5 Colo. Code Regs. § 1002-66.20
The provisions of sections 25-8-202(1)(d) and (2), 25-8-501.1, 25-8-504, and 24-4-103, C.R.S., provide the specific statutory authority for the establishment of this regulation adopted by the Commission. The Commission has also adopted, in compliance with 24-4-103(4), C.R.S., the following statement of basis and purpose.
BASIS AND PURPOSE
The provisions in Commission Regulation No. 66 (5 CCR 1002-66), apply to housed commercial swine feeding operations (HCSFOs), as defined under section 61.2 of the Colorado Discharge Permit System Regulations, Regulation No. 61 (5 CCR 1002-61). Regulation No. 66 supplements the HCSFO discharge permit regulations in section 61.13 of Regulation No. 61 and, therefore, HCSFOs are subject to the provisions of both Regulations No. 66 and No. 61.13.
The proposal considered by the Commission during this rulemaking hearing is the adoption of Regulation No. 66, which is a new Commission regulation. The proposal is the result of a stakeholder process that was initiated in November 2008 for the purpose of establishing a guidance document for the financial test and guarantee financial assurance mechanism for HCSFOs, in accordance with subsection 61.13 of Regulation No. 61. A proposed guidance document was brought before the Commission at an informational hearing in November 2009. In response to statements from the Division and HCSFO producers at the hearing, the Commission agreed that, in lieu of continuing the hearing on the guidance document, a rulemaking hearing would be set to consider putting into regulation the criteria for all financial assurance instruments. Since the November 2009 hearing, the Division met with stakeholders to develop the proposal for today's rulemaking.
The purpose of Regulation No. 66 is to establish the criteria necessary for a HCSFO to satisfy when using one or more of the financial assurance instruments identified in the current subsection 61.13 of Regulation No. 61. The Commission agrees with the recommendation of staff and parties to this hearing that the financial instrument criteria be established and placed into this new Regulation No. 66 for the following reasons:
* Subsection 61.13 of Regulation No. 61 requires that the Water Quality Control Division
(Division) approve submitted financial assurance instruments. Criteria for the instruments are necessary for the purposes of providing the Division and HCSFOs language that an instrument must have in order to be approved.
* The regulatory provisions needed to establish the financial assurance criteria are lengthy and include appendices, making them awkward to add to the permitting requirements of Regulation No. 61.
* Placing the criteria in a new stand-alone regulation allows financial assurance criteria to be readily found and used for financial assurance purposes.
Because Regulation No. 66 supplements section 61.13 of Regulation No. 61, the Commission also adopted in this rulemaking revisions to subsection 61.13 that, among other things, makes reference to the provisions of Regulation No. 66.
Section 66.3 (Definitions): Definitions were included for the purpose of providing clarity of the meaning of certain words used in the regulation. The definitions of "Division" , "Permit" , and "Person" were taken from Regulation No. 61. Definitions of financial terms were taken from financial dictionary sites on the Internet and revised as appropriate to meet the focus of Regulation No. 66.
Sections 66.6 through 66.9 (Criteria for Four Financial Assurance Instruments): These sections address the criteria for the following financial assurance instruments: irrevocable standby letter of credit, trust fund, surety bond, and insurance. The criteria for these instruments were based on the language in section 1.8 of the Colorado Solid and Hazardous Waste Commission's "Regulations Pertaining to Solid Waste Sites and Facilities" (6 CCR 1007-2). The Commission determined that it was reasonable to use the language from section 1.8 of 6 CCR 1007-2 for the following reasons:
* Section 1.8 is a Colorado environmental regulation that has been in place for several years and addresses the same financial assurance instruments that are the subject of sections 66.6 through 66.9.
* Section 1.8 is based on language that was established by the federal Resource Conservation and
Recovery Act (RCRA) regulations pertaining to financial assurance for closure of facilities having waste material.
For Regulation No. 66, the language from section 1.8 of 6 CCR 1007-2 was revised as appropriate to have it pertain to HCSFOs and have it include needed clarifications. In addition, language was added to the instruments so that they would comply with the four requirements of subsection 61.13 of Regulation No. 61 presented below. An exception is that the letter of credit and insurance instruments do not allow for the "written consent" requirement stated in the fourth bullet, below. However, the State of Colorado would be protected by the requirement in Regulation No. 66 that a permittee submit alternate financial assurance prior to one of these instruments being canceled by the issuing entity.
* Standby Trust- With the exception of the trust fund, insurance, and the financial test or guarantee, financial assurance instruments require the establishment of a standby trust.
* The issuing institution of any of the financial assurance instruments, except financial test or guarantee, must have the authority to issue that instrument and its operations shall be regulated and examined by a federal or state agency.
* An issuing institution of a financial assurance instrument is required to waive all rights of set off or liens against the instrument.
* No form of financial assurance shall be approved unless it contains a term that provides that the financial assurance may not be cancelled by the surety or guarantor unless 60 days prior written notice is given the Division and the Division gives written consent, which may be granted only when the requirements of section 61.13 of Regulation No. 61 have been fulfilled.
Section 66.10 (Financial Test Criteria): The financial test and written guarantee instruments (FTG) are the only instruments that do not provide for funds being set aside that the Division can access to hire a third-party to close a facility(ies). As a result, the Commission noted in the Statement of Basis, Specific Statutory Authority and Purpose, Regulation 61.52, ("Statement of Basis and Purpose") accompanying the January 2003 rulemaking on the HCSFO regulations (section 61.13 of Regulation No. 61) that, where a permittee has been approved to use one of the FTG instruments, the expectation exists that the permittee will use its own funds to properly close the operation before abandoning the operation or going out of business. If this expectation is not met, the only recourse available to the Division to properly close the operation against the permittee or guarantee is to bring a court action to enforce the permittee's closure obligations. To prevent such potentially drawn out and uncertain court actions, the Commission concluded that the financial standards for a financial test should identify permittees and guarantors having solid financial status. The Commission considered its statements in the 2003 Statement of Basis and Purpose, in its January 2003 rulemaking in adopting financial test criteria in today's rulemaking.
The hearing record shows that a main focus of stakeholder discussion was determining financial test threshold values, such as for a ratio. To assist in the discussions, Dr. Norm Dalsted (Colorado State University, Department of Agricultural and Resource Economics) served as an agricultural finance expert resource. One of Dr. Dalsted's documents written to the stakeholders regarding financial test criteria is included in the hearing record. Also included in the hearing record is a letter from the Farm Credit Services of America's Omaha office (FCS) indicating that FCS wants a borrower from the swine industry to maintain a liquidity ratio of at least 1.1 to 1.2, and that the inclusion of breeding swine value on the current assets side of the ledger is very typical among lenders in the swine industry.
While agreement does not exist among all parties to the hearing, the Commission believes it is reasonable based on the hearing record to establish the following three financial thresholds for the financial test instrument:
* Solvency test: tangible net worth of 2.0 more than closing costs identified in the approved Financial Assurance Plan.
* Liquidity ratio test: a ratio of at least 1.2 when comparing current assets (which can include the value of breeding swine) to current liabilities. The Commission understands that the lending industry does not find it necessary to require an adjustment to current liabilities where the value of breeding stock is added to current assets.
* U.S assets test: assets located in the United States must equal or be greater than the sum of closure costs identified in the approved Financial Assurance Plan.
The Commission believes that the above thresholds accomplish the following desirable outcomes:
* Provide a measure of both short-term (via the liquidity ratio test) and long-term (via the solvency test) financial health of a HCSFO.
* Identify a HCSFO with a strong financial status.
* Are not overly burdensome such that a number of HCSFOs would not be able to meet the thresholds.
The Commission recognized in its March 1999 rulemaking on HCSFO regulations that because financial assurance costs could be significant, it did not intend that satisfying financial assurance obligations create an undue financial burden upon producers.
* Provide satisfactory assurance that closure obligations will be met by the permittee because a HCSFO with a financial test instrument must annually meet the thresholds.
* With regard to the solvency test, reasonably ensures that a HCSFO currently has the ability to pay closure costs. Such ability is indicated by a 2.0 multiplier, according to the preamble for the April 7, 1982 federal financial assurance requirements for hazardous waste treatment, storage, and disposal facilities.
* With regard to the U.S. assets test, reasonably ensures Division accessibility to a permittee's funds in the event of the HCSFO's bankruptcy or other default with respect to facility closure.
The Commission is aware that in order for a HCSFO to demonstrate that it meets the financial test thresholds, it must submit to the Division its financial statements, and that a HCSFO may want to protect these statements from being subject to disclosure under the Colorado Open Records Act (sections 214-72-102 to 205, C.R.S.) (CORA); for example, the information could be detrimental to the HCSFO's competitive position. Therefore, the Commission adopted language for Regulation No. 66 that addresses how a HCSFO can claim that certain information, including financial statements, are proprietary, confidential business information and should not be disclosed to the public under CORA.
The Commission adopted language requiring a HCSFO to immediately report to the Division that it no longer meets the financial test threshold requirements, and requiring that such a HCSFO establish alternative financial assurance. The Commission emphasizes that it is imperative that a HCSFO maintain valid financial assurance so that the State of Colorado is protected from the costs of closure of an operation. Language also was adopted providing for the Division to request additional information from a HCSFO for the purpose of determining if the HCSFO continues to meet the financial test threshold requirements. The Commission encourages the Division to use common sense and sound judgment in determining when to request such additional information, and when a HCSFO no longer meets financial test threshold requirements.
The Commission is aware that subsidiary companies typically do not have their financial statements audited by a certified public accountant. In order to ensure that these financial statements reflect accurate information about the companies, the Commission adopted language requiring that financial statements of subsidiary companies be prepared in accordance with accounting principles acceptable to the Division. The Commission understands that a commonly accepted accounting principle tool are the Generally Accepted Accounting Principles ("GAAP") published by the Federal Accounting Standards Board. As a result, the Commission intends that GAAP are the preferred accounting principles, unless the Division accepts an equivalent or better tool.
Section 66.11 (Written Guarantee Criteria): A written guarantee is a financial assurance instrument that a permittee can obtain from an entity guaranteeing that it will properly close the permittee's facility(ies) in the event that the permittee fails to do so. The criteria for this instrument in Regulation No. 66 was based on the Colorado Solid and Hazardous Waste Commission's "Regulations Pertaining to Solid Waste Sites and Facilities" (6 CCR 1007-2). The Commission determined that it was appropriate to use the language from 6 CCR 1007-2 for the same reasons as discussed for sections 66.6 through 66.9 , above. For the purpose of Regulation No. 66, the language from section 1.8 of 6 CCR 1007-2 was revised as appropriate to have it pertain to HCSFOs. In addition, the Commission adopted language that provides for an individual with a substantial business relationship with an applicant or permittee to be a guarantor.
Appendices A through F (Wording for Six Financial Assurance Instruments): The language for the financial assurance instruments applicable to these appendices was taken from Appendix A of the Colorado Solid and Hazardous Waste Commission's "Regulations Pertaining to Solid Waste Sites and Facilities" (6 CCR 1007-2). The Commission determined that it was appropriate to use the language from the Appendix A in 6 CCR 1007-2 for the same reasons as discussed for sections 66.6 through 66.9, above.
For the purpose of Regulation No. 66, the language from Appendix A in 6 CCR 1007-2 was revised as appropriate to have it pertain to HCSFOs, have it include needed clarifications, and to have it comply with the requirements of subsection 61.13 of Regulation No. 61, as discussed for sections 66.6 through 66.9, above.
Appendices G and H (Wording for Financial Test and Written Guarantee Instruments): The Commission adopted these appendices because they are the product of language from the corresponding instruments in Appendix A in 6 CCR 1007-2 and of the Division's discussions with stakeholders.
PARTIES TO THE RULEMAKING HEARING
5 CCR 1002-66.20