[Federal Register Volume 63, Number 86 (Tuesday, May 5, 1998)] [Notices] [Pages 24796-24804] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 98-11881] ----------------------------------------------------------------------- ENVIRONMENTAL PROTECTION AGENCY [Docket No. 98F-FRL-6008-8] Final EPA Supplemental Environmental Projects Policy Issued AGENCY: Environmental Protection Agency (EPA). ACTION: Notice. ----------------------------------------------------------------------- SUMMARY: The Environmental Protection Agency (EPA) is issuing a revised, final EPA Supplemental Environmental Projects Policy. This Policy supersedes the May 1995 Interim Revised Supplemental Environmental Projects Policy. Based on experience gained implementing the Interim Revised SEP Policy, EPA has refined and clarified this Policy to better assist it in exercising its enforcement discretion to establish appropriate settlement penalties and supplemental environmental projects (SEPs) that secure significant environmental and public health improvements. DATES: EPA will implement this Policy effective May 1, 1998. FOR FURTHER INFORMATION CONTACT: Ann Kline, 202-564-0119, Office of Regulatory Enforcement, Mail Code 2248-A, United States Environmental Protection Agency, 401 M Street, SW., Washington, DC 20460. SUPPLEMENTARY INFORMATION: These final revisions to the EPA Supplemental Environmental Projects (SEP) Policy refine and clarify the 1995 Interim Revised Supplemental Environmental Projects Policy for easier implementation. The basic structure and operation of the Policy remains unchanged. 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 final Policy retains the 1995 Policy framework for determining whether a proposed project can be considered in establishing an appropriate settlement penalty. In addition, this Policy also 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. The most significant changes made to the 1995 Interim Revised Policy include: (1) Explicit encouragement of community input into the development of SEPs in appropriate cases; (2) a prohibition on using SEPs to mitigate claims for stipulated penalties except in extraordinary circumstances; and (3) the creation of an ``other'' category, under which projects that do not fit within a defined category of this Policy but otherwise meet all other criteria of the Policy may be approved under certain procedural requirements. A full copy of this Policy is set forth below and also may be found at U.S. EPA's Web site at http://www.epa.gov/oeca/sep. Dated: April 10, 1998. 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) requires 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 part of 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, regulated entities 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 [[Page 24797]] 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 regulated entities to adopt pollution prevention and recycling techniques in order to 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 that are consistent with this Policy. SEPs may not be appropriate in settlement of all cases, but they are an important part of EPA's enforcement program. 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 protection and improvements. 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. 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). Selection and evaluation of proposed SEPs should be conducted generally 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, i.e., low-income and/or minority populations, are disproportionately burdened by pollutant exposure. Emphasizing SEPs in communities where environmental justice concerns 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 particular SEP category; 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) 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, I and J) 4. Applicability This Policy revises and hereby supersedes the February 12, 1991 Policy on the Use of Supplemental Environmental Projects in EPA Settlements and the May 1995 Interim Revised Supplemental Environmental Projects Policy. 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. Claims for stipulated penalties for violations of consent decrees or other settlement agreements may not be mitigated by the use of SEPs.1 --------------------------------------------------------------------------- \1\ In extraordinary circumstances, the Assistant Administrator may consider mitigating potential stipulated penalty liability using SEPs where: (1) Despite the circumstances giving rise to the claim for stipulated penalties, the violator has the ability and intention to comply with a new settlement agreement obligation to implement the SEP; (2) there is no negative impact on the deterrent purposes of stipulated penalties; and (3) the settlement agreement establishes a range for stipulated penalty liability for the violations at issue. For example, if a respondent/defendant has violated a settlement agreement which provides that a violation of X requirement subjects it to a stipulated penalty between $1,000 and $5,000, then the Agency may consider SEPs in determining the specific penalty amount that should be demanded. --------------------------------------------------------------------------- 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, and the amount of any penalty mitigation that may be given for a particular SEP, 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, the defendant/respondent may not have the ability or reliability to complete the proposed SEP, or the deterrent value of the higher penalty amount outweighs the benefits of 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 Characterisitics of a SEP Supplemental environmental projects are defined as environmentally beneficial projects which a defendant/respondent agrees to undertake in [[Page 24798]] 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).2 --------------------------------------------------------------------------- \2\ 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 the defendant has previously committed to perform or 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 regulated entity 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. --------------------------------------------------------------------------- Not otherwise legally required to perform means the project or activity is not required by any federal, state or local law or regulation. Further, SEPs cannot include actions which the defendant/ respondent is likely to be required to perform: (a) As injunctive relief 3 in the instant case; --------------------------------------------------------------------------- \3\ The statutes EPA administers generally provide a court with broad authority to order a defendant to cease its violations, take necessary steps to prevent future violations, and to remediate any harm caused by the violations. If a court is likely to order a defendant to perform a specific activity in a particular case, such an activity does not qualify as a SEP. --------------------------------------------------------------------------- (b) As injunctive relief in another legal action EPA, or another regulatory agency could bring; (c) As part of an existing settlement or order in another legal action; or, d) By a state or local requirement. SEPs may include activities which the defendant/respondent will become legally obligated to undertake two or more years in the future, if the project will result in the facility coming into compliance earlier than the deadline. Such ``accelerated compliance'' projects are not allowable, however, if the regulation or statute provides a benefit (e.g., a higher 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. --------------------------------------------------------------------------- 1. A project cannot be inconsistent with any provision of the underlying statutes. 2. All projects must advance at least one of the objectives of the environmental statutes that are the basis of the enforcement action and must have adequate nexus. Nexus is the relationship between the violation and the proposed project. This relationship exists only if: a. The project is designed to reduce the likelihood that similar violations will occur in the future; or b. The project reduces the adverse impact to public health or the environment to which the violation at issue contributes; or c. The project reduces the overall risk to public health or the environment potentially affected by the violation at issue. Nexus is easier to establish 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 geographic 5 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 The cost of a project is not relevant to whether there is adequate nexus. --------------------------------------------------------------------------- \5\ The immediate geographic area will generally be the area within a 50 mile radius of the site on which the violations occurred. Ecosystem or geographic proximity is not by itself a sufficient basis for nexus; a project must always satisfy subparagraph a, b, or c in the definition of nexus. In some cases, a project may be performed at a facility or site not owned by the defendant/respondent. \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 J. --------------------------------------------------------------------------- 3. EPA 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, perform 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 defined in the signed settlement agreement. This means the ``what, where and when'' of a project are defined by the settlement agreement. Settlements in which the defendant/respondent agrees to spend a certain sum of money on a project(s) to be defined later (after EPA or the Department of Justice signs the settlement agreement) are not allowed. 5. a. A project cannot be used to satisfy EPA's statutory obligation or another federal agency's obligation to perform a particular activity. Conversely, if a federal statute prohibits the expenditure of federal resources on a particular activity, EPA cannot consider projects that would appear to circumvent that prohibition b. A project may not provide EPA or any federal agency with additional resources to perform a particular activity for which Congress has specifically appropriated funds. A project may not provide EPA with additional resources to perform a particular activity for which Congress has earmarked funds in an appropriations committee report.7 Further, a project cannot be used to satisfy EPA's statutory or earmark obligation, or another federal agency's statutory obligation, to spend funds on a particular activity. A project, however, may be related to a particular activity for which Congress has specifically appropriated or earmarked funds. --------------------------------------------------------------------------- \7\ Earmarks are instructions for changes to EPA's discretionary budget authority made by appropriations committee in committee reports that the Agency generally honors as a matter of policy. --------------------------------------------------------------------------- c. A project may not provide additional resources to support specific activities performed by EPA employees or EPA contractors. For example, if EPA has developed a brochure to help a segment of the regulated community comply with environmental requirements, a project may not directly, [[Page 24799]] or indirectly, provide additional resources to revise, copy or distribute the brochure. d. A project may not provide a federal grantee with additional funds to perform a specific task identified within an assistance agreement. D. Categories of Supplemental Environmental Projects EPA has identified seven specific 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, or improved containment, or safer disposal of an existing pollutant source. Pollution reduction 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. 4. Environmental Restoration and Protection An environmental restoration and protection project is one which enhances the condition of the ecosystem or immediate geographic area adversely affected.8 These projects may be used to restore or protect natural environments (such as ecosystems) and man-made environments, such as facilities and buildings. This category also includes any project which protects the ecosystem from actual or potential damage resulting from the violation or improves the overall condition of the ecosystem.9 Examples of such projects include: Restoration of a wetland in the same ecosystem 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). --------------------------------------------------------------------------- \8\ If EPA lacks authority to require repair of the damage caused by the violation, then repair itself may constitute a SEP. \9\ Simply preventing new discharges into the ecosystem, as opposed to taking affirmative action directly related to preserving existing conditions at a property, would not constitute a restoration and protection project, but may fit into another category such as pollution prevention or pollution reduction. --------------------------------------------------------------------------- In some projects where a defendant/respondent has agreed to restore and then protect certain lands, the question arises as to whether the project may include the creation or maintenance of certain recreational improvements, such as hiking and bicycle trails. The costs associated with such recreational improvements may be included in the total SEP cost provided they do not impair the environmentally beneficial purposes of the project and they constitute only an incidental portion of the total resources spent on the project. In some projects where the parties intend that the property be protected so that the ecological and pollution reduction purposes of the land are maintained in perpetuity, the defendant/respondent may sell or transfer the land to another party with the established resources and expertise to perform this function, such as a state park authority. In some cases, the U.S. Fish and Wildlife Service or the National Park Service may be able to perform this function.10 --------------------------------------------------------------------------- \10\ These federal agencies have explicit statutory authority to accept gifts of land and money in certain circumstances. All projects with these federal agencies must be reviewed and approved in advance by legal counsel in the agency, usually the Solicitor's Office in the Department of the Interior. --------------------------------------------------------------------------- With regard 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 lead 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 three types of projects in this category: a. Pollution prevention assessments; b. environmental quality assessments; and [[Page 24800]] c. compliance audits. These assessments and audits are only acceptable as SEPs when the defendant/respondent agrees to provide EPA with a copy of the report. The results may be made available to the public, except to the extent they constitute confidential business information pursuant to 40 CFR part 2, subpart B. 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. Pollution prevention assessments are acceptable as SEPs without an implementation commitment by the defendant/respondent. Implementation is not required because drafting implementation requirements before the results of an assessment are known is difficult. Further, many of the implementation recommendations may constitute activities that are in the defendant/ respondent's own economic interest. b. Environmental quality assessments are investigations of: The condition of the environment at a site not owned or operated by the defendant/respondent; the environment impacted by a site or a facility regardless of whether the site or facility is owned or operated by the defendant/respondent; or threats to human health or the environment relating to a site or a facility regardless of whether the site or facility is owned or operated by the defendant/respondent. These include, but are not limited to: investigations of levels or sources of contamination in any environmental media at a site; or monitoring of the air, soil, or water quality surrounding a site or facility. To be eligible as SEPs, such assessments must be conducted in accordance with recognized protocols, if available, applicable to the type of assessment to be undertaken. Expanded sampling or monitoring by a defendant/respondent of its own emissions or operations does not qualify as a SEP to the extent it is ordinarily available as injunctive relief. Environmental quality assessment SEPs may not be performed on the following types of sites: sites that are on the National Priority List under CERCLA section 105, 40 CFR part 300, appendix B; sites that would qualify for an EPA removal action pursuant to CERCLA section 104(a) and the National Oil and Hazardous Substances Pollution Contingency Plan, 40 CFR 300.415; and sites for which the defendant/respondent or another party would likely be ordered to perform a remediation activity pursuant to CERCLA section 106, RCRA section 7003, RCRA 3008(h), CWA section 311, or another federal law. c. Environmental compliance audits are independent evaluations 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 or small community.11 12 --------------------------------------------------------------------------- \11\ 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. A small community is one comprised of fewer than 2,500 persons. \12\ 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. --------------------------------------------------------------------------- 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 or (2) 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 a seminar directly related to correcting widespread or prevalent violations 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. Environmental compliance promotion SEPs are subject to special approval requirements per Section J below. 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 and EPA has not previously provided the entity with financial assistance for the same purposes as the proposed SEP. 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, or CAA section 112(r), or violations of [[Page 24801]] other emergency planning, spill or release requirements alleged in the complaint. 8. Other Types of Projects Projects determined by the case team to have environmental merit which do not fit within at least one of the seven categories above but that are otherwise fully consistent with all other provisions of this Policy, may be accepted with the advance approval of the Office of Enforcement and Compliance Assurance. 9. Projects Which Are Not Acceptable as SEPs The following are examples of the types of projects that are not allowable as SEPs: a. General public 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. Contributions 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 a non-profit, public interest, environmental, or other charitable organization, or donating playground equipment; d. Studies or assessments without a requirement to address the problems identified in the study (except as provided for in Sec. D.5 above); e. Projects which the defendant/respondent will undertake, in whole or part, with low-interest federal loans, federal contracts, federal grants, or other forms of federal financial assistance or non-financial assistance (e.g., loan guarantees). E. Calculation of the Final Penalty Substantial penalties are an important part of any settlement for legal and policy reasons. Without penalties there would be no deterrence, as regulated entities would have little incentive to comply. Additionally, penalties are necessary as a matter of fairness to those regulated entities that make the necessary expenditures to comply on time: Violators should not be allowed to obtain an economic advantage over their competitors who complied. As a general rule, the net costs to be incurred by a violator in performing a SEP may be considered as one factor in determining an appropriate settlement amount. In settlements in which defendant/ respondents commit to conduct a SEP, the final settlement penalty must equal or exceed either: (a) The economic benefit of noncompliance plus 10 percent of the gravity component; or (b) 25 percent of the gravity component only; whichever is greater. Calculating the final penalty in a settlement which includes a SEP is a five step process. Each of the five steps is explained below. The five steps are also summarized in the penalty calculation worksheet attached to this Policy. Step 1: Settlement Amount Without a SEP a. The applicable EPA penalty policy is used to calculate the economic benefit of noncompliance. b. The applicable EPA penalty policy is used to calculate the gravity component of the penalty. The gravity component is all of the penalty other than the identifiable economic benefit amount, after gravity has been adjusted by all other factors in the penalty policy (e.g., audits, good faith, litigation considerations), except for the SEP. c. The amounts in steps 1.a and b are added. This sum is the minimum amount that would be necessary to settle the case without a SEP. Step 2: Minimum Penalty Amount With a SEP The minimum penalty amount must equal or exceed the economic benefit of noncompliance plus 10 percent of the gravity component, or 25 percent of the gravity component only, whichever is greater. The minimum penalty amount is calculated as follows: a. Calculate 10 percent of gravity (multiply amount in step 1.b by 0.1). b. Add economic benefit (amount in step 1.a) to amount in step 2.a. c. Calculate 25 percent of gravity (multiply amount in step 1.b by 0.25). d. Identify the minimum penalty amount: the greater of step 2.c or step 2.b.13 --------------------------------------------------------------------------- \13\ Pursuant to the February 1995 Revised Interim Clean Water Act Settlement Penalty Policy, section V, a smaller minimum penalty amount may be allowed for a municipality. --------------------------------------------------------------------------- Step 3. Calculate the SEP Cost The net present after-tax cost of the SEP, hereinafter called the ``SEP COST,'' is the maximum amount that EPA may take into consideration in determining an appropriate penalty mitigation for performance of a SEP. In order to facilitate evaluation of the SEP COST of a proposed project, the Agency has developed a computer model called PROJECT.14 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 and savings (e.g., labor, chemicals, water, power, raw materials).15 --------------------------------------------------------------------------- \14\ A copy of the PROJECT computer program software and PROJECT User's Manual may be purchased by calling the National Technology Information Service at (800) 553-6847, and asking for Document #98-500408GEI, or they may be downloaded from the World Wide Web at ``http://www.epa.gov/oeca/models/''. \15\ The PROJECT calculated SEP Cost is a reasonable estimate, and not an exact after-tax calculation. 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; such factors may be considered in determining a mitigation percentage rather than in calculating after-tax cost. --------------------------------------------------------------------------- To use PROJECT, the Agency needs reliable estimates of the costs associated with a defendant/respondent's performance of a SEP, as well as any savings due to such factors as energy efficiency gains, reduced materials costs, reduced waste disposal costs, or increases in productivity. For example, if the annual expenditures in labor and materials of operating a new waste recycling process is $100,000 per year, but the new process reduces existing hazardous waste disposal expenditures by $30,000 per year, the net cost of $70,000 is entered into the PROJECT model (variable 4). 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. (For example, if the settlement agreement requires the defendant/respondent to operate the SEP equipment for two years, two years should be entered as the input for number of years of annual expense in the PROJECT model.) 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.16 --------------------------------------------------------------------------- \16\ 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, PROJECT does not readily calculate the cost of an accelerated compliance SEP. The cost of such a SEP is only 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. Please consult with the Office Of Regulatory Enforcement for directions on how to calculate the costs of such projects. --------------------------------------------------------------------------- [[Page 24802]] EPA does not offer tax advice on whether a regulated entity 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 during the period of performance of the SEP, this means that it represents a positive cash flow to the defendant/respondent and is a profitable project. Such a project is generally 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 regulated entities 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.\17\ --------------------------------------------------------------------------- \17\ The penalty mitigation guidelines 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. --------------------------------------------------------------------------- Step 4: Determine the SEP Mitigation Percentage and then the Mitigation Amount Step 4.a: Mitigation Percentage. After the SEP COST has been calculated, EPA should determine what percentage of that cost may be applied as mitigation against the amount EPA would settle for but for the SEP. The quality of the SEP should be examined as to whether and how effectively it achieves each of the following six factors listed below. (The factors are not listed in priority order.) 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, implementation, or dissemination 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. Community Input. SEPs which perform well on this factor will have been developed taking into consideration input received from the affected community. No credit should be given for this factor if the defendant/respondent did not actively participate in soliciting and incorporating public input into the SEP. 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 appropriate mitigation percentage. The percent of penalty mitigation is within EPA's discretion; there is no presumption as to the correct percentage of mitigation. The mitigation percentage should not exceed 80 percent of the SEP COST, with two exceptions: (1) For small businesses, government agencies or entities, and non- profit organizations, this mitigation percentage of the SEP COST may be set as high as 100 percent if the defendant/respondent can demonstrate the project is of outstanding quality. (2) For any defendant/respondent, if the SEP implements pollution prevention, the mitigation percentage of the SEP COST may be set as high as 100 percent if the defendant/respondent can demonstrate that the project is of outstanding quality. If the government must allocate significant resources to monitoring and reviewing the implementation of a project, a lower mitigation percentage of the SEP COST may be appropriate. In administrative enforcement actions in which there is a statutory limit (commonly called ``caps'') on the total maximum penalty that may be sought in a single action, the cash penalty obtained plus the amount of penalty mitigation credit due to the SEPs shall not exceed the limit. Step 4.b: SEP Mitigation Amount. The SEP COST (calculated pursuant to step 3) is multiplied by the mitigation percentage (step 4.a) to obtain the SEP mitigation amount, which is the amount of the SEP cost that may be used in potentially mitigating the preliminary settlement penalty. Step 5: Final Settlement Penalty 5.a. The SEP mitigation amount (step 4.b) is then subtracted from the settlement amount without a SEP (step 1.c). 5.b The greater of step 2.d or step 5.a is the minimum final settlement penalty allowable based on the performance of the SEP. F. Liability for Performance Defendants/respondents (or their successors in interest) are responsible and legally liable for ensuring that a SEP is completed satisfactorily. A defendant/respondent may not transfer this responsibility and liability to someone else, commonly called a third party. Of course, a defendant/respondent may use contractors or consultants to assist it in implementing a SEP.\18\ --------------------------------------------------------------------------- \18\ Non-profit organizations, such as universities and public interest groups, may function as contractors or consultants. --------------------------------------------------------------------------- [[Page 24803]] G. Oversight and Drafting Enforceable SEPS The settlement agreement should accurately and completely describe the SEP. (See related legal guideline 4 in Sec. 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. The defendant/respondent may utilize an outside auditor to verify performance, and 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 and documenting SEP expenditures, 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 a 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 interim milestone activities, and other complex SEPs may not be appropriate in administrative enforcement actions. Specific guidance on the proper drafting of settlement documents requiring SEPs is provided in a separate 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 75 and 150 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 should be reserved to the sole discretion of EPA, especially in administrative actions in which there is often no formal dispute resolution process. I. Community Input In appropriate cases, EPA should make special efforts to seek input on project proposals from the local community that may have been adversely impacted by the violations.19 Soliciting community input into the SEP development process can: Result in SEPs that better address the needs of the impacted community; promote environmental justice; produce better community understanding of EPA enforcement; and improve relations between the community and the violating facility. Community involvement in SEPs may be most appropriate in cases where the range of possible SEPs is great and/or multiple SEPs may be negotiated. --------------------------------------------------------------------------- \19\ In civil judicial cases, the Department of Justice already seeks public comment on lodged consent decrees through a Federal Register notice. See 28 CFR 50.7. In certain administrative enforcement actions, there are also public notice requirements that are followed before a settlement is finalized. See 40 CFR part 22. --------------------------------------------------------------------------- When soliciting community input, the EPA negotiating team should follow the four guidelines set forth below. 1. Community input should be sought after EPA knows that the defendant/respondent is interested in doing a SEP and is willing to seek community input, approximately how much money may be available for doing a SEP, and that settlement of the enforcement action is likely. If these conditions are not satisfied, EPA will have very little information to provide communities regarding the scope of possible SEPs. 2. The EPA negotiating team should use both informal and formal methods to contact the local community. Informal methods may involve telephone calls to local community organizations, local churches, local elected leaders, local chambers of commerce, or other groups. Since EPA may not be able to identify all interested community groups, a public notice in a local newspaper may be appropriate 3. To ensure that communities have a meaningful opportunity to participate, the EPA negotiating team should provide information to communities about what SEPs are, the opportunities and limits of such projects, the confidential nature of settlement negotiations, and the reasonable possibilities and limitations in the current enforcement action. This can be done by holding a public meeting, usually in the evening, at a local school or facility. The EPA negotiating team may wish to use community outreach experts at EPA or the Department of Justice in conducting this meeting. Sometimes the defendant/respondent may play an active role at this meeting and have its own experts assist in the process. 4. After the initial public meeting, the extent of community input and participation in the SEP development process will have to be determined. The amount of input and participation is likely to vary with each case. Except in extraordinary circumstances and with agreement of the parties, representatives of community groups will not participate directly in the settlement negotiations. This restriction is necessary because of the confidential nature of settlement negotiations and because there is often no equitable process to determine which community group should directly participate in the negotiations. J. EPA Procedures 1. Approvals The authority of a government official to approve a SEP is included in the official's authority to settle an [[Page 24804]] 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: 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 project may not fully comply with the provisions of this Policy (e.g., see footnote 1), the SEP must be approved by the EPA Assistant Administrator for Enforcement and Compliance Assurance. If a project does not fully comply with all of the legal guidelines in this Policy, the request for approval must set forth a legal analysis supporting the conclusion that the project is within EPA's legal authority and is not otherwise inconsistent with law. 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 an environmental compliance promotion project (section D.6) or a project in the ``other'' category (section D.8) is contemplated, the project must be approved in advance by the appropriate office in OECA, unless otherwise delegated. 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 explain how the five steps set forth in Section A.3 above have been used to evaluate 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, privileged 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. Attachment.--SEP Penalty Calculation Worksheet [This worksheet should be used pursuant to section E of the Policy. Specific Applications of this Worksheet in a Case Are Privileged, Confidential Documents] ------------------------------------------------------------------------ Step Amount ------------------------------------------------------------------------ STEP 1: CALCULATION OF SETTLEMENT AMOUNT WITHOUT A SEP 1.a. BENEFIT: The applicable penalty policy is $ used to calculate the economic benefit of noncompliance. 1.b. GRAVITY: The applicable penalty policy is $ used to calculate the gravity component of the penalty; this is gravity after all adjustments in the applicable policy. 1.c SETTLEMENT AMOUNT without a SEP: Sum of step $ 1.a plus 1.b. STEP 2: CALCULATION OF THE MINIMUM PENALTY AMOUNT WITH A SEP 2.a 10% of GRAVITY: Multiply amount in step 1.b $ by 0.10. 2.b BENEFIT PLUS 10% of GRAVITY: Sum of step 1.a $ plus step 2.a. 2.c. 25% of GRAVITY: Multiply amount in step 1.b $ by 0.25. 2.d MINIMUM PENALTY AMOUNT: Select greater of $ step 2.c or step 2.b. STEP 3: CALCULATION OF THE SEP COST USING PROJECT $ MODEL. STEP 4: CALCULATION OF MITIGATION PERCENTAGE AND MITIGATION AMOUNT 4.a. SEP Cost Mitigation Percentage. Evaluate the Percent project pursuant to the 6 mitigation factors in the Policy. Mitigation percentage should not exceed 80% unless one of the exceptions applies. 4.b. SEP Mitigation Amount. Multiply step 3 by $ step 4.a. STEP 5: CALCULATION OF THE FINAL SETTLEMENT PENALTY 5.a Subtract step 4.b from step 1.c.............. $ 5.b. Final Settlement Penalty: Select greater of $ step 2.d or step 5.a. ------------------------------------------------------------------------ [FR Doc. 98-11881 Filed 5-4-98; 8:45 am] BILLING CODE 6560-50-P