ALLOCATION OF FUTURE REMEDIATION COSTS AMONG VARIOUS PARTIES WITH RESPECT TO ENVIRONMENTAL CONTRIBUTION CLAIMS

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:

https://sites.google.com/site/metropolitanforensics/environmental-forensics-determining-when-what-where-who-and-how-chemicals-were-released

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

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