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Natural Resource Damages – What’s Interim Loss and What’s it Worth?

Natural resource damages (NRD) can be a result of man’s industrial intrusion into the natural environment.  Injuries to natural habitats can result from activities, such as oil spills and hazardous substance releases. Under federal and state laws, responsible parties are required to “remediate” the contamination.  However, in the meantime the services provided by the habitat (e.g., supporting wildlife or recreational fishing) are disrupted until the habitat has recovered to predisturbance, or baseline, conditions.  This article briefly describes one of the interesting and less intuitive aspects of NRD claims and the unique methodology for valuation being utilized by trustees.

Under federal and state laws,[i] natural resource trustees, who include federal and state agencies and Indian tribes, can seek compensation for NRD, including both the cost of resource restoration as well as compensation for lost services.  While calculating a restoration cost is reasonably straight-forward, determining the cost of interim losses is often harder to define.

Concepts Behind Interim Loss 

So what exactly is an interim loss and how do you place a dollar value on it? When a habitat is injured, some amount of biological service is lost.  For example, imagine lead from decades of mining activity has contaminated river sediments and reduced the number of worms and insect larva the sediment can support by 80 percent.  This in turn reduces the number of fish that feed off the worms and larva, which reduces the number of fish that can be eaten by other animals or caught by fishermen.  Under statutory requirements, interim loss is the service lost from the time of the injury until restoration is complete.

Valuation of Interim Loss

Regulations required that cost recoveries for interim losses be spent on compensatory restoration (i.e., actions that provide resources and services equivalent to those lost).  In the mid-1990s, the National Oceanic and Atmospheric Administration, one of many natural resource trustees, began promoting the use of habitat equivalency analysis (HEA)[ii] to calculate interim losses and determine the amount of restoration required.  In recent years, HEA has grown in popularity and has come to be used by trustees at a wide range of sites.  However, for a lay person, HEA can be hard to understand because it quantifies interim losses in terms of ecological services rather than dollars.

In addition, a discount factor must be applied to make past and future losses and/or gains comparable.  The regulatory guidance recommends use of a 3 percent discount factor and an HEA states the resulting ecological service (loss or gain) in terms of discounted service acre-years (DSAYs).  Thus, if a compensation project will provide services for a long period of time (300 years) and the interim loss occurred over a relatively short period of time (15 years), then the area required for compensation will be smaller than the original injured area.  Also, because the value of future benefits/costs is discounted, restoration that occurs well after an injury is worth less in present-value terms than restoration that occurred shortly after impact.

Practical Issues

The value of HEA is that it allows for multiple types of habitat injury to be quantified in an equivalent manner.  With DSAYs as the “currency,” multiple service losses can be directly added and compared to potential gains in the enhancement of another habitat.  Still, the question remains what is a DSAY worth in dollars?  The quick answer is it depends because DSAY costs can often vary from one restoration project to the next.

Consider our earlier example of contaminated river sediment and assume that the natural resource trustees have used a HEA and determined that the interim habitat losses equal 1000 DSAYs.  Also, assume that liability for doing restoration projects to offset these losses is divided equally between three potentially responsible parties (PRPs) and one orphan share.  The first two PRPs respond quickly and find restoration projects that are easily implemented and provide enough DSAYs to offset their liability at a cost of $5,000 per DSAY.  However, the third PRP takes longer to identify an appropriate project, which turns out to be harder to implement for the same DSAY value and costs $10,000 per DSAY.  Then, several years later one of the PRPs is assigned the orphan share.  Now, all of the restoration projects in the immediate area have been completed and the PRP is forced to look elsewhere.  They identify a project whose value is substantially less per acre that the original injured habitat and is also more difficult to implement.  As a result, their cost per DSAY climbs to $50,000.

As the above example suggests, by using HEA to value interim losses, natural resource trustees have changed the NRD negotiation from one that is about money to one that is about ecological services.  While this approach helps trustees to move forward more quickly with restoration, it has also resulted in a great deal of uncertainty for PRPs as to what their potential future NRD costs will be.  Johnson Wright works nationally with our client to guide them through the process and resolve NRD claims. For a more detailed discussion of this topic or other NRD issues, please contact the author.

For more information, please contact Alborz Wozniak at 925-403-6200.

[i] Federal laws that provide for collection of natural resource damages include the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the Oil Pollution Act (OPA), and the Clean Water Act (CWA).  Many states have laws based on a public trust doctrine that allows for natural resource recovery.

[ii] Habitat Equivalency Analysis: An Overview, National Oceanic and Atmospheric Administration, Silver Spring, MD, 2000.