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Quantifying Financial Environmental Risk Using Probabilistic Cost Estimating

John Lynch, P.E. Palisade Software Miami Users Conference October 25, 2007. Quantifying Financial Environmental Risk Using Probabilistic Cost Estimating. www.johnwlynch.com. Environmental Probabilistic Cost. Drivers 15 minutes Regulatory Reporting Financial Planning

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Quantifying Financial Environmental Risk Using Probabilistic Cost Estimating

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  1. John Lynch, P.E. Palisade Software Miami Users Conference October 25, 2007 Quantifying Financial Environmental Risk Using Probabilistic Cost Estimating www.johnwlynch.com

  2. Environmental Probabilistic Cost • Drivers 15 minutes • Regulatory Reporting • Financial Planning • Liability Management • Techniques & Practices 15 minutes • Precision & Accuracy • Expert Panels • Resources • Case Studies 15 Minutes • California Munitions Plant • New Jersey River Sediments PRP • Manufactured Gas Plants 15 Site Portfolio • Discussion – Q&A 15 Minutes

  3. Regulatory Reporting Drivers • Need to quantify environmental liability under uncertain conditions • “Not understanding the problem is not an excuse for not having an answer” • New accounting rule • FIN 47 … Financial Accounting Board Interpretation Notice • Asset Retirement Obligation

  4. FIN 47 • Financial Disclosure of Environmental Liabilities • Old ….. Potential loss must be “probable” and can be “reasonably estimated” • New …. Use probabilistic tools • FASB Interpretation No.47 • Accounting for Conditional Retirement Obligations • The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement.

  5. Financial Planning • Estimates for accruing reserves • Tax and cash flow issues • Uncertainties • Need, scope, timing • Regulatory • Dissolution of entities • Trusts, corporations

  6. Liability Management • Transfer Liability Obligation to Third Party • Need legal entity • Adequate funding • Reliable and credible estimate • Secure mechanism • Insurance • Trust • Reliable Remediation Contractor

  7. When to use Probabilistic Cost Estimating

  8. Techniques & Practices • Uncertainties • Site …. How much, where, what • Soils, groundwater, sediment • Site characterization … risk vs. remedy • Poor use of site characterization data • Contaminants • Location, concentration, remedy impact • Regulatory status • Technologies … what to do? • Will it work • How much will it cost

  9. Techniques & Practices (Con’t) • Regulatory • Federal (EPA), States (DEP, DEQ, etc.), Tribes, Fish & Wildlife, Third Parties • Superfund … Record of decision (RoD) • ARAR Applicable or Relevant and appropriate requirements? What are they? • Classification of Waste • RCRA, Listed wastes • Contaminated Media • Land ban on disposal

  10. Precision vs. Accuracy • Cost Estimating Tools • Lots of detail • Require an engineering design • Not available for most projects • Unit cost • $/acre of cap • $/gallon of stripping

  11. Technology Resources • Federal Remediation Technologies Roundtable • http://www.frtr.gov/ • Means Estimating Guide

  12. Techniques • Lack of historical cost data • Inconsistency of remedy selection • Not much cost data • Insurers have loss/claims data • DoD, DoE have good technology cost data. • Regulatory uncertainty is most difficult • Evolving standards • Expert panels vs. data • Access to data and decision makers

  13. Expert Panels • 3 to 5 senior technical & regulatory professionals • Mid-level support • Review documents • Identify alternatives • Low, medium, high • Use decision tress • Probabilities • Costs • Run model and “gut test” results

  14. Case Study #1 • California Munitions Plant • Driver…. Insurer needed to establish reserve • WWII Era Munitions Plant • Large Site • Multiple Environmental Issues • Groundwater …. 3 public water supplies impacted • Perchlorate … environmental – public health standard not established • CA, EPA, DOD, USAF

  15. Case Study 1 (Con’t) • Perchlorate Drinking Water Standard • CA and US EPA • Uncertainties • MCL – drinking water standard • 3 – 30 µg/l (ppb) • Extent of GW contamination • Plume footprint • Effectiveness and acceptability of treatment technology • RO, biological

  16. Case Study #2 • River Sediment PRP • Trust holding liability • Estimate needed to dissolve trust and distribute assets to heirs • Credible estimate for regulatory and other RPs. • Billion dollar remedy • Uncertainties • Scope … sediment removal for navigation • Technologies … • Removed material management • Capping material • Dredging technology

  17. Case Study #3 • SE Utility’s Manufactured Gas Plants (MGPs) • Utility has responsibility for environmental of 15 MGPs …. $75M to $150M. • Regulatory Agencies allowed recovery of environmental costs for a limited time • Utility wanted to use an finite risk environmental cost cap insurance policy to fund the cleanup • Needed an estimate of the cleanup costs • Uncertainties • Scope .. Soil, Groundwater, Sediments • Regulatory … Standards, Technology.

  18. Additional Applications • DoD • BRAC. Cost Cap Insurance • EU Petroleum Company • US legacy holding • Las Vegas Developer • Former munitions plant. Cost Cap Policy • Texas refinery • Settle suit over cleanup liability

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