The outlook for compliance in '98

With the December 22, 1998 deadline for compliance with the U.S. Environmental Protection Agency's underground storage tank regulations close at hand, thousands of motor fuel retailers and commercial/industrial fleet operators face a simple, yet very difficult choice: comply with the regs or close down their noncomplying fueling facilities. No deadline extensions or last-minute reprieves-EPA has made that clear and it has the solid support of every segment of the industry in that regard.

(See footnotes for sources and notes)

1997 UST population estimates are based on a regression using benchmarks from 1989 and 1991, Havill Consultants.

The U.S. EPA Regulated Retail, Commercial, and Industrial Gasoline Service Station Markets 1992-1998 (May 1993).

'Actual new-builds and closures since 1993. Net chan₉e calculated from facility counts obtained from state EPA offices and adjusted according to Havill forecasts from The U.S. EPA Regulated Retail, Commercial, and Industrial Gasoline Servce Station Markets 1992-1998.

'UST and UST facility counts for the industrial/commercial market were revised in 1995 according to data compiled for The DOE-EPA Regulated Commercial Fleet Market, Fuels, Equipment, and Serv,ces Forecast, 1994-2000 (August 1995).

Havill's 1993 research suggested that as many as 11,000 of the retail facilities out of compliance could close. The company's 1995 research suggests that somewhere between 15,000 to 25,000 of the out-of-compliance industrial/commercial facilities will close. According to the Havill team, those two figures represent a hard core of facilities that have the "characteristics" (such as low gasoline throughputs) that would make upgrading very difficult to justify economically or otherwise.

Joe Slagle, senior project manager for Havill, says, "The closing of 4,925 retail and private facilities in the next year will present opportunities for marketers, both from the possibility of acquiring private facilities and from increased demand for fuel from retail facilities. There may be opportunities for marketers to acquire smaller retail facilities that are out of compliance and would close otherwise. As a result of decisions by private fleet operators close their facilities and refuel off-site, the 1995 study estimates that potentially 5 billion gallons of fuel will be available to retail marketers.

"For petroleum equipment manufacturers," Slagle says, "the most immediate opportunity remains with the non-compliant stations that will upgrade prior to the 1998 deadline or are unsure of what action they will take. Once the deadline has passed, the majority of new equipment purchases will be for new sites and the expansion of existing sites."

Officials with the top marketer and petroleum equipment associations see continuing progress toward compliance with EPA's regs, but they also foresee substantial closures of marginally profitable outlets.

"The last survey we conducted indicated that about three-quarters of our (members) expected to be in full compliance by the deadline," says Dave Morehead, vice president of communications for the Petroleum Marketers Assn. of America (PMAA). "I don't think that means the other 25% won't be (in compliance), but three-quarters are pretty certain that they will be and have already made significant strides toward being in compliance."

Morehead says some marketers have indicated privately they will close their less profitable outlets, rather than bring tanks at those locations into compliance.

He says PMAA conducted a survey of all its members about nine years ago, right after the regulations were issued, and the results indicated that between 20,000 and 25,000 outlets would be closed. He says that estimate still "is probably in the ball park." Many of these outlets already have been closed, he adds.

Morehead thinks most PMAA members are choosing to replace, rather than upgrade, their tanks because they know it makes sense "to go for the long term."

He emphasizes that it is has been made "absolutely clear" by EPA that the deadline will not be extended, and that virtually all tank owners who have any involvement in an industry association are aware of this. "The concern is going to be with the smaller, less sophisticated operators" who don't belong to an association or read the trade press, he says. "Those are the people who are really in danger."

"There are certain operators out there who (are saying), 'I can't afford to upgrade, so I'm going to operate until I get caught, then I'll just hand them the keys'," Morehead says.

Despite the fact that EPA still says there will be no leniency about the deadline, there is still the question as to whether EPA will have the financial resources to do really rigorous enforcement, or if they will have to depend on the states, Morehead says. "If they do depend on the states, how aggressive are the states going to be? I'm sure that (state enforcement) is going to vary all over the board."

Once the deadline is past, the owners and operators remaining will be "the true survivors," Morehead says. The combination over the last 15 years of an industry "shakeout at the top" (i.e., mergers and acquisitions) and the tank-compliance issues faced at the marketer level means that those who have survived "are going to be around for awhile," he says. Therefore, after December 1998, he predicts, "I think there will be fewer, larger, more successful marketers" in the industry than before.

· 74% of SIGMA member stations meet 1998 standards

· 21% expect to upgrade by the deadline

· 5% will close rather than upgrade

For those tank owners/operators surveyed in 1995 that said they would upgrade, a third of those expected upgrades are not yet completed, says Tom Osborne, SIGMA communications director, so they have fallen behind schedule. "But the other side of the coin is that we are counting (in the 74%) stations that are completely done, so a lot of the (21%) may be partially done but may not (be) in 10% compliance." He says he doesn't know what kinds of tank problems may be involved with the 21%-but perhaps in some cases, there are only minor upgrades to be made.

Osborne says he does not think any mergers and acquisitions that have occurred during the year are a "significant factor" in the percentages. "There is buying and selling all the time, but, for the most part, I (believe) that not a lot of our members are buying a lot of stations that are not upgraded," Osborne says. "Similarly, most of them have shed the stations that they had no plans to upgrade."

"My personal perception is that there are a lot of stations out there that are 'non-economic’," says Osborne. "They are in places where you could not justify building a station, but because the investment was made at some point in the past-and as long as you don't have to invest new capital you can keep it going as a gas station. But when you do have to justify new capital, it can't be justified. … There are some of those stations closing down all the time, and we think we will see a surge of that at the 1998 deadline. But, basically (these are) stations that would have closed over the next five years anyway." The tank regulations have speeded up the inevitable for these stations, Osborne says.

"I would say that tank replacement is, by far, the most predominant option." He says this probably will continue to be the case.

"EPA and the trade associations have been telling people for years: 'Don't wait until '98’," Osborne says. Since EPA says they will enforce the deadline no matter what the reason for violation, it’s certainly a possibility that some people will get caught by waiting too long, he says. "It's likely that there will be a crunch, because there will be some people, despite all the warnings, who will wait until the last minute."

SIGMA found in its latest study that upgrade costs for tank systems have gone down compared to 1995 costs (NPN-Dec. '96, p. S1I-S12). The costs per outlet, on average:

· Equipment for compliance: $10,000

· Testing and remediation: $8,200 ("down significantly")

· Internal compliance: $1,500

· Net insurance/trust fund payments: $2,300

All equipment costs are down, "which says to me that the members have gotten a handle on it (compliance with the new rules)," says Osborne. Also, remediation costs tend to be behind most owners, they are not discovering many new leaks, and problem tanks probably were replaced or otherwise taken care of earlier, he says.

On enforcement, Osborne says, "We have known all along that the states will be taking the lead in enforcement. EPA isn't going to go out and hire a bunch of people to go around and do inspections. EPA will work through the states, and that means, by definition, that (enforcement) will not be uniform nationwide."

Osborne says SIGMA is working to give the states the tools they need to ensure strong enforcement. One thing SIGMA has done is to prepare a model lawsuit-a draft complaint that can be filed in federal court under RCRA against a non-complying facility.

In addition, SIGMA has drafted a model state law "to bring market forces to bear in helping with enforcement." The model law would require a placard or tag on tanks that have been upgraded to meet the 1998 standards, and it would make it illegal to deliver product to a tank that does not have a tag. SIGMA has made this model available to other associations, and it is being discussed. He emphasizes that it is not needed in all states, but SIGMA is providing it for consideration by states having trouble with enforcing the regulations.

He says these models have not been presented to EPA, but some states (e.g., California) are adopting or "moving in the direction" of adopting legislation similar to that of the placarding model.

At SIGMA's annual meeting in Chicago in November, legal counsel Jeff Leiter of Collier, Shannon, Rill & Scott reported that a final draft of the model law, containing some minor revisions, would be submitted to the membership at an early date.

SIGMA, PMAA and the National Assn. of Convenience Stores (NAGS) are adamantly opposed to any extension of the 1998 compliance deadline. Leiter said SIGMA had been asked by EPA to comment on a possible extension for marketers who had contracted for the required upgrades, but for whatever reason were unable to have the work completed by the deadline date. Marketers at the meeting quickly and emphatically rejected that idea. "Those people have had 10 years to comply," said one marketer at SIGMA'S legislative session during the meeting.

Looking past 1998, Osborne sees an industry that will be different than before in several ways. "We will end up with, in essence, no stations more than 10 years old. ... It's been a very quick modernization program.

"We believe you're going to see environmental insurance much more readily available and much less costly, and lenders much more willing to lend to the industry, because they don't have the fear of the underground tank leaks that they have had in the past," he says.

In discussing the compliance issue, Bob Renkes, executive vice president, Petroleum Equipment Institute (PEI), referred to an article in the September 10 issue of the Bureau of National Affairs News which reported that a large percentage-ranging from 16% to 60%-of USTs in the Southeast (EPA Region 4) still are not in compliance.

"I would have thought we were a lot further along" than the article indicates, Renkes says, pointing out that only 21% of tanks in Georgia, for example, have been upgraded. "These numbers, if they are correct, won’t mean that we will be installing a lot more underground storage tanks, but it will mean that there will be a lot more work for PEI members than we had imagined," work involving various kinds of upgrades, as well as tank replacements, he says.

On meeting the demand between now and 1998, Renkes says: "I don't know if we can meet it, because I don't know what it is." Part of the issue is how many owners plan to comply. For example, he says, "If only 40% are going to comply to begin with, then we don't have that far to go."

In assessing the demand for tank replacements, Wayne Geyer, executive vice president of the Steel Tank Institute (STI), says, "Aboveground tanks seem to be keeping the shops busier in most of the country than underground tanks," Geyer says. However, in some areas, such as the Northeastern U.S., "underground tanks are outpacing the aboveground tanks to quite a degree," he adds.

The volume of underground tank installations is slightly higher than last year, and some PEI members he talked to at the recent show report they are backlogged into next year, he said. This is busier than at the same time last year.

By the end of next summer, it may be too late to have an installation or upgrade completed in time to meet the deadline, Geyer says, adding that some shops have a three-month backlog right now. On the other hand, he says, "Some shops are still working only one shift and could go to a second shift if they had to."

The problem will be especially acute for tank owners that are not "good customers" of the installer/distributor, Geyer says. "I suspect a good customer is always going to get a pretty high priority with a tank fabricator and with the distributor who might buy the tank from the fabricator. A petroleum marketer that hasn't really done much business (with a tank distributor or installer) over the last 10 years and kind of comes out of the woodwork ... is going to have a hard time, not only getting the tank but also getting the installation services.

"I guess I'm still surprised that underground tank demand hasn't grown. It's been a steady increase in the last year or two, but certainly not what our industry had expected 10 years ago," Geyer says. "I will say this, if there still is a demand for some 150,000 tanks, there is absolutely no way it's going to be done."

"I think you're going to see more action with tank closures and with upgrades through lining and corrosion protection. I think the people who are waiting until the very last minute are probably financially strapped and are going to pick the cheapest alternative-if they have to take an alternative. If (they feel) no one's going to come and get them, they'll probably wait until they hear the footsteps coming."

For all these reasons, Geyer says he doesn't think there are as many as 150,000 tanks (which he predicted last year in NPN) to be replaced-now he thinks it may be 100,000. He says he thinks between 60% and 65% of tank replacements will be steel tanks. "We are seeing an increase in total tank business," although the demand is less than earlier had been expected.