Friday, November 12, 2010

GAO On Federal Government's Financial Exposure In BP Spill

Nov 12: The Government Accountability Office (GAO) released correspondence entitled, Deepwater Horizon Oil Spill: Preliminary Assessment of Federal Financial Risks and Cost Reimbursement and Notification Policies and Procedures (GAO-11-90R, November 12, 2010). GAO indicates that because the total costs of the Deepwater Horizon oil spill are still unknown, the Federal government's financial exposure as a result of the oil spill is also unknown.
    GAO notes that the total cost to clean up this massive and potentially unprecedented spill, the damage to the environment, as well as the potential impact to the livelihood and economic status of businesses and individuals in the region will undoubtedly be significant, with "current estimates from BP and Oxford Economics in the tens of billions of dollars." BP has voluntarily established a Trust to be funded incrementally up to $20 billion, has paid other costs outside of the Trust, and has stated that it will continue to pay additional costs. BP's financial condition and its continuing resolve to stand behind its public commitments will be key factors if additional costs need to be paid.
    Certain statutory limits on the amount of Federal funds available for response costs and damages are intended to mitigate the exposure. For example, the Oil Pollution Act of 1990, as amended (OPA) establishes caps on the amount of funds that can be expended on each oil spill. NPFC has billed the Responsible Parties for the Deepwater Horizon oil spill $581 million for response activities performed by nine Federal government agencies and various state government agencies. After the U.S. Coast Guard's National Pollution Funds Center (NPFC) authorizes reimbursement, the government agencies are paid from the Fund for actual expenditures. BP has paid NPFC $518.4 million as of October 12, 2010. The Fund is at risk of reaching the OPA-established $1 billion per incident cap on total expenditures in the relatively near future. Consequently, unless the statute is amended to exclude amounts reimbursed by Responsible Parties from the cap, the Fund may be unable to pay any OPA compensable claims or other Deepwater Horizon oil spill-related costs above that limit.
    GAO indicates that, "Our preliminary assessment of the design of Coast Guard's NPFC's policies and procedures for obtaining reimbursement for Deepwater Horizon oil spill costs found they did not always reflect current practices and were not sufficiently detailed to ensure they could be followed consistently." For example, NPFC's procedures for identifying and notifying Responsible Parties are dated 1996, when the Coast Guard was part of Department of Transportation, and are marked "draft."
    The Federal government has been involved in overseeing Responsible Parties' claims processing resulting from the Deepwater Horizon oil spill. Following the spill, DOJ, the Department of Homeland Security (DHS) and various other Federal agencies have been overseeing the establishment of a claims process and monitoring claims processing activities by BP on behalf of the designated Responsible Parties. Congress may wish to consider amending OPA or enacting new legislation that eliminates the Fund's $1 billion per incident expenditure cap to the extent that it does not take into account reimbursements from Responsible Parties. In this regard, Congress may want to consider setting a Fund cap associated with an incident based upon net expenditures (expenditures less reimbursements).
    In order to help establish and maintain effective cost reimbursement policies and procedures for the Fund, GAO recommends that the Secretary of Homeland Security direct the Director of the U.S. Coast Guard's NPFC to update NPFC's policies and procedures to include: (1) current Fund reimbursement billing practices that reflect both a percentage of federal agencies' obligations as well as expenditures; and, (2) specific procedural guidance on processing DOD requests for reimbursement using Military Interdepartmental Purchase Requests (MIPRs).
    In order to ensure that all Responsible Parties are properly notified of their responsibilities for an oil spill, GAO recommends that the Secretary of Homeland Security direct the Director of NPFC to: (1) update NPFC's current policies to reflect current organization and structure and managements' directives; and, (2) update NPFC's current procedures to provide detailed guidance and procedures for identifying and documenting all Responsible Party notifications.
    Access the complete 57-page GAO report (click here).