Economic Benefit Driving Force in Refinery’s $81 Million CWA Penalty

Economic Benefit Driving Force in Refinery’s $81 Million CWA Penalty

James E. Smith

713-221-2534
jsmith@sdablaw.com
Download V-card

A federal district court judge issued a Clean Water Act (“CWA”) civil penalty of $81 million against Citgo Petroleum in December 2015.  The CWA violation came from an oil spill in 2006 from Citgo’s Lake Charles, Louisiana refinery.  This penalty was more than thirteen times the $6 million penalty that this same trial court had assessed for the same incident in a 2011 decision.  The United States had appealed the 2011 decision, and the much larger penalty resulted from the trial judge’s reconsideration of the case, in light of the appellate court’s instructions.

When the United States Court of Appeals for the Fifth Circuit reversed the initial assessment, it agreed with the government that the $6 million penalty was unreasonably low and that the trial judge had failed to make a proper estimate of the economic benefit to Citgo.  U.S. v. Citgo Petroleum Corp., 723 F.3d 547 (5th Cir. 2013).  In the 2011 assessment, the trial judge stated that the economic benefit was virtually impossible to estimate, but was somewhere between the $83 million asserted by the government and the $719.00 asserted by Citgo.

In its opinion, the Fifth Circuit acknowledged that estimating economic benefit was difficult, but ordered the trial judge to make a better estimate of it, because of the importance of this factor in assessing CWA penalties.  The Fifth Circuit stated that, in general, a reasonable approximation of the economic benefit was mandatory.  Further, the estimate of economic benefit is “central” for the district court to assess the factors in a CWA penalty determination, and for the appellate court to review that determination.  As such, an economic benefit estimate is “nearly indispensable.”

In 2015, after a more detailed analysis of the economic benefit to Citgo of the non-compliance, the judge assessed an $81 million civil penalty.  In determining the economic benefit, the court estimated the present value of the delayed and avoided costs that Citgo should have incurred, in order to have prevented the CWA violation.  This was generally the benefit of delaying the installation of oil skimming, sludge removal, and wastewater storage equipment.  The judge found a 10% discount rate based on Citgo’s weighted average cost of capital, and determined the time from when Citgo should have installed equipment until installation was complete.  The time determinations varied for different types of equipment, based on when the judge determined Citgo knew or should have known that it needed the particular equipment.

A few other comments seem worth noting.  All three of the judges on the Fifth Circuit panel are Republican appointees, as is the trial judge.  Most observers would identify this Fifth Circuit panel as one of the most conservative panels that could have considered this case, and yet this panel sided with the government and the Obama EPA.

While the $81 million assessment is thirteen times the 2011 assessment, it is more than $10 million below the full amount of economic benefit estimated in the trial judge’s 2015 decision, $91.7 million.  Also, the trial judge’s 2015 opinion held that Citgo was grossly negligent.  In general, a finding of gross negligence would result in an award above the estimate of economic benefit.  The trial judge did not give any specific explanation for assessing a penalty of less than the full economic benefit to an entity found to be grossly negligent.

Last week, the case was reassigned to a different trial court judge and Citgo filed a request to alter the ruling.  This new judge could give extensive review based on the arguments from Citgo, or the new judge could simply deny the request to alter the ruling.  Moreover, the US may ask the new judge to increase the penalty, because the assessed penalty appears to be less than the economic benefit and assesses no amount to account for the gross negligence.

My expectation is that no matter what the new judge does, another appeal to the Fifth Circuit is likely.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s