**RESPONSE OF THE GENERAL ELECTRIC COMPANY TO EPA'S MAY 14, 2007 REQUEST
FOR COMMENTS ON ENHANCING ENVIRONMENTAL OUTCOMES FROM AUDIT POLICY
DISCLOSURES THROUGH TAILORED INCENTIVES FOR NEW OWNERS**

EPA-HQ-OECA-2007-0291

# I. Introduction

The General Electric Company is a diverse multi-national manufacturing
and services company employing over 300,000 people worldwide. GE's
products range from light bulbs to kitchen appliances to jet engines to
turbines. Additionally, GE provides a wide-range of both manufacturing
and financial services and also operates NBCUniversal. Within the U.S.
GE's operations employs more than 150,000 people and oper5ates more than
250 manufacturing and service sites.

On April 11, 2000, EPA issued its revised final policy on "Incentives
for Self-Policing: Discovery, Disclosure, Correction and Prevention of
Violations" (65 FR 19618) (known as the "Audit Policy"). The purpose of
the Audit Policy was to encourage regulated entities to detect, correct
and promptly disclose noncompliance. As an incentive for carrying out
these activities, the Audit Policy offered 100% waiver of gravity-based
penalties for entities that met all nine specified conditions of the
policy (75% mitigation was available for entities that did not meet the
"systematic discovery" condition). In general, EPA stated that for
noncompliance covered by the policy it would not recommend criminal
prosecution nor would it request copies of audit reports generated in
the process of "Self-Policing."

GE welcomes the opportunity to respond to the Agency's request for
comments on ways to enhance the effectiveness of the Audit Policy. At
the outset, we would like to note that the Audit Policy has been a
success. While we believe that there are ways in which the Policy can be
improved, none of our comments should be construed to suggest that the
Policy does not reflect a sound management approach on the Agency's
part. In order to continue that success however, the Agency needs to be
governed by a single principle: an entity that discovers, corrects, and
discloses noncompliance should never be worse off than an entity that
did not take such steps.

# II. General Approach

GE has a vigorous compliance program in place throughout the company,
requiring regular audits of various types (self-assessments, cross-site
or business, third party, and management system assessments).
Noncompliance identified through these mechanisms is tracked via an
internal database, and sites are measured on promptness of closing the
findings. This measurement drives a corporate culture of "find and fix,"
which we believe is the correct value.

As a result of GE's program, the company has made numerous disclosures
to EPA pursuant to the Audit Policy. As the Agency stated in the current
notice, while the Audit Policy has been a success, more than half of the
disclosures have involved reporting violations. GE's experience is the
same -- over half of the company's disclosures have been of reporting
violations, mostly involving the Emergency Planning and Community Right
to Know Act. Additionally, it is worth noting that many of GE's
disclosures have come about as the result of new businesses that the
company has acquired since the Audit Policy was put in place. The
Company has an acquisition integration process that includes compliance
reviews, and frequently those reviews have identified issues that the
Company has chosen to disclose to the Agency. Note also that GE is
active in both buying and selling facilities, and thus is well
positioned to assess the impacts of the Policy from both viewpoints.

GE agrees with the Agency's efforts to increase use of the Audit Policy
to encourage the discovery, correction and disclosure of noncompliance
that has greater potential impact on the environment than reporting
violations. It is our understanding that the Agency is considering
establishing a web-based process for disclosure of reporting violations
that would streamline the process for regulated entities and at the same
time allow the Agency to direct its energies to reviewing disclosures
with a greater potential for impact on the environment. GE strongly
supports that initiative.

GE also agrees with the Agency's efforts in the current proposal to
address the issue of noncompliance in the context of mergers and
acquisitions. As the Agency is aware, the transfer of ownership of a
facility or facilities to a new owner often triggers a comprehensive
review of compliance. This is exactly the behavior that the Agency
should be encouraging, and as we stated above its approach should be
informed by the principle that an entity that discovers, corrects, and
discloses noncompliance should never be worse off than an entity that
did not take such steps. Unfortunately, the Agency's past approach has
not always conformed to this principle. While there are numerous
examples of the Agency promptly determining that disclosures qualify for
waiver under the existing policy, there are also numerous examples of
routine submissions that have been subject to "interrogatory-like"
requests for additional information, or have been pending without a
determination for years. In addition to the significant burden this
imposes on companies, the practice also detracts from reliability and
certainty in how EPA will look at disclosures, thereby discouraging
companies from taking the risk of making a disclosure. GE encourages
OECA to increase its efforts to insure that implementation of the policy
is consistent, reliable, and not thwarted by the perception that
entities that disclose are "trying to get away with something."

As stated in the current notice, one of EPA's main goals is to secure
the prompt correction of environmental violations and achieve
significant improvement to the environment as expeditiously as possible.
To that end, the Agency is looking at the mergers and acquisitions
process as a unique opportunity to encourage auditing, corrective action
and disclosure. As the Agency has noted, the normal "due diligence"
process of reviewing potential acquisitions provides a unique
opportunity for identifying and correcting noncompliance. However, as
will be discussed further below, extensive pre-closing due diligence is
becoming more the exception than the rule. The Agency must therefore
look to ways of encouraging new owners to audit, correct and disclose
without increasing their risk.

# III. Specific Issues

A. Should the Agency Offer Tailored Incentives to Encourage New Owners
of Regulated Entities to Self-Audit and Disclose Violations?

The Agency should take whatever steps it possibly can to remove any
potential disincentives that might discourage new owners from
self-auditing and correcting violations. In order to do so, however, the
Agency needs to recognize the current state of the merger and
acquisition process.

In today's transaction environment, the level of environmental due
diligence that can be conducted pre-closing varies broadly. More and
more often these transactions -- particularly large ones -- occur
through an auction or other competitive bidding process whereby the
scope and time allowed for due diligence is extremely limited. For
example, environmental due diligence can consist of a review of only the
most-recently issued permits or approvals, limited (or no) site visits,
and an interview with the seller's environmental team. Purchase price,
market synergies and future valuation -- not environmental issues -- are
more likely to drive the transaction. As such, the new owner of a
noncompliant company very likely received no price reduction or benefit
from any identified environmental noncompliance, which, after closing,
it will now be compelled to remedy. Many such buyers are nonetheless, as
EPA notes, ready to spend major capital to make "the substantial
improvements that will enhance their ability to remain in compliance
going forward." Even with transactions that involve entities or assets
with complex environmental processes or systems, today's market and
confidentiality constraints may prevent a buyer from conducting a level
of environmental due diligence that would allow a new owner to fully
understand the scope of environmental compliance issues it may be taking
on.

Moreover, to the extent that any environmental due diligence is
conducted, in almost all cases those efforts focus on potential remedial
liability, rather than compliance. This is driven by the fact that the
potential risk from remedial liability will normally far outweigh the
potential risk from noncompliance.

It is also worth noting, however, that even where environmental due
diligence is possible, and where resources are dedicated to quantifying
potential non-compliance, by its very nature such efforts are limited in
effectiveness. While it may be relatively simple to review Discharge
Monitoring Reports to determine where a prospective acquisition is
meeting its permit limits, more detailed reviews on topics such as the
adequacy of sampling and analytical procedures are usually impossible
given both the time available as well as limitations on access to
confidential production or historic information. Thus, assessments of
whether or not a facility might have triggered NSR, a MACT or NSPS
standard, or a wastewater categorical standard, are well beyond the
scope of any normal due diligence review. The same is true of land ban
requirements or import/export restrictions, the correctness of waste
determinations, or the accuracy of calculations of TRI reports.

Even if a buyer identifies violations during the due diligence period,
in most instances it would not be in a position to disclose them until
after closing due to confidentiality restrictions and its lack of
authority to make the disclosures until it is the owner. Thus, the
Policy should allow a buyer a reasonable time after the deal closes to
disclose violations it discovered during due diligence. Given the huge
amount of activities that attend a closing, GE would recommend 45 or 60
days as an appropriate time for disclosing violations discovered during
pre-closing due diligence. For post-closing audits, it would be
reasonable to have the audit be covered if it commenced within one year
of the closing and completed no more than 2 years after closing.

EPA has specifically requested comment on whether there should be a
requirement that firms conduct a specified level of due diligence in
order to qualify for additional incentives. GE believes that this would
be a serious mistake. First, as set forth above, the level and type of
due diligence varies greatly, and is driven by the nature and
circumstances of the transaction, rather than whether or not
noncompliance identified would qualify for protection. Thus, by
establishing specific standards EPA will only succeed in disqualifying
from protection noncompliance discovered, corrected and disclosed,
rather than driving any change in behavior.

A second negative consequence is that EPA may discourage disclosures
based on due diligence if it imposes an adequacy standard due to the
uncertainty over how EPA would judge a particular level of due
diligence. The uncertainty of how EPA would rule on an after-the-fact
basis may raise enough doubt in a Buyer's mind that it might choose not
to disclose rather than risk being told that its due diligence was
inadequate and did not qualify for relief.

Third, as the Agency is endeavoring to increase the use of the Policy
and promote more effective use of its own resources, establishing
requirements that would drive the need for EPA to delve into the
specific details of individual transactions and how they are crafted
would produce the inverse effect -- fewer companies using the Policy,
and more time to be spent by the Agency on individual disclosures.
Indeed, EPA may get more benefit by doing the opposite, namely, allowing
the discovery of noncompliance by any means to qualify for treatment
under the Policy. By not imposing particular due diligence standards,
and by broadening coverage for how violations are found, EPA may
encourage both due diligence and disclosures because Buyers will be able
to look forward to Audit Policy protection no matter how they discovered
the violations during the due diligence period.

B. What Constitutes a "New Owner" for Purposes of Being Offered Tailored
Incentives under the Audit Policy?

EPA has expressed a specific concern that "firms could evade significant
environmental liabilities by making superficial changes designed to make
it appear as if the regulated entity has a new owner." This is a perfect
example of the issue we raised earlier in these comments -- the Agency's
concern that somehow, in some fashion, someone will "get away with
something." There are several reasons why this concern is completely
misplaced. First and foremost, the costs associated with even a
superficial a change in ownership are often significant. These costs go
far beyond environmental compliance issues, and would include
registration fees, tax consequences, labor issues, etc. Moreover, it is
likely that the Securities and Exchange Commission as well as the
Internal Revenue Service might take a dim view of changes in ownership
driven solely by the desire to avoid environmental penalties. However,
even if one puts aside these issues the fact remains that the current
Audit Policy does not create any protection whatsoever for the sellers
of noncompliant facilities. Thus a sham sale from one part of a company
to another would do nothing to shield the supposed seller or the parent
from ultimate liability.

In consideration of this, it is likewise important that the Agency be
careful in defining what constitutes a "new owner." In many instances
major companies that are otherwise completely separate may have numerous
business relationships, including partnerships and joint ventures. The
fact that Company A and Company B have a joint venture that owns and
operates Facilities X, Y and Z should not in any way impact whether the
Policy applies to the sale of facility M from Company A to Company B. It
is, however, reasonable for the Agency to determine that the sale of the
joint venture -- or any one of the facilities included therein -- from
one of the JV partners to the other should be subject to a stricter
level of scrutiny before it could qualify for waiver under the Policy.

The Agency has also asked for input on how long after an acquisition
could a facility be considered "new" for purposes of this policy. One of
the challenges in answering this is the varied nature of acquisitions.
In the case of the transfer of a single facility from one company to
another, a short time period might suffice. GE, however, often has
conducted transactions involving 30 or more manufacturing facilities,
creating a huge challenge to identify and address noncompliance. Based
on our experience, GE recommends that for these purposes it would be
reasonable for the Agency to expect that audits of "new" facilities
start within one year of the date on which the transaction closes.

Finally, it is worth addressing here the issue of how the Policy should
address Sellers as opposed to Buyers. It has been suggested that failing
to extend the protection of the Policy to Sellers will in some fashion
create an incentive for Sellers to consider selling only to unscrupulous
Buyers who would choose not to audit their newly acquired facilities,
thus reducing potential liability risk for the Sellers. The Agency
should reject this argument for several reasons. First and foremost,
Sellers that have failed to discover, correct and disclose noncompliance
are not now and should not be the beneficiaries of the Policy. Second,
in the current environment, Buyers have leverage to encourage Sellers to
disclose and correct noncompliance before a deal closes, thus assigning
the risk and responsibility for compliance where it belongs -- with the
current owner. Providing protection for Sellers in the Policy would
remove the Buyers' leverage to encourage pre-closing correction of
noncompliance, which is contrary to EPA's purposes.

*C. What Incentives Should the Agency Consider to Encourage New Owners
to Self-Disclose*?

In GE's view the current Audit Policy is working well and has been a
success overall, but it has 2 significant weaknesses: the 20-day time
limit for disclosures and the reservation of the Agency's right to
collect economic benefit. The 20-day time limit is not relevant to this
notice, but the economic benefit issue is a significant one in the
context of the current proposal.

As stated earlier, we believe that the Agency's policy implementation
needs to be informed by a single question: is a company that follows the
elements of the Policy better off than one that did not? The Agency has
always felt bound by a need to insure a "level playing field" by
collecting economic benefit (it is worth noting here that the "level
playing field" concept comes much more from the Agency that from the
regulated community, and thus is arguably a misplaced concept). However,
its commitment to that principle has a down-side: a responsible company
that does a thorough audit and discloses noncompliance from which it
achieved some speculative economic benefit is more likely to get
penalized than a company that did not audit at all. Often the
noncompliance is obscure, complex or otherwise hard to discover. In such
instances the responsible company ends up worse off than had it not
conducted the audit in the first place, or conducted it and corrected
the noncompliance without disclosing it to the Agency. While EPA's
approach of recovering "ill-gotten gains" has superficial appeal, in our
experience it only serves as a disincentive to disclosure.

In any event, a Buyer should not be compelled to pay any economic
benefit of a penalty for any time prior to the Closing of the deal,
since the Buyer has received no economic benefit. It would be
inappropriate to have the economic benefit calculation start to run from
the Closing, since the Buyer should be provided some time to discover
and correct violations in its newly acquired business. If the violation
was discovered during pre-Closing due diligence, then the Buyer should
be entitled to a reasonable period of time to implement the corrective
actions before being subject to any economic benefit penalty. For
violations discovered post-Closing, it seems reasonable to require that
the audit be commenced within one year and completed within two years,
and any findings are corrected reasonably promptly, then there should be
no economic benefit penalty component assessed.

A more relevant question is how to address the noncompliance that could
potentially continue after discovery. This is an issue that goes to the
integrity of the program and the Agency as well as economic benefit.
Companies that audit and discover a "status" violation (such as the
failure to have a required permit) and disclose are often faced with a
Hobson's Choice: shut down the operation and lose significant income or
risk a "knowing" violation and severe economic sanctions, including the
recovery of economic benefit. The challenge for the Agency is to
maintain the integrity of its program without punishing good actors. GE
recommends that the Agency put into place -- and measure for
effectiveness -- a program that would allow the expeditious issuance of
temporary enforcement discretion letters to allow the continued
operation of noncompliant operations pending the completion of required
acts. These letters are most important in the case of status violations
where a regulated entity has discovered and disclosed the failure to
have a permit and, having submitted the necessary application is forced
to languish -- losing money -- until an overworked state or federal
permit program acts on it.

In any case, GE strongly recommends that the Agency not step into the
morass presented by analyzing the existence and terms of any
indemnification agreements between the parties. Again, that would be an
exercise that is beyond the resource capabilities of the Agency, and
would create a severe burden upon it and the regulated entities.
Moreover, such indemnification agreements are exceedingly complex and
very deal-specific, thus providing no basis for establishing general
rules or principles for the Agency to follow.

GE strongly encourages the Agency to consider any and all mechanisms for
encouraging disclosure under the Policy. One of the other shortcomings
of the Policy is that it excludes numerous violations from eligibility
(Condition 2 of the Policy requires that disclosed violations must not
be discovered through a legally mandated monitoring or sampling
requirement). Thus, straightforward issues -- like exceedances of permit
parameters -- are outside the ambit of the Policy. This is unfortunate
for both the regulated community and the Agency, which has thus
disqualified from consideration precisely the noncompliance it has said
it most wants to identify -- noncompliance that has an impact on the
environment. The basic rule against applying the Policy to legally
required reports recognizes that there should be no incentive to get
protection by disclosing an event that needed to be disclosed by law
anyway. In the context of an acquisition, that rationale does not apply
to a Buyer's discovery that reports had not been made by the Seller as
required. The Buyer was not responsible for those failures. In this
case, a Buyer should get protection for filing or correcting reports
that were required prior to the Buyer's taking control. Thus GE supports
the idea of including in the pilot project consideration of
noncompliance that would otherwise not qualify, and it encourages the
Agency to consider expanding that concept to the original policy as
well.

The Agency has also asked whether it should provide "positive
recognition" of a new owners' willingness to voluntarily audit and
disclose. We have found over time that the Agency's commitment to
recognition programs has always been somewhat limited, and that the
impact of such endorsements on the community at large is ephemeral at
best. We do believe, however, that the disclosure program could be used
to improve relationships of disclosing entities within EPA itself, and
we encourage the Agency to look for ways to accomplish this. One
possibility might be to create a list of disclosing companies that is
publicized internally, and appoint some sort of ombudsperson who is
responsible for maintaining the list and serve as a liaison for the
companies to turn to help in resolving conflicts between the company and
the various program or enforcement offices throughout EPA.

# D. Measure of Success

The Agency has asked for suggestions on outcome measures that can be
used to assess the effectiveness of this program. Consistent with the
overall theme of these comments, GE recommends that EPA focus on the
number of instances of noncompliance that have been identified and
fixed. This is a number that should be easy to obtain from the
disclosures, and is the single best measurement of the effectiveness of
the program. We do not recommend that EPA try to quantify pollutant
reductions as a metric, since we believe that the numbers will be
speculative, unreliable, and divert the Agency's attention from the
objectives of the enforcement program overall -- to insure compliance
with the regulations.

## E. Conclusion

While these comments suggest some important ways that the Audit Policy
can be improved, it is important to note that the Policy as a whole has
been a success. Every single disclosure to the Agency is a benefit to
the environment, as it represents another facility correcting
noncompliance. While GE believes that the recommendations it is making
in these comments are essential to insuring that the Policy is as
effective as it can be, we do not want to lose sight of the significant
success that the Policy has thus far achieved.