IEc Economics and Natural Resource Damage Assessment in

IEc Economics and Natural Resource Damage Assessment in the Context of Groundwater By: Robert E. Unsworth Industrial Economics, Incorporated For: University of Houston Law Center 12 September 2016 INDUSTRIAL ECONOMICS, INCORPORATED

Caveat Audiens • This presentation is provided solely to stimulate discussion. • The information provided and statements made do not necessarily reflect the opinions of our clients. INDUSTRIAL ECONOMICS, INCORPORATED 1

Hanford, Washington Plumes INDUSTRIAL ECONOMICS, INCORPORATED 2

Le. Clercq v. Lockformer INDUSTRIAL ECONOMICS, INCORPORATED 3

Mississippi v. Memphis • Mississippi relied on an analysis of supply and demand for tap water in Memphis, to reveal how consumer surplus would change given a reduction in water supply from the Memphis Sands aquifer. INDUSTRIAL ECONOMICS, INCORPORATED 4

Public Values for Groundwater Total Economic Value of Groundwater Ecological Services In Situ Use Services Non-Use Services Bequest Given Discharge to Surface Existence Current Use Extractive Future Use In Situ The public can hold Option Values for all of these Services INDUSTRIAL ECONOMICS, INCORPORATED 5

Methods to Assess Groundwater Damages Approach Application Treatment Cost The cost of treatment either in situ or at wellhead/point of use. Added Cost Contamination can impose added costs on current and future water users (e. g. , access to a substitute source of water). Market Price The application of observed prices in competitive markets. Stated Preference Values derived through surveys of the public. Hedonic Property Value Analysis Econometric analysis of patterns in residential property prices to reveal environmental amenity/disamenity. Benefits Transfer Application of existing valuation literature in a new setting. Values based on the methods listed above. Replacement Cost Damages based on cost to restore, replace or acquire the equivalent of the injured resource, such as cost to protect an aquifer of equivalent yield and quality. INDUSTRIAL ECONOMICS, INCORPORATED 6

How to Engage an Expert • Engagement should begin with a discussion of the cause of action, and under those causes of action, what remedies are possible. • Tort claim (Lockformer: added cost plus reduced property values) v. state NRDA claim (social welfare losses and/or restoration cost) v. interstate water dispute (adjudication). • Events can trigger multiple causes, with varying measures of loss: BP Gulf spill and VW’s use of “cheating” devices. • Expert should understand the cause(s) of action and the remedies the trier of fact can award. • Attorney should understand the range of available methods, and strengths and weaknesses the context of the case. INDUSTRIAL ECONOMICS, INCORPORATED 7

How to Engage an Expert • Social welfare losses are somewhat unusual in the law as a measure of loss. • Common in regulatory economics where decisions are made about resource allocation • In Mississippi v. Memphis the state of MS attempted to claim those losses based on social welfare gains to Memphis. Effectively were asserting an “unjust enrichment” claim. INDUSTRIAL ECONOMICS, INCORPORATED 8

Thoughts on South Valley • South Valley was not tried under CERCLA. • Question is not only whether the technique is reliable, but does it fit the remedies available and is it executed consistent with sound practice. • To a great extent the state’s claim in South Valley failed on lack of fit of the measure of damage. § § § The concept of market prices for water rights is well accepted, but the court ruled that it was not a measure of what the state had lost. At trial the Judge asked state’s counsel what they wanted him to do: more cleanup? Faster cleanup? State’s interest in NRDA context is to assure that the same quantity and quality of groundwater is available. • Scale issue: Over $1 billion at one point. “Hogs get fat, pigs get slaughtered” INDUSTRIAL ECONOMICS, INCORPORATED 9

Thoughts on Essex and other NJ Decisions • Claim was under the NJ Spill Act, under which the Courts in NJ have been supportive of broad claims. • In Essex the witness did a very poor job; somewhat inexplicably, he was not able to describe the technique, and testified that it had not been applied elsewhere, which it had. “Mr. Chapman's testimony at trial was not particularly enlightening as to how REA would be appropriate in this case. When asked in what other situations had he utilized REA, examples given by Mr. Chapman were not comparable to the present facts. ” • The judge tried to help during trial. INDUSTRIAL ECONOMICS, INCORPORATED 10

Thoughts on St. Croix Good fit, well presented • Court rejected argument that Essex applied: not Daubert process or ruling. “Of course, a fact-finder may weigh evidence in any way and find one expert to be less credible than another. ” “ we will deny the motions of the Refinery Defendants and Lockheed to exclude the testimony of Dr. Boyle. ”- INDUSTRIAL ECONOMICS, INCORPORATED 11

Lessons Learned… Hope for work in the Virgin Islands INDUSTRIAL ECONOMICS, INCORPORATED 12

What Do “Restore” and “Replace” Mean? • Restoration means providing a resource that provides equivalent services to those that were lost. • Wellhead treatment is no more restoration than a prosthetic is a replacement for an amputee, or a can of salmon a replacement for the opportunity to catch a salmon. • A POET will not make a homeowner whole. • Connection to a water system will not make the public whole. INDUSTRIAL ECONOMICS, INCORPORATED 13

What Does “Substitute” Mean? • While avoiding unacceptable human health risks, simply moving a well field does not provide a substitute for injured groundwater. • The groundwater at the uncontaminated site was already available to the public. • Inferior substitutes do not represent restoration. INDUSTRIAL ECONOMICS, INCORPORATED 14

What Does “Existence Value” Mean? • The “existence value” of a resource is both quantity and quality. • A resources value changes when there is a measurable adverse change. • The existence value of the Grand Canyon is lowered when we loose the view due to haze. The Canyon remains. INDUSTRIAL ECONOMICS, INCORPORATED 15

What are the Facts? • RPs always argue that resources were in poor condition in “baseline”. • What does “salty” mean? There are standards for TDS. • Groundwater in the VI is the only source following hurricanes. • Be cautious with assertions of “fact”. INDUSTRIAL ECONOMICS, INCORPORATED 16

What we can agree on • Lesson’s learned. • Cases go poorly when: • There is a poor fit of damages metric to recoverable damages. • The testimony is poorly executed and presented. INDUSTRIAL ECONOMICS, INCORPORATED 17

Current Practice in Groundwater Damages • For groundwater damages, largely replacement cost (which we can argue about as well). • Some trustees believe quite strongly that the public can only be made whole through valuation of their losses. • While the value measure is widely accepted theoretically correct measure, replacement cost is often the practical measure. INDUSTRIAL ECONOMICS, INCORPORATED 18

Outlook • Trustees will continue to collect damages for injures to groundwater. • Press release last week: “New York DEC Just Announced Collaborative Efforts With State Attorney General and Livingston County Related to $20 Million Settlement With Akzo Nobel. ” • State of Vermont just passed a groundwater protection statute following PFOA that includes NRDA. • Major assessments are underway at multiple sites throughout the US. • “Water wars” will continue. INDUSTRIAL ECONOMICS, INCORPORATED 19

Outlook • Conflicts over natural resources are just beginning. • Climate change and challenges associated with population growth and consumption patterns will only increase the scale and number of conflicts. • In international realm the law continues to develop and expand (such as recovery of damages following Iraq’s invasion of Kuwait). • These claims (and the law on which they are based) will act to assure that incentives are set to avoid externalities and that those who are impacted by environmental damages are fairly compensated. INDUSTRIAL ECONOMICS, INCORPORATED 20

IEc INDUSTRIAL ECONOMICS, INCORPORATED 617. 354. 0074 INDUSTRIAL ECONOMICS, INCORPORATED 21