[Federal Register Volume 70, Number 165 (Friday, August 26, 2005)]
[Notices]
[Pages 50326-50345]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-17033]


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ENVIRONMENTAL PROTECTION AGENCY

[FRL-7960-3]


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

AGENCY: Environmental Protection Agency (EPA).

ACTION: Notice of final action and response to comment.

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SUMMARY: In a Federal Register notice issued 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 as a part of establishing an appropriate penalty for 
settlement purposes. The Agency's policy is that any civil penalty 
should at least recapture the economic benefit the violator has 
obtained through its unlawful actions. Because enforcement staff 
typically use the BEN (short for benefit) computer model to perform the 
economic benefit calculations, the Agency requested comments on the BEN 
model as well as the larger benefit recapture issues. In a subsequent 
Federal Register notice issued on June 18, 1999, EPA responded to the 
comments on the October 1996 Federal Register notice; provided advance 
notice of the changes EPA proposed to make to its benefit recapture 
approach and the BEN computer model; and requested a second round of 
comment of those proposed changes. This notice responds to the comments 
on the June 1999 notice and contains the changes EPA will implement in 
its benefit recapture program.

ADDRESSES: The Agency has dedicated a page of its website to the 
computers models the enforcement program uses to addresses benefit 
recapture as well as ability to pay claims and the evaluation of the 
costs of supplemental environmental projects (SEP's). The web address 
for those models is: www.epa.gov/compliance/civil/econmodels/index.html html.

FOR FURTHER INFORMATION CONTACT: For further information, contact 
Jonathan Libber, Office of Civil Enforcement, Special Litigation and 
Projects Division, at (202) 564-6102, or through electronic

[[Page 50327]]

mail at [email protected]. Government users (Federal, State, or 
local) can also obtain assistance with the model through the Agency's 
toll-free enforcement economics helpline at (888) ECONSPT or through 
electronic mail at [email protected].

SUPPLEMENTARY INFORMATION: In EPA's October 1996 Federal Register 
notice, the Agency was considering changes in three areas: (1) Broad 
economic benefit recapture issues; (2) the BEN computer model's 
calculation methodology; and (3) improving the BEN model's user-
friendliness. In regard to the broad economic benefit recapture issues, 
the Agency sought out any legitimate alternatives to BEN, but found 
none. In addition, EPA solicited comments on the best way to determine 
the economic benefit from the violator's illegal competitive advantage. 
The comments confirmed our initial thoughts that a model to handle such 
calculations was infeasible. The Agency has instead developed a draft 
conceptual framework document for such cases, and has initiated a peer 
review process by its Science Advisory Board to examine this type of 
benefit.
    With regard to the BEN model's calculation methodology, the Agency 
is making eight sets of changes that should improve the model's 
precision and function. Although the combined effect of these changes 
will affect individual cases differently, the overall impact across all 
EPA's enforcement cases should be insignificant. The two most 
significant changes involve tailoring the discount/compound rate to the 
case and using a more precise inflation adjustment. The new BEN model 
tailors the discount rate to the period of violation through the 
present, which the prior version of the model was incapable of doing. 
The new BEN model also adjusts for inflation based on actual historical 
month-by-month inflation data, whereas the prior version simply applied 
one single average rate for both past inflation and projected 
inflation. All of these changes reflect the Agency's consideration of 
both rounds of public comments, as well as an academic peer review that 
the Agency completed in January of 2004. These reviews should be 
available by within the next few months on the Agency's computer models 
web page (see ADDRESSES section above). Electronic copies of the BEN 
computer model (which includes a comprehensive help system) can be 
downloaded from that same site.
    The major change in improving the BEN model's user-friendliness is 
that EPA has moved the model from the old DOS operating system to the 
Windows environment. This should address those concerns that the model 
was cumbersome. We have also established a helpline to assist 
enforcement personnel from Federal, State and local governments in 
their use of the model.
    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 and/or 
Avoiding Compliance Costs
    1. The Economic Benefit Components that the BEN Model Measures
    2. BEN and Cash Flow Analysis
II.Final Changes
    A. Broad Economic Benefit Recapture Issues
    1. Alternatives to BEN
    2. Illegal Competitive Advantage
    B. The BEN Model's Calculation Methodology
    1. Depreciation Method
    2. Tax Rates
    3. Differences in On-Time and Delay Scenarios
    4. Capital Equipment Replacement
    5. Inflation Treatment
    6. Discount/Compound Rate
    7. Discounting/Compounding Methodology
    8. Investment Tax Credit and Low-Interest Financing
    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?
    D. Procedural Issues Regarding the Public Comment Process
III. Response to Comments
    A. Broad Economic Benefit Recapture Issues
    1. Alternatives to BEN
    2. Illegal Competitive Advantage
    3. Other Broad Economic Benefit Recapture Issues
    B. The BEN Model's Calculation Methodology
    1. Discounting/Compounding
    2. Inflation Adjustments
    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. Procedural Issues Regarding 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 achieving environmental protection and for 
achieving environmental protection goals, such as clean air and clean 
water. EPA upholds these laws through vigorous enforcement actions that 
seek to correct the violations and appropriately penalize violators.
    A cornerstone of the EPA's civil penalty program is at least 
recapturing the economic benefit that a violator may have gained from 
illegal activity. Economic benefit recapture helps level the economic 
playing field by preventing violators from obtaining an unfair 
financial advantage over their competitors who make the necessary 
expenditures for environmental compliance. Penalties also serve as 
incentives to protect the environment and public health by encouraging 
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. The civil penalties that 
EPA seeks usually embody two components: 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, i.e., the extent to which 
the violator is financially better off because of its noncompliance. 
This economic benefit can accrue to the violator in three basic ways: 
(1) Delaying necessary pollution control expenditures; (2) avoiding 
necessary pollution control expenditures; and/or (3) obtaining an 
illegal competitive advantage. The term ``illegal competitive 
advantage'' is a broad catch-all category for economic benefit that 
goes beyond that derived from the mere delay and/or avoidance of 
pollution control expenditures. For example, the violator might have 
sold a product that is entirely illegal (and could not have been 
produced legally by incurring any pollution control expenditures).
    The Agency designed the BEN computer model in 1984 to calculate the 
economic benefit from these first two

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types of economic gain for settlement purposes. BEN may not be 
appropriate for all cases, and EPA's regional offices may use 
alternative approaches that produce reasonably accurate benefit 
calculations. For example, the pattern of necessary pollution control 
expenditures might be so complicated that a customized spreadsheet 
computation would be more appropriate than BEN. Alternatively, the 
pattern of expenditures might be so simple that a mere table in a word 
processing document would suffice. Nevertheless, the Agency believes 
that in the vast majority of cases BEN is by far the best approach 
available for calculating economic benefit derived from delayed and/or 
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. These figures reflect the economic benefit a violator derived 
from delaying and/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: to recover, at a minimum, 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 a 
judicial trial or in an administrative hearing, the Agency relies on an 
expert in financial economics to provide an independent analysis of the 
economic benefit the violator obtained from its violations, reflecting 
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, since a computer model itself cannot be deposed or 
cross-examined.\1\
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    \1\ EPA designed the BEN model as a flexible tool primarily 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 as 
appropriate, but the responsibility to determine the economic 
benefit--as well as explain and defend the results--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) deemed 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 calculates the economic benefit from delaying and/or 
avoiding required environmental expenditures. Delayed costs can include 
capital investments in pollution control equipment, remediation of 
environmental damages (e.g., removing unpermitted fill material and 
restoring wetlands), or one-time expenditures required to comply with 
environmental regulations (e.g., establishing a reporting system, or 
purchasing land on which to site a wastewater treatment facility). 
Avoided costs typically include operation and maintenance costs and/or 
other annually recurring costs (e.g., off-site disposal of fluids from 
injection wells), but can occasionally include capital investments or 
one-time expenditures. BEN does not calculate the economic benefit that 
takes the form of illegal competitive advantage. For example, the BEN 
model is not the appropriate method for calculating the economic 
benefit derived from selling DDT on the black market to U.S. pesticide 
applicators.
3. Current Model Usage and Applicability
    The BEN model can be used in all cases that have delayed and/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, 
although it is also useful for those with such backgrounds. Because the 
program contains standard default values for many of the variables 
needed to calculate the economic benefit, BEN can be run with only a 
small number of required inputs from the user. The program also allows 
the user to replace those standard values with case-specific 
information. The table below lists the inputs to the BEN model, both 
the required inputs and also those inputs with standard default values 
that may be modified.
    The BEN model can calculate economic benefit for many types of 
organizations: corporations, partnerships, sole proprietorships, not-
for-profit organizations, federal facilities, and municipalities. BEN 
customizes its standard values to the entity type, as well as other 
aspects of the case. The BEN inputs listed in the table are discussed 
in detail in the model's help system.
Inputs for BEN
    Required Inputs:

--Descriptive Information (case name, office/agency, analyst name)
--Entity Type and State
--Competitive Advantage Questionnaire
--Penalty Payment Date
--Capital Investment (cost estimate and estimate date)
--One-Time Nondepreciable Expenditure (cost estimate and estimate date)
--Annually Recurring Costs (cost estimate and estimate date)
--Date of Initial Noncompliance
--Date of Compliance

    Inputs with Standard Default Values that May be Modified:

--Year-Specific Marginal Income Tax Rates
--Discount/Compound Rate
--Cost Index for Inflation (specified separately by compliance cost 
component)
--Consideration of Future Capital Replacement
--Useful Life of Capital Equipment
--Delayed v. Avoided (specified separately for capital and one-time 
nondepreciable)
--Tax Deductibility (of one-time nondepreciable expenditure)
--Specific Cost Estimates (for on-time and delay scenarios)

C. How a Firm Obtains an Economic Benefit From Delaying and/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. (Otherwise, and with the 
assumption of some measure of foresight, the organization should have 
already committed the financial

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resources, even in the absence of such environmental regulations.) If 
these financial resources are not used for compliance, then they 
presumably are invested in projects with an expected financial return 
to the organization. This concept of alternative investment--that is, 
the amount the violator would normally expect to make by investing in 
something other than pollution control--is the basis for calculating 
the economic benefit of noncompliance.
    In implementing EPA's penalty policies, the Agency invokes its 
authority to assess penalties to remove or neutralize the economic 
incentive to violate environmental regulations. In the absence of 
enforcement and appropriate penalties, an organization's narrowly 
construed economic interest would usually dictate delaying the 
commitment of funds for compliance with environmental regulations and 
avoiding certain associated costs, such as operation and maintenance 
expenses.
1. The Economic Benefit Components That the BEN Model Measures
    A violator may gain an economic benefit from either delaying and/or 
avoiding compliance costs. By delaying compliance, the violator can 
earn a return on the funds that should have been committed to the 
capital investment or one-time expenditure 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 expected to 
generate a financial return, as opposed to the required pollution 
control investments that typically generate no direct financial return 
for a company. Thus, by delaying compliance, the violator's economic 
benefit is the difference between investing in pollution control and 
investing in other projects.
    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 had it 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 
pollution control equipment). Annual costs are thereby avoided 
entirely, as opposed to capital investments and one-time expenditures 
that are usually only delayed.\2\ Thus, the violator's economic benefit 
from avoided costs is the sum of the total avoided annual costs plus 
the return that could be expected on the funds that were used for 
projects other than pollution control.
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    \2\ Even capital investments and one-time expenditures may be 
avoided on occasion. The typical situation where this happens is 
when a violator shuts down a particular operation rather than 
install required pollution control equipment.
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2. BEN and Cash Flow Analysis
    The BEN model calculates economic benefit by focusing on the effect 
that delayed and/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.\3\ Three important factors that enter 
into BEN's cash flow analysis are inflation, taxation, and the time 
value of money.
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    \3\ Thus, noncash ``paper'' expenses, such as depreciation, are 
considered only to the extent that they affect cash flow.
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a. Inflation
    BEN first requires users to enter a single cost estimate for the 
capital investment and another single cost estimate for the one-time 
nondepreciable expenditure. Then, to adjust for inflation, BEN 
extrapolates from this single cost estimate to create separate 
estimates for the hypothetical cost of complying on-time and the actual 
cost of complying in a delayed fashion. Similarly, BEN extrapolates 
from the user's annually recurring cost estimate to a complete set of 
cost estimates for every year during the noncompliance period. (The BEN 
model's help system provides a more detailed discussion of these 
inflation adjustments.) These adjusted cost estimates form the basis 
for the on-time and delay scenarios: The actions and associated costs 
that would have been necessary for hypothetical on-time compliance, and 
the actions and associated costs that were necessary for the actual 
delayed compliance.
b. Taxation
    The BEN model computes economic benefit on an after-tax basis, 
since environmental expenditures can reduce income tax liability.\4\ 
Depreciation (from capital investments), one-time expenditures, and 
annual costs all effectively reduce taxable income and thereby reduce 
income tax payments. To account for these tax effects, BEN calculates 
the economic benefit using after-tax cash flows for the on-time 
compliance and delayed compliance scenarios.
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    \4\ The term environmental expenditures refers to firms' 
compliance costs and does not include the payment of civil 
penalties. Civil penalties are in almost all cases not deductible.
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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. 
The fundamental financial concept of the time value of money is based 
on the principle that a dollar today is worth more than a dollar a year 
from now, since 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 the time value of money by adjusting all estimated 
cash flows to their present value equivalents. BEN first discounts back 
to the initial noncompliance date all cash flows from the on-time and 
delay scenarios. The initial economic benefit as of this date is simply 
the difference in the present values of these two scenarios. Finally, 
BEN compounds the initial economic benefit forward from the 
noncompliance date to the penalty payment date.
    To adjust the cash flows for both discounting and compounding, BEN 
uses a discount or compound rate (depending on the direction of the 
adjustment) that reflects the time value of money. The selection of the 
appropriate rate, and the structure of the discounting and compounding 
methodology, is a significant issue in the BEN model and will be 
addressed later in this notice. (The model's help system provides a 
more detailed discussion of the discounting and compounding that BEN 
performs for its present value adjustments.)

II. Final 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. The June 18, 1999, 
notice provided responses to these comments, as well as advance notice 
of EPA's proposed changes to the BEN model. The June 1999 notice also 
invited a second round of public comments, especially on EPA's proposed 
changes. EPA also conducted a peer review by academic experts in 
financial economics during the spring of 2003 on the draft proposed 
changes to the model. This peer review of the model changes was

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specifically requested by the United States Senate.\5\
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    \5\ Senate Report No. 106-410 (2000) at page 81.
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    The first area in which we invited comment covered some fundamental 
questions that the benefit recapture approach has raised. Is there an 
alternative to the BEN model that would be both easier to use and at 
least as accurate in calculating the economic benefit of delayed and/or 
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 methodologies. In particular, EPA has 
been aware of substantial differences of opinion with respect to 
inflation adjustments and discounting/compounding. 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 the necessary data acquisition. 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 final changes that EPA is 
making in each of the areas on which we requested comment. Note that 
final changes incorporate EPA's consideration not only of the public 
comments but also of the previously mentioned academic peer review that 
EPA completed in January of 2004.

A. Broad Economic Benefit Recapture Issues

1. Alternatives to BEN
a. Background
    EPA requested comment on whether anyone had an approach that would 
be simpler and at least as accurate as BEN in calculating the economic 
benefit from delayed and/or 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 served this purpose effectively, 
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 
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--Federal, State and local government 
enforcement officials who usually have limited knowledge of financial 
economics.
b. Final Changes
    Many commenters expressed various criticisms on different aspects 
of the BEN model. But these criticisms 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 will continue its use of BEN, 
although it will also implement significant revisions (see following 
sections).
    On a related topic, two commenters questioned the entire benefit 
recapture framework. Although one comment along these lines was 
somewhat unclear, the other comment presented a comprehensive approach 
for basing penalties on the lesser of economic benefit or social cost 
(i.e., environmental damages). Under this proposal, if a violator 
gained a significant economic benefit from its violations but caused 
only trivial environmental damage (as monetized through some 
unspecified economic methodology), then the penalty would be 
commensurately trivial. The Agency finds this approach entirely 
unacceptable in the context of enforcing regulatory requirements for 
individual violators. The appropriate context for considering social 
costs is in the process of formulating proposed regulations. Penalties 
based on social costs (when less than economic benefit) would provide 
an implicit yet clear incentive to violate the law if a company 
anticipated that its economic benefit would exceed the consequent 
measurable environmental damage. Further, such an approach would be 
fundamentally unfair to those firms that resisted the temptation to 
violate the law. In addition, quantifying environmental damages in a 
monetary measure is an exceedingly difficult analytical problem. Even 
if this fundamentally different approach was theoretically sound, it 
would be infeasible for the vast majority of enforcement cases.
2. Illegal Competitive Advantage
a. Background
    Since the issuance of EPA's Policy on Civil Penalties in 1984, the 
Agency has maintained that any given penalty should be structured to 
recover--at a minimum--the economic benefit a violator has enjoyed as a 
result of its noncompliance. That 1984 policy recognized that the 
benefit would be based on delayed costs, avoided costs and illegal 
competitive advantage. 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 BEN model calculates the economic benefit from delaying and/or 
avoiding required environmental expenditures. The economic benefit that 
arises from situations other than the delay and/or avoidance of 
pollution control expenditures is broadly termed ``illegal competitive 
advantage,'' which BEN is incapable of measuring. The essential 
distinction between these two types of economic benefit is that in the 
illegal competitive advantage situation, the violator's noncompliant 
actions have allowed (or will allow) it to attain a level of revenues 
that would have been unattainable had it always been in compliance. In 
delayed and avoided costs situations, the implicit assumption is that 
the revenues from a noncompliant and compliant state are identical. 
Consequently, BEN focuses exclusively on a violator's pollution control 
costs and does not require any data on the violator's revenues.
    In either type of situation (BEN-type economic benefit or illegal 
competitive advantage), the fundamental definition of economic benefit 
is still the same: The economic benefit is the difference in the net 
present values of the compliant/on-time and noncompliant/delay 
scenarios (i.e., the actions and cash flows--both historical and 
possibly also future--associated with the hypothetical compliance, and 
the actual noncompliance). But in the cases

[[Page 50331]]

amenable to BEN, the violator's revenues from the compliant and 
noncompliant states simply cancel each other out, allowing BEN to 
measure economic benefit through a calculation involving only the costs 
that would have differed had the violator been in compliance. Illegal 
competitive advantage encompasses all situations in which the revenues 
do not cancel out each other. Since the revenues were higher in the 
noncompliant state than they would have been in a compliant state, more 
detailed research and analysis is necessary, going beyond the scope of 
the BEN model.
    The BEN model's widespread application is made possible by its 
simplifying assumption regarding revenues, obviating the need for a 
detailed examination of a violator's business records or competitive 
market situation. But in some cases, this assumption is not valid.\6\ 
In such cases, the violator would not have been able to generate a 
given level of revenues were it not for its noncompliance. In those 
cases, EPA's policy is to seek to recapture the economic benefit based 
on the violator's illegal competitive advantage.
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    \6\ The Agency suspects that this relationship may be reversed 
for cases involving wetlands. Although the evidence is largely 
anecdotal, most wetlands cases encompass violations that allowed a 
violator to engage in operations that would not have been feasible 
but for the violation. Therefore, in evaluating wetlands cases, the 
Agency will be particularly sensitive to the possible presence of 
illegal competitive advantage.
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b. Final Changes
    The Agency received many comments on illegal competitive advantage. 
The first round of comments focused mainly on the feasibility of 
developing a stand-alone computer model analogous to BEN (or an add-on 
module to BEN) that could easily and reliably determine the economic 
benefit from the widely varying examples of illegal competitive 
advantage. The broad consensus was that no such model was feasible, and 
the Agency agrees. Without BEN's simplifying assumption that the 
violator's revenues from the on-time and delay scenarios cancel out 
each other, no ``one-size-fits-all'' computer model can analyze the 
range of likely situations.
    The second round of comments the Agency received on illegal 
competitive advantage mainly focused on the June 1999 notice's proposed 
questions for BEN's module and the illegal competitive advantage 
examples. But since the ICA concept is currently under review by EPA's 
Science Advisory Board (SAB), OECA will not put any ICA questions in 
the revised BEN model.
    After careful review of the comments, and in light of the fact that 
the SAB is currently reviewing the ICA issues, EPA has decided against 
publishing at this time any formal guidance delineating detailed 
analytical steps. While EPA remains committed to recapturing economic 
benefit based on illegal competitive advantage, if appropriate, 
quantifying illegal competitive advantage requires a careful 
examination of the facts of the particular case, and EPA believes it is 
premature to try to establish formal guidance in light of these case-
specific issues. Similarly, the Agency does not envision providing a 
specific formula for calculating a benefit component in such cases.
    In summary, EPA will continue to seek the recovery of illegal 
competitive advantage in cases where the BEN model is incapable of 
fully assessing the extent to which a violator is financially better 
off as a result of its noncompliance. The proper evaluation of illegal 
competitive advantage will involve verifying that the use of the BEN 
model alone is inappropriate to the case-specific facts, and then 
formulating an analytical approach that captures the extent of the 
violator's gain.

B. The BEN Model's Calculation Methodology

    Over the years, BEN has received occasional criticism for alleged 
flaws in its calculation methodology, particularly regarding the 
model's inflation adjustments and discounting/compounding. The Agency 
requested substantive 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 also 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. Depreciation Method
a. Background
    The BEN model calculates depreciation for capital investments, 
since the tax deduction for accounting depreciation charges provides a 
real after-tax positive cash flow to businesses.\7\ BEN used to 
calculate 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.\8\
---------------------------------------------------------------------------

    \7\ 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.
    \8\ 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, more detailed calculations by a financial 
analyst in lieu of the BEN model may be necessary.
b. Final Changes
    EPA received no comments on its proposal in the June 1999 notice 
that although a revised BEN model could conceivably allow alternative 
depreciation schedules, the drawbacks of the added complexity and 
potential user confusion might outweigh the gains from addressing a 
rare circumstance. Nevertheless, EPA has devised a relatively simple 
means for BEN to apply shorter depreciation schedules when the user 
enters a capital equipment useful life less than 10 years (as opposed 
to the default 15 years).
    The specification of shorter depreciation schedules will ensure 
that BEN does not overestimate economic benefit in the relatively rare 
cases that involve such short-lived capital equipment. Once the shorter 
useful life has been specified, the alternative depreciation schedule 
will not require any additional input from the user. BEN will also 
include a provision to account for legislation that allows for 
depreciation bonuses over certain periods. This provision will key off 
the previously required noncompliance and compliance dates, and it 
therefore will

[[Page 50332]]

not require any additional input from the user.
2. Tax Rates
a. Background
    The DOS versions of BEN that were issued after 1993 used to apply 
three marginal tax rates: a rate for 1986 and before, one for 1987 
through 1992, and one for 1993 and beyond. Users could accept the 
standard values--which incorporate national averages of State tax 
rates--or modify the inputs to reflect specific State values.\9\
---------------------------------------------------------------------------

    \9\ Tax rate modification can also reflect a business whose low 
net income entails a tax bracket other than the assumed highest 
bracket. Note that BEN's assumption of the highest marginal tax rate 
produces a lower economic benefit calculation than assuming a lower 
tax rate because a higher tax rate decreases the compliance costs' 
after-tax value. Since the model employs an after-tax cost in its 
analysis, the lower the tax, the higher the BEN result.
---------------------------------------------------------------------------

b. Final Changes
    EPA did not receive any objections to the June 1999 notice's 
proposal that the revised BEN model will require the user to enter the 
violator's State of operation, 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.\10\ BEN will 
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.\11\
---------------------------------------------------------------------------

    \10\ The model will also offer the option of the national 
average of all the State tax rates for cases where the State in 
which the violator pays taxes is unclear.
    \11\ 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 
than would be produced by a more precise calculation of the 
violator-specific marginal tax rate.)
---------------------------------------------------------------------------

    Although these options may sound complex, the only data required of 
the user will be the violator's State. The other screens for additional 
data entry and modification will appear only to those users who 
selected such advanced options.
3. Differences in On-Time and Delay Scenarios
a. Background
    The BEN model's baseline assumption is 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 adjusts for automatically in its inflation 
treatment. 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 stringent, but with ``grandfather'' clauses for 
already-compliant firms) BEN will overstate the benefit.
    Where, in the unusual case, the on-time and delay compliance 
scenarios are significantly different, BEN's baseline assumption of two 
identical scenarios is inappropriate.\12\ More sophisticated 
calculations are necessary.\13\
---------------------------------------------------------------------------

    \12\ The inexperienced user will become aware that a more 
sophisticated analysis is needed because there are two sets of cost 
figures, but only one place to put them. The more experienced user 
will just go directly to the ``Specific Cost Estimates'' option 
during data entry.
    \13\ A similar problem arises when no technologically feasible 
method of compliance is available. If the only possible compliance 
method that the Agency would have allowed is to cease all 
production, then this falls under the category of illegal 
competitive advantage, which by definition is beyond the scope of 
the BEN model.
---------------------------------------------------------------------------

b. Final Changes
    EPA received only one minor objection to the June 1999 notice's 
proposal that the revised BEN model allow users to enter separate on-
time and delayed compliance costs. Although the standard operation of 
the revised model will still entail only a single compliance scenario, 
the new screens for additional data entry/modification of separate on-
time vs. delay scenarios will be available to those users who select 
such advanced options. The availability of more advanced options will 
also enhance the model's ability to account for atypical situations 
such as valid pre-compliance expenditures and credits for salvaged 
capital equipment, thus decreasing the need for off-line calculations.
4. Capital Equipment Replacement
a. Background
    One of the three components 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 used to ask the user if the violator 
will need to replace the equipment at some point in the future. If the 
user specified that the investment in capital equipment is recurring, 
then the user could accept the standard value of 15 years for the 
useful life of the capital equipment, or enter another value.
    If the capital equipment does need to be replaced in the future, 
then the violator is financially better off from its delayed compliance 
in two distinct yet related ways: the violator has received a benefit 
in the past from delaying the initial purchase of the capital 
equipment, and will receive a benefit in the future from delaying the 
replacement of the capital equipment when that initial purchase wears 
out. For example, if a steel mill delays installation of a $1,000,000 
baghouse for 5 years, it first obtains a benefit from delaying the 
purchase of that baghouse for 5 years. But when that baghouse needs to 
be replaced 15 years later, the violator's second baghouse is purchased 
5 years later than it should have because the initial purchase lasted 
five years later than if it had complied on time.
b. Final Changes
    Some commenters characterized any consideration of future 
replacement cycles as ``speculative,'' as these cycles have yet to 
occur in the typical case (because the noncompliance period is almost 
always shorter than the capital equipment's useful life). EPA agrees 
only to the extent that BEN does make an assumption about the future, 
but 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 will retain the BEN 
model's default consideration of capital equipment replacement.
    Some commenters argued that BEN should not offer infinitely 
recurring replacement cycles. The Agency notes that although modeling 
infinite cycles might at first seem excessive, all future costs are 
``discounted'' back to their present values (see following sections for 
an explanation of discounting). Thus, the first replacement cycle 
typically has a relatively small impact on the benefit calculation.\14\ 
The impact

[[Page 50333]]

of later replacement cycles is almost negligible.
---------------------------------------------------------------------------

    \14\ If the initial capital investment is $1 million and the 
equipment lasts for 15 years, then the first replacement cycle is 
still $1 million (assuming, for now, the lack of any intervening 
inflation). But since it is purchased 15 years later, the $1 million 
is discounted to a present value at, for example, 10 percent, over 
15 years. The first replacement cycle would only increase the 
benefit component by about 30%. The second replacement cycle is 
purchased 30 years later. Thus, the $1 million piece of equipment is 
discounted at the same 10 percent over 30 years. The economic 
benefit from the delay of that second replacement cycle would only 
increase the benefit component by about 7%.
---------------------------------------------------------------------------

    Some commenters, as well as academic peer reviewers, favored the 
approach of a finite number of replacement cycles (which the Agency 
initially proposed to adopt). But one peer reviewer pointed out that 
this approach runs into problems when the noncompliance period is very 
long, especially when it approximates the useful life of the capital 
equipment. For example, assume a 10-year compliance delay, coupled with 
a 10-year useful life. If BEN were to use one replacement cycle, the 
on-time scenario would include two capital equipment installations, 
covering the years 1 through 20. The delay scenario would also include 
two capital equipment installations, but run from years 11 through 30. 
BEN would implicitly be stating that the violator would need to have 
functional equipment in place for years 21 through 30 (i.e., the delay 
scenario's replacement cycle), but that a company complying on-time 
need not do so (i.e., since the cash flow analysis for the on-time 
scenario runs out only to the year 20).
    Therefore, the revised BEN model will adopt this peer reviewer's 
solution by implementing the concept of economic depreciation, which 
essentially calculates the lease value of pollution control equipment. 
In other words, instead of modeling the on-time replacement capital 
investment and the subsequent depreciation tax shields, and comparing 
that to delayed replacement, the calculation models leasing the 
equipment over the period when the on-time equipment would have 
required replacement yet the delay equipment is still functional. The 
avoided lease cost, therefore, serves as a reasonable approximation of 
the economic benefit from the delayed replacement equipment 
installation, and also allows the two scenarios to the modeled out to 
the same end point. Furthermore, projections far into the future are no 
longer necessary, as the imputed lease cost is calculated only for the 
interim period when the on-time equipment would have required 
replacement yet the delay equipment is still functional.
    This approach will add a few new cells on one of the pages in the 
BEN detailed printouts, yet allow the elimination of another entire 
page of calculations. It will also simplify the previous 0-5 
replacement cycles optional input to a simple ``yes/no'' choice for the 
consideration of future capital replacement (with the default set to 
``yes''). The previously included optional input for the future 
inflation rate (which applied only to replacement cycles in addition to 
the first one) will be eliminated.
5. 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 previously used a standard-value rate 
calculated from the prior ten years of inflation data from the Plant 
Cost Index (PCI) in the magazine Chemical Engineering. (The PCI is 
generally the cost index most relevant to the types of costs typically 
associated with pollution control technology.) This simple inflation 
rate adjusted the initial compliance cost estimates. BEN applied this 
simple inflation rate to the compliance cost figures in order to 
determine what compliance would have cost at the noncompliance date. 
Then BEN applied the same simple inflation rate to determine what the 
costs actually were (or will be) at the compliance date. Finally, the 
model used the same rate to go well into the future to determine what 
those costs will be for the capital equipment replacement cycles.
b. Final 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.
    For actual historical inflation, the revised BEN model will adjust 
each cash flow automatically 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.\15\ The default cost index will be the PCI. This 
particular index may not be perfectly 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, nor did any commenters submit any 
specific nominations for a more suitable index.
---------------------------------------------------------------------------

    \15\ The model will 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.
---------------------------------------------------------------------------

    The revised BEN model will also allow the user to override the PCI 
and instead specify different cost indices for different compliance 
components. The table below describes the alternative cost indices.

------------------------------------------------------------------------
                                                            Typical
   Abbr          Full name           Description         applications
------------------------------------------------------------------------
2.5%......     2.5-percent constant inflation rate    Sensitivity tests;
                                                       model testing.
CCI.......  Construction Cost    Constructions        General
             Index.               costs; based on      construction
                                  1.128 tons           costs, especially
                                  Portland cement,     where labor costs
                                  1,088 bd. ft. 2x4    are a high
                                  lumber, 200 hrs.     proportion of
                                  common labor.        total costs;
                                                       often used for
                                                       municipal
                                                       wastewater
                                                       projects.
ECI.......  Employment Cost      Employment costs...  One-time
             Index.                                    nondepreciable
                                                       expenditures or
                                                       annual costs that
                                                       are mainly labor
GDP.......  Gross Domestic       Economy-wide         A very broad,
             Product price        measure of price     economy-wide
             deflator.            changes.             measure of
                                                       inflation is
                                                       desired.
PCI.......  Plant Cost Index...  Plant equipment and  Standard value.
                                  labor costs.

[[Page 50334]]

 
PPI.......  Producer Price       Representative       General costs for
             Index.               producer costs.      producers, not
                                                       tied to
                                                       industrial
                                                       process
                                                       equipment.
------------------------------------------------------------------------

    The user may also 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 and compliance date. This customized data entry 
could represent another alternative cost index, case-specific inflation 
assumptions, or entirely different actions for on-time and delayed 
compliance (as discussed in a previous section). For projected future 
inflation, the model will project all the cost indices forward in time 
at publically available, consensus-oriented forecasted rates.
    The standard operation of the model will 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 
will appear only to those users who selected more advanced options.
6. Discount/Compound 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 adjusts all present values both 
backward and forward in time.\16\ This section addresses only the 
calculation of BEN's standard value for this single discount rate, 
which was previously based upon a ten-year after-tax weighted average 
cost of capital (WACC), with the inputs representing averages across 
all industries.\17\
---------------------------------------------------------------------------

    \16\ 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 II. B. 8, Discounting/Compounding Methodology.
    \17\ 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 
discount rate for Federal facilities is based upon the yields from 
five-year U.S. Treasury notes.
---------------------------------------------------------------------------

    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 the prior version of 
BEN averaged these annual values 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 
highest marginal corporate tax rate (Federal combined with an average 
of all States). 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 average 
since 1926 of each year's excess stock market return over the risk-free 
rate).
b. Final Changes
    Based on the June 1999 notice's proposal and the lack of any 
objections, the revised BEN model will tailor the standard value 
discount rate to the period from the noncompliance date to the penalty 
payment date.\18\ 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 previous 
methodology.\19\
---------------------------------------------------------------------------

    \18\ 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 entities.
    \19\ The revised BEN model will implement two relatively minor 
changes to the previous model's annual WACC calculation. First, the 
previous practice of applying the most recent figure for the 
expected equity risk premium to all prior years' calculations will 
be replaced with the figure that was actually available at the time 
for that specific year's calculation.
    The second change is altering the horizon for the equity risk 
premium. The standard value previously combined the long-term 
Treasury security rate with the long-horizon equity risk premium, 
the latter being equal to the average of each year's stock market 
return minus 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.) The new calculation will switch to the 
intermediate-horizon risk premium (and the corresponding risk-free 
rate) as a simple compromise between the long-horizon and short-
horizon.
---------------------------------------------------------------------------

    The model will also perform additional customizing in a similar 
automated fashion. Since BEN will have an input for the violator's 
State--thereby customizing the tax rate for compliance costs--that same 
customized tax rate will determine 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 to 
the owners' individual tax returns).
    The standard operation of the model will still entail absolutely no 
input whatsoever from the user who is satisfied with BEN's derived WACC 
for the discount/compound rate. Another screen to override BEN's 
derived rate will appear only to those users who selected such advanced 
options.
7. Discounting/Compounding 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 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

[[Page 50335]]

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/compound rate was too low and should instead be based on 
financing pollution control investments with 100% equity.
    The first group of 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 posited 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-based 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 initial 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 while alternative A will generally 
produce significantly lower benefit analyses than EPA's BEN approach, 
alternative B is so extreme that it 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.\20\ 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.
---------------------------------------------------------------------------

    \20\ 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). Even if 
EPA took this approach, it would make no difference in the 
calculation where compliance had not yet been achieved at the time 
of settlement or trial.
---------------------------------------------------------------------------

b. Final Changes
    Regarding the first group of commenters, although both the 
conceptual bases and results of their two risk-free rate methodologies 
contradict each other, they share one 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 this particular violator and other 
potential future violators.
    By contrast, the third group of commenters advocate the use of an 
equity-based discount rate. This approach is more reasonable than the 
risk-free rate alternatives, although the Agency still believes that 
using the WACC throughout all aspects of the calculation is the most 
reasonable and hence 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 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.\21\ 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). This 
was the reasoning behind some of the commenters in the first group 
advocating that BEN employ such a risk-free rate approach.
---------------------------------------------------------------------------

    \21\ 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, comprising 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 adjusting cash flows to a present value.
    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.

[[Page 50336]]

    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.\22\ 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.
---------------------------------------------------------------------------

    \22\ 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.\23\ An 
example helps to illustrate this point.
---------------------------------------------------------------------------

    \23\ 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 (e.g., 2000), or to wait until the same month in 
the next year (e.g., 2001). 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 2000). This lets the company know how much better off it will be 
by delaying the purchase (e.g., until June 2001), in the absence of any 
penalty. Second, it calculates the economic benefit as of one year 
later (i.e., June 2001, 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 2000). This lets the company 
know the present value of any economic benefit based penalty that is 
calculated and paid the following year in 2001. 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 2001).
    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.\24\ In this example, the only 
compliance measure is a one-time--i.e., no replacement cycles--capital 
investment of $10 million.\25\ The company calculates that it is 
financially better off now in 2000 by $519,767 from a projected one-
year compliance delay.
---------------------------------------------------------------------------

    \24\ 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.
    \25\ Other inputs include a 40-percent tax rate, 1.8-percent 
inflation rate, and 10-percent WACC.
---------------------------------------------------------------------------

    The company also needs to know how much better off it will be on 
net should the enforcement agency assess a penalty in 2001 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 
$571,744.\26\ But because the company will pay the penalty a year in 
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, $519,767). 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.
---------------------------------------------------------------------------

    \26\ 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., $519,767x(1 + 
0.10)=$571,744).

----------------------------------------------------------------------------------------------------------------
                 Economic benefit                         BEN        Alternative A   Alternative B
--------------------------------------------------------------------------------------------------
1. Penalty Payment Date of 6/1/2000...............        $519,767        $519,767        $519,767
2a. Penalty Payment Date of 6/1/2001..............         571,744         533,281       (147,798)
2b. Result 2a discounted back to 6/1/2000.........         519,767         484,801               0
3. Net Result (i.e., 1-2b)........................               0          48,480         519,767
----------------------------------------------------------------------------------------------------------------

    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 2000 to 2001 at an illustrative risk-free 
rate of 2.6 percent yields $533,281. The company

[[Page 50337]]

discounts this future penalty back to the present (i.e., 2000) at its 
WACC, and arrives at $484,801.\27\ Because this is less than the 
current economic benefit of $519,767, the company realizes a net gain 
of $48,480. 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.
---------------------------------------------------------------------------

    \27\ 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 2001 is a negative $147,798.\28\ The 
company realizes that an enforcement agency using this approach will 
conclude a year from now in 2001 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 2000 to be a positive $519,767. At the time of initial noncompliance 
in 2000, 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.
---------------------------------------------------------------------------

    \28\ A negative economic benefit result for the capital 
investment portion of compliance is typical for alternative B. In 
many recent cases, the violators' witnesses implementing this 
approach have arrived at negative economic benefit results for 
delayed capital investments, despite the fact that no changes 
occurred in technological or legal requirements over time between 
the dates of noncompliance and compliance. (In other words, the 
negative economic benefit result was derived from on-time and delay 
scenarios involving the same piece of capital equipment, with the 
passage of time affecting only inflationary adjustments for the cost 
estimate.) 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.\29\ 
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.
---------------------------------------------------------------------------

    \29\ 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) Final 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, 
except a minor modification in certain contexts. 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).\30\ This modification, when applied 
to certain cases, may reduce some of the deviation in results between 
the competing discounting methodologies. BEN will incorporate this 
guidance into its help system.
---------------------------------------------------------------------------

    \30\ 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.
---------------------------------------------------------------------------

8. 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.\31\ 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.
---------------------------------------------------------------------------

    \31\ Note that this and other tax-related adjustments are 
irrelevant for municipalities, federal facilities, and other not-
for-profit entities because their marginal tax rate is equal to 
zero.
---------------------------------------------------------------------------

    Early versions of BEN used to account for the ITC that was 
available on projects completed before January 1, 1986, but did 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.\32\ Because the allowance of the ITC in these years was far from 
automatic (although still possible), BEN warned the user about this 
issue for noncompliance dates between January 1, 1986, and June 30, 
1987. If further research and analysis showed that the granting of an 
ITC was likely in a particular case, then a financial analyst could 
adjust the BEN result through an ``off-line'' calculation.
---------------------------------------------------------------------------

    \32\ 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. A much earlier version of the BEN model included a 
variable that accounted for LIF. The 1993 version of BEN removed this 
variable because it was relevant only for cases with noncompliance 
dates before 1987. Once this variable was removed, BEN would then issue 
a warning to the user about LIF for noncompliance dates before January 
1, 1987. If further research and analysis showed that LIF was probably 
available in a particular case, then a financial analyst could adjust 
the BEN result through an off-line calculation.
b. Final Changes
    A few commenters suggested that 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 would, 
however, add considerable complexity to the model.

[[Page 50338]]

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 had received only 
one call in response to the older BEN model's previous 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 mid-2000s for 
violations that began in the early to mid-1980s.
    The June 1999 notice's proposal on this issue `` that the revised 
BEN model not accept noncompliance dates before July 1, 1987 `` did not 
receive any objections from commenters. This cut-off date will ensure 
that BEN's omission of ITCs and LIF is not leading to incorrect 
economic benefit estimates. EPA will provide assistance in performing 
the necessary calculations for cases that involve noncompliance dates 
before July 1, 1987.

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 
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.
1. Is BEN Too Complex To Operate?
a. Background
    EPA invited comments on whether any aspect of BEN's operation or 
user's documentation is too complex. Although the Agency designed BEN 
to be straightforward and easy to use, we welcomed any suggestions to 
make the model easier to use without compromising BEN's degree of 
precision.
b. Final Changes
    Many commenters thought that although the old BEN model was 
generally easy to use, certain aspects of the prior version's operation 
were cumbersome. The Agency agrees, given the model's origins as a 
mainframe computer application and then its prolonged existence in the 
DOS operating environment. Because essentially all computer users are 
now long accustomed to the WindowsTM operating environment, 
the Agency has decided that the revised BEN model will continue to run 
in Windows (version 95 or higher). This makes basic data entry and 
benefit calculations much easier to perform, as well as allowing the 
addition of various advanced features without burdening the user with 
additional complexity.
    EPA has also 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 \33\--that address 
these issues; and
---------------------------------------------------------------------------

    \33\ ABEL, INDIPAY and MUNIPAY evaluate inability to pay claims 
from for-profit entities, individuals and municipalities, 
respectively.
---------------------------------------------------------------------------

     The calculation of the actual costs of a supplemental 
environmental project, and the application of the computer model--
PROJECT \34\--that addresses this issue.
---------------------------------------------------------------------------

    \34\ As most supplemental environmental projects (SEP's) are 
completed long after the cases are settled, any stated SEP cost is 
usually far above the ``real'' cost to the violator. Therefore, 
PROJECT calculates the SEP's actual costs to the violator.
---------------------------------------------------------------------------

    Callers can obtain assistance in downloading the BEN model and the 
previously mentioned other 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 nongovernment employees 
except for relatively straightforward technical inquiries (e.g., 
installation problems).
    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 8:30 AM 
to 6:00 PM Eastern time and will accept voice mail messages when it is 
not in operation. In addition, the contractor has provided a companion 
e-mail address: [email protected]. When requesting help, enforcement 
staff should identify their governmental affiliation. As mentioned at 
the beginning of this notice, anyone can download the model through the 
EPA's Web site at: www.epa.gov/compliance/civil/programs/econmodels/index.html.
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 only seven data inputs (mainly 
just three dates and up to three cost estimates), 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 the model's degree of precision is preserved.
b. Final 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 has cost information on its Web site for the UST 
(Underground Storage Tanks) and Clean Air Act (Stationary Sources) \35\ 
programs. In addition, it produced a written manual on standardized 
RCRA (Hazardous Waste) costs. These information sources should assist 
users in determining compliance costs, and then using them in the BEN 
model to calculate an economic benefit figure. Although these 
information sources are not a substitute for case-specific data, they 
will at least provide a starting point and a reasonably accurate 
estimate when a violator refuses to provide any detailed cost 
information.
---------------------------------------------------------------------------

    \35\ The web address for the Clean Air Act Stationary Source 
information is: http://www.epa.gov/ttn/catc/products.html.
---------------------------------------------------------------------------

    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.

[[Page 50339]]

D. Procedural Issues Regarding the Public Comment Process

    Although the Agency did not request any comment on the public 
comment process itself, the Agency did receive several comments 
regarding procedural issues. EPA's responses to the major requests are 
as follows:
     Extend the initial public comment period: In response to 
such concerns, the Agency extended the deadline for the initial round 
of 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 61 FR 65391).
     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: In 
response to such concerns, the Agency has done exactly that. The June 
1999 notice responded to the comments, came out with a proposal, and 
then requested further comment on that proposal. This notice contains 
the final findings.
     Provide a separate public comment process for the illegal 
competitive advantage guidance document: Since the Agency has already 
solicited public comment on illegal competitive advantage issues, a 
separate public comment process would be duplicative. But as was 
mentioned earlier in this notice, the EPA's Science Advisory Board has 
initiated a peer review of the draft illegal competitive advantage 
guidance document.
     Submit the BEN model to a formal peer review process: As 
noted earlier, EPA submitted its draft BEN model changes to an academic 
peer review in the spring of 2003. The process concluded at the 
beginning of 2004.

III. Response to Comments

A. Broad Economic Benefit Recapture Issues

1. Alternatives to BEN
    Comment: One commenter challenged the economic rationale of the 
entire benefit recapture ideology, concluding that EPA's current 
approach encourages compliance disproportionate with resultant social 
benefits. The alternative recommendation was to base penalties on 
violations' social costs rather than the private gains, thus providing 
the possibility of an ``efficient breach,'' a concept from contract 
law. The illustrative example was an individual lost in the woods who 
steals food from a cabin to avoid starvation. Under the social cost 
approach the individual would be required to repay the cost of the 
stolen food. The commenter argues that EPA's approach in this context 
would be analogous to attempting to recover the private gain, 
presumably the value of the individual's life.
    Response: As discussed in the main text of this notice, the Agency 
finds this approach unacceptable, inconsistent, and infeasible with 
regard to its objectives to enforce regulatory requirements. More 
specifically, in the example of the starving person, society has 
implicitly agreed that the individual may violate the normal respect 
for private property and steal the food, being required later to repay 
only the cost of the food. By contrast, society has not agreed that 
companies may violate environmental statutes at will whenever they 
expect their private gain to exceed the social costs. To use another 
example at the individual level, motorists are required to stop at red 
lights even at deserted intersections. If a driver is caught running a 
red light, financial compensation to other parties may not be necessary 
if no accident has occurred, but a regulatory penalty in the form of a 
moving violation ticket is still appropriate. A police officer is 
generally not convinced by a violator's argument that the lack of 
social damage is outweighed by the violator's gain (in terms of time 
saved in this example), and EPA is similarly not convinced by such an 
analogous argument.
2. Illegal Competitive Advantage
    Comment: Several commenters felt that EPA has not demonstrated a 
clear need to broaden the benefit recapture framework to consider 
illegal competitive advantage, and questioned whether the scenarios 
described in the June 1999 notice were realistic and supported by 
actual data. These commenters felt that consideration of illegal 
competitive advantage is appropriate only under rare and limited 
circumstances.
    Response: The Agency agrees that consideration of illegal 
competitive advantage will occur far less frequently than the typical 
BEN-type of benefit, but it does not agree that such occurrences will 
be rare. As the main text of this notice explains, specifically those 
situations are where revenues in both the actual noncompliant and 
hypothetically compliant states are not identical (as BEN implicitly 
assumes). As previously noted, the Agency is not planning to issue any 
guidance on the subject of illegal competitive advantage at this time. 
Therefore it is premature to address the comments that were directed at 
the scenarios that appeared in the June 1999 notice.
    Comment: Two commenters recommended that the Agency adopt 
alternative terminology for ``competitive advantage,'' because the 
scenarios described in the June 1999 notice do not necessarily involve 
``competition,'' as in antitrust cases.
    Response: The Agency agrees that the term may not be ideal, and has 
been open to alternative suggestions. Unfortunately, no commenter 
proposed any. The underlying concept is economic benefit that goes 
beyond the BEN model's simplifying paradigm of delayed and/or avoided 
pollution control costs, but unfortunately this is difficult to convey 
in merely two or three words.
    Comment: Many commenters expressed concern over the additional 
resources necessary for the data and analysis associated with illegal 
competitive advantage. One commenter questioned whether such analyses 
were feasible altogether, and another questioned whether EPA staff was 
sufficiently qualified to undertake them. Finally, one commenter 
suggested that attempts to calculate illegal competitive advantage 
should not be made until EPA has issued formal guidance.
    Response: Illegal competitive advantage cases may involve more 
detailed financial data and analysis than typical BEN cases, although 
in some cases they will involve less. When such cases do arise, the 
Agency will rely heavily on expert support, just as it currently does 
for much of its more complex economic benefit recapture work. Moreover, 
the absence of formal guidance in the interim should not preclude staff 
from identifying and analyzing illegal competitive advantage. Recapture 
of economic benefit based on illegal competitive advantage has been 
EPA's position since the inception of the policy in 1984 to recapture 
all the economic benefit from noncompliance. There are now a series of 
case decisions that have already based 100 percent of the violator's 
economic benefit on illegal competitive advantage. It is worth noting 
that in one of the cases, the benefit calculation was so simple that 
the Agency did not even need to present expert testimony on illegal 
competitive advantage.
    Comment: One commenter disagreed with the June 1999 notice's 
characterization of the role of marginal production costs regarding 
illegal competitive advantage from increased market share. Figure 1 
below reproduces the graph that the commenter attached. As in the 
classic textbook example of a ``price-taking'' firm facing a 
competitive market, the firm produces up to the point where its 
marginal cost of

[[Page 50340]]

production (as depicted by the line MCc for a compliant 
firm) is equal to the market equilibrium price (as depicted by the 
horizontal line, P). The firm produces quantity Qc, with a 
profit equal to the triangle described by the points P-A-B (i.e., the 
area lying below the market price but above the marginal cost curve). 
Although noncompliance may alter marginal costs such that the firm is 
at the lower MCnc, if it anticipates with 100-percent 
certainty the imposition of and magnitude of a BEN-based penalty, then 
it will continue to produce at Qc (not the higher 
Qnc,) since the marginal costs will eventually be 
retroactively incurred in the form of the penalty. Therefore, the BEN 
model captures the entire economic benefit.
BILLING CODE 6050-50-P
[GRAPHIC] [TIFF OMITTED] TN26AU05.007

BILLING CODE 6050-50-C
    Response: If the many economic assumptions necessary for this 
hypothetical scenario are accepted (particularly the certain 
anticipation of the size of the BEN component of a penalty), then the 
conclusion is correct. But the complicated analysis necessary to arrive 
at this conclusion is moot: if the firm has not altered its behavior 
and not gained any market share, then market share from illegal 
competitive advantage is not an issue.
    Comment: The same commenter continued with this example, but 
assumed alternatively that the noncompliant firm does not anticipate a 
BEN-based penalty, for whatever reason. With the lower marginal cost of 
production MCc it produces at the higher Qnc. A 
BEN-type calculation would be based on the difference between 
MCc and MCnc (i.e., the per-unit compliance 
cost), multiplied by the number of units (i.e., Qnc), and 
therefore equal the area described by the points A-C-D-E. But this 
overestimates the economic benefit the company has actually received, 
which is A-C-D-B (i.e., the actual profit P-C-D, minus the compliant 
profit P-A-B). Therefore, even if the firm does gain market share from 
its noncompliance, BEN would overestimate the economic benefit, not 
underestimate it.
    Response: The Agency has never encountered such a situation, 
especially

[[Page 50341]]

since such textbook graphs--while helpful for understanding broad 
economic concepts and aggregate market behavior--may not be very 
relevant for many individual firms. For example, marginal cost curves 
for individual firms are often not smooth curvilinear functions, but 
rather approximate more crude step functions. Combined with the 
relatively small magnitude of typical compliance costs compared to 
total variable production costs, the Agency is unaware of any violator 
claiming that it would have produced less had it incurred the 
compliance costs on-time. Nevertheless, this graph does illustrate the 
theoretical possibility that a BEN-type calculation could overestimate 
the economic benefit if all these conditions were present. The 
opposite, however, is also possible: if the compliance costs 
calculation is based upon a compliant level of production (i.e., 
Qc), then the resulting area A-C-F-B will underestimate the 
actual economic benefit (i.e., A-C-D-B). This further emphasizes the 
need for a detailed examination of the company's actual noncompliant 
and hypothetically compliant behavior (and cash flows), if the 
noncompliance is reasonably believed to have increased a violator's 
market share.
    Comment: One commenter suggested that a warning message be 
incorporated in the BEN module that advises the user that an 
affirmative answer to any of the questions regarding illegal 
competitive advantage indicates only the possibility that such a 
situation exists and that any presumed illegal competitive advantage 
may reduce the conventional BEN result.
    Response: The Agency agrees with the goals of this comment. The 
Agency has requested the Science Advisory Board to look at this issue 
as part of its review of the ICA type of economic savings. Thus for the 
immediate future, the BEN model will not contain any questions, 
references or guidance regarding ICA.
    Comment: Many commenters expressed concern over the potential for 
double counting in situations where illegal competitive advantage is 
considered. In particular, several commenters indicated that 
conventional BEN calculations and those related to illegal competitive 
advantage should be mutually exclusive options for penalty arbitration. 
One commenter suggested that a penalty that incorporated both would 
constitute double counting because the violator would have forgone some 
profits that are captured in the BEN calculation. Another commenter 
suggested that an illegal competitive advantage component should not be 
considered unless evidence suggests that it is likely to outweigh the 
conventional BEN result.
    Response: The Agency agrees that simply adding an estimate of 
illegal competitive advantage to the BEN model's result would create 
the potential for double counting. But this is only a potential. In 
some cases it will be appropriate to seek benefit recapture based upon 
both types of benefit. In In re: Lawrence John Crescio III, No. 5-CWA-
98-004, 2001 WL 537494 (May 17, 2001), an administrative law judge 
assessed a civil penalty that recaptured both types of benefit. 
Nevertheless, the emphasis for illegal competitive advantage is on a 
unified approach, laying out all the relevant cash flows associated 
with the on-time and delayed compliance scenarios. The economic benefit 
is then equal to the difference between the two scenarios' after-tax 
net present values. This is the same approach that the BEN model 
follows, although the scenario construction under illegal competitive 
advantage will--almost by definition--be more complex than under the 
BEN model.
    Comment: Several commenters referred to the language of the penalty 
provisions of many of the statutes that EPA is responsible for along 
with the legislative history of those provisions. They claimed that 
those provisions authorize neither the recovery of illegal competitive 
advantage nor the mandated recovery of economic benefit as a necessary 
penalty minimum. Similarly, another commenter questioned EPA's position 
that the recovery of economic benefit is ``no fault'' in nature and 
suggested that it would be incorrect to assert that it must be 
recovered in every enforcement case.
    Response: The passages these commenters cite clearly show that 
various members of Congress were often equating economic benefit with 
delayed/avoided compliance cost savings. But they made this association 
only because economic benefit typically results from delayed and/or 
avoided expenditures. There is nothing in the legislative history cited 
by these commenters to suggest that Congress intended to exclude the 
possibility of other kinds of economic benefit accruing from 
noncompliant actions (i.e., illegal competitive advantage). 
Furthermore, the minimum recovery of economic benefit in a penalty--
regardless of the violator's motives or the violation's impacts--is a 
common-sense notion that need not rely entirely on the legislative 
record for its support. Even if the argument is confined to statutory 
interpretation, the trier of fact, in imposing a civil penalty, is not 
limited to consider only those factors present in the applicable 
statute's penalty provisions. For example, judges have recaptured 
economic benefit in RCRA cases even though RCRA is silent as to the 
consideration of economic savings.
3. Other Broad Economic Benefit Recapture Issues
    Comment: Several commenters asserted that in cases of technological 
infeasibility, shutdown as a means of compliance is an inappropriate 
suggestion, both because EPA does not have the statutory authority to 
mandate shutdowns and because of the consequential economic and social 
displacement.
    Response: The issue of whether the enforcement agency should 
request a judge to order a violating firm to shut down is not germane 
to the discussion of how to calculate the economic benefit of 
noncompliance. What is relevant is that the economic benefit analysis 
should as a general rule (though with reasonable exceptions) be modeled 
on the actual or anticipated means of compliance. If the facility has 
complied (or will comply) by shutting down, then the baseline 
assumption for the economic benefit analysis is that the violator 
should have complied on-time by shutting down at an earlier date.
    Comment: Several commenters stated that penalties should not be 
assessed in cases of industry-wide noncompliance. In particular, some 
commenters argued that penalties should not be assessed in situations 
where EPA has re-interpreted relevant regulations or failed to provide 
``fair notice''.
    Response: If an entire industry has failed to comply, then all of 
the firms in that industry have gained an economic benefit that should 
be disgorged. Otherwise, firms in a given industry would have an 
incentive to collude in noncompliance. In addition, one industry may be 
competing against another (hydroelectric power versus fossil fuel based 
electric power) such that the industry that fails to comply obtains a 
significant advantage in that competition. Finally, if for some reason 
all the firms in a particular industry are out of compliance, each 
violating firm still obtains an economic benefit. By delaying and/or 
avoiding compliance expenditures, each of the firms is saving money 
even if the playing field is level. The Agency needs to recapture that 
benefit from any violating member of that industry if it wants to 
produce deterrence.
    EPA's perspective is that the economic benefit gained is ``no 
fault'' in nature. By this the Agency means that a company need not 
have intentionally

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violated the law, or been aware of the violation, to have accrued 
economic benefit. Nevertheless, the concept of ``fair notice'' can be 
relevant to penalty assessment and may be an exception to this ``no 
fault'' approach. Some courts have found that fair notice is a defense 
to a penalty action if established by the defendant. This is not saying 
that the violator failed to obtain an economic benefit from its 
noncompliance. Fair notice is thus a legal defense, not an economic 
one. As a policy matter, the Agency generally does not seek any 
penalties where that defense has been clearly established.
    Comment: Two commenters stated that the BEN model does not 
accurately measure regulated utilities' economic benefit. Specifically, 
one commenter noted that because regulated utilities are able to 
recover their compliance expenditures and earn a rate of return on 
those investments, the timing of periodic rate adjustments should be 
considered. For example, if compliance expenditures associated with a 
new facility are delayed until after a rate assessment, the utility 
forfeits returns on that investment until the subsequent rate 
assessment, a tacit loss that is not reflected in BEN model 
calculations
    Response: The Agency generally agrees that the BEN model does not 
reflect that potential loss in some situations, but it does not agree 
with the implications. Specifically, the violator has created an 
economic benefit, which, depending upon the particular circumstances, 
has accrued either to the utility or to its customers in the form of 
lower rates. In some cases, both the utility and the customers obtain 
the benefit. Either way, this economic benefit should be recaptured. 
Otherwise, given the joined-at-the-hips relationship between a 
traditional rate-of-return regulated utility and its ratepayers, the 
financial incentive would arise to avoid compliance and thus create 
goodwill among ratepayers (knowing that the economic benefit would not 
be recaptured) that could help the utility in the next rate hearing. To 
ignore this benefit generated by such a regulated utility creates a 
very strong incentive to evade compliance responsibilities.
    The analogy of a landlord-tenant relationship helps to illustrate 
this concept. Suppose that the lease conditions allow pollution control 
costs to be passed through to the tenant, and suppose that the 
regulatory agency agrees that the economic benefit that the landlord 
created through its violations should not be recaptured via a civil 
penalty since the economic benefit was passed through to the tenant (in 
the form of lower rent payments). The landlord now has an incentive to 
avoid compliance, since and thus create goodwill with its tenant 
(knowing that the economic benefit will not be recaptured) that could 
help the landlord in the next round of lease renegotiations.
    Comment: Two commenters questioned whether economic benefit was 
appropriate for Federal agencies and facilities.
    Response: Federal agencies and facilities are no different from 
local, regional, and State governmental jurisdictions in the context of 
economic benefit. Although governmental entities do not have the same 
profit motive as for-profit businesses, they may still benefit 
economically from their noncompliance, and that benefit must be 
recaptured.
    Comment: One commenter suggested that by increasing focus on the 
recovery of economic benefit, EPA will in fact create an ``unlevel 
playing field'' because it will limit the extent of the gravity 
component it can assess given the statutory penalty maximum of $25,000 
per day.
    Response: The Agency has not seen many cases in which the economic 
benefit exceeds (or is very close to) the statutory maximum, but 
concedes that in those cases even the statutory penalty maximum may not 
be sufficient for optimal deterrence. Ignoring or reducing the economic 
benefit in all our penalty actions in order to address this situation 
would make little sense. The solution required is probably a 
legislative issue.
    Comment: One commenter felt that EPA's abilities to recover 
economic benefit should not be permitted to supercede the statute of 
limitations.
    Response: The application of the statute of limitations to a 
benefit calculation is a legal issue and is well beyond the scope of 
this notice. The purpose of this notice is to determine the best 
economic methodology for the Agency employ when calculating the 
economic benefit of noncompliance. From a financial economics 
perspective, the statute of limitations issue is irrelevant. The 
benefit accrues to the violator regardless of whether the first day of 
noncompliance was two years ago or ten years ago.

B. The BEN Model's Calculation Methodology

1. Discounting/Compounding
    Comment: Many commenters indicated that the risk-free rate is the 
appropriate compounding rate for BEN calculations. This is because 
investments in pollution control carry very little, if any, systematic 
risk and do not add value to a firm. Similarly, the probability of the 
violation attracting an enforcement action and the subsequent penalty 
not being paid is not a relevant risk for the present value 
adjustments. Because penalty payment cash flows are certain, a risk-
free rate is the appropriate compounding rate.
    Response: The Agency is puzzled by the critical assertion in this 
line of reasoning that pollution control investments do not add value 
to a firm: would these commenters pay the same price to purchase two 
firms that were identical but for their investments in required control 
equipment? As discussed in this notice's main text, a risk-free rate 
does not accurately reflect the benefit a company could gain through 
alternative use of compliance funds. For these reasons, the Agency 
maintains that an estimate of a violator's cost of capital is 
appropriate for both discounting and compounding purposes in the BEN 
model.
    Comment: Two commenters criticized EPA's distinction between tort 
damages and economic benefit and advocated the adoption of a risk-free 
compounding rate.
    Response: The Agency maintains that tort damages and economic 
benefit differ fundamentally in that the goal of the former is to 
restore to the plaintiff the amount by which it was damaged, while that 
of the latter is to return the defendant to the position it would have 
been in had it complied, and thus remove from it the amount it 
wrongfully gained. Therefore, the relevant rate to apply to the 
violator's cash flows is its cost of capital, which reflects the 
minimum rate of return it can expect to earn on average from funds not 
invested in pollution control.
    Comment: One commenter suggested that a risk-free interest-forward 
rate be used in BEN model calculations because a violator would have to 
place funds in a risk-free vehicle to pay the required penalty.
    Response: Outside of cases in which a violator formally agrees 
during settlement negotiations to escrow penalty funds, the Agency is 
unaware of any violator that has ever done so, and therefore feels that 
this suggested theoretical construct is highly unlikely.
    Comment: One commenter pointed out that a risk-based discount rate, 
specific to the project in question, should be utilized in BEN model 
calculations.
    Response: Because the project is an investment in required 
pollution control equipment, it is essentially an investment in the 
continuing operations of the firm as a whole (or the relevant

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operations division). Thus, the WACC accurately reflects the risk of 
the project.
2. Inflation Adjustments
    Comment: One commenter felt that the cost indices relied upon in 
the BEN model should include an installation component.
    Response: The BEN model's default cost index, the Plant Cost Index 
(PCI), includes such an installation component.
    Comment: One commenter believed that future inflation rates should 
not be linked to the Consumer Price Index (CPI).
    Response: Publicly available forecasts are available only for the 
CPI and the GDP price deflator. Both forecasts are fairly close to one 
another, plus the chosen value has a very small impact upon the 
economic benefit result. The Agency plans to evaluate all available 
information during each year's update of the projected cost indices.
    Comment: One commenter felt that future inflation rates should be 
adjustable or, at a minimum, EPA should recognize analyses that 
incorporate a more complex future inflation scenario.
    Response: The revised BEN model allows the user to specify 
estimates of compliance costs as of the noncompliance and compliance 
dates to reflect an alternative cost index, case-specific inflation 
assumptions, or entirely different actions for on-time and delayed 
compliance.
3. Other Technical Aspects
    Comment: Two commenters commended EPA's proposal to allow for 
differences in delayed and on-time compliance scenarios. A third 
commenter suggested that only in cases where the technology necessary 
for compliance was unavailable at the time of noncompliance should such 
adjustments be allowed. Otherwise, in the on-time scenario, violators 
will be encouraged to seek lower penalties by searching for and 
advocating less costly compliance measures.
    Response: The Agency recognizes that certain technological, legal, 
or other circumstances may occasionally cause on-time and delay 
compliance scenarios to differ significantly. The revised BEN model 
still maintains the default assumption that the on-time and delay 
scenarios are identical (but for inflationary effects), reserving more 
complicated scenarios only as an advanced option. The burden is 
implicitly always upon the violator to provide convincing evidence 
that: (1) A less-costly compliance method was available as of when 
timely compliance was required; and, (2) the only reason the violator 
invested in the more expensive equipment was to improve the 
environment. If, as we usually find, that the motivation to purchase 
the more expensive equipment was business-related (e.g., the more 
expensive equipment was more reliable, fit better with on-board 
equipment, allowed for expansion, etc.) the Agency assumes that the 
company would have chosen that more expensive system as its compliance 
option had it decided to comply on time. Thus the cost entry for BEN 
would be based on the actual option selected by the violator for its 
delayed compliance.
    Comment: One commenter urged EPA to maintain the BEN model's 
previous assumption of infinite replacement cycles, suggesting that it 
is essential when the delay period is longer (or shorter) than the 
useful life of the control equipment or when compliance involves 
controls with different life expectancies.
    Response: As noted earlier in section III.B.5, the revised BEN 
model will solve this problem by implementing the concept of economic 
depreciation, which essentially calculates the lease value of pollution 
control equipment. In other words, instead of modeling the on-time 
replacement capital investment and the subsequent depreciation tax 
shields, and comparing that to delayed replacement, the calculation 
models leasing the equipment over the period when the on-time equipment 
would have required replacement yet the delay equipment is still 
functional. The avoided lease cost therefore serves as a reasonable 
approximation of the economic benefit from the delayed replacement 
equipment installation, and also allows the two scenarios to the 
modeled out the same end point.
    Comment: One commenter felt that the BEN model default should not 
consider capital replacement because (with rare exceptions) process and 
control equipment are typically matched in terms of life expectancy.
    Response: The Agency disagrees. The control equipment will still 
have to be replaced in the future, and then the violator will benefit 
again as its control equipment will still be functional whereas the 
equipment would have already required replacement had the company 
complied on time.
    Comment: Two commenters felt that the BEN model should provide for 
a broader range of costs, such as those additional costs that would not 
have been incurred given timely compliance and precompliance 
expenditures.
    Response: The revised BEN model's ability to accommodate different 
on-time and delayed compliance cost scenarios, when justified, allows 
for incorporation of supplementary costs, as this comment suggests.
    Comment: One commenter proposed that when a defendant can justify 
doing so, EPA should allow for alternative depreciation strategies.
    Response: The BEN model's current depreciation schedule reflects 
the most rapid recovery available for typical pollution control 
investments, resulting in a conservative estimate of economic benefit. 
The revised BEN model will default to shorter schedules when the useful 
life is less than 10 years. BEN will also include a provision for the 
Job Creation and Worker Assistance Act of 2002 depreciation bonus, 
which will be keyed off the previously required noncompliance and 
compliance dates, and therefore will not require any additional input 
from the user.
    Comment: Many commenters endorsed EPA's proposed changes with 
respect to investment tax credits and low interest financing, specific 
tax rates, and increased flexibility with respect to depreciation 
assumptions and inflation indices.
    Response: The Agency appreciates these comments, and hopes both 
regulators and the regulated community will find the revised BEN model 
a more useful and accurate tool.
    Comment: One commenter felt that many of the changes described in 
the June 1999 notice reflected ex post factors and recommended that EPA 
maintain its ex ante perspective in calculating economic benefit.
    Response: The Agency feels that the distinction between an ex post 
(i.e., known only today, looking back in time) and ex ante (i.e., 
restricted to what was known at the time) perspective is not an 
important one, and that almost all models necessarily use a mixture of 
ex ante and ex post data. The BEN model has always used a mixture of ex 
ante and ex post data, the latter of which can be viewed as reasonable 
approximations for the ex ante data that was actually available at the 
time. The changes described in the June 1999 notice merely make the ex 
post data more precise (e.g., month-by-month inflation data, rather 
than a simple 10-year average).

C. Improving the BEN Model's User-Friendliness

1. Is BEN Too Complex To Operate?
    Comment: One commenter noted that BEN is easy to use, requires 
minimal data and expertise and is well supported.
    Response: The Agency similarly feels that BEN's ease of use and 
technical

[[Page 50344]]

support are attractive features of the model.
2. Is the Information BEN Needs Difficult or Expensive to Obtain?
    Comment: One commenter doubted that reliable information will be 
readily available regarding on-time compliance costs that differ from 
delayed costs.
    Response: The use of different on-time and delayed compliance 
scenarios is valid only in exceptional cases. In these situations, the 
violator's best interest will be to provide complete information. 
Otherwise, the default assumption is that the scenarios are identical, 
except for inflationary effects over time.
3. Other Issues Affecting Use of BEN
    Comment: One commenter encouraged EPA to abandon its position that 
the intended use of the BEN model is primarily for settlement purposes.
    Response: An expert witness in litigation may use any analytical 
tool the expert deems appropriate, which may include the BEN model. But 
the reality is that the Agency designed BEN with the goal of assisting 
its staff for settlement purposes. This is not a policy position, but 
rather a statement of fact, although BEN users are free to use BEN for 
whatever purposes they deem appropriate. Should a witness in a case 
wish to use the BEN model in court, that witness is free to do so, but 
the Agency's position is that the model is primarily intended for 
calculating the economic benefit for settlement purposes.
    Comment: One commenter asserted that information regarding the BEN 
methodology, assumptions and applications should be shared with the 
regulated community. In addition, all parties should have access to 
EPA's helpline. Finally, EPA should provide all of BEN's equations and 
assumptions.
    Response: The Agency has made precisely this information regarding 
how the model functions available to the public for almost twenty 
years. EPA does not necessarily share all of its case-specific 
calculations with a violator as that information is enforcement 
sensitive, but all of the BEN model's formulas and databases are 
completely transparent to the user. In regard to the helpline, the 
regulated community's access to this service is restricted to 
straightforward issues regarding software installation and execution. 
For resource and policy issues, EPA feels that it would be 
inappropriate to provide free consulting advice to regulatees who are 
usually the subject of enforcement actions.
    Comment: One commenter felt that to ensure consistency in penalty 
calculations, EPA should provide detailed guidance on economic benefit 
calculations to its enforcement staff.
    Response: In addition to the BEN model's user documentation and 
assistance through the helpline, the Agency has provided extensive on-
site in-person training to Federal, State and local enforcement 
personnel. Since, 1988 EPA has presented over 80 BEN courses. The 
Agency has conducted over 42 ``live'' BEN training courses at EPA 
facilities and invited State enforcement staff to attend nearly all of 
them. In addition, EPA has conducted 45 BEN training courses primarily 
for State and local government personnel in: Hartford, Connecticut 
(three times); Indianapolis, Indiana (three times); Little Rock, 
Arkansas; Baton Rouge, Louisiana (twice); Trenton, New Jersey; Boise, 
Idaho (three times); Ft. Lauderdale, Florida; El Monte, California; 
Baltimore, Maryland; Richmond, Virginia (twice); Phoenix, Arizona 
(twice); Lacey, Yakima and Seattle, Washington (for State of Washington 
personnel); Anchorage, Alaska (twice); Atlanta, Georgia (for State of 
Georgia personnel); Miles City, Montana (for the State enforcement 
staffs of Montana, North Dakota, and South Dakota); Frankfort, 
Kentucky; Montpelier Vermont; Raleigh, North Carolina; Charleston, West 
Virginia; Columbus, Ohio; St. Paul Minnesota; Nashville, Tennessee; 
Denver, Colorado (for the State enforcement staffs of Utah, Colorado 
and Wyoming); Santa Fe, New Mexico; Yakima and Seattle, Washington (for 
State of Washington personnel) Boston, Massachusetts (for State of 
Massachusetts personnel) (twice); Lansing, Michigan; Concord, New 
Hampshire; Providence, Rhode Island; Austin, Texas; and Honolulu, 
Hawaii (twice). EPA also presented a BEN course via satellite in 1994, 
and made videotapes of that broadcast available to government 
enforcement staff on request. In addition, EPA will soon be delivering 
this training to enforcement personnel at their desks through WebEx 
presentations.
    Comment: One commenter recommended that EPA assemble an ``internal 
appeal board'' of experts to resolve disputes over economic benefit 
issues in settlement negotiations.
    Response: Creation of such a board is not feasible. The Agency's 
view is that the decision on the appropriate civil penalty is best 
worked out between the Agency and the violator. Where appropriate, the 
negotiations may involve experts. If an agreement on the appropriate 
penalty cannot be worked out, then the matter must be resolved by a 
trier of fact.
    Comment: One commenter felt that EPA should disclose its methods 
for calculation of economic benefit in litigation settings (as opposed 
to settlement negotiations) and that the regulated community should be 
allowed to comment on these methods.
    Response: The methods employed in litigation follow the same 
general principles of the BEN model, but the Agency is unable to 
predict what each independent expert may do in each case. Experts must 
testify as to their own expertise regarding the economic benefit of 
noncompliance, not as to an Agency methodology designed to produce 
settlements. In addition, parties in litigation have very limited 
amounts of time in which to produce expert reports, depose experts, 
etc. It would therefore be impossible to put these independent experts' 
testimony through some sort of public review in the middle of 
litigation. In addition, it would also be superfluous, since such 
testimony is already subject to legal discovery, and also the focus of 
considerable scrutiny in each case by the violator's counsel and 
experts.

D. Procedural Issues Regarding the Public Comment Process

    Comment: Many commenters expressed concern over the form and 
substance of the proposed guidance document on illegal competitive 
advantage and felt that the document should be made available for 
public comment.
    Response: As stated previously, the Agency feels that a separate 
public comment process would be redundant. Instead, it has initiated a 
peer review process by the Agency's Science Advisory Board.
    Comment: Two commenters advised EPA to subject the BEN model to 
expert review. In addition, one commenter suggested that EPA should 
open its broader civil penalty policy to public comment.
    Response: As noted earlier, the Agency submitted the draft BEN 
model changes to an academic peer review in spring of 2003. With 
respect to broader policy issues, the Agency has attempted to solicit 
relevant comments through this current informal notice and comment 
effort. This has given the public and interested experts extensive 
opportunities to comment on these issues. We would note that this 
eight-year effort was not required by law.
    Comment: One commenter alleged that the BEN model has no history of 
peer review.
    Response: The BEN model is exempt from peer review because the 
Agency's peer review policy, issued in 1994,

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applies only prospectively, not retroactively. Nevertheless, the Agency 
put the BEN model through two peer reviews in 1988 and 1991. As 
mentioned in the June 1999 Federal Register notice, copies of those 
peer reviews are available to the public. In addition, since that 
comment was made, the Agency has put the model through a third peer 
review. That review focused on the changes to the model that we were 
proposing as part of this Federal Register process.
    Comment: One commenter felt that EPA should publish any final 
decisions on economic benefit issues arising from the current public 
comment process.
    Response: All the final decisions are detailed in the main text of 
this notice. Of course, as stated previously, the illegal competitive 
advantage guidance document is not final and has instead been submitted 
to a peer review by the Agency's Science Advisory Board.

    Dated: August 18, 2005.
Granta Y. Nakayama,
Assistant Administrator, Office of Enforcement and Compliance 
Assurance.
[FR Doc. 05-17033 Filed 8-25-05; 8:45 am]
BILLING CODE 6050-50-C