The Oil Spill Response Fund – Four Decades of Success

The Clean Water Act/Federal Water Pollution Control Act of 1972 (CWA) was signed by President Richard Nixon on March 1, 1972. It was the most expansive (at that time) federal law dealing with water pollution in the United States, and arguably in the world. The law dealt with many aspects of pollution affecting the navigable waters of the United States, but this paper will only focus on its impact in the area of oil and hazardous pollution incidents, but most especially oil pollution, and the response to oil pollution incidents.

CWA Section 311 and later OPA created a range of response tools to deal with oil and hazmat spills on the waters of the US. They established a public/private solution to spill response. Key components included:

• An expectation that the spiller was responsible and liable to clean up the spill;

• Creation of the National Contingency Plan (NCP) and the role of “Federal On-Scene Coordinator/FOSC;

• Establishing expertise at the federal level by creating “special teams”: the CG's National Strike Force and EPA's Emergency Response Team;

• Establishing and funding an up-front trust fund available only to the FOSC that pays for removals if the responsible party (RP) does not step forward. The fund became known by the section of the CWA that established it: 311(K) Fund. The fund was created to:

  • Pre-empt the RP from using delay as a response option, despite the law.

  • Give the FOSC money to quickly hire private response companies, if the RP does not act or if the spill's origin is a mystery.

Equally important, the CWA and OPA did NOT designate a government agency to “clean up” oil spills. Rather, the law envisioned private companies performing that role, paid for by the spillers/RP or the 311(k)/OSLTF Fund, under the oversight of the USCG FOSC or the EPA FOSC. It tasked the USCG with managing this Fund.

As noted in the historical data later in this paper, the 311(K) fund was used in its first year, and was responding to a significant number of spills by 1973. Equally important, it was encouraging spillers to undertake cleanups on their own, using their own funds, which was the intent of the law. In an internal analysis conducted by the Coast Guard in 1987 that looked back over the previous 15 years, over 90% of the reported oil spills were in fact cleaned up by the responsible party. While the federal funds expended were significant, they were by no means the majority of moneys spent.

Equally important was the growth of the spill response industry. In 1972 the spill response industry was small, fragmented, and a niche component in most coastal ports, and barely a presence on internal navigable waters such as the Mississippi, Missouri, Ohio, and the Great Lakes. Section 311 created a powerful incentive for firms to expand into this now growing business, whether by investing in technology or expanding their existing port services role to include oil spill response. The International Oil Spill Conference (IOSC) which had started in 1969 grew into a major industry fair where new technologies were showcased and new businesses sought the attention of their potential customers, now comprising far more firms than the traditional major petroleum producers and importers.

The 311(k) Fund had an authorized maximum balance of $35 million, but depended on Congressional appropriations for funding. Those were not regular. In addition to appropriations, the fund did receive revenue from CWA fines and penalties, as well as cost recoveries from responsible parties who caused spills the fund had cleaned up. At no time from 1972 to 1989 did the fund have an available balance in excess of $25 million.

Other federal oil-related funds followed: the Deepwater Port (DWP) Fund, the Outer Continental Shelf Lands Act (OCSLA) Fund, and the Trans-Alaska Pipeline Spill (TAPS) Fund. These differed from the 311(k) Fund by being essentially “insurers”. They were not immediately available for response. Rather, they expected another party to pay the immediate response expenses of a spill, and they would then accept claims for the resulting response costs and damages. The practical effect of this policy was simple – disbursements were infrequent because either there were no incidents that met the standards of the law and implementing regulations, or the immediacy of the response precluded use of the fund. The DWP Fund was never used. The OCSLA Fund similarly was not used. The TAPS Fund was used, but the author's experience with it after using the 311(k) fund for response to the 1987 T/V Glacier Bay spill in Alaska was problematic. The CG used 311(k) funds for the response. These costs were submitted to TAPS, which in 1994 finally adjudicated a limited settlement for only part of the incurred costs. The TAPS fund never paid any of the T/V EXXON VALDEZ spill response costs incurred by the Federal Government. Eventually (under OPA 90), these funds were merged into the Oil Spill Liability Trust Fund (OSLTF).

The most important change to the CWA and the 311(k) Fund was the 1980 passage of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and its attendant fund, commonly referred to as “Superfund”. This moved the response to chemicals and hazardous waste sites from the CWA and its 311(k) Fund. Interestingly, the Congress did not change the response posture of Section 311 – it still applied to oil and hazardous materials. What Congress did was to set up a dedicated fund – SUPERFUND - for CERCLA actions, relieving the 311(k) Fund from that burden. It also stipulated that SUPERFUND could not be used for oil pollution response. Thus was born the dual fund world we still inhabit: CERCLA/Superfund for hazardous materials, pollutants, and contaminants; and 311k/OSTLF for oil.

That world was stood on its head when the T/V Exxon Valdez ran aground at Bligh Reef in Prince William Sound, AK on 24 March, 1989. The fund balance that day was $6.7 million (the author was the fund manager at that time and has personal knowledge of these circumstances). Exxon Corporation undertook the spill response and quickly repaid (within days) all the federal response costs, which eventually came to over $120 million. The total cost of the spill, as reported by Exxon, exceeded $2.4 billion.

The resulting review of the CWA and most significantly the adequacy of the 311(k) Fund were the catalyst for passage of OPA 90, and the creation of the Oil Spill Liability Trust Fund (OSLTF). The OSLTF retained the penalty revenue and cost recovery revenue previously provided the 311(k) Fund, but was strengthened by two key provisions: dedicated excise tax revenues and the ability to earn interest on Treasury investments. The excise tax was one nickel ($0.05) per barrel of crude oil produced or imported into the United States, and the same amount for any refined petroleum products imported into the United States. OPA suspended the tax when the OSLTF balance exceeded $1 Billion, and Congress included a sunset provision that ended the tax on December 31, 1994.

Congress reinstated this excise tax in 2006 and revised the tax provisions further in 2009. First, Congress removed the upper limit on the OSLTF balance that would suspend excise tax collection. Second, the excise tax was raised to $0.08 per barrel of crude oil produced or imported into the United States, and the same amount for any refined petroleum products imported. In 2017 the excise tax rate increases to $0.09 per barrel, and the excise tax is due to end on December 31, 2017. Excise tax revenue currently exceeds $400 million each year.

As for the interest revenue, to the extent OSLTF funds are not needed for spills, the Treasury was charged with investing available OSLTF funds in its own securities. The Coast Guard NPFC and the Treasury review these amounts annually. The resulting interest earned returns to the OSLTF as revenue. Annual interest earned averages $17-$18 million. Cumulative interest earned since the creation of the OSLTF exceeds $870 million.

OPA also changed how the OSLTF was spent. The 311(k) fund was a revolving trust fund. If funds were available, they could be used by an FOSC to respond to a spill. If the balance fell too low, the 311(k) fund was augmented by Congressional Appropriations in the annual budget process. While the CWA allowed spending the 311(k) fund for both oil or hazardous materials, OPA restricted OSLTF use to strictly oil incidents. OSLTF cannot be used for CERCLA-type substances (hazardous materials, pollutants, and contaminants).

Under OPA, the OSLTF was provided three spending vehicles: (1) an Emergency Fund; (2) a Claims Fund; and (3) Annual Congressional Appropriations to the agencies charged with implementing OPA.

The “Emergency Fund”, whose formal OMB name is Oil Spill Restoration, is an annual no-year appropriation of $50 million, which remains available until expended. Amounts that are unused at the end of the fiscal year (30 September) are automatically carried forward to the next fiscal year and added to the new $50 million appropriation. In addition to the annual automatic appropriation, Congress amended OPA to allow the Coast Guard to request an advance of up to $100 million in any year when response costs exceeded the available balance of the Emergency Fund. The Coast Guard must notify Congress within 30 days after taking this action. Finally, in June, 2010 the Congress further amended this provision, just for the Deepwater Horizon spill response, to allow the Coast Guard to make unlimited $100 million advances to the Emergency Fund so long as there were sufficient available funds in the overall OSLTF.

The Emergency Fund pays for CWA oil spill responses by CG and EPA FOSCs, and also is available to Federal Natural Resource Trustees - Department of Commerce/NOAA, Department of Interior, and Department of Agriculture/US Forest Service “to initiate the assessment of natural resource damages”. These activities have been defined through NOAA regulations to generally be “pre-assessment” actions that are necessary for the Trustees to collect ephemeral data at the same time the FOSC is responding and cleaning up the spill. Since the passage of OPA, over $1.5 billion has been paid out of the OSLTF Emergency Fund for both CWA and Initiate actions.

The Claims Fund was a wholly new entity. It is a permanent indefinite appropriation which is not subject to Congressional appropriation. The Claims Fund can only pay OPA claims resulting from oil spills when claims were either ignored or denied by the responsible party or for claims from mystery oil spills where no responsible party could be identified. The Claims Fund limit is essentially the OSLTF available balance when the claim is adjudicated. OPA allows claims for various reasons, but they generally are for unpaid response costs, economic damages, or Natural Resource Damages identified by Federal, State, or Native American Tribe Trustees. OPA does provide two general limits on amounts that can be spent on an incident: No more than $1 billion can be expended on a single incident, and no more than $500 million of the OSLTF can be spent on Natural Resource Damage claims on an incident. The Coast Guard NPFC is delegated authority under OPA to receive and adjudicate all OSLTF Claims. Since the passage of OPA, over $700 million has been paid out of the OSLTF Claims Fund.

OPA also provided authority for annual Congressional Appropriations out of the OSLTF for “the payment of Federal administrative, operational, and personnel costs and expenses reasonably necessary for and incidental to the implementation, administration, and enforcement of this Act...” (33 USC 2712(a)(5). Each year the Congress uses this authority to appropriate funds to the Coast Guard, EPA, and various other federal agencies charged with responsibilities under OPA. The total amount appropriated out of the OSLTF varies, but it generally totals around $100 million each year. These appropriations are reflected in the respective agency's Appropriation Acts. Congress can and does provide agencies with guidance from time to time on how these appropriated funds are to be used.

The final major OPA provision affecting the OSLTF dealt with spiller liability and OSLTF cost recovery. This is commonly referred to as the “polluter pays principle”. If the OSTLF must be used for an incident, the responsible party is liable for all the costs that result from the FOSC's actions, all Emergency Fund expenditures for the incident (both FOSC CWA and Trustee initiate actions), and all Claims Fund expenditures that result from the incident. OPA significantly raised the limits of liability for vessels, facilities, and other sources of oil pollution. The USCG NPFC tracks and compiles incident costs and expenditures and then bills responsible parties the appropriate amount. If the responsible party does not pay promptly, the NPFC refers the debt to either the Department of Justice or the Department of Treasury for further collection activity. Currently, the OSLTF Accounts Receivable balance is over $289 million. Since the passage of OPA, total cost recoveries to the OSLTF exceed $1.2 billion.

The historical tables that follow provide summary details on the Emergency and Claims funds managed by the USCG NPFC and used for spills. Congressional appropriations to agencies have varied year to year and exist in the respective agency Appropriations Acts.

Could the CWA have been successful absent the provision for a federal fund? The answer is “probably not”. The FWPCA was originally written in the 1950s, and was focused on spills from ships and maritime commerce. No fund existed. Ships could, and did, wait for a spill to dissipate, rather than incur the cost of cleanup. The Santa Barbara crude oil spill of 1970, caused by a leaking oil well platform, depended on public pressure applied on the operator of the well to do the cleanup. The Congress' recognition that the Federal response structure needed funds was valid. Using annual appropriations for agency operations was not feasible – when and where might a spill happen? By creating a nationwide fund, spillers were put on notice that if they did not hire cleanup contractors, the Federal Government could (and would) do so, and then bill those spillers the (presumably higher) response costs borne by the government. That proved a powerful incentive to spillers. Equally important, private firms entering the spill response business could be confident that if a spiller did not respond, the government was prepared to hire them to deal with the spill anyway. The Coast Guard and EPA entered into standby contracts all over the country with such firms, so that they could be mobilized when needed. That system remains in place today, and has its own trade group – the Spill Control Association of America (SCAA).

Second, the availability of the dedicated fund allowed response to be fast – and time is equally an enemy during an oil spill. Time allows the oil to spread, making recovery more difficult and damages more extensive. A quick response was desirable from both an ecological and economic standpoint. The Coast Guard used its existing military command and control system to allow FOSCs to request funds, marshal special teams, hire contractors, and mount a response in a matter of days, if not hours. Today that funding system is automated, but the reason is the same – a fast response is generally more efficient, more effective, and less costly.

Every CG FOSC – each located at one of 47 CG Sectors – has funding a computer e-mail away, with private contractor support on-call if a spill occurs. Those contractors are activated and managed by the CG's Shore Infrastructure Logistics Center (SILC) in Norfolk, VA. Expertise from the National Strike Force (NSF) is alerted at the same time, should their assistance be needed. The NSF standard for response from the Pacific, Gulf, or Atlantic teams is to have an advance team en-route within hours of an FOSC request, and additional resources available within one day. If the FOSC requires the services of other federal, state, or local partners under the umbrella of the National Contingency Plan (NCP), OSLTF funds can be immediately dedicated for that support.

The dedicated response funds from the OSLTF permit such fast action, and the CG's National Pollution Funds Center ensures the process remains highly responsive to the needs of field responders.

The first and most important fact is that over the past 40 years, no CG or EPA FOSC has ever been faced with an oil response and told “no funds available”. That is a remarkable testimony to the Coast Guard's stewardship of the oil response funds. The Congress recognized this stewardship in 1990 when OPA was passed and the Coast Guard was assigned to manage the new OSLTF, which incorporated the subsumed 311(k) Fund. Congress recognized it again in 2006 when it re-authorized the tax provisions that fund the OSLTF (which had expired in 1994) and extended them until 2017.

There is a robust commercial contracting community in every coastal port and along the inland waterways. These firms respond for both private spillers and the CG/EPA FOSCs when a spill occurs.

Spillers respond promptly, knowing that if they do not, the federal response will begin, and they will most definitely be billed the costs of that response by the Coast Guard. If they ignore the claims of injured third parties, the fund will adjudicate those claims, and any claims paid will also be billed the spiller by the Coast Guard. If they do not pay, the Departments of Justice (DOJ) and Treasury stand ready to recovery those costs and damages. Since the passage of OPA, the Coast Guard has recovered $1.2 billion from responsible parties. It currently has 724 outstanding accounts receivable that total $289 million, the majority of which are at DOJ. Excluding major spills like Deepwater Horizon, Coast Guard cost recoveries for an average year result in over 100 accounts receivable, and $10–$16 million in costs recovered.

Generally, the OSLTF funding provisions have not encountered limits. The ability to use the “no-year” provisions for the Emergency Fund provided necessary flexibility from year to year, avoiding the annual budgetary syndrome of “use or lose” that can happen with one-year funding. In years when $50 million was not used, it was carried over, and when a major spill occurred (such as the San Juan spill in 1994 which cost $94 million), there were ample funds available, not only for that spill but also the other spills that occurred in the year. Interestingly, knowing that the funds were no-year also tempered FOSCs from requesting more than they might need at the outset of a spill, since they knew if they needed more funds, those funds would be available.

The one exception was the response to the Deepwater Horizon oil well spill in 2010. The response costs incurred by the FOSC during the start of the response were exceeding $10 million a week. By late May 2010 the $100 million advance noted earlier in this paper had been executed and the available balance of the Emergency Fund was nearly depleted, while the overall OSLTF had over $1.5 billion available. The Congress stepped in and passed a provision that allowed unlimited advances from the OSLTF main fund to the Emergency Fund, so long as the main fund had available monies. That statute applied only for the Deepwater Horizon spill. A second limit that is a factor for the Deepwater Horizon oil well spill is the OPA statutory limit of no more than $1 billion can be spent on any one incident. Current expenditures are still below that limit, but the CG and NPFC continue to monitor OSLTF expenditures against that limit. Changing that limit would require a legislative change to OPA 90.

The clear response is that yes, the Oil Response fund has stood the test of time. There have been numerous opportunities over the past 40 years for the Congress and the Executive Branch to subsume this fund into Superfund, the Stafford Act Disaster Relief Fund, or eliminate it entirely. Instead, the national consensus remains that the OSLTF remains an important and vital tool in responding to oil pollution incidents. Its role has grown from strictly response to encompass damage claims, both from injured third parties but also from Natural Resource Trustees (the Federal Trustees, State Trustees, and recognized Native American Tribe Trustees). The claims role continues to grow, while the response support continues.

An alternate way to examine this question would be to consider how it could have (or still might) fail. This fund had a number of contemporaries in the 70's and 80's. The Offshore Oil Fund (OSO), the Deepwater Port Fund (DWP), and the Trans Alaska Pipeline Spill Fund (TAPS) had their legislative birth, existence, and then repeal. Having observed two closely (the OSO and DWP were also managed by the CG) and from afar (Trans-Alaska Pipeline Spill Fund), I observed some common patterns. They were managed as traditional insurance. Their management focused on investment decisions to grow the fund, rather than on responding to events where the fund could be used. In short, their approach to oil spills was: “Spend your own money, then file a claim with us, and we'll decide if, and how much, we'll pay you. We'll do this after a significant period of careful review.” In the author's opinion, they did not address the problem Congress created them to meet. They became irrelevant and Congress acted accordingly.

Alternately, the oil fund could have failed because it was too profligate. The Congress wanted a response fund, but “response” can be defined many ways. Does “response” include readiness drills, pre-positioned equipment, National Response Team meetings, Trustee seminars, or searching for possible leaking vessels on the continental shelf? The Coast Guard was (and still is) urged to fund these types of activities out of the oil response fund. They certainly further the goals of the Clean Water Act and OPA, but doing so could have drained the fund and prevented it from performing its primary goal: responding to oil spills when they happen and paying injured parties' damages promptly. The Coast Guard has chosen to say that these are activities subject to annual congressional appropriations, not the OSLTF Emergency Fund or Claims Fund. The Congress and the other parties have observed this conservative approach and responded by keeping the fund in place and ensuring that its tax revenue was reauthorized when the balance was falling into dangerously low levels (as in 2006). In comparison, the excise tax that was established to support Superfund expired December 31, 1994 and has never been re-authorized. Instead, the Congress appropriates general funds into the Superfund each year to carry out its mission.

Did it meet the goals set at its birth? Yes, by all measures, it has succeeded. Oil spills that occur throughout the nation on navigable waters and waters of the United States are promptly cleaned up, either by the spiller or through the Federal FOSC/National Contingency Plan structures including Federal, State, or local government entities. The Fund has proven to be eminently scalable, responding equally to small, localized spills but also major Spills Of National Significance (SONS), most recently the Deepwater Horizon oil well blowout in the Gulf of Mexico.

Is it still relevant? The Congress affirmed the relevance of the OSLTF when it re-authorized the excise tax supporting the Fund in 2006. It declined to make changes in the Stafford Act amendments following Hurricane Katrina. Finally, it enhanced the response funding mechanism during the Deepwater Horizon response in 2010.

From an operational standpoint, the OSLTF continues to support federal responses and claimants. As of the writing of this paper (February 2014), the fund has already supported FOSCs for 114 responses this year, providing $9.5 million from the Emergency Fund. The NPFC has adjudicated 15 claims and disbursed $8.9 million to injured third parties and Natural Resource Trustees. The current balance of the overall OSLTF is $3.3 billion, and within that total, the amount in the Emergency Fund available to support FOSC responses is $52.5 million.

Should it continue? The unequivocal answer for now is: Yes.