Environmental update

Environmental update

December 09, 2013 | By Andrew Skroback in New York

New standards have been released for phase I environmental site assessments that must be done on project sites as a condition to closing on financing.

The new standards are in ASTM E1527-13. ASTM is the American Society for Testing and Materials, an international standards organization. The new standards apply to phase I assessments done on or after November 1, 2013 and update earlier standards that had applied since 2005.

Key changes are to require consultants making phase I assessments to do a more detailed review of public records, classify environmental conditions that may be found on the project site under three new headings, and take a closer look at potential vapor intrusion from petroleum products and other hazardous substances.

The new standards may increase the cost of phase I assessments and add slightly to the time it takes to complete such assessments. However, in most cases, the effects should not be significant.

Anyone buying commercial real estate should make an “appropriate inquiry” into the environmental condition and current and past uses of the property to assess environmental risks. Lenders and tax equity investors require that these diligence efforts meet certain standards. The goal is not only to identify potential environmental risks, but also to qualify for certain defenses against liability under the federal Superfund law for contamination that the buyer did not cause or make worse. In particular, the buyer wants to be in a position to claim protection under the “innocent landowner” or “bona fide prospective purchaser” defenses to environmental claims under federal law. A buyer may benefit from these protections by doing enough diligence to qualify under an “all appropriate inquiry” rule. However, what qualifies as enough diligence may change over time.

The US Environmental Protection Agency, which administers the Superfund law, had found that environmental diligence that adheres to the prior ASTM standard qualifies as “all appropriate inquiry.” In August 2013, EPA confirmed that the new E1527-13 standard meets the all appropriate inquiry threshold.

In a surprise move, the agency also suggested that it will continue to allow the use of the less stringent 2005 version to qualify. However, EPA now appears to be reconsidering this dual-track qualification after the proposal came in for criticism during the public comment period. EPA expects to reach a final decision by the end of the year, so the fate of continued qualification of the old ASTM standards remains in limbo until then. Conservative lenders may require borrowers to use the more stringent version no matter what EPA decides because two qualifying standards could lead to different conclusions about the environmental risks associated with a site and potentially increase a borrower’s litigation exposure outside of the Superfund context.

A phase I environmental assessment includes a physical inspection of the site and adjacent properties, interviews, and review of historical information and agency regulatory files and databases. Although a phase I assessment requires an inspection of the property, no invasive sampling is typically performed. The inspection identifies visual evidence of environmental contamination associated with the property and the potential risk for such contamination. It also makes recommendations for further investigation, if warranted.

The new ASTM standards clarify language that was unclear in the prior version. None of the changes is seismic. The substantive changes require environmental consultants preparing the reports to gather more information and make a more thorough the review of certain types of risks.

The three most significant changes from the previous version are as follows.

Important Definitional Changes: The new standards simplify the definition of a “recognized environmental condition” or “REC.” The identification of such conditions is the main goal of a phase I assessment. The new standards also revise the definition of “historic recognized environmental conditions” or “HREC” to include past releases that have already been addressed to the satisfaction of regulators or that otherwise satisfy standards for unrestricted use, but do so without the necessity of institutional controls (such as deed restrictions against digging or restrictions on use of groundwater).

A new term is added to distinguish historic conditions from “controlled recognized environmental conditions” or “CREC.” A CREC is a past release that has been addressed to the satisfaction of regulators, but where some level of contamination is allowed to remain on site because institutional controls are in place to address environmental concerns. All of these conditions are distinguished from de minimis conditions, which are not viewed as posing any threat to human health or the environment or otherwise presenting any risk of an enforcement action.

Scope of Review: Environmental consultants must now review a broader range of public agency records and files in certain circumstances. For example, where a state or federal environmental database lists the site or adjoining property, the consultant must review the related regulatory files to determine whether the issue that prompted the listing is a REC, HREC, CREC or is simply a de minimis condition.

Vapor intrusion: The new standards revise the definitions of “migrate” and “migration” to include the intrusion of vapors from petroleum products or other hazardous substances. Thus, it can no longer be argued that the movement of vapor in the subsurface falls under the rubric of indoor air quality, which has been considered outside the scope of a traditional phase I assessment. This change reflects recent increased attention to vapor issues by regulators. While the new standards require consideration of potential vapor issues, they still do not require a full vapor intrusion screening as part of a phase I assessment, although a phase I may now recommend such testing.

Energy storage

The California Public Utilities Commission set energy storage targets for the three investor-owned utilities (Pacific Gas & Electric Co., Southern California Edison, and San Diego Gas & Electric) in October. Together, these utilities are now required to procure 1,325 megawatts of energy storage capacity by 2020. The utilities must set their first energy storage procurement periods by March 1, 2014, and, together, they must buy 200 megawatts of energy storage technology during 2014 with gradual expansion over time.

For good or ill, California has a long history of setting regulatory requirements that drive technology. This latest action to push utilities into advancing energy storage is a small step toward a long-term goal that could allow greater use of renewables such as solar and wind.

It is the first regulatory mandate for energy storage in the United States. The CPUC decision fulfills the obligations of a 2010 California law called A.B. 2514 that directs the commission to try to capture excess generation for use during peak periods. If storage technology advances over time, the chief benefactor may be solar and wind projects whose output fluctuate depending on the weather and time of day.

Climate talks

Thirteen days of UN climate talks in Warsaw ended on November 23, 2013 with several last-minute agreements.

The talks had three central goals: create a pathway to a new global climate agreement to replace the Kyoto accord by a 2015 meeting in Paris, agree on certain financial policies and agree on a “loss and damage” mechanism. While the chair person, Marcin Korolec, declared that all three goals were achieved, they were achieved only by leaving certain disputed points for later determination.

The agreements reached in Warsaw set the stage for efforts to reach a global deal to fight climate change in Paris in 2015. The participants agreed that such a future deal would be a patchwork of offers by individual countries to curb greenhouse gas emissions. However, efforts to set a deadline by which the nearly 200 nations would set their emissions reduction targets for the post-2020 period failed. Instead, the Warsaw agreement simply calls on nations “able to do so” to submit their plans for curbing emissions by the first quarter of 2015, which would leave eight months for review and negotiation of the pledges before the Paris summit in December. If such a deal can be agreed to in Paris, the plan would be to implement it by 2020.

In 2009, developed nations promised $100 billion in aid by the end of 2020 to help developing nations adapt to climate change. Agreement was reached on a number of finance-related terms in Warsaw, but wealthier nations rebuffed requests that they agree to specific financial targets beyond the general statement that $100 billion will be made available. Decisions on deadlines for individual nations to make specific financial pledges were also deferred. The Warsaw agreement only “urges” developed nations to make explicit monetary pledges to developing nations by 2020.

A new mechanism was also adopted to help poorer nations cope with loss and damage resulting from the effects of climate change, such as rising sea levels, floods, drought and desertification. The final agreement did not include language proposed by developing countries that would have made clear that “loss and damage” funding is not a subset of adaptation funding, but the agreement does allow a review of the loss and damage mechanism during climate talks in 2016.