United States of America v. Allegheny Ludlum Corporation

PRECEDENTIAL
IN THE UNITED STATES COURT OF
APPEALS
FOR THE THIRD CIRCUIT
_________________________
NO. 02-4346
_________________________
UNITED STATES OF AMERICA
v.
ALLEGHENY LUDLUM
CORPORATION,
Appellant
__________________________
On Appeal from the United States
District Court
For the Western District of Pennsylvania
(D.C. No. 95-cv-00990)
District Judge: Honorable Robert J.
Cindrich
__________________________
Argued December 16, 2003
Before: ALITO, FUENTES and
BECKER, Circuit Judges
(Filed April 28, 2004)
THOMAS L. SANSONETTI
Assistant Attorney General
JOHN T. STAHR
NANCY FLICKINGER
ROBERT H. MILLER
JOHN SITHER
KATHRYN E. KOVACS (Argued)
U.S. Department of Justice
Environment & Natural Resources
Division, Appellate Section
P.O. Box 23795 L’Enfant Plaza Station
Washington, DC 20026
KERRY NELSON
LORI G. KIER
U.S. Environmental Protection Agency
Office of Regional Counsel
1650 Arch Street
Philadelphia, Pennsylvania 19103
Counsel for Appellee
H. WOODRUFF TURNER (Argued)
JOHN E. BEARD, III
THOMAS J. SMITH
TODD R. BROWN
Kirkpatrick & Lockhart, LLP
Henry W. Oliver Building
535 Smithfield Street
Pittsburgh, Pennsylvania 15222
Counsel for Appellant
____________________________
OPINION OF THE COURT
____________________________
BECKER, Circuit Judge.
This is an appeal from an order of the
District Court granting judgment for the
plaintiff United States and against defendant
Allegheny Ludlum Corporation (“ALC”) in
an action brought for violations of the Clean

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Water Act (“CWA” or the “Act”) at five of
A L C ’ s W e s t e r n P e n n s y l v a n i a
manufacturing facilities. The judgment is
multifaceted, flowing from: (1) pretrial
legal determinations by the Court; (2) a
jury verdict on a number of liability issues;
and (3) determinations by the Court
following a penalty hearing. The jury
verdict was mixed; each side prevailed on
a number of issues, and ALC’s appeal
leaves unchallenged significant portions of
the judgment against it. However, the
appeal does challenge major aspects of the
judgment and also of the civil penalty
assessment leveled against ALC for the
alleged violations in the sum of
$8,244,670.
The first important question
presented by the appeal concerns the
viability of the so-called “laboratory error
defense.” The CWA operates under a self-
monitoring and reporting system whereby
the discharger of toxic waste measures and
reports to the Environmental Protection
Agency (“EPA”) the volume of its
discharge. ALC maintains that the EPA
predicated certain aspects of the violation
upon reports submitted by ALC that were
tainted by laboratory error caused by a
contaminated reagent resulting in
overreporting of the amount of the toxic
zinc discharge. The District Court
declined to allow the laboratory error
defense on the grounds that it had not been
recognized in the Third Circuit, and that to
allow such a “new defense” would
contravene the CWA.
Although the CWA operates under
a regime of strict liability, designed to
ensure that polluters will take responsibility
for ensuring the correct and precise
measurements of their waste (which they are
obliged to certify), we do not believe that a
laboratory error defense—where the error
resulted in overreporting—is inconsistent
with this regime. Rather, inasmuch as the
penalty imposed is for an unlawful
discharge and not for faulty reporting, we
think that deprivation of the defense would
not advance the purpose of the CWA and
that it would be grossly unfair, especially in
view of the presence of companion
provisions of the CWA imposing liability
for monitoring and reporting violations. We
will therefore vacate the judgment in part
and remand so that the laboratory error
defense can be considered and adjudicated
with respect to the affected claims.
The appeal also requires us to
determine whether the District Court made
either a mistake of law or abused its
discretion in calculating the economic
benefit that ALC obtained from those
violations that are unchallenged on appeal.
Section 1319(d) of the CWA requires that
the District Court, when determining the
amount of a civil penalty under the CWA,
consider “the economic benefit (if any)
resulting from the violation,” so as to “level
the playing field.” The District Court’s
calculation here was an agglomeration,
based on a number of factors. The largest
single factor was the 12.73% interest rate
used by the government and the District
Court to compute interest from the date of
violation to the date of the judgment so as to
calculate the total economic benefit to ALC.
This rate was predicated largely on a

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calculation of ALC’s weighted average
cost of capital (“WACC”). Noting that it
was uncontested at trial that ALC had an
actual rate of return on capital that was
less than half the 12.73% rate used by the
District Court, ALC contends that the
12.73% rate is excessive.
We conclude that the application of
the 12.73% rate may so vastly overstate
the economic benefit to ALC of its
improper discharges, that it does not “level
the playing field,” and that it constitutes an
abuse of discretion. As a prelude to
making this determination we explore the
potential ramifications of the notion of
economic benefit under § 1319(d). We
conclude that there are two possible
approaches to calculation of economic
benefit: (1) the cost of capital, i.e., what it
would cost the polluter to obtain the funds
necessary to install the equipment
necessary to correct the violation; and (2)
the actual return on capital, i.e., what the
polluter earned on the capital that it
declined to divert for installation of the
equipment. Because these factors are so
varia ble, depending upon market
conditions and the financial soundness of
the polluter, we leave it to the District
Court, in the sound exercise of its
discretion, to decide which approach to
apply and how to apply it (there are a
variety of models). However, we explain
why the District Court’s application of the
WACC in this case was, at a minimum,
unsupported by the evidence, and needs to
be recalculated should the District Court
on remand elect to pursue that approach.
In contrast, we conclude that the
District Court’s application of the other
legally required factors to calculate ALC’s
economic benefit—the least costly method
of compliance and the periods of non-
compliance—were supported by the record.
In the course of this determination, we
clarify that the proper method for
determining economic benefit is to base the
calculation on the least costly method of
compliance. On the issue of economic
benefit, we therefore vacate and remand
with respect to the interest rate issue.
Finally we must decide whether, in
compiling the number of violations for the
purpose of assessing a penalty, the District
Court erred by counting violations of
monthly averages as violations for each day
of the month. We, of course, follow our
precedent in Natural Resources Defense
Council, Inc. v. Texaco Refining &
Marketing Inc., 2 F.3d 493 (3d Cir. 1993),
that the daily average limit is computed by
averaging effluent levels only for days on
which the facility operated. Although some
Courts—most notably the Fourth Circuit in
Chesapeake Bay Foundation, Inc. v.
Gwaltney of Smithfield, Ltd., 791 F.2d 304
(4th Cir. 1986), vacated on other grounds,
484 U.S. 49 (1987)—have held that a
violation of a monthly average parameter
constitutes a violation for each day of the
month, we find this approach incomplete.
We adopt Gwaltney insofar as it establishes
an absolute upper bound on the penalty that
can be assessed for a monthly average
violation. However, permit limits can be
exceeded in many different ways, both by
very large, isolated discharges and by
m o d e r a t e c o n t i n uo u s d i s c h ar g e s .

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Furthermore, daily and monthly average
limits are designed to avoid distinct
environmental harms. As a result, in some
cases a violator’s wrongful conduct will
merit punishment for both daily and
monthly violations, while in others, the
conduct will have been sufficiently
punished by penalties for daily violations
alone. We hold that district courts have
discretion to determine, on the facts of
each case, how many violation days should
be assessed for penalty purposes for the
violation of a monthly average limit, based
on whether violations are already
sufficiently sanctioned as violations of a
daily maximum limit. In this case, the
District Court did not have the benefit of
this standard, so we will vacate its penalty
assessment and remand for further
proceedings.
We will therefore affirm in part,
vacate in part, and remand for further
proceedings consistent with this opinion.
I. Facts and Procedural History
ALC manufactures steel and owns
and operates five plants comprising three
specialty steel manufacturing facilities in
Western Pennsylvania: the Brackenridge
Facility (the Brackenridge and Natrona
plants); the West Leechburg Facility (the
West Leechburg and Bagdad plants); and
t h e V a n d e r g r if t F a c il it y. T he
Brackenridge Facility conducts melting,
continuous casting, rolling, and finishing
operations. The West Leechburg and
Vandergrift Facilities are finishing
operations.
The steelmaking process generates
a considerable amount of pollution. ALC’s
steel-making process uses water from
adjacent rivers. The water is used as
process water and as non-contact cooling
water. Process water is used directly in the
process of making steel, and makes contact
with steel or steel-making equipment. Non-
contact cooling water cools the steel-making
equipment without actually touching the
steel. ALC operates six on-site wastewater
treatment plants (“WWTPs”) at these
facilities. The three WWTPs at the
Brackenridge facility discharge to the
Allegheny River, pursuant to a National
Pollution Discharge Elimination System
( “N PDES”) perm it issued by the
Pennsylvania Department of Environmental
Protection (“PADEP”). The two WWTPs at
the West Leechburg facility discharge to the
Kiskiminetas River pursuant to another
NPDES permit. The Vandergrift WWTP
discharges treated process waters to the
Kiski Valley Water Pollution Control
Authority (“KVW PCA”) pursuant to
permits with it. After applying further
treatment, KVWPCA discharges to the
Kiskiminetas River.
The United States filed this action
against ALC on June 28, 1995. The
Complaint, as amended, alleged three types
of violations: (1) discharges at each of
ALC’s five facilities containing discharges
in excess of ALC’s permits as shown by the
Discharge Monitoring Reports (“DMRs”)
submitted to the EPA; (2) discharges from
the Vandergrift facility that interfered with
the operations of the Kiski Valley WPCA;
and (3) ALC’s failure to report violations as
required by its permits. The parties filed

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cross motions for summary judgment. In
response, the District Court ruled that ALC
could not raise several defenses to the
reported violations, includin g the
“laboratory error” defense by which ALC
contended that its reported violations
resulted from erroneous laboratory
analyses—later discovered to be caused by
a contaminated reagent— which overstated
zinc pollutant levels.1 The Court opined
that the defense had not been recognized in
this Circuit, and that it would not adopt such
a new defense, “especially since the Act can
be interpreted as creating an obligation to
insure that the self-monitoring of pollutants
is accurate, assigning the risk of inaccuracy
to the company.” The Court thus granted
partial summary judgment to the United
States on that issue. The Court denied the
governm ent’s motion for summary
judgment on the reporting failure and
interference claims, finding that ALC had
provided sufficient evidence to create triable
issues of fact.
The District Court held a jury trial on
liability from January 5 to February 2, 2001.
The jury found in favor of ALC on all of the
interference and reporting failure claims, but
in favor of the government on half of the
remaining reported violations claims. In
total, the violations for which ALC
stipulated to liability, those for which the
court granted summary judgment, and those
for which the jury returned a verdict against
ALC added up to 1,122 days of violations
1 ALC’s overreporting of zinc
exceedences was based upon effluent
sample analyses performed by ALC’s
Technical Laboratory which turned out to
be flawed. ALC allegedly tried to
determine the cause of the zinc
exceedences, without success. In
February 1996, it started to examine its
own laboratory’s performance. ALC
took samples of effluent and had part
analyzed at the ALC Laboratory and part
analyzed by two outside laboratories, a
protocol known as “split sampling.”
According to ALC, the zinc results
obtained by its laboratory were
significantly higher than those obtained
at the outside laboratories, while the
outside laboratories’ results were
consistent with each other. In this split
sampling, each laboratory performed its
own digestion of the samples. In March,
1996, ALC again split samples with the
two outside laboratories, but this time
provided each laboratory with two
sample sets, one undigested and one
predigested by ALC’s Laboratory.
According to ALC, the values generated
by the samples that were both digested
and analyzed by the outside laboratories
showed significantly lower zinc results
than the corresponding results from ALC’s
laboratory. However, the sample sets
analyzed by the outside laboratories after
the samples were predigested by ALC’s
laboratory were as high in zinc as the
results from ALC’s laboratory, leading
ALC to the conclusion that it was the
digestion process in ALC’s laboratory that
was causing zinc values to be overstated.
Once ALC switched to a different reagent,
it no longer reported zinc exceedences.

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from July 1990 through February 1997.
From February 5 to 8, 2001, the
Court conducted a bench trial on the
penalty amount. To save time, the Court
allowed the experts to give their direct
testimony in the form of written proffers,
and allowed live cross-examination.
Following the penalty trial, the parties
submitted proposed (judicial) opinions,
and on February 20, 2002, the Court filed
an opinion and entered judgment against
ALC in the amount of $8,244,670. ALC
filed a motion under Fed. R. Civ. P. 59(e)
to alter or amend the judgment, which the
District Court denied. On November 26,
2002, ALC filed a notice of appeal from
the District Court’s summary judgment
order of September 28, 2000, the
reconsideration order of November 28,
2000, the final judgment of February 20,
2002, and the Rule 59(e) order of October
8, 2002.
The District Court had jurisdiction
pursuant to 28 U.S.C. § 1331. ALC’s
appeal is timely under Fed. R. App. P.
4(a)(1)(B), and we have appellate
jurisdiction pursuant to 28 U.S.C. § 1291.
Our review of the grant of summary
judgment is plenary. See Shelton v. Univ.
of Med. & Dentistry of N.J., 223 F.3d 220,
224 (3d Cir. 2000). We review the
imposition of a penalty under Section
1319(d) of the CWA for abuse of
discretion, see Tull v. United States, 481
U.S. 412 (1987), but our review of the
legal construction of Section 1319(d) is
plenary, see Public Interest Research
Group, Inc. v. Powell Duffryn Terminals,
Inc., 913 F.2d 64, 80 (3d Cir. 1990).
II. The Laboratory Error Defense
A. Overview of the Clean Water Act
The Clean Water Act (“CWA”) was
enacted by Congress in 1972 “to restore and
maintain the chemical, physical, and
biological integrity of the Nation’s waters.”
33 U.S.C. § 1251(a). In order to achieve
this goal, the CWA prohibits the discharge
of any pollutant into waters of the United
States except as expressly authorized under
the Act. See 33 U.S.C. § 1311(a). In order
to discharge pollutants into navigable
waters, one must obtain a National Pollution
Discharge Elimination System (“NPDES”)
permit. 33 U.S.C. § 1342. Discharges that
comply with the limits and conditions in an
NPDES permit are deemed to comply with
the Act. 33 U.S.C. § 1342(k). The CWA
requires NPDES permittees to test their
effluent and report the results to the EPA in
Discharge Monitoring Reports (“DM Rs”).
33 U.S.C. § 1318(a); 40 C.F.R. §§ 122.41(j),
122.48. Section 307 of the CWA authorizes
the EPA to promulgate regulations
prohibiting the discharge of any pollutant
into a Publicly Owned Treatment Works
(“POTW”) that “interferes with, passes
through, or otherwise is incompatible with”
the POTW. 33 U.S.C. § 1371(b)(1). The
Act prohibits discharges to POTWs that are
in excess of those pretreatment standards.
33 U.S.C. § 1317(d). The EPA has issued
general pretreatment standards and national
categorical pretreatment standards for the
iron and steel manufacturing industry. See
40 C.F.R. Pts. 403, 420.
The Act authorizes the EPA to bring
civil enforcement actions for injunctive

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relief and penalties, at times relevant, to up
to $25,000 per day for each violation. See
33 U.S.C. § 1319(d). A violation of the
Act can be established by showing that the
defendant is a person who discharged
pollutants from a point source into
navigable waters in violation of the terms
of the applicable NPDES permit or into a
POTW in violation of a pretreatment
standard. See 33 U.S.C. §§ 1311, 1317(d).
In assessing a civil penalty for a violation
of § 1311 or § 1317, the court must
consider: “the seriousness of the violation
or violations, the economic benefit (if any)
resulting from the violation, any history of
such violations, any good-faith efforts to
comply with the applicable requirements,
the economic impact of the penalty on the
violator, and such other matters as justice
may require.” 33 U.S.C. § 1319(d).
B. The Government’s Contentions
The government argues that the
CWA establishes a scheme of strict
liability aimed at facilitating enforcement.
It first notes that Congress gave the EPA
the “authority to require information, data,
and reports, as well as establish monitoring
requirements,” recognizing that such an
authority is a “necessary adjunct to the
establishment of effective water pollution
requirements and the enforcement of such
requirements.” Government Br. at 16
(citing S. Rep. 92-414, at 62 (1971)).
Furthermore, it points out that Congress
intended “these new requirements” to
“avoid the necessity of lengthy fact
finding, investigations, and negotiations at
the time of enforcement.” Id. (citing S.
Rep. 92-414, at 62 (1971)). The
government then argues that, consistent with
the Act’s requirement for accurate self-
reporting, courts should treat DMRs, which
must be certified by the discharger, as
admissions that are sufficient to establish
liability under the CWA.
The government relies in this respect
on Sierra Club v. Union Oil Co., 813 F.2d
1480, 1491-92 (9th Cir. 1987), vacated on
other grounds, 485 U.S. 931 (1988), where
the Court of Appeals held that a CWA
defendant could not escape liability based
on alleged sampling violations. The Court
noted that the “N PD ES p rogram
fundamentally relies on self-monitoring”
and that Congress deemed accurate DMRs
“critical to effective operation of the Act.”
Id. It opined that allowing CWA permittees
to impeach their own DMRs “would be
sanctioning countless additional hours of
NPDES litigation and creating new,
complicated factual questions for district
courts to resolve.” Id. at 1492. The Court
further reasoned that if permittees could
impeach their own reported violations with
claims of laboratory error, it would “create
the perverse result of rewarding permittees
for sloppy laboratory practices” and
“undermine the efficacy of the self-
monitoring program.” Id.; accord Conn.
Fund for the Env’t, Inc. v. Upjohn Co., 660
F. Supp. 1397 (D. Conn. 1987).
Relying on this reasoning, the
government submits that we should reject
ALC’s laboratory error defense. Because
the regulations require dischargers to amend
their sworn DMRs whenever they discover
an error in their reporting, and because
failure to do so constitutes a criminal

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violation in and of itself, the government
contends that allowing dischargers to
contest their own DMRs conflicts with the
statute and the applicable regulations. See
40 C.F.R. §§ 122.41(k)(2), (1)(8). The
government further argues that allowing a
laboratory error defense would frustrate
“congressional intent, would reward
companies for inaccurate monitoring
practices, and would give them an
incentive to wait until they are sued to
ensure the accuracy of their DMRs.”
C. The Authorities Relied upon by ALC
A L C f i r s t c o u n t e r s t h e
government’s arguments by citing a
number of cases from district courts within
this Circuit that have recognized—either
explicitly or implicitly—the availability of
the laboratory error defense. While no
defendant in these cases has actually made
it past the summary judgment stage based
on the laboratory error defense, that lack
of success has been due to district courts
finding that the defendants failed to raise a
genuine issue of material fact as to the
existence of a laboratory error, and not
because the defendants were precluded
from raising the defense as a matter of
law.
In Public Interest Research Group,
Inc. v. Elf Atochem North America, Inc.,
817 F. Supp. 1164 (D.N.J. 1993), a similar
case of potential overreporting came
before the District Court. The defendant
claimed that errors in its laboratory testing
had resulted in the overreporting of toxic
discharges. Split sampling over a six-
month period revealed large discrepancies
between the defendant’s results and those
from outside laboratories, though no
consistent pattern could be detected in those
discrepancies (sometimes the defendant’s
results were higher, and sometimes they
were lower than the outside laboratories’
results).
The Court explained that “if a
defendant wishes to contest the accuracy of
its DMRs, it ‘has a heavy burden to
establish faulty analysis.’” Id. at 1178
(quoting Student Pub. Interest Research
Group, Inc. v. Georgia-Pacific Corp., 615
F. Supp. 1419, 1429 (D.N.J. 1985)). “The
‘defendant must present direct evidence of
reporting inaccuracies’ and ‘may not rely on
unsupported “speculation” of measurement
error.’” Id. (quoting Georgia-Pacific Corp.,
615 F. Supp. at 1429). The fact that “no
court in this district ha[d] thus far found a
defendant to have met this heavy burden,”
id., however, did not preclude the possibility
of the defense as a matter of law.
The Elf Atochem Court, in discussing
the reasoning in Upjohn, quotes Chesapeake
Bay Foundation v. Bethlehem Steel Corp.,
608 F. Supp. 440, 452 (D. Md. 1985), which
stated that “‘[g]iven the heavy emphasis on
accuracy in the Act and the clear
Congressional policy that DMRs should be
used for enforcement purposes, the court
will not accept claims of inaccurate
monitoring as a defense.’” Elf Atochem, 817
F. Supp. at 1179. The Elf Atochem Court
agreed that “the Act places the burden of
accurately monitoring the levels of
pollutants in their effluent squarely on the
shoulders of permit holders, and that we
must hold them to that obligation,” but it

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ultimately held that
while we agree with the
[Upjohn] court that it is
incon sis t e n t with th e
structure and purpose of the
Act to allow permit holders
to escape liability altogether
on the basis of laboratory
error, we find it more
accurate, where laboratory
error has been shown, to
hold a defendant liable for a
monitoring violation rather
than a discharge violation.
Elf Atochem, 817 F. Supp. at 1179
(emphasis added).
Similarly, in Public Interest
Research Group, Inc. v. Yates Industries,
Inc., 757 F. Supp 438, 447 (D.N.J. 1991),
the Court expressly recognized the
laboratory error defense, noting that
“DMRs may be deemed admissions when
establishing liability in summary judgment
motions,” but are not conclusive proof of
liability. The Court held that under some
circumstances, a “defendant may avoid
liability at the summary judgment stage on
the basis of inaccurate data in DMRs.” Id.
While the Yates Court also recognized the
heavy burden on the defendant to prove
laboratory error, it stated that a showing of
“‘errors in the actual tests performed
which showed a permit violations [sic]’”
may defeat a summary judgment motion.
Id. (quoting Student Pub. Interest
Research Group, Inc. v. Tenneco
Polymers, Inc., 602 F. Supp. 1394, 1400
(D.N.J. 1985)). Thus, while the Court
ultimately granted summary judgment
against the defendant— based on the fact
that the cover letters the defendant
submitted to the Court were too speculative
in that they merely asserted that the
defendant “felt” and “believed” that
laboratory errors had occurred—it clearly
implied that had the factual situation been
different, Yates could have survived a
summary judgment motion based on a
laboratory error defense. See id.
D. Discussion
We find the reasoning of the Elf
Atochem Court persuasive. The violations
at issue here alleged that ALC discharged
pollutants in violation of the terms of its
permit. In order to prove these violations, it
was necessary for the government to
establish that ALC did in fact violate the
permit terms. If a permittee reports that it
has violated a permit limit, the report is
sufficient to discharge the government’s
burden of production, but neither the CWA
itself nor any regulation of which we are
aware makes such a report conclusive.2 The
2The question before us is whether a
permittee violates its permit if its
discharges in fact comply with the terms
of the CWA but its reports erroneously
indicate the permit was violated. This is a
pure question of law, and our review is
plenary. In its brief, the government did
not argue that, in interpreting the relevant
provisions of the Act or any relevant
regulations, we should give any degree of
deference to any formal or informal
administrative interpretations of the Act or

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trier of fact must still be convinced that the
permit was in fact violated. Evidence that
the reports inaccurately overreported the
level of discharge are certainly relevant to
show that no violation occurred.3
The government stresses the fact
that the civil liability provisions of the
CWA create a regime of strict liability, but
this argument misses the mark. Strict
liability relieves the government of the
obligation to show mens rea, not the actus
reus. See, e.g., W. Fuels-Utah, Inc. v. Fed.
Mine Safety & Health Review Comm’n,
870 F.2d 711, 713-14 (D.C. Cir. 1989). In
the context of the present case, strict
liability means that the CWA is violated if a
permittee discharges pollutants in violation
of its permit, regardless of the permittee’s
mens rea. Strict liability does not mean that
a permittee may be held liable for violating
its permit even if it does not in fact do so.
While the government’s policy
arguments are certainly forceful in the case
of a permittee underreporting levels of toxic
waste and then claiming a laboratory error
defense, we are unpersuaded that they prove
compelling in a case like this where the
permittee alleges that the laboratory error
resulted in the overreporting of the levels of
toxic waste.4 From a public policy
perspective, a polluter should not be given
the opportunity to underreport levels of
toxic waste, thereby dumping in excess of
its permit, and then, when caught, cry
“laboratory error kept me from knowing that
I was in violation!” But in the case at bar,
the opposite apparently occurred: ALC was
conducting its sampling but a contaminated
reagent used in the ALC laboratory’s
analysis was causing the laboratory
systematically to overreport the amount of
toxic zinc that was dumped into the water.
We fail to see what incentive ALC could
have had to overreport how much zinc it
was dumping into the river when it knew
that such amounts would result in fines. We
do not believe that a scheme assigning strict
liability for discharge violations in the case
regulations. By failing to make any such
argument in its brief, the government
waived any contention based on
deference. Moreover, when counsel for
the government was questioned on this
point at oral argument, she did not call to
our attention any administrative
interpretation to which she claimed that
deference was owed. Nor has the
government brought any such
interpretation to our attention after the
argument.
3We use the term “laboratory error
defense” in this opinion because the term
has been used in prior cases and is used
by the parties here, but it is important to
note that laboratory error is not an
affirmative defense to liability. Instead,
evidence of laboratory error is simply
evidence that is relevant to the question
whether a violation of a permit
requirement in fact occurred.
4In the underreporting situation, the
permittee would be attempting to use
laboratory error to show that it lacked
mens rea, which is irrelevant under the
civil liability provisions of the CWA.

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of overreporting errors makes sense, nor
do we infer from the CWA that such was
Congress’s intent.
In citing United States v. Pozsgai,
999 F.2d 719, 725 (3d Cir. 1993), the
government correctly asserts that a
discharge that is not in compliance with a
permit “is the archetypal Clean Water Act
violation, and subjects the discharger to
strict liability.” But in Pozsgai, strict
liability was imposed based upon an
unlawful discharge, not the mistaken
report of a discharge. The government
seems to be aware of this difference when
it argues that strict liability should be
imposed on reporting requirements, as it
writes about the conjunction of the
“CWA’s reporting requirements and
imposition of strict liability for permit
violations.” (emphasis added). So, while
the CWA unambiguously imposes strict
liability for unlawful discharges, it is by
no means obvious that a similar strict
liability regime has been imposed on faulty
reporting.
In fact, the existence of a
mechanism to correct erroneous DMRs
suggests the opposite. See 40 C.F.R. §
122.41(l)(8) (requiring a permittee who
becomes aware of any inaccuracy in a
DMR to promptly notify the EPA). That
regulation was promulgated pursuant to
the Administrator’s authority under 33
U.S.C. § 1318(a) to impose reporting
requirements. Since 33 U.S.C. § 1319
authorizes administrative, civil, and even
criminal penalties for violations of § 1318,
the failure to correct an inaccurate DMR is
an independent violation of the CWA and
regulations thereunder. Moreover the very
circumstances that would support a
laboratory error defense would also likely
support the finding of a monitoring
violation. See 40 C.F.R. § 122.41(j). In
light of these direct sanctions on inaccurate
DMRs, we find wanting the government’s
argument that CWA provisions addressed to
actual discharges ought to be made
surrogate enforcers of the reporting
requirements. In sum, barring the assertion
of a laboratory error defense seems unfair
and at odds with the overall plan of the
CWA, especially in a case such as this
where the alleged laboratory error caused
overreporting rather than underreporting.
We have considered the arguments of
the government and the Union Oil Court
that recognizing a laboratory error defense
would reward sloppy practices and
undermine the self-monitoring program by
giving companies an invitation to wait until
they are sued. But these arguments do not
apply to overreporting, which is almost
certainly involuntary. We also suspect that
overreporting is rare, for only the most
penny-wise and pound-foolish of permittees
would expose itself to the cost of a decade
of litigation (as here) if it had any chance of
clearing the matter up with improved
laboratory testing and amended NPDES
reports. Concomitantly, we are
underwhelmed by the government’s
argument that permitting the defense will
add time to NPDES litigation. At bottom,
we do not believe that efficiency should
override fairness in administration. Thus,
while we do not gainsay the validity of the
government’s argument that, consistent with

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12
the Act’s requirement for accurate self-
reporting, courts should treat DMRs,
which must be certified by the discharger,
as admissions that are sufficient to
establish liability under the CWA, we hold
that the presence of certified DMRs does
not preclude the laboratory error defense in
cases of overreporting.
The government has argued that
even if the laboratory defense is
recognized, there is insufficient evidence
in this record to support it. The District
Court did appear to endorse this position in
a post-trial opinion: “Nothing in ALC’s
proffer or testimony on this issue
persuades the court that these violations
arise solely from laboratory error.” But
that statement followed a trial at which the
laboratory error defense had been
excluded. More specifically, while the
District Court did have available some of
ALC’s laboratory error evidence in the
penalty phase, having already determined
that ALC was liable for discharge claims,
this after-the-fact consideration of the
evidence for penalty purposes does not
cure the error in precluding the laboratory
error defense in the liability jury trial.
Arguably the District Court’s evaluation of
ALC’s laboratory error evidence in the
penalty phase strengthens ALC’s argument
that it was entitled to have the jury
evaluate such evidence because, what the
District Court was doing was to assess the
credibility to that evidence (“[I]t is not
credible that laboratory error would persist
. . . .”, normally a jury function.
Since the District Court did not
consider the sufficiency of laboratory error
defense argument in the proper light, it, not
this Court, should consider the defense in
the first instance. We will therefore vacate
and remand so that the laboratory error
defense can be considered and adjudicated
with respect to the claims that it affected.
III. The Penalty Calculation - Economic
Benefit
A. ALC’s Objections to the Penalty
Assessment
The assessment of civil penalties for
these violations as sought by the United
States is governed by 33 U.S.C. § 1319(d).
Section 1319(d) provides that the violator of
a permit issued pursuant to the Act shall be
subject to a civil penalty not to exceed
$25,000 per day for each violation. This
penalty provision further states that in
assessing the penalty, the court shall
consider the following factors:
the seriousness of the
violation or violations, the
economic benefit (if any)
resulting from the violation,
any history of such violations,
any good-faith efforts to
comply with the applicable
requirements, the economic
impact of the penalty on the
violator, and such other
matters as justice may require.
Id. The District Court considered each of
these factors in connection with the penalty
determination. The Court found ALC’s
violations of the CWA to be serious. It
questioned the level of ALC’s commitment

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to the obligations imposed by the Act. It
found the economic benefit to ALC to be
considerable, primarily in terms of the
avoided cost stemming from reduced
(inadequate) staffing at its wastewater
treatment plants, its delay in a plant
upgrade at the Vandergrift facility, and a
number of other smaller projects. The
Court totaled the economic benefit at
$4,122,335, and ultimately doubled it to
$8,244,670 as the final penalty. See infra
note 6.
The imposition of a penalty under §
1319(d) is subject to the exercise of a
district court’s discretion. See Tull v.
United States, 481 U.S. 412, 426-27
(1987). In general, a district court abuses
its discretion when it “bases its opinion on
a clearly erroneous finding of fact, an
erroneous legal conclusion, or an improper
application of law to fact.” LaSalle Nat’l
Bank v. First Conn. Holding Group, L.L.C.
XXIII, 287 F.3d 279, 288 (3d Cir. 2002).
Many of the District Court’s
findings are supported, and unchallenged
on appeal. The primary issue contested
here relates to economic benefit—i.e. the
Court’s use of the government’s experts’
computation of ALC’s weighted average
cost of capital (“WACC”) as the interest
rate to use to bring the money forward to
the penalty judgment date. WACC is
defined as “the average cost of capital on
the firm’s existing projects and activities,
. . . . calculated by weighting the cost of
each source of funds by its proportion of
the total market value of the firm.”
Stephen A . Ross, Randolph W.
Westerfield & Jeffrey Jaffe, Corporate
Finance 932 (6th ed. 2002).5
ALC asserts that the District Court’s
economic benefit calculation did not “level
the playing field,” as required by law, but
rather imposed a severe penalty. ALC also
contends that the District Cou rt’s
calculations failed to apply other principles
required by law, including that (1)
expenditures made and included in the
economic benefit calculation must relate
directly to the violations; (2) the least costly
method of compliance should be used in
calculating economic benefit; and (3)
economic benefit calculations must be based
only on periods of non-compliance. We
reject the argument that the District Court
did not apply the proper legal precepts.
Rather the question is the manner of
application, and whether the District Court
made clearly erroneous fact findings which
skewed the calculations to ALC’s detriment.
B. The Economic Benefit Principle
As noted above, § 1319(d) requires
the District Court to consider “the economic
benefit (if any) resulting from the violation”
when determining the amount of a civil
penalty under the CWA. ALC argues that
the purpose of the economic benefit
component of the penalty is to “level the
5 Of course, this general definition is
only so useful; moving from the broad
definition to the actual numbers (in
particular establishing the “cost of ...
funds”) can be extremely complex and
subject to dispute as this case so aptly
demonstrates.

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14
economic playing field.” We agree. See
United States v. Mun. Auth. of Union
Township, 150 F.3d 259, 263-64 (3d Cir.
1998) [hereinafter Dean Dairy]. In other
words, the purpose is to prevent a party
violating the CWA from gaining an unfair
advantage against its competitors, and to
prevent it from profiting from its
wrongdoing. See Powell Duffryn
Terminals, 913 F.2d at 80. The
government, on the other hand, submits
that CWA penalties are intended to
“promote immediate compliance” and
“deter future violations” by the defendant
and other regulated entities. Friends of the
Earth, Inc. v. Laidlaw Envtl. Servs., Inc.,
528 U.S. 167, 185 (2000). Therefore,
while the government agrees that the
economic benefit analysis is designed to
calcu late how much money was
illegitimately gained by failing to spend
the appropriate amounts on environmental
safeguards, it does not agree that the
assessment of a penalty need stop at that
figure. In our view, the latter point
addresses a different aspect of the Act, as
explained in the margin.6
Putting aside the ultimate way in
6 The CWA does not prescribe a
specific method for determining
appropriate civil penalties for violations.
In Dean Dairy, we noted that some
courts use the “top down” approach in
which the maximum penalty is set
($25,000 per day of violation at the times
relevant here), and reduced as
appropriate considering the six
enumerated elements of § 1319(d) as
mitigating factors, while other courts
employ the “bottom up” approach, in
which economic benefit is established, and
the remaining five elements of § 1319(d)
are used to adjust the figure upward or
downward. Dean Dairy, 150 F.3d at 265.
In Dean Dairy, we held that the method
used in assessing the civil penalty is best
left to the trial court’s discretion. See id.
In the case at bar, the District Court
followed the “bottom up” approach.
Having arrived at a figure of economic
benefit totaling $4,122,335, the District
Court then conducted a detailed analysis
of the remaining factors enumerated in §
1319(d) and found that, while the
government advocated a trebling of the
economic benefit, a doubling would be
more appropriate under the circumstances
of the case for a total penalty of
$8,244,670. In Dean Dairy, we approved
the doubling of economic benefit as a
possible method for assessing a penalty
stating that, even after the doubling of
economic benefit, the “penalty was barely
9% of the maximum statutory penalty to
which Dean Dairy was subject.” Dean
Dairy, 150 F.3d at 265. In the case at bar,
the statutory maximum penalty that could
have been leveled against ALC was
$28.05 million, counting $25,000 for each
of the 1,122 days of violations. While
$8,244,670 is approximately 29% of
$28.05 million, a much larger proportion
than the 9% approved in Dean Dairy, we
are satisfied that the District Court was
well within its discretion to assess such a
penalty in this case.

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15
which the result of the economic benefit
calculation might be employed, such a
calculation is intended, at its base, to
identify the benefit realized by a violator
from delayed expenditures to comply with
the CWA. The economic benefit
calculation starts with the costs spent or
that should have been spent, to achieve
compliance. Once that figure is
established, an appropriate calculation of
economic benefit should also reflect the
time value of money. In order to make
that calculation, a court must “apply an
interest rate to determine the present value
of the avoided or delayed costs.” United
States v. Smithfield Foods, Inc., 191 F.3d
516, 530 (4th Cir. 1999). Herein lies the
crux of the disagreement: ALC contends
that the District Court used an interest rate
so high that the effect was punitive rather
than “leveling,” whereas the government
contends that the interest rate used by the
District Court was entirely appropriate and
yielded a result that was well within the
Court’s discretion.
C. The Interest Rate Adopted by the
District Court
The District Court, in arriving at its
penalty assessment, adopted the economic
analysis proffered by the government. In
that submission, the alleged economic
benefit stemming from each violation was
computed forward from the date of
violation to February 28, 2001 (roughly the
date of the judgment) at a rate of 12.73%
annually, to arrive at a $4,122,335 total
economic benefit at the time of judgment.
The District Court derived this rate
from the proffer of government witnesses
Gary Amendola and Robert Harris who
explained the three steps they took to
calculate the WACC. First, they determined
that ALC had a debt rating of “A,” as
assigned by Standard & Poor’s (“S&P”).
Then, they researched what the typical
monthly interest rate was for A-rated bonds
in each relevant year and computed yearly
averages. This rate was adjusted to account
for the advantageous tax treatment of
interest payments on corporate debt.
Second, they calculated the cost of equity as
follows: They started with a 30-year
treasury bond as a baseline. They next
looked up the company’s “beta,” which is a
measure used to evaluate the relative risk of
a particular stock for an equity investor.
Finally, they assumed a generic value for the
market-risk premium— the premium that a
person would demand to invest in stock
rather than in a (risk free) treasury
instrument. At that point, they multiplied
the beta by the market-risk premium, and
added an “intermediate stock premium” for
the years before ALC merged with another
entity and became a bigger, “safer”
company. They then added this to the 30-
year treasury bond rate to arrive at an equity
cost by year. Third, they combined these
cost of debt and cost of equity measures by
taking a weighted average of them, based on
the relative proportions of debt and equity in
ALC’s capital structure for that year.7
7 In its brief, the government
mischaracterizes its own experts’
testimony and states that the WACC was

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16
1. The Contentions of the Parties
ALC characterizes the 12.73% rate
as “a theoretical, risk-adjusted rate
(denominated by EPA as the weighted
average cost of capital or ‘WACC’), based
on broad averages across the U.S. capital
markets.” As the foregoing explanation
suggests, this characterization is generally
accurate. ALC contends that using such a
hypothetical rate of interest was an error of
law because ALC had presented evidence
of its actual rate of return on capital which,
at the time of the penalty trial, showed that
the average rate of return on capital for
ALC and its parent company between
1990-2000 was 5.7%. This fact was
uncontested, and thus ALC submits that
the 12.73% rate did not achieve the legal
purpose of “leveling the economic playing
field,” but rather was used to exact a
severe penalty “reflecting not the time
value of money nor ALC’s benefits from
retaining funds, but rather theoretical
investment averages that indisputably were
not achieved by ALC.
ALC submits that, instead of the
12.73% rate, one of four alternative rates
should have been used:
(1) the statutory interest rate
(6%)
(2) the risk-free rate
represented by the short-term
U.S. treasury rates during
the relevant time period
(3) the actual average rate of
ALC’s return of capital from
1990-2000
(4) the actual average rate of
ALC’s return of capital from
1990-2001
Each of the rates suggested by ALC results
in approximately the same interest rate,
hovering between 5.2% and 6%, which is
less than half the rate that the District Court
actually used.8 ALC adds that the
“theoretical WACC has been rejected
consistently when applied to companies and
industries that are not achieving such
theoretical rates of return.”9
calculated by “first determining the rate
at which ALC borrowed funds during the
relevant time period.” This
representation implies that the
government experts relied on figures that
were much more ALC specific than was
actually the case. As we have explained,
the experts seem to have relied primarily
on general market numbers for
companies situated similarly to ALC
over a long period. We do not know the
reasons for the government’s
mischaracterization, but we do note our
disapproval.
8Although the government maintains
that the only alternatives to the WACC
preserved by ALC for appeal are the T-bill
rate and the Pennsylvania statute rate, we
have examined the record and do not find
that ALC waived any of the proposed
alternative rates.
9We think that ALC overstates the
principle—if any—that may be drawn

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17
The government responds with a
number of arguments. First, the government
correctly notes that the economic benefit
calculation need not be precise. In Dean
Dairy, we recognized that economic benefit
“ m a y n o t b e c a p a b l e o f re a dy
determination,” and the Court gave “the
district court’s award of a penalty wide
discretion, even though it represents an
approximation.” 150 F.3d at 264 (citing
Tull, 481 U.S. at 426-27). The government
couples this deference accorded to district
court awards with the suggestion that, since
the statutory maximum penalty for ALC’s
violations was $28.05 million, the District
Court gave ALC “a break.” The
government advocated taking other statutory
factors into account and trebling the
economic benefit to yield a penalty of
approximately $12.3 million, see supra note
6, but the District Court only doubled the
economic benefit and ordered ALC to pay
$8,244,670. The government points to this
discrepancy between what it asked for and
what the Court actually did as proof that the
District Court really does have, and should
have, a great amount of discretion in
determining these types of penalties.
The government also points to the
decisions of other courts that have approved
the use of WACC to discount economic
benefit when calculating CWA penalties,
particularly Smithfield Foods where the
District Court, crediting expert testimony,
used the WACC to discount the defendant’s
from the cases it cites. The two cases it
discusses are Chesapeake Bay
Foundation v. Gwaltney of Smithfield,
Ltd., 611 F. Supp. 1542 (E.D. Va. 1985),
aff’d, 791 F.2d 304 (4th Cir. 1986),
vacated on other grounds, 484 U.S. 49
(1987), and United States v. Sheyenne
Tooling & Mfg. Co., 952 F. Supp. 1420
(D.N.D. 1996).
In Gwaltney, 611 F. Supp. at
1559, the Court held that “the actual
interest rate Gwaltney itself paid on
borrowed funds [] is a more accurate
basis for determining Gwaltney’s
economic benefit from delay” than “the
ten-year rate of return on equity earned
by Smithfield Foods, Inc.—Gwaltney’s
parent corporation.” While this case
does not adopt WACC as a measure of
economic benefit, it also does not
affirmatively reject it.
Likewise, in Sheyenne Tooling,
952 F. Supp. at 1426, the Court held that
the principle of requiring that
persons at fault must be held
to a ‘level playing field’ means
that the defendant must be held
to the conditions of his field, not
that of larger or more wealthy
players. And the economic
experts for the United States
used averages and generalizations
which were not compatible with
the playing field in which the
defendant operated.
This is doubtless a sound principle, but
simply does not address what the
appropriate measure is for determining economic benefit.

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18
economic benefit. See United States v.
Smithfield Foods, Inc., 972 F. Supp. 338,
349 & n.17 (E.D. Va. 1997), cited with
approval in Dean Dairy, 150 F.3d at 266.
2. The Appropriate Interest Rate
The methodology used by the
District Court and those advanced by the
parties do not exhaust the possible
interpretations of economic benefit under
§ 1319(d). It will be helpful to analyze the
options. There are, as we see it, two
possible approaches. The first is the cost
of obtaining capital—i.e., the interest rate
necessary to acquire the capital with which
to make the improvements (which were
never made). The second is the use of the
corporate offender’s actual return on its
capital, which, it is conclusively presumed,
was not used to make the improvements.
These are both highly variable factors,
turning on the cost of money to the
company (which depends not only on the
general market forces but also on its
financial strength and credit rating) or on
the profitability of the company at a given
time.
In view of this variability, we think
that it would be inappropriate for us to
decree which methodology should be used
since in any given situation, “leveling the
playing field” might be more readily
achieved with one or the other. Therefore,
we think that the choice of methodology
should be left to the sound discretion of
the District Court.10 In this case, however,
10We note a provision from the field of
trusts that enables the District Court to
exercise its discretion in choosing the
appropriate measure for assessing a
trustee’s liability in the case of a breach of
trust. The choice to make here (i.e., both
cost measures and actual returns are
possible ways of valuing economic
benefit, so which should be adopted?)
resembles that choice. The Restatement
(Second) of Trusts § 205 provides (in the
disjunctive):
If the trustee commits a
breach of trust, he is
chargeable with:
(a) any loss or depreciation
in value of the trust estate
resulting from the breach of
trust; or
(b) any profit made by him
through the breach of trust;
or
(c) any profit which would
have accrued to the trust
estate if there had been no
breach of trust.
As in Gwaltney, 611 F. Supp. at 1558-59
& n.17, the choice is within the discretion
of the District Court, and we are confident
that it will give due consideration to the
equities involved in selecting an
appropriate measure of economic benefit.
Indeed, we do not even hold that economic
benefit is the sole permissible approach to
assessing a penalty; there may well be
other ways. Given this variability, we
disagree with the dissent’s contention that

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19
it is not clear that the District Court was
aware of or considered the range of
options available.
a. Economic Benefit as Measured by the
Cost of Capital
As noted above, economic benefit
can be measured by an entity’s cost of
capital. In accepting the government’s
experts’ position, the District Court
adopted one such measure—WACC— but
there are others. In commenting upon the
cost-of-capital measure adopted by the
District Court, we hope to provide some
guidance as to what constitutes an
appropriate cost-of-capital measure of
economic benefit.
With respect to the cost-of-capital
measure used by the District Court, we
conclude that both the calculation and
application are, at the very least,
unsupported. The first problem is the
government’s calculation of the WACC.
That calculation relied on values that were
not ALC-specific. Instead of using the
actual yield on bonds that ALC had issued,
the government experts computed the
WACC by using the yield on Standard &
Poors A-rated bonds. While using the
S&P figure might well have been a
reasonable approximation of ALC’s
bonds’ yield, a more accurate calculation
could easily have been achieved by using
figures specific to ALC’s bonds.11
The second problem is the
government’s application of the WACC.
WACC averages are constructed on the
basis of a company’s existing capital
structure (that is, the relative proportions of
debt and equity). A WACC figure based on
a company’s existing capital structure at a
given time is not, without further support,
necessarily the same as a company’s
marginal or current cost of capital at that
time (i.e., what it would cost to obtain
additional capital) because new capital
might come in a different mix of debt and
equity. See Aswath Damodaran, Applied
Corporate Finance 108 (1999) (“In
estimating [the current cost of capital using
WACC], we have in a sense conceded the
status quo in terms of financing mix, since
we have estimated the cost of capital at the
existing mix. It is entirely possible that a
firm, by changing its mix, could lower its
cost of capital.”). Unless WACC is shown
to be a good approximation for the marginal
or current cost of capital, it sheds little light
on how expensive it would have been for
the company to go to the market for its
capital, instead of diverting funds that
should have gone to improving pollution
our holding saps too much discretion
from district courts in cases under the
CWA.
11 In contrast, as far as we can tell, the
cost of equity calculation was as ALC-
specific as could reasonably be achieved:
The value for beta seems to have been
ALC-specific, and the other figures that
entered into the computation (the market-
risk premium and the “intermediate stock
premium”) are not by their nature
company specific.

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20
controls.
As noted above, the government
and the District Court relied on Smithfield
Foods. But, upon closer analysis,
Smithfield Foods does not help the
government. There are reasons to suspect
that in the food processing industry (in
which Smithfield operated), the WACC
may have been an entirely appropriate
approximation of Smithfield’s economic
benefit, whereas conditions in the steel
industry (in which ALC operates) are
radically different. More precisely, it may
have been that in Smithfield Foods that the
WACC was a good approximation for the
terms on which money could have
currently been raised; the food processing
industry is a stable industry where
companies probably attract new capital on
terms similar to their existing capital
structure. The steel industry, in contrast,
has been highly volatile and rife with stiff
foreign competition, dislocations, and
bankruptcies. Indeed, as the District Court
noted, the industry is going through a
“brutal restructuring,” and more than
twenty-five United States steelmakers have
sought bankruptcy protection since 1997.
Thus, a company in ALC’s position may
not have, at the times in question, been
able to raise capital on the same terms as
its existing capital structure. We need not
(indeed, cannot) resolve this; but for our
purposes, it is enough that there was
insufficient evidence for the District Court
to say that ALC’s existing capital structure
was representative of the terms on which
new capital would be raised. Thus, if the
economic benefit to ALC is to be
established by a cost-of-capital measure, the
measure to use is ALC’s marginal or current
cost of new capital in the years in question.12
Some courts appear to have endorsed this
approach. See, e.g., Gwaltney of Smithfield,
611 F. Supp. at 1559 (“[T]he actual rate
Gwaltney itself paid on borrowed funds . . .
is a more accurate basis for determining
Gwaltney’s economic benefit from delay.”).
It is of course possible that this
approach might make an offender worse off
than under the government’s WACC
proposal. For example, a company in dire
financial straits may well have a marginal
cost of capital (offered by lenders who see it
as a high-risk investment) that exceeds its
WACC. This is no anomaly. For
companies that are hard up for capital and
cannot afford to raise it in the market, it is
doubtless all too tempting to forego the
sometimes costly improvements and
pollution controls that are required by the
CWA and EPA regulations. But such
companies must still be held to the law. To
do otherwise is, in essence, to allow capital-
12This could be established by looking
to, for example, the cost of any capital
actually raised by ALC at the relevant
times, or by the expert opinion of an
investment banker regarding the terms on
which ALC could have raised capital. Of
course, if expert testimony can establish to
the District Court’s satisfaction that
WACC is—in this particular case—a good
approximation for marginal cost of capital,
then WACC could be accepted as a
surrogate measure of the marginal cost of
capital.

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21
strapped polluters to take out low-interest
loans against the environment.
We of course intimate no view on
what a remand may develop respecting
ALC’s situation in the 1990s. The
government’s experts’ proffer shows debt
costs for S&P A-rated bonds were in the
6.68% - 10.06% range in the 1990s. That
is significantly lower than the 12.73%
WACC figure relied on by the District
Court. Moreover, in recent years, which
would also figure in the calculations,
interest rates have been very low. The
record does not reflect ALC’s actual
financial strength, and it may (or may not)
also have (or have had) a good credit
rating throughout the relevant period.
b. Economic Benefit as Measured by
Actual Return
We have so far been talking about
measuring the economic benefit of
additional capital by the cost to obtain that
capital elsewhere. But the other option is
to use actual rates of return on capital to
com pute economic benefit. The
government’s experts cited the importance
of leveling the economic playing field “in
the same industry.” It is obvious, for
example, that ALC and the steel industry
were not, at times relevant, enjoying stellar
returns. Indeed, as noted above, it was
uncontested at trial that ALC had a return
on capital that was less than half the
12.73% rate used by the District Court.
On this view, any advantage that ALC
enjoyed over its competitors by avoiding
the cost of CWA compliance is measured
by the return that ALC actually realized on
its retained funds or the risk-free return it
might have enjoyed using those funds. We
think that the return on capital is a quite
viable means of leveling the playing field,
along with the marginal or (then) current
cost of capital.
3. Other Observations About the District
Court’s Analysis
There are other potential problems
with the District Court’s calculation, which
relied on the methodology provided by the
government’s experts. It appears that the
government’s experts computed annual
estimates of WACC for each of the years
1990-1998, and came up with the 12.73%
figure by taking the arithmetic mean.13
Since the savings from different violations
accrued on different dates over a several
year period, it is questionable whether an
average interest rate is appropriate, when
year-to-year interest rate estimates are
known and could be used with only minimal
additional effort by the experts.14 The
13To be clear, by “mean” we are
referring not to WACC (which, as a
“weighted average” is a mean of sorts) but
rather to the further step of taking the
mean of a whole series of WACC figures
(one for each of the years in the relevant
period). We have no objection, as the
dissent suggests, to the use of the WACC
formula to assess economic benefit.
14While any correction will be slight, in
the interest of precision the District Court
might also consider whether, if an average
is to be used, the correct procedure would

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22
potentially problematic practice of using a
mean interest rate over a large time span is
present in the government’s experts’
report.15 As it happens, this wound up
hurting ALC: The theoretical WACC
figures from the early 1990s (15.85% in
1990 and 1991, and 13.95% in 1992) are
the highest of the group, but really have no
bearing on the economic benefit conferred
by post-1992 violations. Thus, the average
WACC was biased toward the less-
relevant higher WACC estimates from the
early 1990s.
Finally, we note that the
government is unquestionably correct in its
assertion at oral argument that any
computation must use the same discount
rate for both forward and backward
computations during the same period. For
example, it would be clearly inappropriate
to discount all econo mic benefit
backwards to a uniform date using one
rate, and then use a different rate to carry
the value forward to the date of judgment.
4. Conclusion
We are, of course, acutely aware that
we review the District Court’s interest rate
determination for abuse of discretion, and
that its determination need not be exact. See
Dean Dairy, 150 F.3d at 264-65. Our
deferential scope of review does not mean,
however, that we cannot intervene when a
District Court makes a finding that is
methodologically flawed, even if, under
such theory, the penalty figure it ultimately
arrives at is plausible.
In the dissent’s view “given our
highly deferential standard of review, the
District Court did not clearly err in crediting
the government’s witness over ALC’s
witness and adopting the WACC to
calculate economic benefit.” Of course,
when presented with two sound but
conflicting expert opinions, a district court
has discretion to credit one over the other.
But this discretion is not a license to adopt
an opinion based on unsound methodology,
whatever its source.
Based upon our analysis of the
government’s expert’s methodology, we are
unconvinced that the use of the 12.73%
interest rate achieves the stated purpose of
“leveling the economic playing field,” nor
are we sure that it bears much connection to
a meaningful measure of ALC’s cost of
capital (much less its return on capital).
We therefore must set aside the penalty
calculation and remand for further
proceedings with respect to the interest rate,
fully open to the possibilities that the record
on remand will support a higher, lower, or
substantially similar penalty. We will not
choose among the alternatives we have
suggested (or those suggested by ALC ) in
be to use a geometric mean (computed as
the nth root of the product of n items),
since the percentages involved are
applied in consecutive multiplications.
See Damodaran, Applied Corporate
Finance at 69-70.
15 Moreover, this practice is not
unique to the use of W ACC as a measure
of economic benefit; it is an issue
regardless of the method used to derive
the interest rate.

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23
the discussion above; rather we shall leave
it to the District Court, after receipt of
further submissions by both parties, to
decide what alternative rate is best applied
to the circumstances developed in the
record on remand.16
D. The District Court’s Determination of
Costs of Compliance
1. Introduction—The Least Costly
Method of Compliance
The second basis on which ALC
asks us to overturn the District Court’s
calculation of economic benefit is its
contention that the District Court erred in
calculating the amount of money it would
have cost ALC to institute the changes that
would have led to compliance with the
requirements of its permits. In brief, ALC
argues that the numbers the EPA came up
with (which were adopted by the Court)
and the kinds of solutions it proposed were
cons iderab ly overpriced, es pecia lly
considering that, according to ALC, it had
already fixed the problems for much less
money and could show that the solutions it
had implemented already worked.
The threshold question is whether,
as a matter of law, the District Court must
calculate economic benefit using the least
costly method of compliance. This
question does not appear to have been
addressed by any Court of Appeals. Those
District Courts that have addressed the issue
hold that the calculations should be based on
the least costly method of compliance. See,
e.g., Gwaltney of Smithfield, 611 F. Supp. at
1563 n.25 (holding that economic benefit
calculations could not be based on a more
expensive, “permanent solution” when a
less expensive “interim solution” had
already achieved compliance); United States
v. WCI Steel, Inc., 72 F. Supp. 2d 810 (N.D.
Oh io 1999) (finding cre dib le the
defendant’s expert testimony regarding
poss ible com pliance measures and
calculating economic benefit based on
significantly less expensive method of
compliance than that proposed by the
government’s expert). We find these
decisions persuasive, and hold that
economic benefit analysis should be based
on the least costly method of compliance.
However, contra ALC’s contentions, it does
not appear to us that the District Court took
a different approach.
2. The Vandergrift Plant
ALC cites to two main instances of
alleged miscalculation of benefit. The first,
relating to the Vandergrift plant, stems from
the District Court’s calculation which
incorporated a $600,000 project that the
government’s expert posited would have
brought ALC into compliance with the
pretreatment permit issued for that site.
ALC, however, claims that, in October of
1993, shortly before the Vandergrift
violations ceased, it installed and began to
operate a diversion tank connected to the
discharge piping leading to the Vandergrift
16The District Judge who originally
heard and decided this case has resigned
from the bench. Accordingly, the parties
will doubtless have to develop a record
for the edification of the newly assigned
judge.

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24
facility WWTP outfall. This diversion
tank cost no more than $150,000 to buy
and install. According to ALC, the
pretreatment violations stopped shortly
after the installation of the diversion tank
although there were two monthly average
and four daily maximum violations in
November and December 1993, which
ALC attributed to “start-up problems.”
ALC contends that starting December 15,
1993, not a single violation occurred.
ALC then argues that, in adopting the
government’s proposed $600,000 project
to solve the problem and bring ALC into
compliance, the District Court made
clearly erroneous findings of fact.
There is, however, another side to
the story. As noted above, there were
several so-called “start-up violations” after
the diversion tank was installed, and ALC
cannot claim a clean record until
December 15, 1993. ALC claims that the
District Court should have used the
December 15, 1993 date as the compliance
date because that is the last reported
pretreatment violation before the WWTP
upgrade in August of 1994. However, the
government’s expert, Gary Amendola,
explained that he chose to use August
1994 as the compliance date (as did the
District Court) because the diversion tank
installed in October 1993 was not
sufficient to address the problem at
Vandergrift. Amendola explained that the
fact that ALC had reported no violations
during the first half of 1994 did not
establish that the diversion tank was a
sufficient compliance measure because the
facility had previously operated for months
at a time without reporting any violations.
The District Court chose to credit the
testimony of the government’s expert that
the diversion tank “would not have been
adequate to prevent all violations.” A
decision to credit the expert testimony of
one expert witness over another is entitled to
deference. See Gen. Elec. Co. v. Joiner, 522
U.S. 136, 143 (1997) (holding that a District
Court’s assessment of expert testimony is to
be accorded “the deference that is the
hallmark of abuse-of-discretion review”).
Under these circumstances the District
Court’s findings of fact were not clearly
erroneous, and they must therefore be left to
stand.
3. Outfall 107
The next issue concerns a $476,090
project that the government’s expert posited
was necessary to bring ALC into
compliance for non-contact cooling water
violations at Outfall 107. ALC contends
that the District Court’s economic benefit
calculation which adopted that figure was
premised on clearly erroneous findings of
fact which led to misapplication of the least
costly method of compliance legal principle.
ALC argues that violations at the outfall
were limited to June though October 1994
and that those violations were resolved
through various maintenance efforts,
including repairing cracks in certain
trenches and sumps. The government,
however, points out that ALC’s brief does
not contain any record citation indicating
that it presented factual material to the
District Court at trial relating to its
maintenance efforts, and that to the extent
that there is such evidence in the record, the

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25
evidence is limited to ALC’s own
pleadings. Furthermore, the government
contends that ALC reported violations
long after it alleges that it cured them in
October 1994.
This difference of opinion as to
whether more violations occurred stems
from the fact that ALC identifies only one
internal monitoring point, “Outfall 107,”
associated with the $476,090 re-lining
project. The government expert,
Amendola, however, opined that the re-
lining project was required to cure
violations associated with Number 90
Anneal and Pickle Line, which discharged
through Outfall 007. Outfalls 107 and 207
are internal monitoring points that
discharged through Outfall 007. Since
ALC reported violations at Outfall 007
through December 1995, long after ALC
alleges it cured those violations with
maintenance efforts in October 1994, the
government contends that the maintenance
efforts at Outfall 107 are not enough to
carry the day.
It is clear that the District Court
decided to adopt the government’s
framework regarding the monitoring and
links between these different outfalls. In
view of the bona fide evidentiary dispute,
its findings were not clearly erroneous and
must be upheld.
E. Periods of Non-Compliance
ALC’s final complaint relating to
the economic benefit analysis undertaken
by the District Court is the identification of
the period of non-compliance. Obviously,
the length of the period of non-compliance
has a direct relationship to the calculation of
economic benefit: The longer the period of
non-compliance, the greater the amount of
economic benefit, and the higher the
penalty. ALC contends that the government
miscalculated the period of non-compliance
and that, in adopting the government’s
calculations, the Court calculated ALC’s
purported economic benefit on lengths of
time that bore no semblance to reality.
We do not find it necessary to engage
in a lengthy analysis of the various
contentions regarding the periods of non-
compliance and will set forth some of the
factual disputes only in the margin.17
17 ALC relies on a table it has created
that purports to show the non-compliance
periods designated by the government
were far greater than the actual non-
compliance periods that occurred. In the
table, ALC challenges the non-compliance
dates for the $476,090 relining project
discussed above. That project was
completed in 1996 and was necessary to
cure violations at Outfall 007, at which
ALC reported violations through
December 1995. However, government
expert Amendola extended the non-
compliance date back to the beginning of
the limitations period for this case because
ALC reported violations associated with
the Number 90 Anneal and Pickle Line
beginning at the time it came online in
1988. See App. 583-88; see also App. 991-
92, 994-95 (ALC documents stating need
for treatment upgrade to attain
compliance).
ALC also appears to be repeating

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26
Having thoroughly reviewed the record,
we hold that the District Court’s findings
as to the periods of non-compliance are
supported by the record, were not clearly
erroneous, and must be left to stand.
IV. Monthly Average Violations
In a pretrial ruling the District
Court held:
Plaintiff’s Motion in Limine
on Cou n t i n g D a y s of
Violation, Doc. No. 242, is
GRANTED. All violations of
t h e m o n t h l y a v e r a g e
parameters of defendant’s
NPDES permits shall be
counted as violations equal in
number to all the days in the
monitored month. See
Atlantic States Legal Found’n
v. Tyson Foods, Inc., 897
F.2d 1128, 1139 (11th Cir.
1990).
ALC maintains that the District Court erred
in so ruling, and in particular by improperly
excluding evidence that actual exceedences
occurred on fewer days. ALC relies
primarily on Texaco Refining & Marketing,
2 F.3d at 507. The relevant portion of the
holding of that case is that violations of the
daily average limits result in penalties only
for the number of days within the month that
the facility operated. That decision does
not, however, resolve this case.
The leading authority in this area is
the Court of Appeals for the Fourth
Circuit’s opinion in Gwaltney. Gwaltney
held that a violation of a monthly average
parameter constitutes a violation of each day
of the month. The Court reasoned:
While the statute does not
address directly the matter of
monthly average limitations,
it does speak in terms of
penalties per day of violation,
rather than penalties per
its contention that the $150,000 diversion
tank it installed in October 1993 cured its
pretreatment violations at Vandergrift,
but the District Court found that it was
not until the WW TP upgrade in August
1994 that the pretreatment problem at
Vandergrift was solved, and we have
declined to disturb that finding.
Additionally, ALC’s table
challenges the non-compliance date of
December 1994 for the 24-hour staffing
the District Court deemed necessary to
alleviate pretreatment violations at
Vandergrift. The Court found that ALC
did not have 24-hour staffing in place
until “late 1994” or 1995. ALC’s
contemporaneous internal documents
confirm that 24-hour staffing was
necessary and was not in place before
December 1994. Thus, like the WWTP
upgrade, the 24-hour staffing problem
was not solved until December 1994.
ALC’s table also challenges the non-
compliance dates for 24-hour staffing at
West Leechburg. The District Court
rejected this challenge, finding ALC’s
analysis “misleading” because ALC
committed 599 violations between 1990
and November 1993 that were the subject
of consent agreements with the State.

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27
violation. This language
strongly suggests that where
a violation is defined in
terms of a time period
longer than a day, the
m a x i m u m p e n a l t y
assessable for that violation
should be defined in terms
of the number of days in that
time period.
791 F.2d at 314 (footnote omitted). The
Court of Appeals for the Eleventh Circuit
has followed Gwaltney. See Atl. States
Legal Found., Inc. v. Tyson Foods, Inc.,
897 F.2d 1128, 1139-40 (11th Cir. 1990).
ALC contends that charging it with
a month’s worth of violations based on the
excedence of a monthly average permit
limit yields illogical and unfair results.
For example, ALC claims that a single
upset caused the average of the four
samples for May and September 1991 to
exceed the monthly average limit, while
three of the months’ samples were within
the effluent limits. ALC submits that the
District Court’s ruling “automatically
converted a single event into 31 violation
days, despite evidence to the contrary.”
This was the justification rejected in
Gwaltney. In that case the defendant
presented the Court with hypotheticals
similar to ALC’s contentions. 791 F.2d at
314-15. The Court noted that the
defendant’s hypotheticals ignored the fact
that “both large, isolated discharges and
moderate, long-term discharges are
potentially harmful.” Id. at 315 n.17. The
Court also observed that the statute merely
sets a maximum penalty; the District Court
retains the discretion to assess a smaller
penalty where appropriate. Id. The Court
stressed that counting average monthly
violations as a violation of each day of the
month is essential to providing a framework
that allows district courts “sufficient
flexibility to assess penalties that suit the
particular circumstances of each case.” Id.
at 314. We find the reasoning of Gwaltney
incomplete. A discharger who exceeds the
monthly average maximum by a great
amount will probably also have committed
a number of daily violations, and the
penalties for those violations will mete out
at least part of the total punishment that the
permittee’s conduct for the month merits.
The penalty for violating the average
monthly maximum seems well suited to
punish a pattern of discharges that, with a
few exceptions, do not violate the daily
maximums but are nevertheless, in the
aggregate, excessive. However, we find
problematic the proposition that the
maximum penalty for such a course of
conduct should be thirty times the maximum
penalty for the worst daily violation
imaginable.
Under 33 U.S.C. § 1319(d) a violator
is “subject to a civil penalty not to exceed
$25,000 per day for each violation,” which
means that a civil penalty of $25,000 may be
assessed for each day that a violation
occurs. Under Gwaltney, a violation of the
monthly average maximum occurs on every
day of the month, which could result in a
monthly penalty of roughly $750,000, but
that does not seem to be the most literal
reading of the statutory language. That said,

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28
we are fairly confident that no one in
Congress ever thought of the question that
is now before us, and it does not appear
that there is any answer to be found in the
text of the CWA or its legislative history.
Nor do we think that the structure or
purpose of the Act yields any clear answer.
Certainly we can infer that Congress
wanted to set an upper limit on the civil
penalty that a district court can award;
Congress did not want to leave this
entirely to the district court’s discretion.
But without knowing Congress’s views on
the relative severity of a violation of a
monthly as opposed to a daily limit, it is
difficult to tell what sort of upper limit
Congress wanted to propose.
Given the opaqueness of the statute
and the consequent muddle that we have
described, we urge either that the Congress
amend the statute to clarify its intentions
or that the EPA consider the matter and,
after notice and comment, promulgate
regulations that will give more guidance.18
To that end we will direct the Clerk of
Court to send copies of this opinion,
directing attention to this section, to the
Administrator and General Counsel of the
EPA and to the counsel for the relevant
House and Senate Committees. But we
must still decide this case. We are not
prepared to say that Gwaltney was simply
wrongly decided. Instead—and the best we
can do in view of the muddled state of
affairs— is to follow Gwaltney on the
question of the statutory maximum, and to
use it as a framework, but to give guidance
structuring the way in which a district court
is to exercise its discretion in setting an
actual penalty. This is the course we follow.
More particularly, in exercising its
discretion, a district court should take into
account the degree to which the polluter’s
conduct had already been punished by
penalties for daily violations and to use the
maximum penalty for a daily violation as a
basis for comparison. Thus a district court
would not assess a daily penalty of more
than $25,000 as a function of the monthly
average violation unless it could say that the
permittee’s violation of the average monthly
maximum was as blameworthy (taking into
account the factors enumerated in 33 U.S.C.
§ 1319(d) including environmental harm) as
a daily violation for which the $25,000
maximum would be appropriate. This
exercise will not always be simple as there
is a certain incommensurability between
short, intense and prolonged moderate
discharges, but we are confident that the
district courts, in the exercise of their
discretion, can do the job. Since the District
Court did not have the benefit of this
standard, we must vacate and remand so that
it may apply it to reconsider the penalty for
monthly average violations.
Our modified Gwaltney approach
must, however, be applied in accord with
Texaco. Under such a regime, there must be
excluded from the calculation days on which
the facility in question did not operate. If
18Indeed, in a sense it is the EPA’s
regulations that have created the
quandary, because they inject the concept
of a monthly violation into a statute that
authorizes penalties denominated only in
days.

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29
there was evidence in this record that the
plant did not operate on certain days, this
District Court would have to consider that
as well. As best we can ascertain,
however, there is no such evidence in the
record. The closest ALC comes is to
represent that the Basic Oxygen Furnaces
were not operating during the week of
January 24, 1994, but ALC makes no
claim that non-functioning furnaces
establishes overall plant closure. In fact,
one ALC witness testified “all of our
facilities typically operate 365 days a year,
24 hours a day” and that “Allegheny
Ludlum’s facilities generally operate 24
hours a day, 365 days a year.” At all
events, no date other than January 24,
1994, is identified as a date for (possible)
plant shut down. Additionally, we note
that the argument maintained by ALC in
its briefs is not that the Court’s order
deprived it of the opportunity of proving
that plants were not operating on given
days, but rather that it was not discharging
or was in compliance during parts of the
month.
V. Conclusion
For the foregoing reasons, we will
affirm the judgment on liability, except as
to those aspects of the government’s
claims that are affected by the laboratory
error defense and the monthly average
violations. We will vacate the assessment
of penalty and remand for further
consideration in light of this opinion.
Parties to bear their own costs.
United States v. Allegheny Ludlam,
No. 02-4346
FUENTES, Circuit Judge, dissenting.
I concur and join in Part II, Parts IIID
and E, and Part IV of the majority’s well-
crafted opinion. I disagree, however, with
the majority’s conclusion that the District
Court abused its discretion when it credited
the EPA’s expert economist and used that
expert’s interest rate to calculate ALC’s
economic benefit rather than the rate
presented by ALC’s expert. The majority
writes that the District Court committed
clear error because, in applying the EPA’s
12.73% discount rate, the Court so vastly
overstated the economic benefit to ALC of
its Clean Water Act (“CWA”) violations
that it failed to level the economic playing
field. In my view, in selecting the 12.73%
rate, the District Court acted squarely within
its discretionary authority.
I.
Before discussing the discount rate
issue and the Court’s exercise of discretion,
I think it worth commenting on the
proceeding conducted by the District Court.
The $8,244,670 penalty imposed on ALC
came after a three-day penalty hearing
during which the District Court heard
testimony from 13 witnesses, 11 live and 2
through depositions. These witnesses
included experts on economic benefit, cost
avoidance and aquatic toxicology, ALC’s
Director of Environmental Affairs, and

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30
officials from the United States Coast
Guard, the Pennsylvania Fish and Boat
Commission and the Pennsylvania
Department of Environmental Protection.
Expert testimony was submitted by written
proffer with live cross-examination. On
the subject of economic benefit, the EPA
presented testimony from Robert Harris,
an economist, who explained how he
calculated the 12.73% WACC. ALC
presented testimony from Dr. Howard
Pifer, who proposed using the 30-day
treasury bill rate to determine the value of
the money going forward to the penalty
payment date. In a 30-page opinion issued
after the hearing, the District Court
credited the EPA’s expert testimony,
concluding that Dr. Pifer’s argument was
not supported by the facts and that the
WACC offered a reasonable approach
because it represented an average of
potential investments made by ALC during
the time it had use of the funds that it did
not spend on compliance. The District
Court also followed Dean Dairy’s
endorsement of the WACC, as used in
Smithfield Foods.
The majority finds fault with the
District Court’s analysis, noting that the
government’s calculation of the WACC
“relied on values that were not ALC-
specific.” Maj. Op. at 19. The majority
also believes that, rather than using an
average such as the WACC, the
government should have applied the actual
rate it would have cost ALC to raise
capital for the years when it was diverting
funds that should have gone to pollution
control. Therefore, the majority concludes
that the District Court erred in using the
12.73% discount rate.
II.
As I see it, the central issue here is
whether the District Court abused its
discretion in crediting one expert over
another when it determined the interest rate.
We have noted many times that abuse of
discretion is a highly deferential standard of
review. And, we have stated, on numerous
occasions, that a decision to credit the
testimony of one expert witness over
another is entitled to deference. See United
States v. Universal Rehabilitation Services
(PA), Inc., 205 F.3d 657, 665 (3d Cir.
2000), quoting General Elec. Co. v. Joiner,
522 U.S. 136, 143 (1997), United States v.
Mathis, 264 F.3d 321, 335 (3d Cir. 2001),
Laverdi v. Jenkins Township, 2002 WL
31108910 at *364 (3d Cir. Sept. 19, 2002),
Matlin v. Langkow, 2003 WL 283164 at
*382 (3d Cir. Jan. 22, 2003). The Supreme
Court has held that a district court’s
evaluation of expert testimony is to be
accorded “the deference that is the hallmark
of abuse-of-discretion review.” General
Elec. Co. v. Joiner, 522 U.S. at 143. A
district court abuses its discretion when it
“bases its opinion on a clearly erroneous
finding of fact, an erroneous legal
conclusion, or an improper application of
law to fact.” LaSalle Nat’l Bank v. First
Conn. Holding Group, L.L.C. XXIII, 287
F.3d 279, 288 (3d Cir. 2002). Indeed, we
have said that “[i]n order to justify reversal,
a district court’s analysis and resulting
conclusion must be “arbitrary or irrational.”

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31
United States v. Universal Rehabilitation
Services (PA), Inc., 205 F.3d 657, 665 (3d
Cir. 2000), quoting In re Paoli R.R. Yard
PCB Litig., 113 F.3d 444, 453 (3d Cir.
1997) (internal quotations omitted).
Abuse of discretion requires a showing of
clear error, not inappropriateness. In my
view, given our highly deferential standard
of review, the District Court did not clearly
err in crediting the government’s witness
over ALC’s witness and adopting the
WACC to calculate economic benefit.
Here, after considering all of the
testimony, the District Court credited the
testimony of the government’s economic
expert concerning the WACC, stating that
it “represents the rate of return a company
must earn annually to continue to attract its
current investors and maintain its current
levels of operations. It is a rate which is
commonly used by companies in making
capital budgeting decisions.” Dist. Ct. Op.
at 22, quoting Harris Proffer at 6 (internal
quotations omitted); App. I at 47. The
District Court also credited the testimony
of the government’s expert on avoided
costs, noting that he had 30 years of
experience in the environmental field,
including working for and as a consultant
to the EPA and several major steel
companies. Dist. Ct. Op. at 16-17; App. I
at 41-42. The District Court was not
required to explore every possibility. As
the Supreme Court has stated, a district
court need not have conducted an
“exhaustive search” of all possible
alternatives. See, e.g., Daubert v. Merrell
Dow Pharms., Inc., 509 U.S. 579, 597
(1993); see also Kumho Tire Co., Ltd. v.
Carmichael, 526 U.S. 137, 147 (1999)
(extending Daubert’s gatekeeping obligation
to all expert testimony).
Still, the majority conducts a
protracted survey of economic theories,
considers treatises not specifically presented
by experts before the District Court, and
decides that it disagrees with the District
Court’s discretionary determination. Of
course, there will always be disagreement
among experts concerning scientific, or in
this case economic, theories. However, it is
for the District Court Judge, as fact finder,
to resolve those disagreements by judging
the credibility of the expert witnesses,
resolving the conflicting evidence, and
assessing the weight of the expert’s
testimony. There is nothing in the record
here to indicate that the government’s expert
did not use sound methodology and
adequately support his opinion, and nothing
to show that the District Court was clearly
erroneous in crediting that opinion.
The majority’s disagreement as to
which interest rate is more “appropriate” is
not enough to justify a remand.19 This is
19 The majority states, for example, that
“[i]n commenting upon the cost-of-capital
measure adopted by the District Court
[i.e., the WACC], we hope to provide
some guidance as to what constitutes an
appropriate cost-of-capital measure of
economic benefit.” Maj. Op. at 19.

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especially true in light of Dean Dairy,
where we stressed that economic benefit
“may not be capable of ready
determination,” and we accorded “the
district court’s award of a penalty wide
discretion, even though it represents an
approximation.” 150 F.3d at 264, citing
United States v. Tull, 481 U.S. 412, 426-
27 (1987). Surely the choice to credit the
government’s expert over ALC’s falls
within this wide discretion. Indeed, the
Dean Dairy Court went on to say that the
“[p]recise economic benefit to a polluter
may be difficult to prove” and that
“[r]easonable approximations of economic
benefit will suffice.” 150 F.3d at 264,
quoting Public Interest Research Group of
N.J., Inc. v. Powell Duffryn Terminals,
Inc., 913 F.2d 64, 80 (3d Cir. 1990). As
here when the District Court credited one
expert’s reasonable approximation of the
economic benefit over another’s, it acted
well within its discretion. We ought not
substitute our own opinion for that of the
District Court’s.
In its attempt to fault the District
Court’s calculation of the WACC for
“rely[ing] on values that were not ALC-
specific” [i.e., using theoretical yields on
bonds issued rather than actual yields], the
majority, in fact, concedes that the District
Court’s analysis contained reasonable
approximations. Maj. Op. at 19. It states
that while the bond-yield “figure might
well have been a reasonable approximation
of ALC’s bonds’ yields, a more accurate
calculation could easily have been
achieved by using figures specific to
ALC’s bonds.” Id. However, as long as
the District Court’s calculation was
“reasonable,” we cannot find the Court to
have abused its discretion. Relying on
theoretical values rather than actual values
to calculate the WACC does not render the
District Court’s decision “unsupported,” as
the majority contends.
The record shows th at the
government’s expert gave a satisfactory
explanation for his decision to use the
WACC in this case instead of, for example,
the marginal or current cost of capital for
the relevant years, as the majority suggests.
He stated:
[The WACC] is a rate that I consider proper
and represents a rate that falls between the
risk free rate and the equity rate. The reason
that I believe that the WACC rate is
appropriate is because a company’s cash is
fungible. That is, funds are not segregated
and used for specific purposes. Funds are
used in many different ways and the
company receives different returns for each
use. Some projects earn a high rate of
return. Others earn a low or no rate of
return. It is impossible to say exactly how
the funds that should have been spent in this
example were used. Therefore, I believe the
most appropriate rate to use is the average
return the company earns on all of its
projects. In essence, this is the average
return for the company.
App. IV at 1009. The record evidence
clearly shows that the District Court’s
decision to use the WACC was supported by
various considerations, including, as
testified by the government’s expert, the

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fungibility of a company’s funds and the
variable rates of return a company receives
depending on how it uses those funds.
Further, the Court’s exercise of
discretion is supported by the case law.
Dean Dairy cites the Smithfield Foods
Court’s use of the WACC favorably,
indicating that the WACC is a perfectly
acceptable interest rate for a district court
in this circuit to adopt when calculating
economic benefit. 150 F.3d at 266, citing
United States v. Smithfield Foods, Inc.,
972 F.Supp. 338, 349 (E.D.Va. 1997).
The majority’s failure to find clear
error after combing the record is evident in
several places. For example, the majority
criticizes the government’s expert’s use of
the arithmetic mean (instead of the
geometric mean) to compute an estimate of
the WACC for the years 1990-1998.
Although the majority admits that “any
correction will be slight,” the WACC
comes to 12.71%, as opposed to 12.73%,
when it is calculated using the geometric
mean. Maj. Op. at 21-22 n.14. Surely, a
discretionary choice by a district judge that
results in an interest rate .02% higher than
an alternative cannot be viewed as clearly
erroneous.
The majority also criticizes the
government’s use of a mean interest rate at
all, asserting that it “wound up hurting
ALC.” Maj. Op. at 22. I do not agree that
this calculation unduly punished ALC.
Taking an average of the interest rates for
all of the years in which ALC was non-
compliant is a common and perfectly
acceptable method for arriving at a single
figure to use when calculating ALC’s
economic benefit during those years. I
disagree with the majority’s contention that
“[t]he theoretical WACC figures from the
early 1990s . . . really have no bearing on
the economic benefit conferred by post-
1992 violations” simply because they are the
highest figures of the group. Maj. Op. at 22.
The figures from 1990 to 1992 are equally
as relevant as those from 1993 to 1998, as
CWA violations occurred in each of the
years from 1990 to 1998. There is no record
support for the majority’s assertion that the
WACC figures from the early 1990s are
“less-relevant” than those for later years. Id.
Therefore, the majority’s suggestion that the
average WACC was unduly biased towards
high numbers is inaccurate.20 Further, the
District Court pointed out that, in some
instances, it credited the government’s
expert in ways that wound up benefitting
ALC. For example, in calculating the
economic benefit that ALC enjoyed by
spending less money to staff its facilities,
the District Court noted that the
government’s expert
made two assumptions that were favorable
to defendant. First, he included in ALC’s
actual staffing costs time billed by
maintenance workers who stopped by the
20 The majority also overstates the
degree to which the highest figures deviate
from the rest of those in the calculation. A
figure of 15.85% would not be considered
a statistical outlier when computing an
average, particularly when the same figure
appears twice and the rest of the figures
range from 10.53% to 13.95%.

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facility, even though having a maintenance
worker stop by is not the same as having
full-time staffing. Second, [his]
calculations do not include money saved
by ALC at its West Leechburg and
Brackenridge facilities prior to entry of the
consent agreements w i th P aD E P
[ P e n n s y l v a n i a D e p a r t m e n t o f
Environmental Protection].
Dist. Ct. Op. at 16 n.7, citing Amendola
Proffer at 17; App. I at 41. Also, in
calculating the least costly upgrade that
would have brought ALC into compliance
at its Vandergrift facility before 1994, the
District Court noted that
the United States might have pointed to a
$1.8 million upgrade considered by ALC
in 1988 and 1989, or the entire cost of the
$5.7 million upgrade of the Vandergrift
WWTP [Wastewater Treatment Plants],
and argued that money should have been
spent in 1990, rather than 1994. But in an
approach that is favorable to ALC, [the
government’s expert] calculated the least
costly upgrade in 1994 that would likely
have eliminated the violations, and
provided a $600,000 alternative.
Dist. Ct. Op. at 19, citing Amendola
Proffer at 12-13; App. I at 44. As with its
WACC calculation, the District Court
exercised its discretion here and supported
its decision with acceptable explanations.
Here, however, it arrived at a figure that
benefitted ALC. The majority fails to
explain how this decision falls within the
District Court’s discretion while its
WACC calculation does not.
The majority also hypothesizes that
the WACC may not have been as
appropriate an approximation of economic
benefit for ALC as it was for the company
in Smithfield Foods because of differences
in the volatility of the industries in which
each company operated. Again, the
standard of review is abuse of discretion,
and not whether another decision might
have been more “appropriate.” Further, the
majority cites no authority for the
proposition that using a theoretical interest
rate as opposed to an actual one in a
particular industry is clearly erroneous. The
majority quotes Chesapeake Bay Found.,
Inc. v. Gwaltney of Smithfield, Ltd., 611 F.
Supp. 1542, 1559 (E.D.Va. 1985), as stating
that “[t]he actual interest rate Gwaltney
itself paid on borrowed funds . . . is a more
accurate basis for determining Gwaltney’s
economic benefit from delay.” Maj. Op. at.
20 (ellipsis in original). When put into
context, however, this case does not support
the majority’s position. In Gwaltney, the
plaintiff’s calculation computed Gwaltney’s
economic benefit from delay using “the ten-
year rate of return on equity earned by
Smithfield Foods, Inc.--Gwaltney’s parent
corporation.” 611 F. Supp. at 1559. The
Court went on to hold that “[a]t least in
these circumstances, the Court believes that
13%--the actual interest rate Gwaltney itself
paid on borrowed funds--is a more accurate
basis for determining Gwaltney's economic
benefit from delay.” Id. The Gwaltney
Court, therefore, held against the use of a
parent corporation’s interest rate, but not the
use of a theoretical interest rate per se. In
addition, the record shows that the District
Court did consider the economic benefit
calculation in an industry-specific context,

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stating that “[f]ailures to comply with the
[CWA] can . . . result in indirect
competitive benefits when compared with
companies in the same field that do
comply with the [CWA].” Dist. Ct. Op. at
15; App. I at 40.
Finally, the majority asserts that the
District Court abused its discretion in
choosing the WACC instead of a lower
alternative interest rate because using the
WACC evidenced an effort to punish and
deter when calculating the economic
benefit. However, the District Court
clearly recognized that there are two steps
to the “bottom up” approach to penalty
assessment and it is the second step that is
geared toward punishing and deterring the
violator. The District Court stated:
To achieve the goal of deterrence,
an appropriate penalty must encompass
both the economic benefit that the
d e f e n d a n t o b t a in e d t h ro u g h i t s
noncompliance, and an additional punitive
component that takes into account the
penalty factors listed in Section 1319(d).
Without the second component, those
regulated by the CWA would have nothing
to lose by violating it.
Dist. Ct. Op. at 29; App. I at 54.
The District Court was clearly mindful of
the two-step process to be used when
assessing penalty, first calculating the
economic benefit and then considering the
penalty factors to increase that figure. The
Court followed the correct analysis, only
taking punitive measures in the second
step when it doubled the economic benefit
figure. Despite the majority’s contention to
the contrary, the District Court demonstrated
a proper application of the law in assessing
the penalty and, therefore, did not abuse its
discretion.
In short, there is nothing in the record
to show that the District Court committed
clear error in its choice of the interest rate to
calculate economic benefit. After carefully
weighing the evidence presented by experts
on both sides during a three-day penalty
trial, the District Court exercised its
discretion as the trier of fact and credited the
testimony of one witness over another. The
decision is supported by the expert
testimony as well as our case law. Because
I do not believe that the District Court’s
fact-finding was clearly erroneous, its
decision is entitled to deference under abuse
of discretion review.
I would, therefore, affirm the District
Court’s decision as to the interest rate used
to calculate economic benefit.

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