allocation of FUTURE remediation costS among
various parties with respect to environmental CONTRIBUTION claims
Important
New Jersey Supreme Court Decision Regarding the Right to Sue for Contribution
On July 28, 2014, the New Jersey Supreme
Court issued a very important decision regarding the right to sue for
contribution in Superior Court and the assignment of liability for
environmental contribution claims without prior approval of the remediation plans
by the New Jersey Department of Environmental Conservation (NJDEP or
Department). The case is Magic Petroleum Corporation v. Exxon
Mobil Corporation, et al., A-46-12 (069083)(N.J. 2014).
Magic Petroleum is the owner and operator of
a gasoline refueling and service station in the Clarksburg area of Millstone
Township which contained several underground storage tanks that were alleged to
have leaked petroleum hydrocarbons into the soil and groundwater. Magic
Petroleum was designated a Spill Act discharger by the DEP and agreed to
remediate the property under NJDEP oversight.
The lower courts reasoned that only the NJDEP could identify the
contamination, analyze the extent of the discharge, and devise a cleanup strategy
– findings that needed to be made prior to an allocation of liability.
Moreover, such findings were deemed to be within NJDEP’s expertise and would
not be determined until after completion of cleanup. The Appellate Division
also declared that under the Spill Act, a party seeking contribution must first
obtain the NJDEP’s written approval of the remediation plan.
The Supreme Court reversed the lower courts
and held that Plaintiff property owners or other responsible parties may file
contribution claims in Superior Court, and a court may allocate liability
before the final resolution of a site remediation plan by the NJDEP. The trial court may assign liability based on
evidence presented at trial, but may not be able to issue a final damages
award. In addition, a party need not
obtain written approval of the remediation plan prior to filing a claim for
contribution. This
right to pursue contribution lawsuits grows out of the express language of New
Jersey Spill Compensation and Control Act (Spill Act), as well as common law
(as codified in the Joint Tortfeasors Contribution Law, N.J.S.A. 2A:53A-1, as
modified by the Comparative Negligence Act, N.J.S.A. 2A:15-5.1.
This decision is in agreement with decisions
reached by other courts in CERCLA (or Superfund as is commonly known)) contribution
claims to determine liability and/or cost allocation among the responsible
parties. See for example, New York v.
Solvent Chemical Co., Inc., 664 F.3d 22, 27 (2d Cir. 2011) where the Second
Circuit Court reversed the Trial Court's refusal to issue a declaratory
judgment for future costs. The Circuit
Court noted that the Trial Court found that DuPont and Olin were liable for
contribution for past remediation costs and that it provided no good reason why
those parties should not be liable for ongoing, future costs. The Circuit Court reasoned that a declaratory
judgment with respect to liability saves litigants and courts substantial time
and money, leaving for the future only the need to fix the amount of
contribution and affording the court flexibility with respect to the time and
manner for doing so.
See also Ashley
II of Charleston, LLC v. PCS Nitrogen, Inc., et al, 2010 U.S. Dist.,
Eastern District of SC, Charleston Division LEXIS 104772 (Docket No.
2:05-cv-2782-MBS), May 27, 2011. In Ashley II the court noted that with
regard to future response costs there is no final remediation plan for the site
that has been approved by the U.S. EPA.
However, the court ruled that a government-approved remediation plan is
not a prerequisite for the court’s entry of “an order allocating liability
allocation”. Dent v.Beazer, 993 F.
Supp., (D.S.C. 1995) at 949. To the
extent that it later becomes disputed whether the final remediation plan for
the site is consistent with the NCP, the court will retain jurisdiction over
the case to decide this issue.
The implications of Magic Petroleum decision
are particularly significant because it will foster greater cooperation between
the responsible parties, leading into an expedited site remediation and
restoration. Responsible parties will no
longer be able to sit on the sideline and avoid paying their fair share until
after remediation is complete which could take many years.
As you all know, the real argument between
the Potentially Responsible Parties (PRPs) is always about the amount money
they think they are liable for. During
these contribution suits, the party that presents the most credible cost
analysis wins the battle. Based on our
experience with contribution lawsuits, we believe that the most effective
methods are the probabilistic methods that use Monte Carlo simulations or
equivalent approaches. Now we will be
able to use our experience with the federal contribution program to determine
the future remediation costs in the New Jersey litigation using the
EPA-approved Monte Carlo and decision tree methods.
Monte Carlo Simulation and
Decision Trees to Determine the Future Remediation Costs
Traditionally, remediation cost estimates have been point-in-time
estimates that represent a single value for the cost of the project and a +/-
range of 10 to 30 percent, depending on the stage of the estimate. These estimates, especially the ones prepared
early on in the project impart a false sense of accuracy because they are not
capable of describing the wide variability that can occur as risks or
uncertainties unfold.
Monte Carlo is a simulation technique that uses random numbers to
measure the probabilistic effects of uncertainty. It permits the calculation of probability
distributions of outcomes for complex decision trees. The technique employs a computer to repeatedly
and rapidly simulate the outcome of a series of probable events. A decision tree is prepared following the
initial assessment of the all of the available information. The decision tree visually portrays the
structure of a decision problem, thus displaying the alternative courses of
action, all possible outcomes and the probability values of each decision.
The decision tree is a model representing pertinent alternative
future events, their costs, timing, and the probabilities of their occurrence.
It lays out the most reasonable, possible cleanup responses, sequentially over
time (i.e., one “branch” of the tree). It
breaks down these responses into their elements, such as studies, soil
responses, groundwater responses, etc.
Each
response element is represented by a “box” on a branch of the decision tree, and
those boxes are then assigned costs, timing, and probabilities. Cost
information is derived from project information when possible, such as agency
planning documents or from internal budgets.
The decision tree is then statistically analyzed using Monte Carlo simulation. Metropolitan has applied Monte Carlo
simulation to the problem of comparing the possible costs of alternative
environmental remediation options. Using
Monte Carlo random sampling from an option’s cost probability distribution, the
probability that one option will cost more than another can be estimated and
the most likely costs of each operation can be compared. Probabilities (i.e., confidence levels) can
be assigned to a range of possible costs, leading to more credible and defensible
comparisons.
Monte Carlo simulation assigns a probability distribution to
environmental risk. That risk can
increase or decrease depending on changes to environmental legislation. Once probability distributions are
established for all inputs required for a Net Present Value (NPV) analysis, the
Monte Carlo simulation begins. A
computer program implementing the algebraic formula for NPV is written. When the simulation calls for the dollar value
of future liabilities or interest rates, these amounts are replaced by random
numbers drawn from the appropriate probability distributions. The model then applies the input values to
the model and records the output. We use
@Risk, Crystal Ball, or similar software in conjunction with MS-Project
software to do the simulations and present the results.
The computer works through the decision tree, drawing a sample from the
relevant probability distributions at each point where an event occurs and then
applying simple logic to determine how to proceed through the tree. When alternative technologies are available,
the computer model will determine the probability distributions of the possible
costs of the technologies and then choose the least costly option. If different possible events exist in the
decision tree, the computer will model each event and the possible outcomes. This process is repeated until meaningful probability
distributions can be established. The
output of the simulation is a quantification of the ranges of outcomes, such as
probability of cost overrun, probability of exceeding a deadline, and so
on. The simulation allows us to perform
a sensitivity analysis to identify the primary variation drivers.. The results of the modeling include the mean,
standard deviation and other statistics for the variable we model.
As an example, we would define as input to the simulation the
environmental remediation costs for the future months as any value between $3.0
million and $6.0 million. We would then
identify a key output that we desire, such as the total project cost. The Monte Carlo program then would perform
thousands of simulations by repeatedly sampling random combinations of the
input costs (all the cost items we provide, such as: permit costs, labor,
material, oversight and other costs) to determine a distribution for the
output, i.e., the total project cost.
The
primary result of the analysis is a distribution of predicted costs derived
from pertinent reasonable response alternatives allowing clients to select a
single cost estimate according to their risk tolerance. Monte Carlo estimates both capital and operating
costs, so it also provides a cash flow prediction and a Net Present Value (NPV)
for a given discount rate.
The clear advantage of this approach is that it uses all data in any
possible combination to derive at the full range and probability of potential outcomes
in other words, it does use the uncertainty as part of the decision making. It provides a more realistic result and not
one that is based on compounded conservative assumptions. And it provides a measure of the quality of
the data inputs by calculating the statistics of the distribution. It does allow the decision maker to know how
much risk is associated with a certain remediation cost estimate. We believe that this method reduces the difficulty
in estimating the allocation of remediation cost among various parties with
respect to environmental claims and provides an early consensus or buy in of
the PRPs and their insurers by instilling confidence in the results.
Probabilistic modeling is the generally-recognized standard for
evaluating environmental liabilities.
Metropolitan has overseen the
investigation and cleanup of more than 600 Superfund, ISRA, Act 2, UST, RCRA,
state hazardous waste sites and other impacted sites. We have estimated total response costs for
sites, discounted to net present value, using a decision tree method, combined
with Monte Carlo probabilistic analysis.
This kind of probabilistic modeling is the generally-recognized standard
for evaluating environmental liabilities.
It is the preferred methodology for estimating environmental obligations
in the future according to the ASTM International (formerly the American
Society for Testing and Materials) "Standard Guide for Estimating Monetary
Costs and Liabilities for Environmental Matters" (ASTM E2137-01 and ASTM
E2137-06 (2011). This method is
specifically designed to examine and evaluate a wide range of uncertainty and
results in an estimate that takes into account all potential remedial actions
that might be required. We believe this
is a key method that will be applied in New Jersey cleanup cases moving
forward.
Metropolitan’s analysis
appropriately accounts for the distinct possibility that no future remediation
of site may ever be required or undertaken.
Metropolitan also considers that, if remediation were required, the
property might be remediated in part rather than in whole, and the remediation
might take one of several different forms and occur at different times in the
future. As an example, at a cleanup
site, Metropolitan analysis assigned an 80 percent probability that no further
cleanup of the property (beyond the cleanup of a small parcel) would be
necessary. Then Metropolitan evaluated
future costs of further action assessing both a 100 percent cleanup remedy and
a 80/20 chain-link fencing and cleanup remedy.
Metropolitan also calculated the net present value of cleanups of
various amounts of the remaining 120 acres over the next 20 years;
specifically, Metropolitan assigned a 15 percent probability that the
remediation would begin in five years; an 75 percent probability that the
remediation would begin in 10 years; and a 10 percent probability that the
remediation would begin in 20 years.
Metropolitan further assigned a 40 percent probability to the full 120
acres (i.e., 100 percent of the acreage) of right-of-way area being excavated;
a 30 percent probability that 60 acres (i.e., 50 percent of the acreage)
would be excavated; and a 30 percent probability that 30 acres (i.e., 25
percent of the acreage) would be excavated.
Based on these various
probabilities of different outcomes, Metropolitan calculated the net present
value (NPV) of the estimated total future response costs using all of these
probabilities to be $1,200,000.
Allocation of Liability for
Commingled Groundwater Plumes Based on Groundwater Modeling
Quite often we see that the ground water contamination at a site has
been caused by a number of on-site and off-site sources. For example, groundwater beneath
two adjacent gas stations is contaminated with releases from the underground
storage tanks. The groundwater may all
move in the same general direction, but because the contaminant plumes spread or
fan out as they migrate through the soil and groundwater, the plumes blend
together and the contaminants mix. So a
certain groundwater monitoring well would represent the impacts from both
stations. This is what we call a commingling plume issue and it is a very common
phenomenon in urban settings.
Courts have often imposed joint and several liability on parties that
caused indivisible harm because of commingled contaminant plumes. In a number of Superfund case, the courts
apportioned liability for commingled contaminant plumes using computer
modeling. While statutorily only
available under CERCLA §107 cost recovery actions, joint and several liability
has often worked its way into contribution actions under CERCLA §113 when
multiple parties were alleged to have contributed to the contamination. In
such instances, courts have often required defendants to provide evidence apportioning
harm pursuant to the principles provided in the Restatement (Second) of Torts (.“Restatement.”)
§ 43 3A, a difficult burden. See, United States v. Hercules, Inc., 247
F.3d 706, 717 (8th Cir. 2001). The
Restatement provides that two parties can apportion damages for harm they caused
by showing the harms are distinct or by offering a reasonable basis to
determine the contribution of each party.
Defendants in a CERCLA § 113
contribution action can, in theory, apportion their liability based on the
waste’s relative toxicity, migratory potential, extent of migration, distinct
geographical area, release chronology (time), contaminant mass, contaminant
concentration, and contamination volume. U.S. v. Hercules, at 247 F.3d
at 718; U.S. v. Alcan Aluminum, 990 F.2d at 711, 722 (2nd Cir. 1993); U.S.
v. Alcan Aluminum, 964 F.2d at 270 n. 29, 271; U.S. v. Broderick, 862
F. Supp. 272, 276-77 (D. Colo. 1994). The
volume of the plume is determined by the extent of groundwater contamination
that exceeds a Remedial Action Objective, usually based on the Maximum
Contaminant Levels (MCLs) of the contaminants or some multiple thereof or
site-specific cleanup levels.
The Use of Forensic Methods to Allocate
Costs
In
quite a few cases we used forensic methodologies to determine the age of the
releases and to apportion the liability.
See for example:
Metropolitan personnel have been frequently
retained to perform forensic chemical analysis.
Environmental forensics are used to develop a clearer understanding of
the source(s) of the chemical contaminants, the time since chemical release,
and how chemicals have moved through the environment. With a clear understanding of hydrogeology,
chemistry and physics and how chemicals interact in the environment, forensic
analysis is used to support PRP allocations in situations involving commingled plumes, track the fate
and transport of the chemicals in the environment, and determine the extent to
which remediation has successfully removed chemical mass from the environment.
Metropolitan staff was chosen to provide expert
witness services in a case involving petroleum hydrocarbon contamination of
commercial and industrial park from a refinery pipeline used by one oil &
gas producer versus contamination from a second oil refinery located adjacent
to the commercial and industrial park.
Metropolitan performed an exhaustive forensic
analysis using soil, soil vapor, groundwater and free product data to demonstrate
the source of soil and groundwater contamination on the property. In addition
to the traditional environmental analyses typically performed on these media, a
more focused forensic analysis was performed. Using forensic techniques,
Metropolitan was able to successfully demonstrate that the contamination was
caused by a release of leaded gasoline and aviation fuel which had been
produced between 1965 and 1985. In
addition, Metropolitan identified several biomarker chemicals in the
groundwater which confirmed the source as the refinery pipeline.
Since
our involvement with the Superfund, RCRA and ECRA sites in the 1980’s, our firm has
actively participated in significant environmental litigation throughout the
United States. Today, our practice provides a wide range of consulting
engineering, remediation and auditing, forensic engineering, forensic
accounting and litigation consulting services to potentially responsible
parties (PRPs), insurance companies and various governmental entities.
Specific services provided by our professionals include:
·
Preparation and evaluation of cost recovery claims
for environmental cleanups
·
Analysis of historical costs involving one or more
financial accounting systems
·
Analysis of claimed internal cost allocations
·
Examination of accounting policies and internal
controls with respect to GAAP and industry practices
·
Calculation of lost profits or other business
damages resulting from contamination
·
Allocation of environmental response costs and
other damages to multiple parties at contaminated sites
·
Apportionment of costs to multiple parties,
insurers and/or insurance coverage layers
Metropolitan Engineering, Consulting & Forensics
(MECF)
Providing
Competent, Expert and Objective Investigative Engineering and Consulting
Services
P.O. Box
520
Tenafly,
NJ 07670-0520
Tel.:
(973) 897-8162
Fax:
(973) 810-0440
E-mail:
metroforensics@gmail.com
Web
pages: https://sites.google.com/site/metropolitanforensics/
https://sites.google.com/site/metropolitanenvironmental/
https://sites.google.com/site/metroforensics3/
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