Environmental Law Advisory - Goodwin

1 Environmental Law October 2003 Advisory A monthly update on law, policy and strategy EPA Wins Another Challenge To Indirect Oversight Costs Imposed Under Superfund In general, indirect costs are costs of administering the Superfund program that cannot be identified with any particular site. They include compensation and benefits for personnel, travel, rent, communications, utilities, contracted services and supplies necessary for EPA s administrative and non-site Superfund activities. In contrast, direct costs are such costs as assessing, investigating and cleaning up a particular site, site-related oversight and enforcement activities, the costs of classifying a site, and research and development costs.

2 These categories and EPA s revised methodology for calculating indirect costs were first announced in a June 2000 document entitled Guidance on Exercising CERCLA Enforcement Discretion in Anticipation of Full Cost accounting Consistent With the Statement of federal Financial accounting standards No. 4 . 65 Fed. Reg. 35,339 (June 2, 2000). In August, a federal district court upheld application of the Environmental Protection Agency s controversial revised methodology for computing CERCLA response costs, awarding EPA over $11 million in indirect costs. In United States v. Grace and Co. 2003 Dist. LEXIS 15928 (D. Mont. 2003), the court rejected Grace s arguments that EPA s methodology was flawed and that EPA was asking the company to pay for more than the costs attributable to its site.

3 In ruling against Grace, the court endorsed EPA s application of a region-wide indirect cost rate which Grace had challenged as excessive and inconsistent with generally accepted accounting standards . While Grace represents the first judicial decision reviewing application of EPA s new indirect cost assessment calculus, it extends a line of federal court decisions that have upheld large awards under CERCLA for costs over and above site-specific labor and cleanup costs. EPA s Revised Policy Prior to the June 2000 guidance document, EPA calculated the indirect costs of a particular site as a percentage of the labor hours for that site. However, the agency revised its methodology in response to the federal Financial Management Improvement Act of 1996 which directed all federal agencies to adopt cost accounting methods that consistently and accurately report the full costs of their activities.

4 This Advisory reviews application of EPA s indirect cost recovery policy and discusses the methods by which responsible parties may still limit or challenge indirect costs. What Are Indirect Costs? Under CERCLA, EPA is authorized to recover both direct and indirect costs in connection with site remediation. Boston | New York | New Jersey | Washington DC Under its new policy, EPA identifies a pool of indirect costs to allocate to sites. The pool consists of: (i) agency-wide costs such as facilities and human resources management, (ii) the regional administrative, support, and management costs for all regions combined; and (iii) the regional and nationwide costs of running the Superfund program.

5 Once the pool has been established, EPA calculates the percentage of nationwide, site-specific direct costs attributable to each EPA Region and assigns an indirect rate to each Region. Impact of EPA s Revised Policy The revised indirect rates became effective on October 2, 2000. The intended effect, as stated in the guidance document, was to increase the amount of indirect costs allocated to Superfund site-specific activities. Although the exact effect of the revised rates will be different for each individual site, based on its direct costs and the indirect rate assigned to its Region, EPA s effort to allocate more of its indirect costs generally has resulted in higher payments by responsible parties.

6 Thus, regions in which more direct costs are incurred are assigned higher indirect cost rates. For an individual site, EPA identifies the total annual direct costs for the site and then multiplies that total by the corre-sponding year s indirect cost rate for the region. The resulting number is that year s indirect cost allocation. For example, if a site has incurred $1 million in direct costs during a given fiscal year and it is located in a region with an indirect cost rate of 30% for that year, that year s indirect costs for the site will be $300,000. One study published by Pricewaterhouse-Coopers LLP calculated that an average state-led cleanup involving $25 million in direct remedial costs will be assessed approximately $7 million more in indirect costs under EPA s revised methodology.

7 Criticism of the Revised Methodology Since its announcement in June, 2000, EPA s new policy has been subject to sharp criticism. The biggest concern is that, by applying fixed region-wide indirect cost rates, the policy fails to take into account differences between individual sites and cleanup remedies that could affect the amount and type of indirect costs incurred. Industry groups like the American Chemistry Council have argued that indirect costs are not homogenous and should not be treated as one big pool for allocation on a percentage basis, and that EPA should take a more site-specific approach to the calculation of indirect costs, instead of applying a broad regional rate to every site.

8 Indirect cost rates have been established by EPA for the years 1990 through 2001 and projected for 2002. Sites that were not assessed indirect costs under the prior dollars per work-hour formula are subject to retroactive calculation under EPA's revised methodology. Provisional Indirect Cost Rates by EPA Region for Work Performed in FY2002-2003 Region Rate 1 2 Moreover, critics point out that it is possible that two sites incurring the same dollar amount of direct costs but employing different cleanup remedies may not cause the same amount of indirect costs. One remedy may incur more in terms of administrative and other indirect costs than another, even though the direct costs appear to be equal.

9 3 4 5 6 7 8 9 10 Another criticism arises from the fact that indirect rates vary widely among regions. The guidance document estimated a rate of for Region 6, while it estimated a rate of for Region 7. This disparity will likely continue to raise questions as to the accuracy of the new methodology. Companies and industry groups have also challenged the new policy in court by arguing that it was improperly issued.

10 In Atlantic Richfield v. EPA, 38 Fed. Appx. 614 ( Cir. 2002) unpublished, several companies argued that EPA should have issued the policy as a regulation, allowing for a comment period to address industry concerns. The Circuit Court of Appeals dismissed their petition, holding that EPA s policy merely referenced requirements imposed upon all federal agencies under the federal Financial Management Improvement Act and imposed no additional obligation on EPA. Therefore, the court held that the guidance document was not a regulation promulgated under CERCLA, and it did not require a comment period. The Grace Decision In Grace, defendant Grace and Co. disputed the amount of indirect costs allocated to its site and argued that EPA s revised methodology did not comply with generally accepted accounting principles.