[Federal Register Volume 60, Number 90 (Wednesday, May 10, 1995)]
[Notices]
[Pages 24856-24862]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11501]
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ENVIRONMENTAL PROTECTION AGENCY
[Docket No. 95F-FRL-5205-5]
Interim Revised EPA Supplemental Environmental Projects Policy
Issued
AGENCY: Office of Enforcement and Compliance Assurance, EPA.
ACTION: Notice.
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SUMMARY: The Office of Enforcement and Compliance Assurance (EPA) is
issuing the Interim Revised EPA Supplemental Environmental Projects
Policy. This Policy supersedes the February 12, 1991 Policy on the Use
of Supplemental Environmental Projects in EPA Settlements. This Policy
responds to numerous complaints that the 1991 Policy was too
cumbersome, rigid and difficult to understand and apply. This Policy is
being issued to provide greater flexibility to EPA in exercising its
enforcement discretion to establish appropriate settlement penalties
and to the regulated community in proposing supplemental environmental
projects (SEPs) designed to secure significant environmental or public
health protection and improvements. EPA intends to implement this
Policy on an interim basis effective May 8, 1995.
DATES: Comments must be received on or before August 6, 1995.
ADDRESSES: Comments may be mailed to: SEP Policy, Multimedia
Enforcement Division, Office of Regulatory Enforcement, Mail Code 2248-
A, United States Environmental Protection Agency, 401 M Street, S.W.,
Washington D.C. 20460.
FOR FURTHER INFORMATION CONTACT: David A. Hindin, 202-564-6004, Gerard
C. Kraus, 202-564-6047 or Peter W. Moore, 202-564-6014, Office of
Regulatory Enforcement, Mail Code 2248-A, United States Environmental
Protection Agency, 401 M Street, S.W., Washington D.C. 20460.
SUPPLEMENTARY INFORMATION: This interim final version of the EPA
Supplemental Environmental Projects Policy expands and clarifies the
1991 Policy on the Use of Supplemental Environmental Projects in EPA
Settlements. The primary purpose of this Policy is to obtain
environmental and public health protection and improvements that may
not otherwise have occurred without the settlement incentives provided
by this Policy. The revised Policy, issued today, establishes a
framework for determining whether a proposed project can be considered
in establishing an appropriate settlement penalty. In addition, this
Policy sets out clear legal guidelines, well-defined categories of
acceptable projects and simple easy to apply rules for calculating and
applying the cost of a SEP in determining an appropriate settlement
penalty.
Dated: May 1, 1995
Steven A. Herman,
Assistant Administrator, Office of Enforcement and Compliance
Assurance, United States Environmental Protection Agency.
A. Introduction
1. Background
In settlements of environmental enforcement cases, the U.S.
Environmental Protection Agency (EPA) will require the alleged
violators to achieve and maintain compliance with Federal environmental
laws and regulations and to pay a civil penalty. To further EPA's goals
to protect and enhance public health and the environment, in certain
instances environmentally beneficial projects, or Supplemental
Environmental Projects (SEPs), may be included in the settlement. This
Policy sets forth the types of projects that are permissible as SEPs,
the penalty mitigation appropriate for a particular SEP, and the terms
and conditions under which they may become part of a settlement. The
primary purpose of this Policy is to encourage and obtain environmental
and public health protection and improvements that may not otherwise
have occurred without the settlement incentives provided by this
Policy.
In settling enforcement actions, EPA requires alleged violators to
promptly cease the violations and, to the extent feasible, remediate
any harm caused by the violations. EPA also seeks substantial monetary
penalties in order to deter noncompliance. Without penalties, companies
would have an incentive to delay compliance until they are caught and
ordered to comply. Penalties promote environmental compliance and help
protect public health by deterring future violations by the same
violator and deterring violations by other members of the regulated
community. Penalties help ensure a national level playing field by
ensuring that violators do not obtain an unfair economic advantage over
their competitors who made the necessary expenditures to comply on
time. Penalties also encourage companies to adopt pollution prevention
and recycling techniques, so that they minimize their pollutant
discharges and reduce their potential liabilities.
Statutes administered by EPA generally contain penalty assessment
criteria that a court or administrative law judge must consider in
determining an appropriate penalty at trial or a hearing. In the
settlement context, EPA generally follows these criteria in exercising
its discretion to establish an appropriate settlement penalty. In
establishing an appropriate penalty, EPA considers such factors as the
economic benefit associated with the violations, the gravity or
seriousness of the violations, and prior history of violations.
Evidence of a violator's commitment and ability to perform a SEP is
also a relevant factor for EPA to consider in establishing an
appropriate settlement penalty. All else being equal, the final
settlement penalty will be lower for a violator who agrees to perform
an acceptable SEP compared to the violator who does not agree to
perform a SEP.
The Agency encourages the use of SEPs. While penalties play an
important role in environmental protection by deterring violations and
creating a level playing field, SEPs can play an additional role in
securing significant environmental or public health
[[Page 24857]] protection and improvements.1 SEPs may not be
appropriate in settlement of all cases, but they are an important part
of EPA's enforcement program. SEPs may be particularly appropriate to
further the objectives in the statutes EPA administers and to achieve
other policy goals, including promoting pollution prevention and
environmental justice.
\1\Depending on circumstances and cost, SEPs also may have a
deterrent impact.
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2. Pollution Prevention and Environmental Justice
The Pollution Prevention Act of 1990 (42 U.S.C. 13101 et seq.,
November 5, 1990) identifies an environmental management hierarchy in
which pollution ``should be prevented or reduced whenever feasible;
pollution that cannot be prevented should be recycled in an
environmentally safe manner whenever feasible; pollution that cannot be
prevented or recycled should be treated in an environmentally safe
manner whenever feasible; and disposal or other release into the
environment should be employed only as a last resort * * *'' (42 U.S.C.
13103). In short, preventing pollution before it is created is
preferable to trying to manage, treat or dispose of it after it is
created.
Selection and evaluation of proposed SEPs should be conducted in
accordance with this hierarchy of environmental management, i.e., SEPs
involving pollution prevention techniques are preferred over other
types of reduction or control strategies, and this can be reflected in
the degree of consideration accorded to a defendant/respondent before
calculation of the final monetary penalty.
Further, there is an acknowledged concern, expressed in Executive
Order 12898 on environmental justice, that certain segments of the
nation's population are disproportionately burdened by pollutant
exposure. Emphasizing SEPs in communities where environmental justice
issues are present helps ensure that persons who spend significant
portions of their time in areas, or depend on food and water sources
located near, where the violations occur would be protected. Because
environmental justice is not a specific technique or process but an
overarching goal, it is not listed as a category of SEP; but EPA
encourages SEPs in communities where environmental justice may be an
issue.
3. Using This Policy
In evaluating a proposed project to determine if it qualifies as a
SEP and then determining how much penalty mitigation is appropriate,
Agency enforcement and compliance personnel should use the following
five-step process:
(1) Ensure that the project meets the basic definition of a SEP.
(Section B)
(2) Ensure that all legal guidelines, including nexus, are
satisfied. (Section C)
(3) Ensure that the project fits within one (or more) of the
designated categories of SEPs. (Section D)
(4) Calculate the net-present after-tax cost of the project and
then determine the appropriate amount of penalty mitigation. (Section
E)
(5) Ensure that the project satisfies all of the implementation and
other criteria. (Sections F, G, H and I)
4. Applicability
This Policy revises and hereby supersedes the February 12, 1991
Policy on the Use of Supplemental Environmental Projects in EPA
Settlements. This Policy applies to settlements of all civil judicial
and administrative actions filed after the effective date of this
Policy, and to all pending cases in which the government has not
reached agreement in principle with the alleged violator on the
specific terms of a SEP.
This Policy applies to all civil judicial and administrative
enforcement actions taken under the authority of the environmental
statutes and regulations that EPA administers. It also may be used by
EPA and the Department of Justice in reviewing proposed SEPs in
settlement of citizen suits. This Policy also applies to federal
agencies that are liable for the payment of civil penalties. This
Policy does not apply to settlements of claims for stipulated penalties
for violations of consent decrees or other settlement agreement
requirements.2
\2\ The Agency is evaluating whether SEPs should be used, and if
so, how, in evaluating claims for stipulated penalties.
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This is a settlement Policy and thus is not intended for use by
EPA, defendants, respondents, courts or administrative law judges at a
hearing or in a trial. Further, whether the Agency decides to accept a
proposed SEP as part of a settlement is purely within EPA's discretion.
Even though a project appears to satisfy all of the provisions of this
Policy, EPA may decide, for one or more reasons, that a SEP is not
appropriate (e.g., the cost of reviewing a SEP proposal is excessive,
the oversight costs of the SEP may be too high, or the defendant/
respondent may not have the ability or reliability to complete the
proposed SEP).
This Policy establishes a framework for EPA to use in exercising
its enforcement discretion in determining appropriate settlements. In
some cases, application of this Policy may not be appropriate, in whole
or part. In such cases, the litigation team may, with the advance
approval of Headquarters, use an alternative or modified approach.
B. Definition and Key Characteristics of a SEP
Supplemental environmental projects are defined as environmentally
beneficial projects which a defendant/respondent agrees to undertake in
settlement of an enforcement action, but which the defendant/respondent
is not otherwise legally required to perform. The three bolded key
parts of this definition are elaborated below.
``Environmentally beneficial'' means a SEP must improve, protect,
or reduce risks to public health, or the environment at large. While in
some cases a SEP may provide the alleged violator with certain
benefits, there must be no doubt that the project primarily benefits
the public health or the environment.
``In settlement of an enforcement action'' means: (1) EPA has the
opportunity to help shape the scope of the project before it is
implemented; and (2) the project is not commenced until after the
Agency has identified a violation (e.g., issued a notice of violation,
administrative order, or complaint).3
\3\Since the primary purpose of this Policy is to obtain
environmental or public health benefits that may not have occurred
``but for'' the settlement, projects which have been started before
the Agency has identified a violation are not eligible as SEPs.
Projects which have been committed to or started before the
identification of a violation may mitigate the penalty in other
ways. Depending on the specifics, if a company had initiated
environmentally beneficial projects before the enforcement process
commenced, the initial penalty calculation could be lower due to the
absence of recalcitrance, no history of other violations, good faith
efforts, less severity of the violations, or a shorter duration of
the violations.
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``Not otherwise legally required to perform means'' the SEP is not
required by any federal, state or local law or regulation. Further,
SEPs cannot include actions which the defendant/respondent may be
required to perform: as injunctive relief in the instant case; as part
of a settlement or order in another legal action; or by state or local
requirements. SEPs may include activities which the defendant/
respondent will become legally obligated to undertake two or more years
in the future. Such ``accelerated compliance'' projects are not
allowable, however, if the regulation or statute provides a benefit
(e.g., a higher [[Page 24858]] emission limit) to the defendant/
respondent for early compliance.
Also, the performance of a SEP reduces neither the stringency nor
timeliness requirements of Federal environmental statutes and
regulations. Of course, performance of a SEP does not alter the
defendant/respondent's obligation to remedy a violation expeditiously
and return to compliance.
C. Legal Guidelines
EPA has broad discretion to settle cases, including the discretion
to include SEPs as an appropriate part of the settlement. The legal
evaluation of whether a proposed SEP is within EPA's authority and
consistent with all statutory and Constitutional requirements may be a
complex task. Accordingly, this Policy uses five legal guidelines to
ensure that our SEPs are within the Agency's and a federal court's
authority, and do not run afoul of any Constitutional or statutory
requirements.4
\4\These legal guidelines are based on federal law as it applies
to EPA; States may have more or less flexibility in the use of SEPs
depending on their laws.
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1. All projects must have adequate nexus. Nexus is the relationship
between the violation and the proposed project. This relationship
exists only if the project remediates or reduces the probable overall
environmental or public health impacts or risks to which the violation
at issue contributes, or if the project is designed to reduce the
likelihood that similar violations will occur in the future. SEPs are
likely to have an adequate nexus if the primary impact of the project
is at the site where the alleged violation occurred or at a different
site in the same ecosystem or within the immediate geographic5
area. Such SEPs may have sufficient nexus even if the SEP addresses a
different pollutant in a different medium. In limited cases, nexus may
exist even though a project will involve activities outside of the
United States.6
\5\The immediate geographic area will generally be the area
within a 50 mile radius of the site on which the violations
occurred.
\6\All projects which would include activities outside the U.S.
must be approved in advance by Headquarters and/or the Department of
Justice. See section I.
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2. A project must advance at least one of the declared objectives
of the environmental statutes that are the basis of the enforcement
action. Further, a project cannot be inconsistent with any provision of
the underlying statutes.
3. EPA or any other federal agency may not play any role in
managing or controlling funds that may be set aside or escrowed for
performance of a SEP. Nor may EPA retain authority to manage or
administer the SEP. EPA may, of course, provide oversight to ensure
that a project is implemented pursuant to the provisions of the
settlement and have legal recourse if the SEP is not adequately
performed.
4. The type and scope of each project are determined in the signed
settlement agreement. This means the ``what, where and when'' of a
project are determined by the settlement agreement. Settlements in
which the defendant/respondent agrees to spend a certain sum of money
on a project(s) to be determined later (after EPA or the Department of
Justice signs the settlement agreement) are generally not allowed.
5. A project may not be something that EPA itself is required by
its statutes to do. And a project may not provide EPA with additional
resources to perform an activity for which Congress has specifically
appropriated funds. In addition, a SEP should not appear to be an
expansion of an existing EPA program. For example, if EPA has developed
a brochure to help a segment of the regulated community comply with
environmental requirements, a SEP may not directly, or indirectly,
provide additional resources to revise, copy or distribute the
brochure.
D. Categories of Supplemental Environmental Projects
EPA has identified seven categories of projects which may qualify
as SEPs. In order for a proposed project to be accepted as a SEP, it
must satisfy the requirements of at least one category plus all the
other requirements established in this Policy.
1. Public Health
A public health project provides diagnostic, preventative and/or
remedial components of human health care which is related to the actual
or potential damage to human health caused by the violation. This may
include epidemiological data collection and analysis, medical
examinations of potentially affected persons, collection and analysis
of blood/fluid/ tissue samples, medical treatment and rehabilitation
therapy.
Public health SEPs are acceptable only where the primary benefit of
the project is the population that was harmed or put at risk by the
violations.
2. Pollution Prevention
A pollution prevention project is one which reduces the generation
of pollution through ``source reduction,'' i.e., any practice which
reduces the amount of any hazardous substance, pollutant or contaminant
entering any waste stream or otherwise being released into the
environment, prior to recycling, treatment or disposal. (After the
pollutant or waste stream has been generated, pollution prevention is
no longer possible and the waste must be handled by appropriate
recycling, treatment, containment, or disposal methods.)
Source reduction may include equipment or technology modifications,
process or procedure modifications, reformulation or redesign of
products, substitution of raw materials, and improvements in
housekeeping, maintenance, training, inventory control, or other
operation and maintenance procedures. Pollution prevention also
includes any project which protects natural resources through
conservation or increased efficiency in the use of energy, water or
other materials. ``In-process recycling,'' wherein waste materials
produced during a manufacturing process are returned directly to
production as raw materials on site, is considered a pollution
prevention project.
In all cases, for a project to meet the definition of pollution
prevention, there must be an overall decrease in the amount and/or
toxicity of pollution released to the environment, not merely a
transfer of pollution among media. This decrease may be achieved
directly or through increased efficiency (conservation) in the use of
energy, water or other materials. This is consistent with the Pollution
Prevention Act of 1990 and the Administrator's ``Pollution Prevention
Policy Statement: New Directions for Environmental Protection,'' dated
June 15, 1993.
3. Pollution Reduction
If the pollutant or waste stream already has been generated or
released, a pollution reduction approach--which employs recycling,
treatment, containment or disposal techniques--may be appropriate. A
pollution reduction project is one which results in a decrease in the
amount and/or toxicity of any hazardous substance, pollutant or
contaminant entering any waste stream or otherwise being released into
the environment by an operating business or facility by a means which
does not qualify as ``pollution prevention.'' This may include the
installation of more effective end-of-process control or treatment
technology. This also includes ``out-of-process recycling,'' wherein
industrial waste collected after the manufacturing process and/or
consumer waste materials are used as raw materials for production off-
site, reducing the need for treatment, [[Page 24859]] disposal, or
consumption of energy or natural resources.
4. Environmental Restoration and Protection
An environmental restoration and protection project is one which
goes beyond repairing the damage caused by the violation to enhance the
condition of the ecosystem or immediate geographic area adversely
affected.7 These projects may be used to restore or protect
natural environments (such as ecosystems) and man-made environments,
such as facilities and buildings. Also included is any project which
protects the ecosystem from actual or potential damage resulting from
the violation or improves the overall condition of the ecosystem.
Examples of such projects include: Reductions in discharges of
pollutants which are not the subject of the violation to an affected
air basin or watershed; restoration of a wetland along the same avian
flyway in which the facility is located; or purchase and management of
a watershed area by the defendant/respondent to protect a drinking
water supply where the violation, e.g., a reporting violation, did not
directly damage the watershed but potentially could lead to damage due
to unreported discharges. This category also includes projects which
provide for the protection of endangered species (e.g., developing
conservation programs or protecting habitat critical to the well-being
of a species endangered by the violation).
\7\If EPA lacks authority to require repair, then repair itself
may constitute a SEP.
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With regards to man-made environments, such projects may involve
the remediation of facilities and buildings, provided such activities
are not otherwise legally required. This includes the removal/
mitigation of contaminated materials, such as soils, asbestos and
leaded paint, which are a continuing source of releases and/or threat
to individuals.
5. Assessments and Audits
Assessments and audits, if they are not otherwise available as
injunctive relief, are potential SEPs under this category. There are
four types of projects in this category:
a. Pollution prevention assessments; b. site assessments; c.
environmental management system audits; and d. compliance audits.
a. Pollution prevention assessments are systematic, internal
reviews of specific processes and operations designed to identify and
provide information about opportunities to reduce the use, production,
and generation of toxic and hazardous materials and other wastes. To be
eligible for SEPs, such assessments must be conducted using a
recognized pollution prevention assessment or waste minimization
procedure to reduce the likelihood of future violations.
b. Site assessments are investigations of the condition of the
environment at a site or of the environment impacted by a site, and/or
investigations of threats to human health or the environment relating
to a site. These include but are not limited to: Investigations of
levels and/or sources of contamination in any environmental media at a
site; investigations of discharges or emissions of pollutants at a
site, whether from active operations or through passive transport
mechanisms; ecological surveys relating to a site; natural resource
damage assessments; and risk assessments. To be eligible for SEPs, such
assessments must be conducted in accordance with recognized protocols,
if available, applicable to the type of assessment to be undertaken.
c. An environmental management system audit is an independent
evaluation of a party's environmental policies, practices and controls.
Such evaluation may encompass the need for: (1) A formal corporate
environmental compliance policy, and procedures for implementation of
that policy; (2) educational and training programs for employees; (3)
equipment purchase, operation and maintenance programs; (4)
environmental compliance officer programs; (5) budgeting and planning
systems for environmental compliance; (6) monitoring, record keeping
and reporting systems; (7) in-plant and community emergency plans; (8)
internal communications and control systems; and (9) hazard
identification, risk assessment.
d. An environmental compliance audit is an independent evaluation
of a defendant/respondent's compliance status with environmental
requirements. Credit is only given for the costs associated with
conducting the audit. While the SEP should require all violations
discovered by the audit to be promptly corrected, no credit is given
for remedying the violation since persons are required to achieve and
maintain compliance with environmental requirements. In general,
compliance audits are acceptable as SEPs only when the defendant/
respondent is a small business.8,9
\8\For purposes of this Policy, a small business is owned by a
person or another entity that employs 100 or fewer individuals.
Small businesses could be individuals, privately held corporations,
farmers, landowners, partnerships and others.
\9\Since most large companies routinely conduct compliance
audits, to mitigate penalties for such audits would reward violators
for performing an activity that most companies already do. In
contrast, these audits are not commonly done by small businesses,
perhaps because such audits may be too expensive.
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These two types of assessments and environmental management system
audits are allowable as SEPs without an implementation commitment by
the defendant/respondent. Implementation is not required because
drafting implementation requirements before the results of the study
are known is difficult. Further, for pollution prevention assessments
and environmental management systems audits, many of the implementation
recommendations from these studies may constitute activities that are
in the defendant/respondent's own economic interest.
These assessments and audits are acceptable where the primary
impact of the project is at the same facility, at another facility
owned by the violator, or at a different facility in the same ecosystem
or within the immediate geographic area (e.g., a publicly owned
wastewater treatment works and its users). These assessments and audits
are only acceptable as SEPs when the defendant/respondent agrees to
provide EPA with a copy.
6. Environmental Compliance Promotion
An environmental compliance promotion project provides training or
technical support to other members of the regulated community to: (1)
Identify, achieve and maintain compliance with applicable statutory and
regulatory requirements; (2) avoid committing a violation with respect
to such statutory and regulatory requirements; or (3) go beyond
compliance by reducing the generation, release or disposal of
pollutants beyond legal requirements. For these types of projects, the
defendant/respondent may lack the experience, knowledge or ability to
implement the project itself, and, if so, the defendant/respondent
should be required to contract with an appropriate expert to develop
and implement the compliance promotion project. Acceptable projects may
include, for example, producing or sponsoring a seminar directly
related to correcting widespread or prevalent violations
[[Page 24860]] within the defendant/ respondent's economic sector.
Environmental compliance promotion SEPs are acceptable only where
the primary impact of the project is focused on the same regulatory
program requirements which were violated and where EPA has reason to
believe that compliance in the sector would be significantly advanced
by the proposed project. For example, if the alleged violations
involved Clean Water Act pretreatment violations, the compliance
promotion SEP must be directed at ensuring compliance with pretreatment
requirements.
7. Emergency Planning and Preparedness
An emergency planning and preparedness project provides
assistance--such as computers and software, communication systems,
chemical emission detection and inactivation equipment, HAZMAT
equipment, or training--to a responsible state or local emergency
response or planning entity. This is to enable these organizations to
fulfill their obligations under the Emergency Planning and Community
Right-to-Know Act (EPCRA) to collect information to assess the dangers
of hazardous chemicals present at facilities within their jurisdiction,
to develop emergency response plans, to train emergency response
personnel and to better respond to chemical spills.
EPCRA requires regulated sources to provide information on chemical
production, storage and use to State Emergency Response Commissions
(SERCs), Local Emergency Planning Committees (LEPCs) and Local Fire
Departments (LFDs). This enables states and local communities to plan
for and respond effectively to chemical accidents and inform
potentially affected citizens of the risks posed by chemicals present
in their communities, thereby enabling them to protect the environment
or ecosystems which could be damaged by an accident. Failure to comply
with EPCRA impairs the ability of states and local communities to meet
their obligations and places emergency response personnel, the public
and the environment at risk from a chemical release.
Emergency planning and preparedness SEPs are acceptable where the
primary impact of the project is within the same emergency planning
district or state affected by the violations. Further, this type of SEP
is allowable only when the SEP involves non-cash assistance and there
are violations of EPCRA or reporting violations under CERCLA Section
103 alleged in the complaint.
8. Projects Which Are Not Acceptable as SEPs
Except for projects which meet the specific requirements of one of
the categories enumerated in Sec. D. above, the following are examples
of the types of projects that are not allowable as SEPs:
a. General educational or public environmental awareness projects,
e.g., sponsoring public seminars, conducting tours of environmental
controls at a facility, promoting recycling in a community;
b. Contribution to environmental research at a college or
university;
c. Conducting a project, which, though beneficial to a community,
is unrelated to environmental protection, e.g., making a contribution
to charity, or donating playground equipment;
d. Studies or assessments without a commitment to implement the
results (except as provided for in Section D.5 above);
e. Projects which are being funded by low-interest federal loans,
federal contracts, or federal grants.
E. Calculation of the Final Penalty
As a general rule, the costs to be incurred by a violator in
performing a SEP may be considered in determining an appropriate
settlement amount. Calculating the final penalty in a settlement which
includes a SEP is a three-step process. First, the Agency's penalty
policies are used as applicable to calculate all of the other parts of
the settlement penalty (including economic benefit and gravity
components). Second, calculate the net-present after-tax cost of the
SEP. Third, evaluate the benefits of the SEP, based on specific
factors, to determine what percentage of the net-present after-tax cost
will be considered in determining an appropriate final settlement
penalty.
1. Penalty
Penalties are an important part of any settlement. A substantial
penalty is generally necessary for legal and policy reasons. Without
penalties there would be no deterrence as regulated entities would have
little incentive to comply. Penalties are necessary as a matter of
fairness to those companies that make the necessary expenditures to
comply on time: violators should not be allowed to obtain an economic
advantage over their competitors who complied. Except in extraordinary
circumstances, if a settlement includes a SEP, the penalty should
recover, at a minimum, the economic benefit of noncompliance plus 10
percent of the gravity component, or 25 percent of the gravity
component only, whichever is greater.
In cases involving government agencies or entities, such as
municipalities, or non-profit organizations, where the circumstances
warrant, EPA may determine, based on the nature of the SEPs being
proposed, that an appropriate settlement could contain a cash penalty
less than the economic benefit of non-compliance. The precise amount of
the cash penalty will be determined by the applicable penalty policy.
2. Calculation of the Cost of the SEP
To ensure that a proposed SEP is consistent with this Policy, the
net present after-tax cost of the SEP, hereinafter called the ``SEP
Cost,'' is calculated. In order to facilitate evaluation of the SEP
Cost of a proposed SEP, the Agency has developed a computer model
called PROJECT. To use PROJECT, the Agency needs reliable estimates of
the costs and savings associated with a defendant/respondent's
performance of a SEP. Often the costs will not be estimates but known
amounts based on a defendant/respondent's agreement to expend a fixed
or otherwise known dollar amount on a project.
There are three types of costs that may be associated with
performance of a SEP (which are entered into the PROJECT model):
capital costs (e.g., equipment, buildings); one-time nondepreciable
costs (e.g., removing contaminated materials, purchasing land,
developing a compliance promotion seminar); and annual operation costs
or savings (e.g., labor, chemicals, water, power, raw
materials).10
\10\PROJECT does not evaluate the potential for market benefits
which may accrue with the performance of a SEP (e.g., increased
sales of a product, improved corporate public image, or improved
employee morale). Nor does it consider costs imposed on the
government, such as the cost to the Agency for oversight of the SEP,
or the burden of a lengthy negotiation with a defendant/respondent
who does not propose a SEP until late in the settlement process.
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In order to run the PROJECT model properly (i.e., to produce a
reasonable estimate of the net present after-tax cost of the project),
the number of years that annual operation costs or savings will be
expended in performing the SEP must be specified. At a minimum, the
defendant/respondent must be required to implement the project for the
same number of years used in the PROJECT model calculation. If certain
costs or savings appear speculative, they should not be entered into
the PROJECT model. The PROJECT model is the primary method to determine
the SEP cost for purposes of negotiating settlements.11
\11\See PROJECT User's Manual, January 1995. If the PROJECT
model appears inappropriate to a particular fact situation, EPA
Headquarters should be consulted to identify an alternative
approach. For example, the December 1993 version of PROJECT does not
readily calculate the cost of an accelerated compliance SEP. The
cost of such a SEP is the additional cost associated with doing the
project early (ahead of the regulatory requirement) and it needs to
be calculated in a slightly different manner. [[Page 24861]]
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EPA does not offer tax advice on whether a company may deduct SEP
expenditures from its income taxes. If a defendant/respondent states
that it will not deduct the cost of a SEP from its taxes and it is
willing to commit to this in the settlement document, and provide the
Agency with certification upon completion of the SEP that it has not
deducted the SEP expenditures, the PROJECT model calculation should be
adjusted to calculate the SEP Cost without reductions for taxes. This
is a simple adjustment to the PROJECT model: just enter a zero for
variable 7, the marginal tax rate. If a business is not willing to make
this commitment, the marginal tax rate in variable 7 should not be set
to zero; rather the default settings (or a more precise estimate of the
business' marginal tax rates) should be used in variable 7.
If the PROJECT model reveals that a project has a negative cost,
this means that it represents a positive cash flow to the defendant/
respondent and as a profitable project thus, generally, is not
acceptable as a SEP. If a project generates a profit, a defendant/
respondent should, and probably will, based on its own economic
interests implement the project. While EPA encourages companies to
undertake environmentally beneficial projects that are economically
profitable, EPA does not believe violators should receive a bonus in
the form of penalty mitigation to undertake such projects as part of an
enforcement action. EPA does not offer subsidies to complying companies
to undertake profitable environmentally beneficial projects and it
would thus be inequitable and perverse to provide such subsidies only
to violators. In addition, the primary goal of SEPs is to secure a
favorable environmental or public health outcome which would not have
occurred but for the enforcement case settlement. To allow SEP penalty
mitigation for profitable projects would thwart this goal.12
\12\The penalty mitigation guidelines in subsection E.3 provide
that the amount of mitigation should not exceed the net cost of the
project. To provide penalty mitigation for profitable projects would
be providing a credit in excess of net costs.
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3. Penalty Mitigation
After the SEP Cost has been calculated, EPA should determine what
percentage of that cost may be applied as mitigation against the
preliminary total calculated gravity component before calculation of
the final penalty. The SEP should be examined as to whether and how
effectively it achieves each of the following five factors listed
below.
Benefits to the Public or Environment at Large. While all
SEPs benefit public health or the environment, SEPs which perform well
on this factor will result in significant and quantifiable reduction in
discharges of pollutants to the environment and the reduction in risk
to the general public. SEPs also will perform well on this factor to
the extent they result in significant and, to the extent possible,
measurable progress in protecting and restoring ecosystems (including
wetlands and endangered species habitats).
Innovativeness. SEPs which perform well on this factor
will further the development and implementation of innovative
processes, technologies, or methods which more effectively: reduce the
generation, release or disposal of pollutants; conserve natural
resources; restore and protect ecosystems; protect endangered species;
or promote compliance. This includes ``technology forcing'' techniques
which may establish new regulatory ``benchmarks.''
Environmental Justice. SEPs which perform well on this
factor will mitigate damage or reduce risk to minority or low income
populations which may have been disproportionately exposed to pollution
or are at environmental risk.
Multimedia Impacts. SEPs which perform well on this factor
will reduce emissions to more than one medium.
Pollution Prevention. SEPs which perform well on this
factor will develop and implement pollution prevention techniques and
practices.
The better the performance of the SEP under each of these factors,
the higher the mitigation percentage may be set. As a general
guideline, the final mitigation percentage should not exceed 80 percent
of the SEP Cost. For small businesses, government agencies or entities,
and non-profit organizations, this percentage may be set as high as 100
percent. For any defendant/respondent, if one of the five factors is
pollution prevention, the percentage may be set as high as 100 percent.
A lower mitigation percentage may be appropriate if the government must
allocate significant resources to monitoring and reviewing the
implementation of a project.
In administrative enforcement actions in which there is a statutory
limit on administrative penalties, the cash penalty obtained plus the
amount of penalty mitigation credit due to the SEPs shall not exceed
the statutory administrative penalty limit.
F. Performance by a Third Party
SEPs are generally performed either by the defendant/respondent
itself (using its own employees) and/or by contractors or
consultants.13 In the past in a few cases, a SEP has been
performed by someone else, commonly called a third party. Because of
legal concerns and the difficulty of ensuring that a third party
implements the project as required (since by definition a third party
has no legal or contractual obligation to implement the project as
specified in the settlement document), performance of a SEP by a third
party is not allowed.
\13\ Of course, non-profit organizations, such as universities
and public interest groups, may function as contractors or
consultants.
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G. Oversight and Drafting Enforceable SEPS
The settlement agreement should accurately and completely describe
the SEP. (See related legal guideline 4 in Section C above.) It should
describe the specific actions to be performed by the defendant/
respondent and provide for a reliable and objective means to verify
that the defendant/respondent has timely completed the project. This
may require the defendant/respondent to submit periodic reports to EPA.
If an outside auditor is necessary to conduct this oversight, the
defendant/respondent should be made responsible for the cost of any
such activities. The defendant/respondent remains responsible for the
quality and timeliness of any actions performed or any reports prepared
or submitted by the auditor. A final report certified by an appropriate
corporate official, acceptable to EPA and evidencing completion of the
SEP, should be required.
To the extent feasible, defendant/respondents should be required to
quantify the benefits associated with the project and provide EPA with
a report setting forth how the benefits were measured or estimated. The
defendant/respondent should agree that whenever it publicizes a SEP or
the results of the SEP, it will state in a prominent manner that the
project is being undertaken as part of the settlement of an enforcement
action.
The drafting of a SEP will vary depending on whether the SEP is
being performed as part of an administrative or judicial enforcement
action. SEPs with long implementation schedules (e.g., 18 months or
longer), SEPs which require EPA review and comment on
[[Page 24862]] interim milestone activities, and other complex SEPs may
not be appropriate in those administrative enforcement actions where
EPA lacks injunctive relief authority or is subject to a penalty
ceiling. Specific guidance on the proper drafting of SEPs will be
provided in a separate guidance document.
H. Failure of a SEP and Stipulated Penalties
If a SEP is not completed satisfactorily, the defendant/respondent
should be required, pursuant to the terms of the settlement document,
to pay stipulated penalties for its failure. Stipulated penalty
liability should be established for each of the scenarios set forth
below as appropriate to the individual case.
1. Except as provided in paragraph 2 immediately below, if the SEP
is not completed satisfactorily, a substantial stipulated penalty
should be required. Generally, a substantial stipulated penalty is
between 50 and 100 percent of the amount by which the settlement
penalty was mitigated on account of the SEP.
2. If the SEP is not completed satisfactorily, but the defendant/
respondent: (a) made good faith and timely efforts to complete the
project; and (b) certifies, with supporting documentation, that at
least 90 percent of the amount of money which was required to be spent
was expended on the SEP, no stipulated penalty is necessary.
3. If the SEP is satisfactorily completed, but the defendant/
respondent spent less than 90 percent of the amount of money required
to be spent for the project, a small stipulated penalty should be
required. Generally, a small stipulated penalty is between 10 and 25
percent of the amount by which the settlement penalty was mitigated on
account of the SEP.
4. If the SEP is satisfactorily completed, and the defendant/
respondent spent at least 90 percent of the amount of money required to
be spent for the project, no stipulated penalty is necessary.
The determinations of whether the SEP has been satisfactorily
completed (i.e., pursuant to the terms of the agreement) and whether
the defendant/respondent has made a good faith, timely effort to
implement the SEP is in the sole discretion of EPA.
I. EPA Procedures
1. Approvals
The authority of a government official to approve a SEP is included
in the official's authority to settle an enforcement case and thus,
subject to the exceptions set forth here, no special approvals are
required. The special approvals apply to both administrative and
judicial enforcement actions as follows:14
\14\In judicial cases, the Department of Justice must approve
the SEP.
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a. Regions in which a SEP is proposed for implementation shall be
given the opportunity to review and comment on the proposed SEP.
b. In all cases in which a SEP may not fully comply with the
provisions of this Policy, the SEP must be approved by the EPA
Assistant Administrator for Enforcement and Compliance Assurance.
c. In all cases in which a SEP would involve activities outside the
United States, the SEP must be approved in advance by the Assistant
Administrator and, for judicial cases only, the Assistant Attorney
General for the Environment and Natural Resources Division of the
Department of Justice.
d. In all cases in which a SEP includes an environmental compliance
promotion project, the SEP must be approved by the Office of Regulatory
Enforcement in OECA. With time, this approval requirement may be
delegated to Regional officials.
2. Documentation and Confidentiality
In each case in which a SEP is included as part of a settlement, an
explanation of the SEP with supporting materials (including the PROJECT
model printout, where applicable) must be included as part of the case
file. The explanation of the SEP should demonstrate that the five
criteria set forth in Section A.3 above are met by the project and
include a description of the expected benefits associated with the SEP.
The explanation must include a description by the enforcement attorney
of how nexus and the other legal guidelines are satisfied.
Documentation and explanations of a particular SEP may constitute
confidential settlement information that is exempt from disclosure
under the Freedom of Information Act, is outside the scope of
discovery, and is protected by various privileges, including the
attorney-client privilege and the attorney work-product privilege.
While individual Agency evaluations of proposed SEPs are confidential
documents, this Policy is a public document and may be released to
anyone upon request.
This Policy is primarily for the use of U.S. EPA enforcement
personnel in settling cases. EPA reserves the right to change this
Policy at any time, without prior notice, or to act at variance to
this Policy. This Policy does not create any rights, duties, or
obligations, implied or otherwise, in any third parties.
[FR Doc. 95-11501 Filed 5-9-95; 8:45 am]
BILLING CODE 6560-50-P