The Commodification of Phase I ESA’s and the Need for Innovation

Introduction

Individuals who read environmental site assessments (“ESAs”) in the early 1990’s as part of their job will likely remember the unevenness of recommendations and conclusions and the wide range in the quality of reporting.  During that time, as an in-house environmental engineer at a major law firm, I likely read more ESA reports from more environmental consulting firms than I care to remember.  To this day I still read my fair share of ESA reports from various consultants as part of my job.

Standardization

In the 1990’s there was a growing demand from users of ESA reports for some form of standardization.  Back then, and to this day, a potential buyer of a property and the associated lender used an ESA report to aide in determining the monetary risk associated with any environmental liabilities linked to a property.  The wide variety of styles, coverage, disclaimers, recommendations, and conclusions in ESA reports back in the early 1990’s made that task very hard.

More than one consultant in the 1990’s would try to absolve themselves of liability by merely stating the findings of the investigation and avoiding any recommendation or conclusions.  Others would include disclaimers that would essentially hold them blameless for all errors and or omissions.

The first standardized ESA reports that came across my desk conformed with the United States ASTM E1527 standard published in 1993.  The first Canadian ESA standard (Z768) was issued in 1994 by the Standard Council of Canada.

In Canada, the latest version of the CSA Z768 standard is what is used as starting point for conducting Phase I ESA’s.  A vast majority of ESA reports that I read begin quoting the CSA standard but with the added qualifying statement that the report is in “substantial conformance” with the standard.

Commodity

Currently, many of the major lenders in Canada have lists of approved consultants for ESA’s.  Any borrower can choose freely from the list and arrange for an ESA on a property.  Other organizations have similar lists.

The CSA Z768 standard combined with the lists of qualified consultants typically supplied by lending institutions has created, in my opinion, a commodification of Phase I ESA’s.  An unsophisticated and occasional user of environmental services would most likely choose a consultant to conduct a Phase I ESA based on price.

Sophisticated buyers of environmental services have their own favourite consultants.  To earn the trust of a regular user of ESA services, a consultant needs to be able provide a clear explanation of environmental liabilities and a strong justification for the need further investigation (i.e., Phase II ESA).  The exemplary consultant has the ability to uncover the less than obvious environmental liabilities.  All trusted consultants provide timely report in a cost-effective manner.

The advantage of the sophisticated buyers of ESA services is the experience gained from reading reports from dozens of different firms and knowledge of the revelations and oversights of each.  Even amongst sophisticated buyers, there is a level of commodification that exists as they would likely have anywhere from 4 to 5 firms (any maybe more) that they trust to do good work.

Differentiation

When being sold environmental services from consultants, I typically ask a consultant what differentiates them from their competitors with respect tot the conduct of a Phase I ESA.  In essence, I want them to articulate to me how their ESA work is superior to the competition.  The typical list of replies can be found in the table below.  Based on the majority of responses I receive, it is my conclusion that the consultants themselves are unknowingly conceding that they are selling a commodity service.  The differentiators they describe can apply to almost any firm that provides the service.

Table 1: Common Reasons Cited by Environmental Consultants for Choosing Them

Innovation

So how can a consulting firm give clients what they want – more certainty on risk associated with a property – and differentiate the ESA service they provide?

I have found one consultant that I now work with has risen above the commodity Phase I ESA.  This consulting firm, through innovation, has gone beyond the bare minimum of a Phase I ESA that would conform to the CSA Standard and utilized technology to enhance the Phase I ESA.

A standard Phase I ESA requires only observation as part of the site visit portion of the ESA.  The use of intrusive testing is saved for a Phase II.  However, with the utilization of field instrumentation that is non-intrusive, an enhanced Phase I can provide much more information that a standard Phase I ESA.

The environmental consulting firm, Altech Consulting Group, uses magnetic surveys as a standard part of the its Phase I ESAs.  A magnetometer measures the magnetic potential underground through non-obtrusive means.  It can identify the presence of underground steel tanks or drums, and other ferrous buried objects (i.e. pipes).

Enhanced Phase I ESA – Seeing underground with the magnetic survey

By including a magnetic survey as a standard part of a Phase I ESA, Altech has more information from which to base its conclusions and recommendations.  It can utilize the information found from the magnetic survey along with historical data and interviews with persons knowledgeable of the property to have a stronger argument for the need for a Phase II ESA or not.

Chad Stewart, the head of the environmental investigation group at Altech stated “one of the biggest sources of environmental liability at the majority of sites is leaks from underground storage tanks or pipelines.  By including a magnetic survey as part of our Phase I ESA, we are in a much better position to state if further intrusive investigation is required.  Our approach saves the client time and money.”

As I said earlier, I have seen my share of ESA reports from numerous consultants.  Their a some that are very quick to recommend a Phase II ESA based on the limited information that only hints that a UST may have been present.  A vast majority of the subsequent Phase II findings reveal that there is no contamination.

Any means of bringing non-intrusive testing and measurement techniques into use for a standard Phase I ESA is a good thing in my opinion.  The more information that can be obtained during the Phase I ESA, the better the decision making on the need for a Phase II.

By not having to perform an unnecessary Phase II ESA, a client could save tens of thousands of dollars.  By performing a Phase II ESA based on information obtained from a magnetic survey that is a standard part of a Phase I ESA, a client could potentially save hundreds of thousands of dollars.