Natural Resource Damage Assessments: Key Economic …€¦ · · 2012-06-16liability that their company might face. ... complete alignment with the economic concept of “with and

Speaker 10: William H. Desvousges of W. H. Desvousges & Associates Page 1

Law Seminars International | Natural Resource Damages Litigation | 7/16/07 in Santa Fe, NM

Natural Resource Damage Assessments:

Key Economic Issues in Defending a Damages Claim

Prepared by:

William H. Desvousges, Ph.D.

June 19, 2007

W.H. Desvousges & Associates, Inc.

700 Exposition Place Suite 141

Raleigh, NC 27615

Phone: 919-847-7101 Fax: 919-847-7445



1. INTRODUCTION

Since the promulgation of the Department of Interior (DOI) natural resource

damage assessment (NRDA) regulations in 1986, various pundits have called the

regulations “the sleeping giant.” I personally have participated in numerous panel

discussions where the moniker has appeared somewhere in the program title or

marketing materials in 20 years of damage assessment practice. Of course, the term is

often used to encourage people to pay attention to potential natural resource damage

liability that their company might face. Despite the popular conception of the program

being asleep, more than 20 years have passed since the rules were promulgated,

numerous cases have been litigated to various stages, with settlements the

predominant outcome of the NRD process. With the completion of some of these

cases, such as the Clark Fork, Exxon Valdez, South Valley, and Fox River, we have a

unique opportunity to take stock of some lessons learned from a potentially responsible

party’s (PRP) perspective. This paper provides an economist’s perspective on the key

economic issues that a PRP needs to evaluate in the damage assessment process and

how past experiences can help in developing an effective defensive strategy.

While focusing primarily on the economic concepts, the paper also recognizes

that damage assessment is inherently interdisciplinary process. In fact, the DOI

regulations were framed by a team of authors that included both scientists and

economists who worked closely together to try to establish a regulation that would

encourage interdisciplinary assessments. Nevertheless, as discussed below, many of

the attempts to achieve integration in assessments have fallen short. Natural scientists

often design studies without regard to the need to link the results of that study to the

economic valuation process. Economists have been equally culpable by developing

economic models that fail to correspond to the appropriate scientific input.

Understanding the concept of services, both human use and ecological, can help PRPs

develop a strategy that can effectively counter the often misguided and seldom

integrated trustee studies.



Additionally, few concepts are as important in a damage assessment as

baseline. The DOI regulations provide a clear definition of baseline, as being the level

of natural resource “but for” the release of hazardous substances. This definition is in

complete alignment with the economic concept of “with and without” that is used in

measuring potential changes in economic well-being. Nevertheless, few trustee

damage assessments have attempted to develop a realistic characterization of baseline

service levels. Often, they rely upon unfounded assumptions that pristine conditions

constitute a relevant baseline. Thus, it is critical for PRPs to design their economic

studies and their data collections to ensure that baseline can be properly characterized

in the damage assessment. In this paper, I will share experiences in how baseline can

be addressed and the types of data that are crucial.

Finally, economic valuation concepts complete the list of critical concepts to be

addressed in the damage assessments. In this stage, PRPs and their experts must

decide what approach(es) will be used to measure the various potential categories of

damages. Although the choice of approach will influence the types of data that will be

required for measuring damages, several key decisions arise at this stage as well. We

will review some of the lessons learned about valuation methods and the most

appropriate data sources in the last section of this paper.

2. BACKGROUND ON DAMAGE ASSESSMENTS

To provide a framework for conducting complex NRDAs, and to provide

assistance in the decision process, in individual cases, the DOI promulgated NRDA

regulations in 1986 (with subsequent amendments) (the “Type B Rule”)1. The Type B

Rule provides a set of methodologies that enable natural resource trustees to

determine the amount of compensation, if any, that would be required to compensate

the public for the residual injury to natural resources that remains after the completion

of remediation. The regulations provide a basis for linking together injury studies from

various natural and physical sciences with economic studies of potential service losses

1 DOI also promulgated regulations (Type A) that provide a standardized formula for measuring natural resource damages, including interim losses, from small oil spills. Given the differences in the scope and objectives of the Type A rule, we did not address it specifically. Nonetheless, many of the general principles and conclusions would apply to this rule as well.



and damages arising from those injuries. Additionally, the Type B Rule details

procedures and criteria for estimating public interim services lost during the time

between the initiation of injury and the return of services to baseline levels. Ultimately,

the regulations describe the process for developing restoration plans that would

address the identified injuries and interim service losses and be implemented by using

any damages that might be recovered.

In most of the early damage assessments, the key economic issues involved

measuring the dollar value of interim service losses. These losses correspond to the

period of time, usually from the passage of CERCLA in December 1980, to the time

that the intended remediation program, including natural recovery, would return

services to the baseline levels. The DOI regulations proscribe that consumer and

producer surplus, the economically correct bases in measuring losses, be used in the

damage assessment. Consumer surplus, for example, is the difference between the

maximum someone would pay for a fishing trip and the amount actually paid. Producer

surplus is the analogous concept for the supplier. The services losses in a damage

assessment include both use services, such as fishing and boating, and ecological

services that one resource provides for another. The assessments also included

measures of both use value and nonuse value. The latter corresponds to the value that

people may have for natural resource services that are independent of their use, or

future use of the resource. Nonuse values, and the use of survey-based methods to

measure them, were, and continue to be, one of the crucial issues that divide PRPs

and trustees in the assessment process. PRPs’ usual position is that although such

values may be valid theoretical concepts, they cannot be reliably measured. Trustees

argue that excluding nonuse values ignores a potentially significant category of

damages. In fact, in some trustee studies, the nonuse category dwarfs any other

damages category.

Recently, the damage assessment process has focused on using projects to

offset the potential loss in natural resource services that might result from a release.

Figure 1 illustrates the idea of project-based restoration, with either primary restoration

or natural recovery returning services to the baseline level. Compensatory restoration

projects aim to restore the services lost during the interim period between the onset of



service losses and the completion of primary restoration. As shown in Figure 1, these

projects may be undertaken either on-site or offsite. The objective is to determine the

size of the restoration project that would equate Area A and Area B. A key step in this

process is to equate the flow of services from the restoration project to the cumulative

stock of services that were lost. The economic concept of discounting is used to

complete this translation as a stream of future services is discounted to equal the lost

services. Three percent is the discount rate that is conventionally used based on the

NOAA regulation requirement (NOAA 1999; 15CFR990.63; 43CFR11.84). Under this

type of approach, damages are based on the cost of the properly sized restoration

project, not the value of the services provided by the project. An example of this

process for restoring human use services in the Fox River Basin can be found in

(Desvousges, MacNair, and Smith 2000).2

Figure 1 (from NOAA Coastal Services Center: http://www.csc.noaa.gov/coastal/economics/habitatequ.htm)

2 The Department of the Interior is currently engaged in a FACA review of the 43 CFR regulations to determine whether changes are needed in the rule to accommodate project-based restoration. I am unaware, however, of any restoration project that has been precluded by the current regulations.

Figure 1. Interim losses of services (X) at the primary restoration site and the corresponding required level of services gained (Y) at the compensatory restoration site (from King 1997).



3. KEY STRATEGY CONSIDERATIONS

Since the promulgation of the Type B Rule almost 20 years ago, substantial

experience has been gained from NRDAs conducted throughout the United States.

These NRDAs encompass a variety of hazardous substances, affected natural

resources, and resource services. The NRDAs have ranged from full-scale

assessment and litigation among the various parties to cooperative undertakings. The

long time period since 1986 and the variety of circumstances encountered in these

NRDAs provide an opportunity to evaluate potential lessons learned from this

cumulative NRDA experience. Such lessons can play a vital role in helping PRPs

develop their economic strategies. The critical strategic lessons learned include:

• � Determining baseline is critical for measuring potential losses and gains in services.

• � Revealed preference (RP) methods are preferred for measuring relevant use services.

• � Evaluating the reliability of survey methods is critical in a damage assessment.

• � Habitat Equivalency Analysis (HEA) is a nascent method with no established implementation standards.

Determining baseline is critical for measuring potential losses and gains in services.

The Type B Rule uses the appropriate definition of baseline to describe the level

of services provided by the resource at the site of the injury. The definition states

“baseline means the condition or conditions that would have existed at the assessment

area had the discharge of oil or the release of the hazardous substance under

investigation not occurred” (43 CFR 11.72(b)(1)). This definition is appropriate because

it takes into account the current trend in the level of services provided by the resource

that might be affected by factors unrelated to the injury. These trends are particularly

important in the case of Superfund sites that often exist for long periods of time.



Factors that are independent of the release of hazardous substances often

prevent natural resource services from being provided in the baseline condition. For

example, in the Fox River NRDA, swimming was precluded because of concerns about

fecal coliform resulting from sewage overflows or other causes. Additionally, swimming

is highly unlikely in many urban rivers because of safety concerns created by

dangerous currents and shipping traffic. Similarly, drinking water services would be

precluded from groundwater aquifers that are subject to saltwater intrusion, have

inadequate flow rates caused by natural geologic conditions, or cannot be pumped due

to potential subsidence. Thus, trustees should focus on studies where there is a

reasonable likelihood that any natural resource injury attributable to a release of

hazardous substances has resulted in service losses. Often, with a modest amount of

background research on a site, it is possible to determine the most important services

and, equally important, to eliminate services precluded by baseline limitations from

further consideration. From our vantage point, it appears that trustees seldom engage

in such exercises before preparing assessment plans and instead cast their net far and

wide to assess every service potentially provided by a resource with insufficient regard

to the potential relevance or significance of the natural resource services under

baseline conditions.

Likewise, baseline must be considered when considering compensatory

restoration projects to offset interim losses rather than monetary compensation.

Compensatory restoration may occur on-site, in which case the injured resource is

improved above baseline levels, or off-site, so that services from the resource would be

improved above baseline. In either case, the level of resource services that would have

existed had the improvement not been made would be the appropriate benchmark for

scaling compensatory restoration. In many cases, the restoration project will occur

over time providing an increasing flow of services. This change should be measured

against what the expected flow of services would have been if the restoration did not

occur. For example, in Lavaca Bay, marsh grasses are being planted to provide

increased habitat for fish and other wildlife. The creation of these new marsh lands will

take place over time. The increase in services from these new marsh lands as

compared to baseline will be used to evaluate the flow of restoration services over time.



Finding data to characterize baseline conditions requires a significant amount of

detective work. Frequently, data that are routinely collected by the trustee agencies for

their regulatory and resource management purposes often prove to be veritable

treasure troves of baseline data. For example, trustee data on pathogens from various

municipal sources can be use to indicate whether contact recreation has been limited in

an area by sources other than hazardous wastes. Additionally, for recreational issues,

it is critical to establish the character of the shoreline and whether recreational access

is possible in an area. Urban river systems often have very limited access because of

private property ownership along long stretches of the river. Even rural rivers may have

limited access because of terrain limitations or a lack of boat launches or other forms of

access. Other sources of valuable baseline information can be gleaned from fishing

guides, maps, and various books and pamphlets. With the explosion of information

available on the internet, obtaining such information is easier today than in the early

years of conducting assessments that relied upon legwork to obtain the necessary

data.

For groundwater issues, trustees frequently use short-cut approaches that rely

upon calculating the volume of water that exceeds some water quality criterion and

then multiplying it by some type of market price of water. Of course, such approaches

completely ignore the role of services in the valuation process. To demonstrate the

lack of validity of such approaches, it may be possible to use trustee data, or data from

independent water resource management entities, to demonstrate that the water would

not have been potable in its baseline state. It also may be possible to demonstrate that

the water would never be used for drinking water because it is not commercially

feasible to develop it, even if it were in its baseline condition.

Finally, PRPs need to consider how they are going to integrate the studies

performed by various experts involved in the assessment. Determining how baseline

will be addressed among the studies is a crucial consideration. It is important that the

conditions are defined consistently among the studies and that key data sources are

shared to improve understanding of the relevant baselines for various resources.



Revealed preference methods are preferred for measuring relevant use services.

Economists use two broad types of methods for measuring reduced losses in

human use services: RP and stated preference (SP) methods. RP methods are based

on decisions that people actually make (e.g., decisions to visit a recreation site or to

purchase a filter for their drinking water). Random utility models (RUMs) and averting

behavior are two commonly used RP methods.3 SP methods are based on people’s

answers given to hypothetical choice situations. Contingent valuation (CV) and conjoint

analysis are the two most prevalent forms of SP methods.4

Human use services require people to have some type of direct contact or

experience with the natural resource. In economic terms, people combine their time,

and potentially expenditures, along with the natural resource itself to produce the

service. Based on our experience, drinking water, recreational fishing, and beach use

are three use services that have been addressed in damage assessments, with

recreational uses being the most prevalent category. However, beyond these three

types of use services, few others have been linked to an injury in NRDA cases. The

primary reason is that it is difficult to show how marginal changes in the services of a

natural resource, which is often the situation in an NRDA, affect people’s use of that

resource. For example, if groundwater contains hazardous substances that are above

baseline but below the government’s standard for drinking water, it is highly unlikely

that any human use service would be affected. Also, consider how difficult it would be

for even an experienced hunter to notice that there were one percent fewer game birds

in a wetland area. Thus, a relatively modest subset of potential human use services

has been the subject of substantive study in NRDAs.

Clearly, the experience gained from past damage assessments indicates that

RUMs are the preferred choice of both trustees and PRPs to measure recreation use

losses. RUMs provide a way of statistically analyzing people’s recreation choices

3 Recent studies using RP methods include: Whitehead 2005; Blomquist 2004; Hauber and Parsons 2000; Parsons, Massey, and Tomasi 1999; Train 1998; Kaoru, Smith, and Liu 1995; Abdalla, Roach, and Epp 1992. 4 Recent studies include: Breffle, et al. forthcoming; Flachaire and Hollard 2006; Heberlein, et al. 2005; Araña and León 2005; Chien, Huang, and Shaw 2005; Leggett, et al. 2003; Rekola 2003; Svedsäter 2003.



based on the premise that they choose the site that yields the highest potential benefit

or utility to them. RUMs can be estimated using RP data, the sites that people actually

visit, or SP data, the sites that people say they would visit. More recently, RUMs have

used both RP and SP data in the same estimation in an attempt to improve the

efficiency of the results. As we describe below, these new attempts have not led to the

results that were anticipated.

In the case of drinking water, the track record is less established. In some

instances, studies have relied upon the averting cost method, which uses the costs

people pay to avoid a potential undesirable substance in their drinking water to

estimate how much people would pay to avoid the problem altogether. This method

has the advantage of being based on actual decisions made by households. However,

disagreements often arise over the number of households affected by the hazardous

substance that can lead to substantial differences in damage estimates. Other

approaches for valuing drinking water have relied upon the cost of providing a

substitute supply of water as the measure of damages. Such measures are

appropriate from an economic perspective as long as they represent the least cost way

of providing that substitute service.

Finally, from a PRP’s perspective, it is critical to have reliable data on the actual

consequences of a release of hazardous substance or the imposition of some type of

institutional control such as a fish-consumption advisory. Over time, Trustees have

moved away from collecting RP data, and are relying increasingly upon SP data. Thus,

the responsibility for having reliable data on actual consequences and actual behavior

fall upon the PRPs. My experience indicates that the advantage of having a large,

rigorous well-designed data collection on actual behavior, be it drinking water or

recreation uses, far exceeds any risks or disadvantages. Such data provides a robust

basis from which the PRPs experts may offer opinions about the magnitude of potential

losses in human use services.



Evaluating the reliability of survey methods is a critical in a damage assessment.

The controversy of the reliability of contingent valuation (CV), especially when

employed to measure more than use values, has been at the forefront of the NRDA

debate since the beginning. Trustees have relied upon CV in NRDAs for almost 20

years. For instance, in the case of the Martinez oil spill (1988), the first major spill that

occurred after the DOI regulations were promulgated, funds from the settlement were

used to conduct a large scale CV study in an attempt to evaluate the lost resource

services that would result if there was a future oil spill along the California coast

(Carson, et al. 1996). Likewise, the State of Alaska conducted a national CV survey to

measure the total values, and especially nonuse values, that allegedly were lost as a

result of the Exxon Valdez oil spill (Carson, et al. 2003). Further fuel was added to the

debate when Exxon held a symposium to showcase the results of several counter CV

studies that it had commissioned (Hausman 1993).

Subsequently, NOAA convened a Blue-Ribbon panel of experts to review the

reliability of CV in response to the Exxon Symposium. The Panel’s report specified

criteria that would have to be met before a CV study could be considered reliable

(Arrow, et al. 1993). Chief among these criteria was that a CV study would have to

pass a scope test to demonstrate that the study’s willingness-to-pay estimates increase

with increases in the level of injury that would be avoided. The Panel also specified

criteria for including reminders of substitute resources and budget constraints. The

Panel also indicated that at the time it prepared its report, it had not seen a study that

met its criteria. Nonetheless, the Panel indicated that if its criteria were met, CV studies

could provide a “starting point” for further evaluation in a damage assessment.

However, basic questions about whether any CV could ever meet these reliability

criteria still remain today.

In the wake of the NOAA Panel Report, researchers have conducted a number

of studies to test the reliability of CV to measure values for natural resources, in



particular nonuse values5, which are values people may hold for natural resources that

are independent of any use values—a value based on mere existence of the resource.

Tests of soundness and reliability have shown that CV is not a consistent predictor of

real consumer choices and is, therefore, a poor technique to use to estimate natural

resource damages.

A central flaw with CV studies is that people give answers that extend beyond

the questions that are included in the survey. As Schkade and Payne (1994) show,

people have much broader motivations than economists assume in developing their

valuation estimates. Specifically, they are motivated by various moral views and

perceptual cues that are unrelated to the natural resource services in question. These

views and cues lead to a bias or flaw known as embedding. The bottom line is that

people often end up answering a different question than what was asked of them.

For example, in the Clark Fork River case, the state conducted a large-scale CV

study to measure total damages (Schulze, et al. 1993). Using the States’ own data,

several experts showed that the study did not pass the appropriate scope test—that is,

one that shows people would pay more to have more resource protection (Hausman

1995; Desvousges 1995). Instead, the respondents indicated that they were willing to

pay as much for a partial cleanup as they were for a complete cleanup. The Montana

CV respondents clearly indicated that they were valuing something more than the clean

up of the Clark Fork River sites—despite repeated reminders from the study designers

that they should focus only on those sites. The result is a classic example of

embedding, which was described above. Such embedding is a primary contributor to

the inability of CV studies to pass the scope test. Hausman and Desvousges also

pointed out other critical logical and economic inconsistencies in the trustee’s study.

5 Alberini, Boyle, and Welsh 2003; Berrens, et al. 2002; Boyle, et al. 1994; Boyle, et al. 1998; Burton, et al. 2003; Carson, et al. 1997; Loomis, Gonazales-Caban, and Gregory 1994; Loomis, et al. 1996; McFadden 1994



Another main obstacle to the use of CV in damage assessments stems from the

inability of survey designers to get the facts right when CV is going to be used in

litigation. For example, in the Los Angeles Harbor case in the late 1990s, NOAA’s

economic experts conducted expensive CV studies ($7 million plus) in an effort to show

that the method could meet the NOAA panel guidelines (Carson, et al. 1994). The

judge did not allow the study into evidence because it did not reflect the injuries that the

government’s own biological experts ultimately acknowledged were relevant for the

assessment (Thompson 2002). Such problems are inherent in a process in which long

lead times are required to develop and implement a survey, especially an in-person

household survey such as the one used in the Los Angeles Harbor case, during which

time the results of the biological studies may well be changing.6

Additionally, even if the injuries had been correctly described in the Los Angeles

Harbor study, the empirical results were not reliable because they did not pass a

meaningful scope test. Specifically, the differences between the two versions were so

large, that although the willingness-to-pay estimates were statistically different, they

were not economically meaningful. Moreover, the survey also had a large percentage

of respondents who said that they would have paid the highest bid offered in the

survey. This result implies that a large share of the survey respondents would have

paid amounts to protect a few bird species and two fish species that were equivalent to

the total amount the average household annually spends on charitable contributions in

the United States. Thus, the Los Angeles Harbor CV study not only underscores the

inability of CV to provide reliable damage estimates, it also provides a vivid example of

the lack of integration between economists and environmental scientists in damage

assessments.

6 Of course, the actual injuries that the court will find compensable will not be known until the judge rules on that issue. Thus, even if the injury studies were complete, the most that these results would represent is the trustees’ experts’ opinions about the relevant injury.



As an alternative to CV studies, conjoint analysis has begun to receive more

attention in natural resource damage assessments. Conjoint is a survey approach in

which people answer questions that require them to trade off different combinations of

attributes of a product or service. For example, in the Fox River study, people chose

between three alternatives that described different characteristics of fishing trips: how

far the site was from their home, the number of fish caught, the type of fish, the level of

congestion, and the level of advisory on the fish. In a survey that covered the fishing

season, people answered a series of these questions each month. A statistical

analysis is used to estimate the relative importance of each attribute on people’s stated

choices. For example, it is possible to estimate the distance that people’s stated

choices predict they would drive to catch more walleye or to have better facilities such

as a boat launch at a site. Thus, conjoint provides information that potentially can be

combined with or compared to answers based on actual recreation site choices.

Recently, economists have devoted significant efforts to employ conjoint

analysis in various valuation experiments. For example, various studies are being

conducted as part of the U.S. Environmental Protection Agency’s economic research

program on ecological benefits.7 However, most of this research has not been

published, nor has it been designed for use in NRDAs. Conjoint studies also have

appeared in resource and economic journals on various topics but few have involved a

NRDA.8

Conjoint analysis has some advantages compared to traditional CV studies,

such as the focus on having people trade off attributes of goods or services (Mathews,

et al. 1995). Such trade-offs are a closer approximation to the kinds of decisions that

people make in real market situations. Conjoint also may be less subject to some of

the payment vehicle or starting point biases that have been found in CV studies. If

properly designed and implemented, conjoint may also include various tests to evaluate

the reliability of people’s answers (Johnson and Mathews 2001).

7 Hanemann and Lazo 2004; USEPA 2004. Nonetheless, the National Research Council (2005) notes that the use of conjoint analysis for valuing ecosystem services is relatively recent and that very few studies have been done that valued ecosystem services. 8 Boxall, et al. 1996; Roe, Boyle, and Teisl 1996; Stevens, et al. 2000; Breffle and Rowe 2002



However, despite the initial optimism over the potential for conjoint analysis to

represent an improvement over CV in environmental applications, our recent

experience indicates that significant reliability problems remain. For example, many of

the recent studies have not addressed the hypothetical bias that exists in conjoint

analysis or other SP studies. As noted above, the Fox River study includes conjoint

questions that require people to trade off reduced fish consumption advisories with

other attributes, including the distance traveled to the recreation site. The study

showed that people say in response, to hypothetical questions, that they are willing to

travel a lot further than they actually will travel. Clearly, the Fox River study

demonstrates that hypothetical bias is alive and flourishing in conjoint data, with people

failing to realistically trade off distance traveled relative to lower consumption

advisories.

Similar results are evident in the Lavaca Bay conjoint data with respondents

again failing to trade off distance against restrictions on fishing. The Lavaca Bay

empirical results showed similar large differences between the distances people said

they would drive to avoid fishing restrictions and the amount they actually drove. The

results from both the Fox River and Lavaca Bay studies are especially troubling

because they represent a situation in which one would expect conjoint to perform well.

That is, the people (anglers) performing the tasks have considerable experience in

evaluating the choice (fishing trips). Moreover, both studies employ rigorous statistical

designs and contain large sample sizes, which limit the potential for the results to have

been caused by some design flaw. Nevertheless, the results are discouraging for the

continued use of conjoint analysis in damage assessments.

Moreover, using conjoint analysis to have people value losses and or gains in

ecological services is even more problematic. In this situation, people would have far

less experience in making the kinds of trade-offs between attributes of ecological

services that conjoint analysis requires. People are unlikely to have more than a

superficial knowledge about the kinds of attributes that are important in the provision of

ecological services. It also is very difficult for ecologists or other scientists to develop

the service information that would be required for the conjoint analysis to reflect the



actual circumstances at the site. Moreover, it is not possible to calibrate ecological

services against an actual choice as is the case in the fishing models.

Finally, PRPs should be reluctant to rely upon SP data in a damage

assessment. To the extent that trustees use such methods, which is highly likely in a

high profile case, PRPs’ first priority should be to evaluate the reliability of the data and

the predictions based on the data. This can be a two-step process beginning with the

trustees’ own data, and then following with counter experiments if the experimental

design used in the trustees’ study is not sufficiently robust to allow reliability testing.

The best of all worlds is when it is possible to re-interview the same respondents from

the trustees’ survey. Because of purported confidentiality issues, such opportunities

are rare. However, if they arise, the results can be powerful.9 One-on-one pretesting is

an extremely valuable tool for helping to assess potential directions to be explored in a

counter study. Other payoffs can found by carefully evaluating the experimental

designs underpinning the survey. Some design flaws can compound the errors in a

survey as we demonstrated in the trustees’ Fox River conjoint study (Desvousges, et

al. 2000.)

9 For example, in the Clark Fork case, we were able to get the telephone numbers of the respondents from a groundwater survey conducted by Dr. John Duffield. His survey showed that more than 80 percent of people would have preferred to get their water from a ground water. Of course, he did not inform them that it would cost several thousand dollars to have the well-installed. When we added a one sentence statement about the average cost of a well, fewer than 30 percent indicated that they would still prefer to have their water from groundwater (Desvousges 1995).



Habitat Equivalency Analysis (HEA) is a nascent methodology with no established implementation standards.

HEA has been used in settling a number of NRDA cases recently. HEA seeks

to estimate the ecological value of lost resource services and scale compensatory

restoration without assigning a monetary value to the services. Although HEA can be a

useful technique to scale ecological service losses and gains in a settlement context, it

is not a sufficiently reliable method for conducting NRDAs consistent with the

requirements of the Type B Rule or for use in litigation. Because HEA is in its early

stages of development, it has not been subjected to the same level of scientific scrutiny

as other damage assessment methods. For example, the National Research Council

does not even mention HEA in its recent volume on valuing ecological services. Such

an omission surely indicates that if this approach was so well-established it would have

at least deserved a mention. Additionally, a recent article by Cacela, et al. (2005)

notes:

“Interpreting reports about the toxic effects of hazardous substances and estimating the associated actual or potential environmental injuries and applying this knowledge in HEA is still an emerging aspect of the practice…”(343).

The authors go on to say:

“Translating knowledge about toxicity into formulas useful for HEA typically requires some degree of subjective interpretation and justifications based on professional judgment” (343).

While I may disagree with other aspects of this manuscript, I think it clearly describes

the state of the art in applying HEA in damage assessments. Standards simply do not

exist at this time.10

HEA is intended to be used when the service losses are primarily ecological, not

direct human use services, such as recreation. The value of human use services, such

as fishing and wildlife viewing, directly translate into observable choices that people

make. Therefore, it is more meaningful to observe the choices that people make than

10 The authors of this article include two staff from natural resource trustee agencies. Milon and Dodge 2001 also express similar concerns about the lack of standards for HEA.



to estimate the value of those choices using HEA. As cited earlier, metrics other than

dollars may be used to scale compensatory restoration based on the measurement of

recreation choices people make as evidenced by the Fox River assessment.

When the primary services affected by a release are ecological rather than

human use, HEA may provide a method for scaling compensatory restoration to offset

those losses. In cases where affected habitat services are easily identifiable and

restoration through equivalent services is possible, HEA can be an effective tool for

estimating losses and gains in a settlement context, particularly for small- to medium-

sized oil spills rather than for complex Superfund sites.

However, HEA requires several restrictive assumptions be met to provide a

reliable estimate of the appropriate scale of compensatory restoration projects:

• � A proper service metric must be determined to scale service losses and gains;

• � Baseline conditions must be clear; and

• � The type, quality, and quantity of services provided must be comparable to those lost.

If those assumptions are not met, then HEA results can differ substantially from

the amount of restoration actually needed to compensate the public for natural resource

service losses resulting from oil spills or hazardous-substance releases. In practice, it

is difficult to meet these assumptions because available data often are not adequate for

accurate and appropriate estimates of HEA input parameters. Consequently, some of

the input parameters typically are based on professional judgment.

Moreover, HEA ignores the basic economic law of substitution that says that

peoples’ value of a natural resource service will be less when there are a large number

of substitute services available. Of course, the converse would be true as well.

Instead, HEA assumes that the value of the affected resource and the restored

resource are identical regardless of the presence, or absence, of substitutes. This flaw

leads to nonsensical results. For example, if a fire were to burn 100 acres of prairie

grasses, HEA assumes that the value of the lost prairie grass does not depend on



whether this is the only prairie grass within a 200 mile radius, or if it is surrounded by

thousands of acres of high quality prairie grass. Thus, HEA’s failure to account for

substitution is a critical flaw, which contributes to the unreliability of the method.

HEA’s shortcomings are particularly pronounced in complex CERCLA cases

that have one or more of the following characteristics:

• � Multiple contaminants or sources of injury;

• � Relatively long and/or relatively uncertain injury period;

• � Poor baseline information for the services of the injured habitat;

• � Multiple affected services;

• � Dissimilar habitat services that can be created or enhanced nearby; and

• � Relatively long and/or relatively uncertain compensatory-restoration period.

Finally, I do not believe that HEA, in all but the simplest cases, is sufficiently

reliable to be sanctioned in the Type B Rule as a method for calculating damages. At

most, in some instances, it can appropriately be used as a tool to provide information

useful in NRD settlement negotiations. From a PRPs’ perspective, they should tread

carefully with HEA. As long as things are moving along a settlement track, HEA can be

a useful discussion device among experts. However, should settlement break down,

HEA is not a good substitute for rigorous scientific studies that measure potential

losses in natural resource services.

4. CONCLUDING THOUGHTS

Based on my experience, PRPs have many potential options for developing a

coherent economic strategy. As shown above, a critical component in this strategy is

the collection of high quality data on people’s actual behavior. Obtaining such data

substantially improves the PRPs position in the assessment or litigation process. This

has certainly been the experience gained from past damage assessments. As long as

there is likely to be a significant disagreement among the parties about damages from

potential losses in human use services, PRPs are well served by high-quality data. In

fact, it is becoming increasingly unlikely that trustees will even collect any data on



human use services, leaving PRPs significantly exposed if they fail to collect data.

Moreover, given the lead time required for a sizeable recreation survey, and the

amount of time required for the survey itself to capture a representative year, PRPs

may find themselves needing to collect data before a suit is formally filed.

Additionally, project-based damage assessments are not a panacea and do not

make a PRPs job much easier in developing an economic strategy. In fact, they are

subject to the same limitations imposed by the state of natural sciences and

economics. They also are subject to the same institutional pressures that can hamper

the effectiveness of assessments. While some may argue that the apparent ability to

avoid monetizing services losses simplifies assessments, I believe that it only disguises

the inherent valuation problems. Ultimately, if trade-offs are being made, then a

valuation is being performed, whether it is expressed in dollars or not. Moreover,

assessments that include ill-conceived restoration projects must still be evaluated from

an economic perspective to demonstrate that they are not cost effective. The baseline

and services concerns still apply to project-based assessment. Trustees also may try

to use survey methods to inflate potential gains from the restoration project to try to

justify the high price tags that often accompany the ill-conceived projects. Thus, the

economic issues that I have discussed in this paper apply equally well to project-based

assessments.

Finally, several key areas for future research could have significant payoffs for

PRPs in future litigation or damage assessments. In particular, research studies that

address services from an interdisciplinary perspective will be most beneficial. For

example, it is very difficult to find studies that link together the potential changes in fish

population to potential changes in fish catch and ultimately to fishing. I believe that

damage assessments would be more credible if they were to develop more reliable

linkages between economic and natural science studies, such as developing a

coherent explanation of the effects of injuries or restoration actions on fishing choices.

Understanding the key linkages between ecological services and potential restoration

projects also is an area that would benefit substantially from future research.



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