Where are we now? EPA's Audit Policy, Next Generation Compliance and Budgetary Implications

Posted on January 21, 2014 by Mary Ellen Ternes

The EPA Audit Policy, “Incentives for Self-Policing:  Discovery, Disclosure, Correction and Prevention of Violations,” adopted in 1995, 60 Fed. Reg. 66,706 (Dec. 22, 1995), amended at 65 Fed. Reg. 19,618 (Apr. 11, 2000), was targeted by EPA for abandonment in 2012.  Perhaps in response to resounding objections by industry and outside counsel, EPA has not yet dismantled this cherished avenue toward forgiveness. 

For counsel productively utilizing the EPA’s Audit Policy, EPA’s announcement that it intended to abandon the Audit Policy, particularly in the context of Next Generation Enforcement and budgetary cutbacks in “boots on the ground” inspections, created significant concern that industry would be caught in a communication and policy void that would lead to more punitive yet unnecessary enforcement proceedings.  While EPA has removed the possibility of e-reporting per its Audit policy electronic disclosure website, EPA has maintained regulated entities’ ability to utilize the Audit Policy by directly reporting to regional Audit Policy staff.  See EPA’s Audit Policy website here.  Hopefully, EPA will continue to recognize the many benefits resulting from continued support of the Audit Policy, particularly in the context of more remote enforcement strategies, fewer “boots on the ground” and heavier reliance on state enforcement resources.

Audit policy – History

In response to developing state audit privilege legislation, EPA developed an interim policy addressing the scope of “privilege” allowed for voluntary environmental audits and their findings.  60 Fed. Reg. 66,709 (March 31, 1995).  Seeking to avoid litigation regarding the scope of privileged environmental audit findings, EPA’s interim policy offered incentives to conduct voluntary audits where the findings were disclosed and promptly corrected.  EPA issued its final Audit Policy in 1995, with the specific purpose of enhancing protection of public health and the environment by encouraging regulated entities to voluntarily discover, disclose, correct and prevent violations of Federal enforcement law.  The benefits offered by EPA’s 1995 final Audit Policy included reductions in the amount of civil penalties, possible elimination of gravity-based penalties, and a determination not to recommend criminal prosecution of disclosing entities.  EPA’s adoption of the 1995 Audit Policy followed five days of dialogue, hosted by ABA’s SEER (then SONREEL) with representatives from regulated industry, states and public interest organizations which identified options for strengthening the former interim policy and included changes reflecting insight gained through this ABA dialogue, over 300 comments received and EPA’s practical experience in implementing the interim policy.  Since its adoption, EPA has issued several guidance documents, including EPA’s Audit Policy Interpretive Guidance (January 1997), Audit Policy; Frequently Asked Questions (2007); and EPA’s Audit Policy:  Tailored Incentives for New Owners, 73 Fed. Reg. 44, 991 (Aug. 1, 2008), all available here

Enforcement budgetary constraints

In the face of fierce political opposition and severe budgetary cutbacks, EPA issued public statements regarding areas where resources would be cut back or eliminated.  Specifically, on April 30, 2012, EPA’s OECA issued its “National Program Manager (NPM) Guidance” to EPA’s regional offices proposing to spend no resources processing self-disclosures under the Audit Policy beginning with EPA’s 2013 Fiscal Year. In the NPM Guidance, EPA stated its position that internal compliance reviews had become more widely adopted by the regulated community as part of good management, that most violations disclosed under the Policy were not in the highest priority enforcement areas for protecting human health and the environment, and that EPA could reduce its investment in the program to a limited national presence without undermining the incentives for regulated entities to do internal compliance reviews to find and correct violations with potentially a modified Audit Policy that is self-implementing.  See the FY2013 OECA NPM Guidance (Publication Number – Final: 305R12001) available here

With the issuance of the April 2012 NPM Guidance came a strong response by regulated entities.  Members of the national environmental bar, including individual practitioners, the American College of Environmental Lawyers and the Corporate Environmental Enforcement Council, reached out to the EPA and requested discussion, urging EPA to retain the Audit Policy.  See e.g., related ACOEL blog postings available here, and  CEEC letter to Cynthia Giles, Assistant Administrative, EPA OECA (Feb. 8, 2013), available here

Common arguments defending the continued implementation of the Audit Policy include the fact that the Audit Policy serves as the basis for a continued culture of compliance even in landscape of dynamic changes to industry and regulation, quantifiable benefits in achieving compliance, as well as serving as a consistent baseline for states adopting their own audit policies.

EPA’s Promotion of Next Generation Enforcement

In 2012, EPA began promoting its Next Generation Compliance initiative.  See Next Generation Compliance article from Environmental Forum, republished here.  With EPA’s NGC, EPA is seeking to streamline federal enforcement oversight with regulations adopting “built-in” compliance, advanced pollution monitoring, electronic reporting, increased transparency and innovative enforcement strategies.  EPA’s examples of “built-in” compliance include standards for manufacturers of mobile sources and air pollution control equipment, where compliance with standards are certified initially by the manufacturer, rather than relying initially on post-installation field testing.  Following installation of air pollution control equipment, EPA’s approach would utilize advanced pollution monitoring to evaluate compliance of operating air pollution control equipment.  Advanced pollution monitoring would also include fence-line monitoring and remote sensing techniques including infrared cameras.  Examples of electronic reporting include NPDES Electronic Reporting, see 78 Fed. Reg. 46006 (July 30, 2013) (proposed rule), and EPA’s Toxic Release Inventory electronic reporting data based, TRI-MEweb, available here. With electronic reporting, greater electronic availability of data allows greater transparency of reported data.  Finally, innovative enforcement strategies build on advanced monitoring, electronic reporting and third-party verification, coupled with industry sector approaches,  including industry wide recognition and notification of noncompliance, followed by set compliance deadlines and, if necessary, enforcement.

EPA’s Reduced Enforcement Goals for 2014-2018 

On November 19, 2013, EPA published its Draft 2014-2018 Strategic Plan, with public comment ending on January 3, 2014. 78 Fed. Reg. 69412 (Nov. 19, 2013).  Comparing EPA’s proposed 2014-2018 enforcement goals to its 2011-2015 enforcement goals shows that EPA intends to significantly cut back on the number of inspections as well as many other enforcement goals.  Specifically, EPA is reducing its 5-year cumulative inspection and evaluation goal from 105,000 inspections to 70,000 inspections.  EPA expects to initiate fewer civil judicial and administrative enforcement cases, setting its initiation goal at 11,600 compared to an earlier 19,500, and conclude fewer cases, 10,000 compared to an earlier 19,000.  Compare  Draft FY 2014-2018 EPA Strategic Plan, available here, to FY 2011-2015 EPA Strategic Plan, available here

Implications of NGC and Reduction in Inspections

EPA’s Next Generation Compliance approaches, coupled with significantly reduced inspections, may seem like a relief to some.  However, EPA’s NGC emphasizes remote monitoring methods and automatic electronic reporting.  In other words, data will be reported electronically, potentially without the necessary context required for a full compliance evaluation.  However, numbers alone do not allow a conclusive compliance determination.  Reliance on mere data without the context achieved with an in-person inspection raises risks that enforcement actions, albeit reduced in number, may be allowed to proceed despite facts that mitigate against taking such action.  Of course, this risk varies depending upon the regulatory program and may be less significant where delegated states maintain sufficient budgets for inspections.  However, this concern remains magnified where qualitative data, such as, for example, fence-line monitoring and use of remote infrared cameras, may be relied upon in the Clean Air Act enforcement context to create a presumption of noncompliance, potentially collected in a manner that is divorced from actual quantitative point-source emission data and permitted parametric operating conditions which facilities rely on to demonstrate ongoing compliance.  While regulated entities maintain documentation demonstrating ongoing compliance, the threat remains that such NGC techniques could mire entities in unnecessary enforcement actions where an in-person inspection could preempt such proceedings.  

In this uncertain enforcement environment, regulated entities will likely want to continue to directly rely on the assurance provided by EPA’s Audit Policy, as well as state audit policies adopted pursuant to, and maintained consistent with, EPA’s Audit Policy and the policies and principles therein.

Conclusion

As of January 2014, EPA continues to allow regulated entities to avail themselves of EPA’s Audit Policy by reporting to named regional EPA Audit Policy staff.  Hopefully, EPA’s dismantling of its electronic Audit Policy reporting program constitutes sufficient savings to allow EPA’s regional offices to continue accepting Audit Policy disclosures. 

BSSE Issues Final Safety Culture Policy Statement

Posted on May 24, 2013 by Ronald R. Janke

When an environmental lawyer is asked to draft or review a corporate environmental, health and safety program, the question arises as to what elements should be included. In the post-mortem evaluation of an accident, spill or some near-miss, it is often apparent that the corporate culture has played an important role, whether for good or for ill, in the employees’ implementation of the company’s program or in their immediate reactions to an unanticipated event. New guidance by the Bureau of Safety and Environmental Enforcement (BSSE) should help to shape a positive corporate culture toward compliance and environment protection. BSSE was created as part of the Department of Interior’s response to the Deep Horizon incident.

In a short notice issued in the May 10, 2013 Federal Register, the BSEE has issued its Final Safety Culture Policy Statement. This Statement briefly describes what BSEE regards as nine foundational characteristics of a positive safety culture -- one that embodies a commitment to conducting business in a safe and environmentally responsible way. These nine characteristics are: Leadership Commitment to Safety Values and Actions; Hazard Identification and Risk Management; Personal Accountability; Work Processes; Continuous Improvement; Environment for Raising Concerns; Effective Safety and Environmental Communication; Respectful Work Environment; and Inquiring Attitude. BSEE adds that additional traits can amplify or extend these basic characteristics.

Virtually all of these characteristics are familiar to an experienced environmental compliance counselor. Indeed, BSEE credits the Nuclear Regulatory Commission, the Federal Aviation Administration and other organizations for their input. Accordingly, the BSEE’s concise listing of these characteristics should be recognized for their application not only to BSEE’s focus on improving safety culture for Outer Continental Shelf activities, but also to environmental, health and safety programs in general. Hence, the BSEE Safety Culture Policy Statement is worth considering and perhaps citing when environmental lawyers are asked to develop or comment upon such corporate programs.

Expanded Access to Environmental Information – The New Era of Transparency and Its Risks and Opportunities

Posted on March 11, 2013 by Dean Calland

Over the past several years, EPA has created or upgraded a number of new informational tools that enable the public to gain access to environmental data.  This is part of the agency’s efforts to increase “transparency” regarding private and public sector environmental compliance and enforcement efforts.  As expressed in a recent press release, EPA believes that “transparency and access to information at all levels help to drive improvements in environmental performance.” 

A couple of very recent examples are worth noting.  Earlier this year, EPA announced the creation of new interactive state dashboards and comparative maps.  These online tools are components of EPA’s Enforcement and Compliance History Online (ECHO) website, and contain air, water and hazardous waste data for the previous five years.  According to EPA, such information includes “the number of completed inspections, types of violations found, enforcement actions taken, and penalties assessed by state.”  Users of the site can customize their searches to view just state activity, EPA activity, or both.  

A second example is EPA’s program to increase the transparency of chemical information under the Toxic Substances Control Act (TSCA).  Just last month, EPA released the 2012 Chemical Data Reporting (CDR) information for more than 7,600 chemicals.  The data can be used to identify important trends and analyses, such as determining the number of workers exposed to a particular chemical, the top 20 chemicals used in children’s products, the top 20 chemicals used in consumer products and the top industrial sectors that processed and used reportable chemicals.  EPA modified the CDR rule (formerly known as the Inventory Update Reporting rule) in 2011 to require that manufacturers and importers submit CDR information electronically.  Accordingly, the CDR information is added to the agency database and made publicly available much faster than ever before.  Stakeholders such as the American Chemistry Council and the Environmental Defense Fund applauded the recent changes to the CDR rule to increase the amount of information available to the public and thereby improve public understanding and confidence.

With appropriate controls, greater transparency is laudable for a variety of readily apparent reasons, and there is little doubt that federal and state agencies will increase both the number of tools available to the public and the usability of these tools to interpret data in the coming years.  Environmental stakeholders should evaluate these new tools and determine the risks and opportunities presented by them. 

For example, industry practitioners are quite familiar with the increasing scrutiny that has been placed on corporate decision-making in recent years by major investors and shareholders regarding such matters as the impact of the corporation’s activities on issues like greenhouse gas emissions and sustainability.  Some of these entities are using the new information tools and others like them to identify trends and determine how the corporation “measures up” against industry norms and political or governmental expectations.  Similarly, corporations are finding that their outside financial auditors are reviewing environmental databases to “check on” the environmental and safety disclosures that the companies are putting forth during the audit period.  Indeed, company management and counsel have sometimes been surprised by their auditors’ independently-gathered information that one or more of the company’s plants are listed on EPA or state databases as “non-compliant” with environmental requirements. 

In the same way, increased access to environmental and safety information brings with it new opportunities to gather meaningful information that can be extremely useful in preparing business plans for future activities and for claims and litigation related to environmental exposures.  Manufacturers and suppliers of environmental products and services, plaintiffs’ counsel, expert witnesses, environmental groups, public and governmental relations firms and insurance companies are just a small subset of the universe of interested parties for whom easier access to environmental and safety information can be helpful.  And now such data can be gathered more quickly and at a fraction of the costs that would have been required in the past.  Environmental stakeholders would do well to monitor the development of these transparency tools and to assess the risks and opportunities that they present.

EPA Audit Policy Options: What do you think?

Posted on January 7, 2013 by Mary Ellen Ternes

Environmental practitioners and their clients have benefitted greatly from the EPA’s historic implementation of the EPA Audit Policy.  Thus, the level of concern that has been expressed by environmental practitioners in response to EPA’s statements that the Audit Policy may not live through 2013 is not surprising.  For background, see Linda Bochert’s posting, “Dear EPA:  please don’t abandon your Audit Policy!”,  and FY2013 OECA National Program Manager Guidance.

EPA has discussed the basis for its proposal to abandon the Audit Policy in terms of perceived decreasing utility, which creates difficulty in justifying the expense of implementation.  The explanation goes something like this:  with the maturity of the environmental programs, regulated industry knows that it needs to comply by now, thus the incentives provided by the Audit Policy are no longer necessary.  Also, along with industry outgrowing the original purpose of the Policy, the cost of implementing the policy does not justify its continued implementation in this era of shrinking budgets, particularly given the relatively minor noncompliance events reported pursuant to the Audit Policy.

Has EPA really considered the entire calculus?  And, assuming one buys into the external benefits provided by the continued implementation of the Audit Policy, given what’s at stake, isn’t it worth developing options for implementation that don’t impose the same level of staff investment?

Many believe that the Audit Policy has served a purpose far greater than the mere forgiveness of the gravity component of the reported noncompliance events.  For many years, the EPA Audit Policy has provided regulated entities with a mechanism to conduct compliance audits with confidence that noncompliance issues can be corrected without fear of punitive enforcement action.  The Audit Policy continues to serve this purpose, despite the maturity of the environmental programs, because the nature of regulated entities and industry sectors is so dynamic.  Regulated entities are in a constant state of change, as are many EPA programs at any one time.  EPA’s assertion that the EPA’s Audit Policy is no longer needed contemplates regulated entities and applicable regulations as static and monolithic bodies and does not recognize the constant state of change across industry sectors and within individual entities, particularly in response to new and modified regulations.  Industry sectors also vary in their inherent levels of sophistication and adaptability to changing regulatory requirements, depending in large part upon the degree to which the industry has been pervasively regulated in the past.  New regulations across an industry sector upset the equilibrium and demand new management models and compliance approaches, requiring a period of education, acquisition of staff, operational and cultural adaptation to the new requirements.  Adaptation within industry sectors can be slowed when immediate demands are placed on sector resources for all entities in that sector simultaneously such as occurs with new industry sector-wide regulation, prioritizing rapid reaction to new regulation over comprehensive proactive compliance.  In this regulatory environment, the Audit Policy continues to serve the same purpose as it always has, to encourage a culture of compliance in the dynamic landscape in which regulated entities operate.

To read more and provide your own input on how you believe EPA should approach the future of the EPA Audit Policy, click here.

Sackett v. EPA: Parties May Sue To Challenge Clean Water Act Compliance Orders

Posted on March 22, 2012 by Theodore Garrett

The Supreme Court issued its long awaited decision in Sackett v. EPA. In a unanimous decision, the Court held that the Sacketts may bring a civil action under the Administrative Procedure Act to challenge EPA’s compliance order. The court rejected the government’s argument that EPA is less likely to use orders if they are subject to judicial review, saying that “[t]he APA’s presumption of judicial review is a repudiation of the principle that efficiency of regulation conquers all.” It will be important to see how EPA responds and what if any changes are made to EPA’s practice and procedure for issuing orders in wetlands and perhaps other matters. See link to the Sackett opinion.

EPA had issued a compliance order charging the Sacketts with filling in a wetland during construction of their home, in violation of the Clean Water Act, and requiring them to restore their property. The Sacketts argued that they were entitled to prompt judicial review because they faced severe penalties for noncompliance and disputed that their property is a wetland. The United States argued that the Sacketts could comply with the EPA order and  submit an application for a wetlands permit or defend if EPA brings an enforcement action, but may not seek judicial review of EPA’s order. The tenor of the oral argument did not bode well for the United States, as previously reported.  The Court’s unanimous opinion, reversing the Ninth Circuit, bears that out.

The court’s opinion, written by Justice Scalia, starts with the proposition that the APA provides for judicial review of  “final agency action for which there is no other adequate remedy in a court.” 5 U.S.C. §704. The court concludes that EPA’s compliance order has all the hallmarks of APA finality: it required the Sacketts to restore their property according to an agency-approved plan, exposed the Sacketts to double penalties in future enforcement proceedings, and severely limits their ability to obtain a Section 404 permit from the Army Corps of Engineers. See 33 U. S. C. §1344; 33 CFR§326.3(e)(1)(iv). Rejecting the government’s argument, the court held that applying to the Corps of Engineers for a permit and then filing suit under the APA if that permit is denied does not provide an adequate remedy.

The Court also had little difficulty in disposing of the government’s argument that the Clean Water Act should be read as precluding judicial review under the APA, 5 U. S. C. §701(a)(1). The APA creates a presumption favoring judicial review of administrative action, and the Court concluded that nothing in the Clean Water Act’s statutory scheme precludes APA review.  The court was similarly not persuaded that the issuance of a compliance order is simply a step in the deliberative process, given that EPA rejected the Sackett’s attempt to obtain a hearing, and the next step will involve judicial and not administrative deliberation.  Justice Scalia’s opinion concludes that “there is no reason to think the Clean Water Act was uniquely designed to enable the strong-arming of  regulated parties into ‘voluntary compliance’ without the opportunity for judicial review -- even judicial review of the question whether the regulated party is within the EPA’s jurisdiction.” 

Justice Alito’s concurring opinion is of interest because of its emphasis on the fact that the “reach of the Clean Water Act is notoriously unclear.” Citing an amicus brief filed by the Competitive Enterprise Institute, Justice Alito cites EPA’s guidance advising property owners that jurisdictional determinations concerning wetlands will be made on a case-by-case basis.  His opinion concludes that allowing property owners to sue under the APA is “better than nothing,” but only clarification of the reach of the Clean Water Act can rectify the underlying problem. 

It will be important to see how EPA responds and what if any changes are made to EPA’s practice and procedure for issuing orders in wetlands and perhaps other matters.  The Sackett decision will be relied upon by parties who are subject to orders under other statutes that EPA administers.  For some of the reasons cited by Justice Alito, the Sackett decision also underscores the need for clarification of the reach of the Clean Water Act.  Stay tuned.