The Texas Natural Resource Conservation Commission (commission) proposes amendments to §37.11, concerning Definitions, §37.261, concerning Corporate Guarantee for Closure, and §37.551, concerning Corporate Guarantee for Liability.

EXPLANATION OF PROPOSED RULES

The commission is proposing the adoption of a definition for "substantial business relationship," which would allow corporations to provide financial test guarantees for entities including Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), and Limited Partnerships (LPs).

In September 1988, the United States Environmental Protection Agency (EPA) modified 40 Code of Federal Regulations (CFR) Parts 264 and 265, Subpart H, to expand the mechanisms available to owners and operators to demonstrate financial responsibility for third-party liability. The modifications included a new option which allowed corporate guarantors to demonstrate financial responsibility for liability using the financial test on behalf of entities with which the guarantor had a "substantial business relationship." In September 1992, EPA modified 40 CFR Parts 264 and 265, Subpart H again and expanded the use of substantial business relationship to financial test guarantees for closure and post-closure care. In 40 CFR 254.141(h), EPA defines the "substantial business relationship" as "the extent of a business relationship necessary under applicable State law to make a guarantee contract issued incident to that relationship valid and enforceable. A 'substantial business relationship' must arise from a pattern of recent or ongoing business transactions, in addition to the guarantee itself, such that a currently existing business relationship between the guarantor and the owner or operator is demonstrated to the satisfaction of the applicable EPA Regional Administrator." This broad federal definition requires each state to determine under its own laws what constitutes "a business relationship necessary... to make a guarantee contract issued incident to that relationship valid and enforceable."

Current federal regulations allow corporations to use the financial test to provide guarantees on behalf of: (1) their subsidiaries; and (2) entities with which the guarantor has a substantial business relationship. Federal regulations define a "subsidiary" in 40 CFR 261.141(d) as a corporation in which a "parent corporation" directly owns at least 50% of the voting stock of the corporation which is the facility owner or operator. For the purpose of providing corporate guarantees using the financial test, guarantors cannot treat LLCs, LLPs, LPs or other noncorporate entities as "subsidiaries."

The commission's proposed rules will adopt a definition for "substantial business relationship" and allow corporate guarantors to use the financial test to demonstrate financial responsibility for liability, closure, and post-closure on behalf of noncorporate (non-subsidiary) entities such as LLCs, LLPs, and LPs. The proposed definition would recognize a substantial business relationship between a guarantor corporation and entities such as LPs, LLPs, and LLCs in which the guarantor corporation has at least a 50% ownership interest. Such a definition for substantial business relationship will provide an additional option to corporations which choose to provide guarantees on behalf of noncorporate entities in which the corporation has an ownership interest, similar to a corporate parent's interest in a subsidiary. This definition will narrowly define the relationship and preserve the state's ability to enforce the guarantee for financial responsibility. In addition, the proposed rules require the guarantor to provide documentation to the commission which demonstrates that the guarantee contract is valid and enforceable under state law and that a substantial business relationship exists between guarantor corporation and the entity guaranteed.

Definitions of substantial business relationship and entity are added to §37.11. Substantial business relationship means a relationship where the guarantor is a corporation and owns at least 50% of the entity guaranteed. The term "entity," for the purposes of Chapter 37, means a legal organization engaged in lawful business or purpose, such as a corporation, partnership, sole proprietorship, LLC, LLP, or LP. The commission seeks comments on the definition of substantial business relationship and the definition of entity.

Amended §37.261, concerning Corporate Guarantee for Closure, adds a description of the supplemental information that the guarantor must include with the demonstration of financial responsibility for closure and post-closure in order to provide the commission with adequate assurances that a substantial relationship exists and that the guarantee issued incident to that relationship is valid and enforceable. The guarantor will be required to submit certain information such as a description of the "substantial business relationship" and the value received in consideration of the guarantee; an original or certified original copy of the Resolution by the Board of Directors authorizing the corporate guarantee on behalf of the entity; the Resolution by the Board of Directors authorizing the formation of the guaranteed entity; an organizational chart which shows the relationship between the two entities; the partnership agreement or other agreements, articles, or bylaws which set out the formation, structure, and operation of the guaranteed entity.

Amended §37.551, concerning Corporate Guarantee for Liability, adds a description of the supplemental information that the guarantor must include with the demonstration of financial responsibility for liability in order to provide the commission with adequate assurances that a substantial relationship exists and that the guarantee issued incident to that relationship is valid and enforceable. Again, the guarantor will be required to submit certain information such as a description of the "substantial business relationship" and the value received in consideration of the guarantee; an original or certified original copy of the Resolution by the Board of Directors authorizing the corporate guarantee on behalf of the entity; the Resolution by the Board of Directors authorizing the formation of the guaranteed entity; an organizational chart which shows the relationship between the two entities; the partnership agreement or other agreements, articles, or bylaws which set out the formation, structure, and operation of the guaranteed entity.

FISCAL NOTE

Matthew Johnson, Financial Administration Division, has determined that for the first five-year period the proposed sections are in effect, there will be no significant costs to state government or units of local government as a result of administration or enforcement of these sections. There are no new economic costs anticipated for any owners or operators required to comply with the sections as proposed. The rules will not reduce the amount of financial assurance required to be demonstrated. However, corporate guarantors who demonstrate financial assurance for an LLC, LLP, or LP in which it has at least a 50% interest will experience lower costs by using the financial test. The financial test is a less expensive mechanism than a letter of credit, bond, trust, etc. Savings realized by corporate guarantors will vary with the amount of financial assurance demonstrated and the guarantor's cost of previously available mechanisms. For a demonstration of $64 million, a corporate guarantor could realize an estimated savings of $160,000 annually, assuming the guarantor's cost for a bank letter of credit is 0.25%. For a demonstration of $1.7 million, a corporate guarantor could realize an estimated savings of $4,250 annually, assuming a similar letter of credit cost. A corporate guarantor's savings would be greater if its cost for bank letters of credit or other similar mechanisms exceeded 0.25%.

PUBLIC BENEFIT

Mr. Johnson has also determined that for each year of the first five years the proposed sections are in effect, the public benefit anticipated as a result of enforcement of and compliance with the sections will not change. The effect on owners or operators of facilities subject to this new section will be a potential reduction in cost of demonstrating financial assurance.

SMALL BUSINESS ANALYSIS

The proposed rules provide a new option for corporations to use the financial test to provide a financial guarantee on behalf of entities with which the corporation has a substantial business relationship. As a financial assurance mechanism, the financial test is a less expensive mechanism than other mechanisms, such as letters of credit, bonds, or trusts. These cost savings may represent a savings for any person affected by the proposed rules or a part of the costs of any project. The potential cost savings will affect small businesses on the same basis as any larger business to the extent that a small business is either a guarantor corporation or a noncorporate entity for which a guarantee is provided. There are no new economic costs anticipated for any owners or operators required to comply with these sections as proposed.

REGULATORY IMPACT ANALYSIS

The commission has reviewed the rulemaking in light of the regulatory analysis requirements of Texas Government Code, §2001.0225 and has determined that the rulemaking is not subject to §2001.0225 because it does not meet the definition of a "major environmental rule" as defined in the Texas Government Code inasmuch as the rules will merely offer an additional option for financial assurance, and they do not meet any of the four applicability requirements listed in §2001.0225(a). The rules will merely offer greater flexibility in instances where corporations guarantee financial responsibility for entities with which the corporation has a substantial business relationship.

The economy, a sector of the economy, productivity, competition, or jobs, will not be adversely affected in a material way because no additional costs are caused by the rules.

The rules do not adversely affect in a material way the environment, or the public health and safety of the state or a sector of the state, because the rules will not reduce the amount of financial assurance required to be demonstrated. The rules are administrative in nature and simply expand the instruments available to corporate guarantors who provide guarantees on behalf of noncorporate entities.

The purpose of these rules is to adopt a Texas definition for "substantial business relationship" which will allow corporations to provide financial test guarantees for entities including LLCs, LLPs, and LPs. The new definition will allow corporations to use the financial test for demonstrating financial responsibility on behalf of LLCs, LLPs, and LPs.

This proposal does not exceed a standard set by federal law and is specifically allowed by federal law. The federal regulations allow the corporations to use the financial test as a corporate guarantee for closure, post-closure, and liability coverage, on behalf of third parties with which the corporation has a substantial business relationship. The federal regulations defer to each state to ensure that guarantee contracts issued incident to that relationship are valid and enforceable.

This proposal does not exceed the requirements of a delegation agreement or contract between the state and federal government, as the substantial business relationship requirements as proposed will be equivalent to the federal financial assurance mechanism requirements.

The rules are proposed under specific state law and the general powers of the commission. The specific state law is Texas Health and Safety Code, §361.085.

TAKINGS IMPACT ASSESSMENT

The commission has prepared a takings impact assessment for this rule proposal pursuant to Texas Government Code, §2007.043. The following is a summary of that assessment. The purpose of this rulemaking is to adopt the definition of substantial business relationship which would allow corporations to provide financial test guarantees for entities including LLCs, LLPs, and LPs. The new definition will allow corporate guarantors to use the financial test to demonstrate financial responsibility on behalf of noncorporate entities such as LPs, LLPs, and LLCs. The federal regulations allow guarantor corporations to provide corporate guarantees using the financial test on behalf of: (1) their subsidiaries; and (2) entities with which the guarantor has a substantial business relationship. Federal regulations define "subsidiaries" as corporations. For the purpose of providing corporate guarantees using the financial test, guarantors cannot treat LLCs, LLPs, LPs or other noncorporate entities as "subsidiaries." The commission's proposed rules will adopt a definition for "substantial business relationship" and allow corporate guarantors to use the financial test to demonstrate financial responsibility on behalf of noncorporate (non-subsidiary) entities such as LLCs, LLPs, and LPs for liability, closure, and post-closure. The proposed definition would recognize a substantial business relationship between a guarantor corporation and entities such as LLCs, LLPs, and LPs in which the guarantor corporation has at least a 50% ownership interest. Such a definition for substantial business relationship will provide an additional option to corporations which choose to provide financial test guarantees to the state on behalf of noncorporate entities in which the corporation has an ownership interest, similar to a corporate parent's interest in a corporate subsidiary. This definition narrowly defines the relationship and preserves the state's ability to enforce the guarantee for financial responsibility. The promulgation and enforcement of these rules will not burden private real property nor adversely affect property values because the proposed rules will not reduce the amount of financial assurance required to be demonstrated.

COASTAL MANAGEMENT PROGRAM CONSISTENCY REVIEW

The commission has determined that this rulemaking action is not subject to the Texas Coastal Management Program in accordance with the Coastal Coordination Act of 1991, as amended (Texas Natural Resources Code, §§33.201 et seq.), the rules of the Coastal Coordination Council (31 TAC Chapters 501-506), and the commission's rules in 30 TAC Chapter 281, Subchapter B, concerning Consistency with the Texas Coastal Management Program.

PUBLIC HEARING

A public hearing on this proposal will be not be held unless one is requested.

SUBMITTAL OF COMMENTS

Written comments regarding this proposal and request for alternatives may be submitted to Lisa Martin, Office of Environmental Policy, Analysis, and Assessment, MC 205, P.O. Box 13087, Austin, Texas, 78711-3087 or faxed to (512) 239-4808. All comments should reference Rule Log Number 98059-037-AD. Comments must be received by 5:00 p.m., July 5, 1999. For further information or questions concerning this proposal, please contact Linda Shirck of the Financial Administration Division, Office of Administrative Services, (512) 239-6260.

Subchapter A. General Financial Assurance Requirements