california integrated waste management board august 19, 2008 item 6 discussion and request for...

California Integrated Waste Management Board

August 19, 2008

California Integrated Waste Management Board

August 19, 2008

Item 6

Discussion And Request For Rulemaking Direction To

Formally Notice The 45-Day Comment Period For Draft Regulations For Long-Term

Postclosure Maintenance And Corrective Action

Item 6

Discussion And Request For Rulemaking Direction To

Formally Notice The 45-Day Comment Period For Draft Regulations For Long-Term

Postclosure Maintenance And Corrective Action

Financial Assurances TopicsFinancial Assurances Topics

AB 2296 Issues Posed by the Makeup of

Waste Management IndustryClosed and Operating StatusTypes of Financial Assurances (FA)

Provided Closed Landfills’ Time Performing

PCMSystem Cost Exposure to State

AB 2296 Issues Posed by the Makeup of

Waste Management IndustryClosed and Operating StatusTypes of Financial Assurances (FA)

Provided Closed Landfills’ Time Performing

PCMSystem Cost Exposure to State

AB 2296 RequirementsAB 2296 Requirements

By July 1, 2009, the CIWMB shall:

Adopt regulations (Phase II)

Develop recommendations for needed legislation to implement the findings of the study

By July 1, 2009, the CIWMB shall:

Adopt regulations (Phase II)

Develop recommendations for needed legislation to implement the findings of the study

Landfill Operators in California

Landfill Operators in California

Types of Operators and Default Concerns

FA Demonstrations“System View” in Calculating

CostsExposure to the State

Types of Operators and Default Concerns

FA Demonstrations“System View” in Calculating

CostsExposure to the State

Makeup of Waste Management Industry

Makeup of Waste Management Industry

Type of PCM FA DemonstrationType of PCM FA Demonstration

Trust Funds and Enterprise Funds

Trust Funds and Enterprise Funds

Landfills Years Into Postclosure Maintenance

Landfills Years Into Postclosure Maintenance

System Cost – Status QuoSystem Cost – Status Quo

Management of RiskManagement of Risk

Operator FA Demonstration LevelEncouraging Good PerformanceManaging Divestiture Through FA

RequirementsMinimizing Defaults

Operator FA Demonstration LevelEncouraging Good PerformanceManaging Divestiture Through FA

RequirementsMinimizing Defaults

Definition of Terms Definition of Terms

• Financial Assurance• Assured Costs• Unassured Costs• Defaults• Divestitures• Draw-Down• Step-Down• Step-Up• Contingency

• Financial Assurance• Assured Costs• Unassured Costs• Defaults• Divestitures• Draw-Down• Step-Down• Step-Up• Contingency

Definition of Terms Definition of Terms

Financial Assurance

Financial mechanism used to assure that funds will be available to pay for the PCM costs when needed.

Financial Assurance

Financial mechanism used to assure that funds will be available to pay for the PCM costs when needed.

Definition of Terms Definition of Terms

• Assured Costs – Financial exposure covered by a matching financial demonstration.

• Unassured Costs – Financial exposure not covered by a financial demonstration. This includes both Defaults and Divestitures.

• Assured Costs – Financial exposure covered by a matching financial demonstration.

• Unassured Costs – Financial exposure not covered by a financial demonstration. This includes both Defaults and Divestitures.

Definition of Terms Definition of Terms

• Defaults – The temporary or permanent inability of the operator to provide the necessary funding to perform required PCM or CA activities.

• Divestitures – The sale or transfer of a facility to a new entity, whether the new entity is a subsidiary corporation or a wholly unrelated company.

• Defaults – The temporary or permanent inability of the operator to provide the necessary funding to perform required PCM or CA activities.

• Divestitures – The sale or transfer of a facility to a new entity, whether the new entity is a subsidiary corporation or a wholly unrelated company.

Definition of Terms Definition of Terms

• Draw-Down – Automatic annual incremental reduction of PCM financial assurance

• Step-Down –5X reductions of PCM FA based on good performance during 5-year review

• Step-Up – 5X increase of PCM FA based on failure to meet performance criteria during

5-year review

• Draw-Down – Automatic annual incremental reduction of PCM financial assurance

• Step-Down –5X reductions of PCM FA based on good performance during 5-year review

• Step-Up – 5X increase of PCM FA based on failure to meet performance criteria during

5-year review

Definition of Terms Definition of Terms

• Contingency – Additional percentage of estimated costs required to be assured in order to cover unforeseen expenditures and cost overruns.

• A contingency is not a substitute for a pooled fund.

• Contingency – Additional percentage of estimated costs required to be assured in order to cover unforeseen expenditures and cost overruns.

• A contingency is not a substitute for a pooled fund.

Management of RiskManagement of Risk

Operator FA Demonstration LevelEncouraging Good PerformanceManaging Divestiture Through FA

RequirementsMinimizing Defaults

Operator FA Demonstration LevelEncouraging Good PerformanceManaging Divestiture Through FA

RequirementsMinimizing Defaults

Management of RiskOperator FA Demonstration

Level

Management of RiskOperator FA Demonstration

LevelRisk Can Be Managed by Operator

FA DemonstrationsAmount of FA DemonstrationMultiplier of PCM CostDuration of FA DemonstrationCost Estimating Improvements

Risk Can Be Managed by Operator FA DemonstrationsAmount of FA DemonstrationMultiplier of PCM CostDuration of FA DemonstrationCost Estimating Improvements

Management of RiskEncouraging Good

Performance

Management of RiskEncouraging Good

PerformanceStep-Down - Basis for Allowance

No Corrective ActionsEnhanced Monitoring EffortsRepayments of Prior CA DisbursementsAccurate Cost Estimating

Step-Up – Causes for IncreaseCorrective ActionsNo Enhanced Monitoring EffortsNon-Payment of Prior CA Disbursements

Step-Down - Basis for AllowanceNo Corrective ActionsEnhanced Monitoring EffortsRepayments of Prior CA DisbursementsAccurate Cost Estimating

Step-Up – Causes for IncreaseCorrective ActionsNo Enhanced Monitoring EffortsNon-Payment of Prior CA Disbursements

Management of RiskManaging DivestitureManagement of RiskManaging Divestiture

ConcernsPotential Transfer to Unrelated

Business OperationLack of Experience Successfully

Maintaining LandfillsDesire to Minimize Loss and

Maximize Profits for ShareholdersMay Be Partially Managed By

Requiring New Owners to Have Enhanced FA Demonstrations

ConcernsPotential Transfer to Unrelated

Business OperationLack of Experience Successfully

Maintaining LandfillsDesire to Minimize Loss and

Maximize Profits for ShareholdersMay Be Partially Managed By

Requiring New Owners to Have Enhanced FA Demonstrations

Potential Landfill Operator Default Types

Potential Landfill Operator Default Types

Standard Default – Operator and Financial Institution

Single Privates (29) Most (22) Are Anticipated to Eventually Permanently

Default 14 closed 6 operating 2 permitted

Some Are Not Likely to Permanently Default 7 corporate or publicly assured

Rural Publics – Temporary Defaults (64) Divestiture – Sell During PCM, All Privates

(Potentially a Few Publics), Calculated Costs Utilize “Start-up Business” Default Rate

Standard Default – Operator and Financial Institution

Single Privates (29) Most (22) Are Anticipated to Eventually Permanently

Default 14 closed 6 operating 2 permitted

Some Are Not Likely to Permanently Default 7 corporate or publicly assured

Rural Publics – Temporary Defaults (64) Divestiture – Sell During PCM, All Privates

(Potentially a Few Publics), Calculated Costs Utilize “Start-up Business” Default Rate

Management of RiskManaging Defaults

Management of RiskManaging Defaults

Operator Retention Improving Cost Estimates and

ReviewPostclosure Maintenance

Performance

Some Defaults are Unavoidable and Will Occur

Operator Retention Improving Cost Estimates and

ReviewPostclosure Maintenance

Performance

Some Defaults are Unavoidable and Will Occur

Management of RiskPooled Fund

Management of RiskPooled Fund

A Method to Address Defaults and Divestitures

ProsIncreased ability to mitigate the costs of

defaults and divestituresAbility of the Board to provide additional

relief to individual operators by allowing further reductions in PCM FA

ConsTransfer additional costs to rate payersMay not successfully establish in statute

A Method to Address Defaults and Divestitures

ProsIncreased ability to mitigate the costs of

defaults and divestituresAbility of the Board to provide additional

relief to individual operators by allowing further reductions in PCM FA

ConsTransfer additional costs to rate payersMay not successfully establish in statute

Managing Long-Term PCM RiskManaging Long-Term PCM Risk

A Certain Level of Defaults Will Occur Regardless of the Amount of Individual Financial Assurance.

Imposition of a Perpetual Operator Provided FA Will Likely Precipitate Early Defaults of Single Private Operators.

Divestiture Leading to Default May Be Partially Controlled by Buyer Financial Assurance

A Certain Level of Defaults Will Occur Regardless of the Amount of Individual Financial Assurance.

Imposition of a Perpetual Operator Provided FA Will Likely Precipitate Early Defaults of Single Private Operators.

Divestiture Leading to Default May Be Partially Controlled by Buyer Financial Assurance

Key Financial ExposuresKey Financial Exposures

DefaultsDivestituresLevel of Individual FA

Demonstration

DefaultsDivestituresLevel of Individual FA

Demonstration

Managing Long-Term PCM Risk of Landfill System

Managing Long-Term PCM Risk of Landfill System

ScenariScenarioo

AssureAssured Riskd Risk

UnassureUnassured Riskd Risk

StdStd Rural Rural PublicPublicss

Sgl Sgl PvtPvt

DefaultDefaultss

DivesDivest-t-ituresitures

TotalTotal

43X $5,590 0 $11 $26 $263 $300 0 $300

30X 4,562 $1,232 29 26 41 96 0 96

15X 2,972 2,748 60 26 84 170 0 170

5X 2,153 2,955 75 26 103 204 $578 782

Status Quo

1,822 3,172 83 26 120 229 667 896

$ in Millions over 100 years$ in Millions over 100 years

Financial Exposure Comparison Between State

and Operators

Financial Exposure Comparison Between State

and Operators

Rulemaking Approach Options

Rulemaking Approach Options

Develop regulations as if a pooled fund will be established Two-step rulemaking approach to allow further

step-down to 5X after fund is established Reducing FA below 15X before fund is

established increases risk to State up to $782M over 100 years

Reduces incentive for pooled fund creation

Develop regulations without the pooled fund concept Recommend not going below 15X

Develop regulations as if a pooled fund will be established Two-step rulemaking approach to allow further

step-down to 5X after fund is established Reducing FA below 15X before fund is

established increases risk to State up to $782M over 100 years

Reduces incentive for pooled fund creation

Develop regulations without the pooled fund concept Recommend not going below 15X

Individual FA Without Pooled Fund Option 1(a)

Individual FA Without Pooled Fund Option 1(a)

30X Draw-Down to 15X Rolling 15X Until PCM Ends10% PCM ContingencyExposure to State=$96-170M over

100 YearsMinimizes Divestiture RiskAddresses Temporary Defaults

30X Draw-Down to 15X Rolling 15X Until PCM Ends10% PCM ContingencyExposure to State=$96-170M over

100 YearsMinimizes Divestiture RiskAddresses Temporary Defaults

Individual FA Without Pooled Fund Option 1(b)

Individual FA Without Pooled Fund Option 1(b)

30X Step-Down to 15X Based on Performance

Minimum of 15X Until PCM EndsNo PCM ContingencyExposure to State=$96-170M over

100 YearsMinimizes Divestiture RiskAddresses Temporary DefaultsRewards Good Performance

30X Step-Down to 15X Based on Performance

Minimum of 15X Until PCM EndsNo PCM ContingencyExposure to State=$96-170M over

100 YearsMinimizes Divestiture RiskAddresses Temporary DefaultsRewards Good Performance

Individual FA Combined With Pooled Fund - Option 2

Individual FA Combined With Pooled Fund - Option 2

• 30X Draw-down to 15X, then• Step-down to Rolling 5X based on

Performance• Minimum of 5X Until PCM Ends• No PCM Contingency• Defaults – Exposure to State Covered

by Fund=$96-204M over 100 years• Divestitures add up to $578M

Exposure• Partially Address Divestiture Defaults by

Returning FA to 15X for Buyer

• 30X Draw-down to 15X, then• Step-down to Rolling 5X based on

Performance• Minimum of 5X Until PCM Ends• No PCM Contingency• Defaults – Exposure to State Covered

by Fund=$96-204M over 100 years• Divestitures add up to $578M

Exposure• Partially Address Divestiture Defaults by

Returning FA to 15X for Buyer

Questions / DiscussionQuestions / Discussion

Regulatory Approach for Long-Term PCM

Other Regulatory ChangesPreviously Identified as Groups A,B &

C

Regulatory Approach for Long-Term PCM

Other Regulatory ChangesPreviously Identified as Groups A,B &

C