Rock and a hard place: 

What will be the impact of EPA’s proposed financial assurance regulations

for the hardrock mining industry?

By Michael S. Giannotto and Matthew Brewer

In January 2017, the U.S. Environmental Protection Agency proposed a rule under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). If finalized, the rule would impose new and extensive requirements that U.S. hardrock mining operations maintain financial assurances sufficient to fund potential CERCLA liabilities (such as remediation costs and natural resource damages [NRD]) that they might potentially incur due to releases of hazardous substances from their facilities.

EPA, which estimates costs of compliance for industry of $171 million per year, believes the rule is necessary to avoid public funding to clean up future Superfund sites. Industry, and virtually all states where hardrock mining occurs, have condemned the proposal as duplicative of and unnecessary in the light of existing state and federal Land Management Agency regulatory programs.

Litigation Driven

Section 108(b) of CERCLA directs EPA to develop regulations requiring U.S. facilities to establish financial responsibility “consistent with the degree and duration of risk” associated with their management of hazardous substances. The statute’s purpose is to ensure that facilities handling hazardous substances can cover any CERCLA liabilities – such as response costs and NRD – that may arise, thereby preventing so-called “orphan sites” that lack sufficient financial resources to pay for any cleanup that may be necessary.

Enacted in 1980, section 108(b) required EPA to identify the first class of facilities subject to regulation by December 1983. Despite the statutory mandate, this provision lay dormant for nearly three decades until 2008, when several environmental groups filed suit to force EPA to promulgate regulations under section 108(b). That lawsuit was resolved in 2009 when, upon the court’s order, EPA published a notice identifying hardrock mining as the initial class of facilities for which regulations would be developed.

When, by August 2014, EPA had yet to propose any rules for the industry, environmental groups again filed suit seeking to compel EPA to propose such rules. That litigation was resolved in January 2016 when the court issued an order approving the parties’ mutually agreed-upon schedule requiring EPA to propose a rule by Dec. 1, 2016 and make a final decision by Dec. 1, 2017.

Facilities Covered

The proposed rule would, with certain limited exceptions, apply to all currently operating and future hardrock mining and associated mineral-processing operations on public or private lands in the United States. This includes facilities that engage in the extraction and beneficiation of metals (e.g., copper, gold, iron, lead, magnesium, molybdenum, silver, uranium and zinc) and non-metallic, non-fuel minerals (e.g., asbestos, phosphate rock and sulfur).

All such operations would have to obtain and maintain financial assurance for potential CERCLA liabilities separate and apart from any financial assurance already maintained with states, the Bureau of Land Management, and the U.S. Forest Service for closure or reclamation. The rule would not apply to operations that are “solely” exploration operations or to wholly inactive or abandoned mine sites.

Financial Assurance

Under the proposed rule, the financial assurance amount would be computed by calculating three separate numbers: response costs, NRD and health assessment costs. Health assessment costs would be a fixed number for every facility ($550,000), based on EPA’s review of health assessment data for CERCLA sites over the past few years. The NRD component would be a fixed percentage (13.4%) of the response costs component, based on EPA’s assessment of the relative percentage of NRD versus response costs incurred at a set of currently operating mines.

The response costs component would consist of a series of numbers applied to 13 specific response categories (e.g., hazardous waste disposal, tailings impoundments, heap leach facilities, waste rock piles, etc.) at a given site. The amount applicable to most of these categories would be a unit amount multiplied by the disturbed acreage of a unit, with the unit amount calculated by EPA after review of reclamation costs for such units at 64 currently active facilities.

Operators theoretically can get a full, 100 percent, credit for any item of response costs if they are compliant with certain “best practices” proposed by EPA, but only if those practices are already required under other federal or state programs and there is financial assurance in place under such programs for those controls. Thus, technically at least, the response cost element, and therefore the NRD element, could be reduced to zero. In practice, most operators believe that such credits will be few, as EPA’s best practices often go far beyond what is now required under state or other federal programs.

Phase-In of Requirements

Financial assurance requirements would be phased in over a four-year period. Financial assurance for health assessments would have to be established within two years of a final rule, one-half of NRD and response costs within three years, and the remainder of NRD and response costs within four years.

Financial assurance would have to be maintained throughout the operating life of the facility and the closure/reclamation period. After that time, the operator could petition EPA to release the financial assurance instrument, but only if the operator could demonstrate that there is a “minimal” chance of any cost being incurred at the facility. Thus, the financial assurance amount might, in the case of a typical facility, have to remain in place in perpetuity.

Financial Assurance Instruments

The proposed rule allows financial assurance to be satisfied by a number of instruments – letters of credit, surety bonds, insurance and trust funds (i.e., cash and securities) – and specifies the exact wording each instrument must have. Among other things, and as CERCLA section 108(b) requires, the instrument must allow for direct actions against the instrument by CERCLA judgment creditors if the operator is in bankruptcy or jurisdiction cannot be obtained over it. Moreover, not only could EPA access the financial assurance instrument if it had an unsatisfied claim against an operator, but so too could any other potentially responsible party.

There is currently no market for such financial assurance instruments, and insurance brokers, surety associations, and bankers associations have commented that a market is unlikely to develop. In that case, operators may have no choice but to satisfy assurance obligations by use of trust funds. That may be impossible for many operators, given the likely magnitude of the financial assurance required.

Financial Test

EPA also is considering use of a financial test/corporate guarantee. Under EPA’s “preferred” alternative, no financial tests/corporate guarantees would be allowed. Under a second alternative, a financial test would be allowed, but the criteria EPA has proposed would be quite onerous, and in fact more onerous than EPA uses in any of its other programs. A company could only use a financial test/corporate guarantee to satisfy 100 percent of the financial assurance requirements if it had a bond rating of A- or better.

A company could use a financial test to cover 50 percent of the financial assurance amount if it had a bond rating of BBB or better. However, in both the 100 percent and 50 percent instances, the company would have to satisfy several other requirements, including having a tangible net worth equal to at least six times (1) the financial assurance amount to which the financial test would apply and (2) any other amounts under any other state or federal programs which the operator satisfies through a financial test. 

Grossly Underestimated?

EPA estimates that 221 facilities will be subject to any final rule, and that they will collectively need to post $7.1 billion in financial assurance – a figure industry believes is grossly underestimated. EPA estimates the compliance cost to industry will be $171 million per year, assuming financial assurance instruments are available, and will result in savings to the government in terms of lesser Superfund expenditures of only $15.5 million per year.

The hardrock mining industry and western states are up in arms about the proposed rule, which they believe is duplicative of and unnecessary in the light of existing state, BLM and Forest Service programs requiring financial assurances for closure and reclamation. Industry believes that, due to the magnitude of financial assurances that will be required, and the unavailability of third-party financial assurance instruments, the proposed rule, if finalized, will lead to shut downs or curtailment of operations and loss of jobs. States also see the proposal as preempting or overriding long-standing and successful state substantive and financial assurance programs.

Given the new administration, many operators and states are hopeful that any final rule will take account of their concerns, and will cut back substantially the burdens that would ensue if the proposal is finalized as is.

Michael S. Giannotto is a senior partner in Goodwin Procter’s Business Litigation and Environmental Groups in Washington, D.C. Matthew Brewer is a senior attorney in Goodwin Procter’s Washington, D.C., office specializing in environmental and energy issues.


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