DEPARTMENT OF PUBLIC HEALTH AND ENVIRONMENT
Solid and Hazardous Waste Commission
Hazardous Materials and Waste Management Division
6 CCR 1007-2

Statement of Basis and Purpose
 and Specific Statutory Authority for

Part 1 – Regulations Pertaining to Solid Waste Sites and Facilities (6 CCR 1007-2)
Amendment of Financial Assurance Regulations – Deletion of Section 1.8 of the regulations; Addition of Section 4 to the regulations

(Adopted by the Solid and Hazardous Waste Commission on May 15, 2018)

Basis and Purpose
	
I.	Statutory Authority

These amendments to 6 CCR 1007-2, Part 1 are made pursuant to the authority granted to the Solid and Hazardous Waste Commission in § 30-20-104.5, C.R.S and § 30-20-109, C.R.S.

Statement of Basis & Purpose
 
The purpose of the current Part 1.8 and the future Part 4 of the solid waste regulations is to provide assurance that funds will be available to the Department when needed for adequate closure and post-closure of, and corrective action at, solid waste disposal sites and facilities should the owner and operator become financially insolvent.  These regulations require the owners and/or operators to estimate the costs of closure, post-closure and corrective action and assure financial responsibility for those costs through any of nine mechanisms: trust fund, letter of credit, surety bond, insurance, corporate financial test, local government financial test, corporate guarantee, local government guarantee, and certificate of deposit. 

These changes to the financial assurance regulations are a result of, and response to, concerns of the Department after many years of program implementation.  Vulnerabilities in the existing regulations that have been exposed by research done by EPA’s Environmental Financial Advisory Board (EFAB), and effects of the 2008 economic recession.  The proposed regulatory changes were developed with the help of a series of five stakeholder meetings at which comments were received from interested parties, discussed, and incorporated as appropriate.  Work on the regulatory language may continue up to the rulemaking hearing date.  

Discussion of the Regulatory Proposal

This rulemaking proposes to make the solid waste financial assurance requirements a stand-alone section of the regulations by moving the requirements from Section 1.8 to Section 4, which is currently empty.  This simplifies Section 1 of the regulations, gives appropriate emphasis to the financial assurance requirements, and makes the solid waste regulations consistent with the hazardous waste regulations where financial assurance requirements are in a separate section.

I.	The significant changes proposed in this rulemaking fall into the five groups listed below, all of which are discussed in the following sections:

1.	Clarification of the role of the local governing authority,
2.	Elimination of pay-in periods for new non-landfill facilities,
3.	Adding requirements for financial assurance coverage of corrective action liabilities, 
4.	Eliminating requirements for stand-by trusts, and
5.	Strengthening the requirements for insurance and captive insurance companies.

1.	Clarification of the role of the local governing authority

The role of the local governing authority is prominent and vital in the current Regulations Pertaining to Solid Waste Sites and Facilities.  This is true in the existing Section 1.8, where the local governing authority is involved with the Department in many review and consultation processes and decision points.  While our experience has been that the local governing authorities have less expertise in financial assurance than Department staff and almost always default to agreement with Department positions, local governing authority stakeholders opposed having their role significantly diminished.  On the other hand, the regulated community was concerned that, if the role of the local governing authority remained unchanged from the previous regulations, regulated entities could find themselves in a situation where the Department had approved their financial assurance mechanism or updated cost estimates, but the local governing authority never indicated a decision.  This would leave the regulated entity at risk in terms of the adequacy of their financial assurance.  To solve this problem, proposed regulations define two levels of local governing authority involvement.  The higher level of local governing authority involvement is “consultation.”  Consistent with the Colorado Solid Wastes Disposal Sites and Facilities Act, the draft regulations include a consultation role for the local governing authority in a) all approvals of new financial assurance, including initial financial assurance for new solid waste disposal sites and facilities and any subsequent financial assurance for corrective action, b) all instances where financial assurance is being terminated for any solid waste disposal sites and facilities (except those instances where one financial assurance mechanism is being terminated in favor of a new or different mechanism), and c) in approving situations where a single financial assurance mechanism is being used to cover multiple solid waste disposal sites and facilities which may be owned by different owners or operators.  An invitation for local governing authority consultation will come from the Department and will require an affirmative response from the local governing authority by a date set by the Department.  The lower level of local governing authority involvement is “notification.”  Notifications may come from the Department or the owner or operator and will not require an affirmative response from the local governing authority.  In the event a local governing authority has a concern about any matter in a notification, they may request consultation with the Department. The Department is always available for any local governing authority questions or concerns regarding any aspect of financial assurance and is willing to consult with local governing authority upon request.

2.	Elimination of pay-in periods for new non-landfill facilities

It is clear from the federal financial assurance regulations for solid waste that allowance of a pay-in period for trust funds was intended for use by landfills.  The problem is that the current state financial assurance regulations do not limit pay-in period to landfills, but allow the use of pay-in periods for all solid waste disposal sites and facilities.  This has created current situations where a solid waste disposal site and facility reaches a point where it can present its maximum closure risk, but is still many years from full-funding of its trust fund.  

Pay-in periods for financial assurance trust funds are appropriate for solid waste disposal sites and facilities that accumulate closure and post-closure liabilities slowly.  Most disposal facilities (landfills and monofills) would fit in this category because as new cells are constructed and filled, which can take many years, closure and post-closure liabilities expand slowly.  Conversely, risk does not accumulate slowly at other types of solid waste disposal sites and facilities such as impoundments, waste treatment facilities, and compost facilities.  These facilities typically reach capacity quickly, long before any pay-in period has accumulated the needed financial assurance protection. If these facilities were to become financially insolvent, the Department would not have access to sufficient capital to cover closure, post-closure and corrective action costs. 

This regulatory proposal allows all current solid waste disposal sites and facilities that have pay-in periods to continue to operate under those pay-in schedules, unless the facility does not comply with the pay-in schedule.  This proposal will also continue to allow new landfills and monofills to use pay-in periods.  However, the proposal eliminates pay-in periods for other solid waste disposal sites and facilities such as new impoundments, waste treatment facilities, and compost facilities. 

3.	 Adding requirements for corrective action coverage with financial assurance

When solid waste disposal sites and facilities have a confirmed release of contaminants to the environment that requires monitoring or remediation, corrective action is required.  Depending on the severity of the release, corrective action could be limited to monitoring the contamination to ensure that it naturally attenuates over time, or the corrective action may involve complicated and costly remediation projects.  The Department must be able to pay these costs if the owner and/or operator become financially insolvent.  Therefore, the Department must be able to call upon adequate financial assurance to complete the corrective action liabilities.

4.	Eliminating requirements for stand-by trusts

In the years since these regulations were promulgated, Colorado has developed alternatives to, and no longer needs, stand-by trust accounts for receipt of financial assurance funds.  This will eliminate the account set-up and administration fees paid for these accounts, which are expensive. 

5.	Strengthening the requirements for insurance and captive insurance companies

A.	Requirements for Insurers. 

These proposed regulations strengthen the requirements for insurers.  The insurer must, at a minimum, be licensed to transact the business of insurance in the State of Colorado, attain a rating of A- or better from A.M. Best, be eligible to provide insurance as an excess or surplus lines insurer of more than $100 million in one or more States, and submit a copy of the proposed insurance policy to the Department for review before it is in full force and effect. 

The Department has chosen to utilize an A.M. Best rating to assure that the insurer has the financial strength to secure their liabilities. A.M. Best is a third-party rating agency that evaluates all insurers and is one of the top rated third-party agencies to provide their type of analysis and research. A rating of A- means that the insurer has a very good financial prognosis and is not at risk of becoming financially insolvent. An insurer will also have to demonstrate that they have at least $100 million or greater in capital and surplus beyond the liability of their outstanding policies. This will assure that the liability covered by the policy will be guaranteed even if other outstanding policies are paid in full.  The Department is also requiring an owner and/or operator to submit the insurance policy to the Department before it is approved for financial assurance. This will ensure that the policy coverage adequately meets the required needs of the closure, post-closure and/or corrective action at the solid waste disposal site and facility before the policy is bound.

B.	Requirements for Captive Insurance Companies. 

These regulations also strengthen the requirements for captive insurance companies.  Captive insurance is insurance issued by a wholly-owned subsidiary of the company being insured. The financial health of the captive insurance company is closely tied with the parent company, so if the company encounters financial difficulties there is no guarantee that the captive insurance company would retain the necessary resources to fund any closure, post-closure, and corrective action liabilities they may have. 

The Department has had concerns about captive insurance for some time.  These concerns include the following:  
1.	A lack of independence, and thus the transfer of risk, between the captive insurance subsidiary and the insured parent company.
2.	A lack of consistent requirements for captive insurance companies with regard to minimum capitalization thresholds, reserves, and encumbrances on reserves.
3.	A general lack of Department expertise in monitoring and reviewing the financial status of captive insurance companies and their parent companies.
4.	The financial viability of companies (and their captive insurance companies) can change very rapidly.  

To address these concerns, and to address comments received from stakeholders, the Department sought additional outside expertise on captive insurance from the Colorado Division of Insurance (part of the Department of Regulatory Agencies); the Vermont Department of Financial Regulation, and the U.S. Environmental Protection Agency.  That input is very much appreciated.  

For captive insurance, the same requirements have been that were added for all insurers, as explained above.  In addition, requirements have been added that the captive insurance company be domiciled in a jurisdiction accredited by the National Association of Insurance Commissioners (NAIC) and be in good standing with the domiciliary regulator.  Further, the captive insurer must give the Department at least 180 days of notice before cancelling a captive insurance policy.  

In working with stakeholders, the Department had originally proposed that all captive insurance companies be domiciled in Vermont because Vermont regulates more captive insurance companies than any other state and has developed regulations that keep pace with, and effectively control, the industry.  For many years, Vermont has been widely viewed as the “gold standard” in captive insurance regulation.  However, after feedback from stakeholders, as well as from the Division of Insurance, these regulations allow captive insurance companies to be domiciled in an NAIC accredited jurisdiction and be in good standing with the domiciliary regulator.  This accounts for the more rigorous national standards that have developed over the past few years, including in Colorado.  

These regulations also require that if the captive insurance company fails to provide a Certificate of Good Standing, or its equivalent, issued by the domiciliary regulator, the owner and operator shall submit notification to the Department, at which point a different approved mechanism would need to be secured.  The 180-day notice allows the Department to work with the company to put another approvable financial assurance mechanism in place before the captive insurance policy lapses.

II.	In addition to these significant changes, the following issues were discussed with stakeholders:

1.	Section 4.2.1(D):  Stakeholders asked why owners and operators would not be allowed to incorporate a zero cost into their financial assurance cost estimates for solid wastes that might have an economic value.  That is to say, if the Department has to call on the financial assurance to enable cleanup and closure of a solid waste disposal site and facility, and there are solid wastes on-site that might have re-sale or re-use value to another entity, should the cost estimate for financial assurance be able to take that value into consideration at least to the extent that disposition of that material would have a zero-cost impact to the closure of the facility?  This proposal was not incorporated in these regulations for several reasons:
a.	Market values of these waste materials are usually dynamic, unpredictable, and hard for the Department to verify;
b.	The market value of these waste materials are often over-estimated by the owner and/or operator;
c.	Many times even processed materials viewed by the owner/operator as a product do not have market value and are instead a closure liability; and
d.	Neither the Department nor the third party performing closure will have the time or expertise to dispose of materials from a site that might have positive or non-negative value.

2.	Section 4.6.2(B):  Stakeholders asked why investments with trust fund monies need to have “no” risk of losing principle value versus having a “low” risk.  Trust fund money can be invested in a manner that achieves rates of return that cover inflation, but have essentially no risk of losing the underlying principle of the fund.  This can be done by investing in high grade corporate bonds, treasury bonds, and even Certificates of Deposit.  Such investments can be structured to remain fully insured by the FDIC.  Any loss of the underlying principle represents inadequate financial assurance and places the owner/operator in a non-compliant status.
The remainder of the changes in the proposed rulemaking are clarifications and readability improvements.