory requirement at issue for advice on cost 
estimates. Finally, retaining an outside consulting expert may 
occasionally be necessary to develop the compliance cost estimates.
    Comment: One commenter wanted the Agency to develop a set of 
standardized rules or a protocol to be

[[Page 32969]]

followed when applying case-specific information to an economic benefit 
calculation.
    Response: The Agency strives to provide sufficient guidance to 
enforcement staff, but does not feel that a strict protocol is 
feasible. Therefore, enforcement staff will always have to exercise 
case-specific judgment.
    Comment: One commenter suggested that users should perform a cost-
benefit analysis when contemplating the use of case-specific inputs in 
lieu of BEN default values. The commenter further stated that the 
Agency should consider allowing enforcement staff more flexibility with 
respect to the use of investment tax credits, depreciation schedules, 
tax rate choices, different inflation options, and low-interest 
financing. Another commenter stressed the increased workload and 
questionable reliability associated with case-specific data. Similarly, 
another commenter noted that BEN is intended to serve as only a gross 
indicator of the economic benefit, rather than as a precise 
calculation, and that more specific information should be used only if 
such information will improve the result significantly. This commenter 
further asserted that the occasional use of more specific data than 
BEN's default values will lead to skewed results in the aggregate, 
because only firms that will benefit from the precise information will 
make it available.
    Response: The Agency agrees that the pursuit of case-specific 
inputs takes place within a resource-constrained environment and should 
be measured against the expected gains in accuracy. The Agency adopts 
the same approach to adding flexibility to the model, where such 
flexibility may make the model more difficult to use for less advanced 
users. The Agency also agrees that, theoretically, a firm will dispute 
standard values such as the discount rate only when a more accurate 
value is in its best interests. But it is the Agency's policy that if 
it the violator urges the use of a particular company-specific value in 
place of standard value, the Agency will insist on using company-
specific values in place of all the standard values. The Agency 
believes this approach will limit the aggregate impact of adopting 
regulatee-specific values instead of standard values.
3. Other Issues Affecting Use of BEN
    Comment: One person stated that Appendix A of the BEN User's Manual 
should be expanded to include the model's entire mathematical 
algorithm, and should be written with more focus on economic theory, 
like a textbook. Another stated that Appendix A should include a 
thorough development of equations 15a and 15b.
    Response: The Agency is pleased that at least some members have 
taken the time and effort to familiarize themselves with the details of 
the BEN User's Manual. A user's manual for any computer model, however, 
can not take the place of a textbook on mathematics or financial 
economics. To answer some of the specific concerns, Equation 15a is the 
sum of an infinite geometric series, which can be found in most 
calculus texts. Equation 15b is a simple discount formula similar to 
the one given on page A-4 in Appendix A. Equation 15c is the sum of the 
present value of the first replacement cycle plus all the additional 
replacement cycles to infinity. The Agency encourages enforcement staff 
who have further questions along these lines to contact its enforcement 
economics helpline at 888-ECONSPT. As mentioned above, this helpline is 
strictly limited to employees of federal, state and local government 
enforcement agencies.
    Comment: One person thought the model departs from the formulae in 
Appendix A for depreciation, and instead appears to use a simplified 
formula that calculates each year's depreciation as a percentage of the 
previous year's. This commenter felt that any simplifications or 
departures from theory made for the sake of simplifying the model's 
programming should be detailed in the manual.
    Response: BEN uses no such simplifying formula, and instead uses a 
seven-year depreciation life (for capital investments after 1987). The 
first four years use a double-declining balance with a half-year 
convention switching to a straight-line depreciation for the rest, 
corresponding to the revised tax law's Modified Accelerated Cost 
Recovery System (MACRS). The model adjusts the depreciation deduction 
to occur once a year at midyear.
    Comment: One person stated that the manual should answer questions 
such as: What is the difference between a C Corporation and an S 
Corporation? What, other than land, constitutes a one-time 
nondepreciable expense? What happens when you choose a useful life that 
is shorter than the depreciation schedule?
    Response: Between the BEN User's Manual and the ``Help'' prompts 
within the model, BEN attempts to provide as much guidance as is 
feasible in answering these frequently asked questions. For example, 
the difference between a C Corporation and an S Corporation can be 
found by selecting ``3'' of input number 1C--BEN will show information 
about both types of corporations. On page 4-10 of the user's manual, 
``nondepreciable expenditures'' are defined as items that ``do not wear 
out;'' the manual proceeds to list several examples, such as a record-
keeping system, employee training, waste removal, etc. For questions 
such as how to account for a useful life shorter than BEN's 
depreciation schedule (which requires off-line calculations by a 
financial analyst), the Agency encourages enforcement staff to contact 
its enforcement economics helpline at 888-ECONSPT. As mentioned above, 
this helpline is strictly limited to employees of federal, state and 
local government enforcement agencies.
    Comment: Several commenters agreed that BEN is a useful tool for 
calculating the economic benefit of noncompliance, and encouraged EPA 
to retain the model. But other commenters asserted that the regulator's 
discretion should be used in lieu of BEN's calculation to determine 
economic benefit; these commenters felt that EPA should not mandate the 
use of BEN. From the defense bar's viewpoint, one commenter thought 
that the plaintiff's failure to accept anything other than a BEN 
calculation can lead to ``unprincipled negotiations.''
    Response: Although computer spreadsheets or even programmable 
calculators can calculate economic benefit accurately, the Agency 
suspects that leaving economic benefit determination up to the 
regulator's discretion will result in either no calculations at all or 
fundamentally flawed calculations. (For example, the Agency examined 
one state's ``alternative'' to BEN and found it unreliable and even 
more difficult to use than BEN.) The Agency is convinced that BEN is a 
reasonably accurate, relatively simple way to calculate the economic 
benefit from noncompliance, and it continues to promote the use of BEN. 
The Agency does not require state enforcement agencies to use BEN, but 
the Agency strongly encourages them to employ it. State enforcement 
personnel who want to employ a valid alternative to BEN are welcome to 
do. For example, one state enforcement staff member's spreadsheet 
version of BEN was perfectly adequate. Nevertheless, EPA strongly 
believes that the ``risk-free rate'' approaches are seriously flawed 
and discourages their use as alternatives.
    Comment: Some commenters noted that BEN is reasonable and provides 
results that are fair to the violator. Others thought that estimates of 
economic benefit obtained from BEN are at times so high that they are 
useful only

[[Page 32970]]

for their shock value. Some commenters noted that BEN gives penalty 
amounts that are so high that many Agency resources are spent 
negotiating or pursuing legal judgments with violators who are not 
confident of the accuracy of BEN's assumptions and methodology. One 
commenter felt that BEN was designed to produce the maximum possible 
penalty.
    Response: The Agency strives to provide enforcement staff with a 
model that makes reasonable estimates of economic benefit. If the model 
produces numbers so high that they are shocking to either the 
enforcement staff or the violator, then that is generally because the 
violator has gained a high economic benefit and not because the model 
is designed to produce the maximum possible penalty. The compliance 
cost inputs to the BEN model are always open to discussion, but the 
methodology, by contrast, is not open to compromise. The Agency is 
comfortable defending its benefit calculations based on the BEN 
approach.
    Comment: One commenter noted that BEN is an inexpensive method of 
determining economic benefit, making it an economical option for case 
work, although others thought that BEN is resource-intensive and not 
cost-effective. Several others felt that attempting to use BEN in 
``small'' enforcement activities was a waste of resources, with one 
commenter noting that in many small cases, the cost associated with 
using BEN would exceed that of the penalty itself.
    Response: The Agency disagrees that BEN is ``resource-intensive and 
not cost-effective.'' A typical analysis takes about five minutes. The 
only potential issue is the user's need to determine the compliance 
costs, which normally should not take much time, particularly for small 
enforcement actions. In addition, the Agency is not confident that 
enforcement staff are always able to determine beforehand that a case 
is too small to merit the use of BEN. Often, it is only after running 
BEN that the magnitude of the economic benefit becomes apparent.
    Comment: Some commenters thought BEN was difficult to understand 
and explain for enforcement staff, who are often engineers untrained in 
and unfamiliar with financial economics. While BEN may be designed for 
people with little background in financial economics, many commenters 
felt that determining actual numerical inputs, and whether to use BEN's 
standard values, requires the judgment of a financial expert. Another 
commenter similarly noted that the EPA needs sufficiently trained staff 
to handle a variety of ``real world'' circumstances which presumably 
may require calculations in addition the BEN model.
    Response: The Agency strives to make BEN as easy to understand for 
non-experts as is possible. Interestingly, BEN's compliance cost inputs 
typically require engineering expertise, not knowledge of financial 
economics. Once such cost inputs have been obtained--either based on 
the violator's actual purchases or through the discovery process--then 
the BEN model can be run with no knowledge of financial economics. The 
Agency also encourages enforcement staff who have questions to contact 
its enforcement economics helpline at 888-ECONSPT, from which staff can 
receive copies of training videos, training materials, and user's 
manuals. The helpline can also assist users in performing off-line 
calculations for circumstances that the BEN model cannot accurately 
calculate by itself. As mentioned above, this helpline is strictly 
limited to employees of federal, state and local government enforcement 
agencies. Finally, in the coming years training courses for the new, 
revised BEN model will be conducted in each EPA Region and at the 
national headquarters, to which state and local government enforcement 
staff will be invited.
    Comment: One commenter felt that EPA should not ``oversell'' the 
idea that BEN can be used by people with no knowledge of economics, as 
that may invite misuse. According to this commenter, users of BEN must 
at least be willing to learn what the model is doing.
    Response: Our experience with the model over the last thirteen 
years is that users can be very effective in the settlement context 
without thoroughly understanding the theory behind the model. We do 
include an extensive presentation of the theory in the BEN training 
course, although the model is sufficiently simple that users need not 
possess an intricate knowledge of economic theory to calculate accurate 
and reliable results.
    Comment: One commenter noted that it is not feasible to expect 
states to hire financial experts and, therefore, that the BEN model 
should be made easier to understand for non-expert users. Several other 
commenters thought that EPA should provide the expert assistance to 
states.
    Response: EPA believes that the model is easy to understand and 
operate as is. Most of our users have taken the four-hour BEN training 
course, which we have found covers almost every situation our 
enforcement professionals will encounter. While we are working on ways 
to improve BEN's simplicity and yet make it more flexible, the current 
model was designed for use by enforcement professionals with little or 
no background in finance. The model is used effectively across the 
country by such personnel. With respect to providing expert assistance 
to the states, EPA has established the helpline, mentioned above, to 
address this need.
    Comment: One commenter suggested that EPA develop a program to 
provide investigative and analytical assistance to state and local 
agencies.
    Response: The provision of analytical assistance is being addressed 
by the helpline mentioned above. The provision of investigative 
assistance is clearly beyond the scope of this effort to review and 
revise the Agency's benefit recapture approach.
    Comment: In addition, many commenters felt that EPA should provide 
more training for users of the BEN model.
    Response: The EPA has presented over forty BEN courses since 1988. 
The Agency has conducted over thirty ``live'' BEN training courses at 
EPA facilities, and EPA invited state enforcement staff to nearly all 
of them. In addition, EPA has conducted fourteen BEN training courses 
primarily for state and local government personnel in Hartford, 
Connecticut (twice); Indianapolis, Indiana (twice); Little Rock, 
Arkansas; Baton Rouge, Louisiana; Trenton, New Jersey; Boise, Idaho; 
Ft. Lauderdale, Florida; El Monte, California; Baltimore, Maryland; 
Richmond, Virginia, Phoenix, Arizona; and Anchorage, Alaska. (Other 
state and local governments that are interesting in at least sharing 
the delivery costs with the EPA can also arrange for such a course.) 
EPA also presented a BEN course via satellite in 1994, and has made 
videotapes of that broadcast available to government enforcement staff 
on request.
    Comment: One commenter argued that EPA should put pressure on 
individual states to account for the economic benefit component of 
noncompliance in their enforcement programs; another stated that EPA 
should help states incorporate the concept of economic benefit in 
penalties or assessments.
    Response: The issues the Agency is addressing in this Notice are 
related to the determination of the economic benefit of noncompliance. 
Whether states are adequately accounting for the economic benefit 
component is beyond the scope of this effort. The EPA is ready and 
willing to provide support to states in using the model. Not only has 
the Agency provided such support to states in the past, but it has even

[[Page 32971]]

provided it to the governments of Indonesia, China, Taiwan, Brazil, 
United Kingdom and Mexico.
    Comment: Several commenters noted that short, in-depth, case-
specific reviews by experts should replace BEN analyses, as they yield 
more credible, defensible results than BEN.
    Response: The Agency is convinced that the BEN model produces 
reasonably accurate calculations of economic benefit. It has proven to 
be an effective enforcement tool over the past 14 years. Furthermore, 
the new BEN model may often be a sufficiently accurate analytical tool 
for experts to use in such case-specific reviews. By contrast, to adopt 
an in-depth review of every case would require costs--either in 
contractor support and/or full-time in-house staff--that would be 
prohibitive, as well as add little value.
    Comment: Several commenters noted that defending the BEN model's 
results in court is difficult, for a variety of reasons. While EPA's 
earlier guidance explains that BEN should be used only in settlement 
discussions, and that the regulator should never be put in the position 
of having to defend BEN in court, one commenter felt that most state 
users cannot follow EPA's advice. According to this commenter, a 
state's negotiations or settlements occur after a document has already 
been mailed to the violator with a penalty amount on it; therefore, if 
the case goes to court, the state must defend the amount.
    Response: The suggested protocol is to hire an expert witness to 
perform an economic benefit calculation for presentation in court, as 
an expert is necessary to explain the methodology (either that of BEN 
or of some other analytical tool). If the result of this more 
customized analysis differs significantly from the initial BEN result, 
then the penalty demand can be changed.
    Comment: One commenter noted that although BEN is not appropriate 
for all cases, if BEN is not used in every case, then the regulator is 
subject to criticism for inconsistency.
    Response: BEN is appropriate in every case in which compliance 
costs were avoided or significantly delayed. BEN is not appropriate 
when the benefit comes from an illegal competitive advantage. As long 
as the regulator applies the BEN model to all the cases for which it 
was designed, then the regulator will be consistent.
    Comment: Several commenters thought that small businesses and 
sources which are genuinely ignorant of their violations should be 
treated differently than large companies which have many resources and 
who commit egregious violations. One commenter suggested that small 
communities and businesses should be helped by small business 
assistance programs to achieve compliance, rather than be penalized for 
what may well be a genuine mistake. This commenter also suggested that 
if EPA continues to support the use of the BEN model in these cases, 
BEN should at least allow the regulator to account for the size of the 
community or business in question. A few commenters noted that 
sometimes, even when BEN calculates a positive economic benefit, it may 
be inappropriate to ask the violator to pay that amount; similarly, 
some commenters suggested that the regulator should run the ABEL model 
in conjunction with the BEN model to determine the effects of payment 
on the entity.
    Response: Economic benefit is no-fault in nature and as a result 
accrues regardless of genuine mistakes. If a small business delays a 
required pollution control expenditure--for whatever reason--then it 
obtains an economic benefit. The regulatory agency must recover this 
benefit, otherwise the business will have an unfair advantage over 
those businesses that complied. If violations are especially egregious, 
then this should be reflected in the gravity component of the penalty 
or in criminal sanctions. The size of the violator is relevant only to 
the ability to pay a civil penalty. The Agency maintains the ABEL, 
INDIPAY, and MUNIPAY models (for corporations, individuals, and 
municipalities, respectively) to guide its enforcement personnel in 
determining ability to pay. BEN already favors small businesses in that 
the standard value discount rate is based upon the typical large 
company's WACC. Significant evidence exists that small companies on 
average have higher costs of financing than larger ones, but EPA has 
conservatively decided to base its standard value discount rate on 
large companies, instead of small firms' higher (by about two 
percentage points) discount rate. (For a detailed discussion of this 
issue, see the Ibbotson Associates Stocks, Bonds, Bills, and Inflation 
annual yearbooks, in particular Chapter 7, ``Firm Size and Return.'') 
Similarly, many small communities have higher debt costs on average 
than large communities, but the not-for-profit standard value discount 
rate is nevertheless based upon the average interest rate for 
communities that have access to the municipal bond market and are able 
to obtain ratings for the debt issues. If the discount rate were 
tailored to such small businesses and communities, then the discount 
rate, economic benefit result, and hence the penalty demand, would be 
higher. In order to maintain simplicity, BEN actually favors small 
businesses and communities in this regard.
    Comment: One commenter stated that the BEN model should be used 
more as a tool for promoting environmental compliance than merely for 
recapturing the economic benefit of noncompliance. Another commenter 
noted that the EPA should de-emphasize penalty assessment and instead 
encourage self-compliance. One commenter noted that EPA's goal should 
be to prevent future noncompliance, which could in some circumstances 
be accomplished with a fine smaller than the economic benefit.
    Response: The Agency is always in favor of promoting compliance and 
encouraging self-compliance. One means of promotion and encouragement 
is penalty assessment based upon full economic benefit recapture, which 
ensures that any gain potential violators reap from noncompliance will 
be fully taken away from them in the form of a civil penalty. Any 
penalty assessment short of this creates an incentive among regulatees 
to wait until they are caught before complying.
    Comment: One commenter suggested that the EPA has been secretive 
regarding the BEN methodology.
    Response: The BEN model and its user's manual are freely available, 
and the calculations are easily replicable.
    Comment: One commenter noted that a supplemental environmental 
project (SEP) would in some cases be better than a ``disgorge'' of 
economic benefit.
    Response: The Agency's policy is that a SEP can be performed for 
mitigation of only the gravity component of the civil penalty, not for 
the economic benefit component. Otherwise, given the additional 
motivations a violator may have for performing a SEP, the Agency could 
never ensure that the violator was really financially indifferent with 
respect to noncompliance. Therefore, the civil penalty must always, at 
a minimum, recapture economic benefit.
    Comment: One commenter noted that the EPA should address the issue 
that competing regulatory requirements may force firms into 
noncompliance under one set of regulations when these firms comply with 
another.
    Response: This is outside the scope of the issue of economic 
benefit recapture.
    Comment: One commenter noted that it would be helpful if some type 
of ``gravity'' component could be incorporated into BEN for 
noncompliance prevention and/or a compliance incentive.
    Response: The Agency feels that gravity component calculations in 
the various penalty policies are sufficiently

[[Page 32972]]

simple and straightforward so that a module in BEN is not necessary.
    Comment: One commenter stated that BEN has historically been 
available only through a mainframe, making it useless to staff without 
such access.
    Response: BEN now runs on the EPA LAN or on a personal computer. 
Copies for the latter are available through the Internet (http://
es.epa.gov/oeca) or, for enforcement staff, through EPA's enforcement 
economics helpline at 888-ECONSPT or, for non-government employees, 
through National Technical Information Service (NTIS) at 800-553-6847.

D. General Comments on the Public Comment Process

    Comment: Several commenters made the point that EPA does not need 
to go through a formal rulemaking process with the BEN model.
    Response: The Agency recognizes the distinct advantages of public 
input on its benefit recapture approach which is why it is seeking 
comment at this time.
    Comment: Some of the commenters expressed the need for the 
formation of one or more ``blue ribbon'' panels of outside experts in 
financial economics (similar to the National Oceanic and Atomospheric 
Administration panel on the use of contingent valuation in natural 
resource damage assessment). Along these lines, one commenter thought 
EPA's goal should be to find a solution with the broadest possible 
support in the financial field. By contrast, one commenter strongly 
opposed the ``weight of opinion'' process for adopting changes in BEN. 
Another commenter felt that although such expert panels might be 
beneficial, the financial and economic principles BEN uses are simple 
enough that any finance professor could discover whether the model held 
to the mainstream of modern finance and economics.
    Response: Given that both academicians and practitioners in the 
field of financial economics disagree significantly (both on economic 
benefit analysis and a myriad of other issues), the Agency does not 
feel that the formation of an expert panel would be a productive 
exercise. For instance, tenured professors from business schools have 
reached diametrically opposed conclusions in the written comments they 
have submitted on the BEN model.
    Comment: Some commenters expressed doubts about the nature of and 
manner for this public comment process and recommended a more open 
policy. To do otherwise, they state, would only continue the 
controversy and would not be in either EPA's or the regulated 
community's best interest. Similarly, one commenter stated that the 
adoption of the procedures for the public comment session should be 
subject to administrative due process.
    Response: The Agency has made every effort to make the public 
comment process as open as possible.
    Comment: A few commenters criticized the limited time for 
interested parties to respond to the request for comment as listed in 
the Federal Register notice of October 9, 1996.
    Response: In response to such concerns, the Agency extended the 
deadline for public comments from the originally stated January 1, 
1997, to a significantly later March 3, 1997, (see Federal Register 
notice on December 12, 1996, at page 65391).
    Comment: Some commenters expressed concern that EPA has yet to 
release earlier statements made by several prominent professors in the 
field of finance that allegedly criticized the BEN model. These 
commenters asserted that the professors' prior remarks, if relevant, 
should also become part of the public record and be incorporated into 
any forthcoming decision.
    Response: The Agency released these statements in April of 1997. 
The Agency recognized the merit of those comments long before they were 
released, but some of the statements were the subject of a three-year 
Freedom of Information Act case. That case was eventually resolved, and 
the Agency has since released the analyses sought in that case. In 
addition, the Agency released three other similar analyses which were 
not sought. Some of the statements were critical of the BEN model as it 
then existed, and the Agency adopted many of the changes they 
suggested. In any event, all of the analyses were of the prior BEN 
model version, not the current version. Copies of these statements are 
available by calling 202-564-2235.
    Comment: Several commenters felt that the EPA should follow up on 
the public comment period by first drafting the findings, then 
requesting and evaluating further public comment, and finally 
publishing a formal draft on the final decision.
    Response: The Agency agrees, and is taking that approach.

IV. Request for Comments

    The Agency is interested in comments relating to its proposed 
changes to its benefit recapture approach as discussed in Section II of 
this Notice. After the comment period closes, the Agency plans to 
review all the comments and revise its benefit recapture approach and 
the BEN computer model as appropriate. EPA encourages parties of all 
interests, including state and local government, industry, not-for-
profit organizations, municipalities, public interest groups and 
private citizens to comment so that we can have as broad a spectrum as 
possible.

    Dated: June 8, 1999.
Sylvia K. Lowrance,
Deputy Assistant Administrator, Office of Enforcement and Compliance 
Assurance.
[FR Doc. 99-15271 Filed 6-17-99; 8:45 am]
BILLING CODE 6560-50-U