Expected Environmental Loss (EEL) on a Vapor Encroachment Condition (VEC)?
Expected Environmental Loss is a term I coined and introduced on my previous blog post. EEL is essentially the mean or expected loss that an owner will experience if they own a given asset with an associated recognized environmental condition (or Vapor Encroachment Condition, VEC). The term is mathematically patterned after the Probable Maximum Loss product.
A series of Loss Scenarios could be imagined and then either through real data or professional estimates, a likelihood could be assigned to each scenario. Of course, each scenario is unique. Comparing the liability associated with a 20-year-dry-cleaner in California when groundwater is at 20 feet below ground surface with the liability of a 5-year-dry-cleaner in Colorado where the groundwater is at 100 feet below ground surface. However, large site-specific case variability does not stop us from opining on PMLs, so why should it stop us from opining on the Expected Environmental Loss?
So what is the Expected Environmental Loss on a Vapor Encroachment Condition? First, let me state that I don’t want to get too far into the debate as to whether a VEC is a Recognized Environmental Condition (REC) – VECs are often RECs but it depends on the site.
Secondly, my argument in past blogs has been that off-site releases rarely result in a big dollar amount for the owner of a site, if none of the following are true: 1) she is developing or dewatering the property; 2) the subject site has a drinking water well on-site; 3) the subject site has also released some sort of chemical and there has been co-mingling; 4) VOCs migrate on-site and represent a VEC.
Now, let’s take the 4th scenario where an off-site VEC would be considered a REC as the basic case study for this EEL:
A firm does a Phase 1 Environmental Site Assessment and finds that a retail center with no on-site RECs and on city water is 100 feet from a dry cleaner with a substantial release of PERC. After a file review of the off-site dry cleaner’s regulatory file, the EP concludes that PCE vapors likely have migrated to the site at soil vapor levels above human health screening levels (HHSLs). Since vapor levels are likely above the HHSLs, the EP designates the Vapor Encroachment Condition a REC.
EEL calculating for an off-site VEC
Here is my EEL estimate on this VEC/REC case. Suppose that I have had 100 clients in this exact situation. Let’s say that all 100 clients purchase the property anyway and owned the office building for the next 20 years. Here is my supposition on the resulting scenario likelihood:
50 Office Buildings Zero Loss
29 Office Buildings Minor Loss; forced to do Phase IIs during financing. $10,000
20 Office Buildings Does an investigation, a risk assessment, installs a venting system. $40,000.
1 Office Building Conducts active remediation on the on-site fraction of the plume. $100,000
Total Loss = (50x$0) + (29x$10,000) + (20x$40,000) + (1x$100,000) = $1,190,000
EEL = Total Loss/Sample Size = 1,190,000 /100 = $11,900.
If we look at the past 10 years, I think loss rates on this issue are far lower than the above estimates. However, the EEL is intended to be forward looking.
I think someone could argue that as awareness of these issue rises the third category will grow, but even so I don’t think that the EEL is going to get larger than $25,000.
Some might argue that this data is all made up and arbitrary. Well, that is how predicting the future goes. We must use the best data and experience we have, and extrapolate that to estimate what the future might look like. VEC loss data from the 1990s would not be very meaningful. If our client is a buyer, she needs to know what the next 10 or 20 years will hold in liability.
An off-site VEC has a low EEL
The REC represented by a VEC from an off-site source is a soft REC compared to that of an on-site gas station. The difference between EELs of an off-site VEC, $11,900, and a gas station, $164,000, is huge. See my previous blog on Expected Environmental Loss for a discussion of the gas station EEL.
I wonder if some users would be willing to post their view on how such a data set would look in the future. What do you think?