[Federal Register Volume 60, Number 90 (Wednesday, May 10, 1995)]
[Notices]
[Pages 24856-24862]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11501]



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ENVIRONMENTAL PROTECTION AGENCY
[Docket No. 95F-FRL-5205-5]


Interim Revised EPA Supplemental Environmental Projects Policy 
Issued

AGENCY: Office of Enforcement and Compliance Assurance, EPA.

ACTION: Notice.

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SUMMARY: The Office of Enforcement and Compliance Assurance (EPA) is 
issuing the Interim Revised EPA Supplemental Environmental Projects 
Policy. This Policy supersedes the February 12, 1991 Policy on the Use 
of Supplemental Environmental Projects in EPA Settlements. This Policy 
responds to numerous complaints that the 1991 Policy was too 
cumbersome, rigid and difficult to understand and apply. This Policy is 
being issued to provide greater flexibility to EPA in exercising its 
enforcement discretion to establish appropriate settlement penalties 
and to the regulated community in proposing supplemental environmental 
projects (SEPs) designed to secure significant environmental or public 
health protection and improvements. EPA intends to implement this 
Policy on an interim basis effective May 8, 1995.

DATES: Comments must be received on or before August 6, 1995.

ADDRESSES: Comments may be mailed to: SEP Policy, Multimedia 
Enforcement Division, Office of Regulatory Enforcement, Mail Code 2248-
A, United States Environmental Protection Agency, 401 M Street, S.W., 
Washington D.C. 20460.

FOR FURTHER INFORMATION CONTACT: David A. Hindin, 202-564-6004, Gerard 
C. Kraus, 202-564-6047 or Peter W. Moore, 202-564-6014, Office of 
Regulatory Enforcement, Mail Code 2248-A, United States Environmental 
Protection Agency, 401 M Street, S.W., Washington D.C. 20460.

SUPPLEMENTARY INFORMATION: This interim final version of the EPA 
Supplemental Environmental Projects Policy expands and clarifies the 
1991 Policy on the Use of Supplemental Environmental Projects in EPA 
Settlements. The primary purpose of this Policy is to obtain 
environmental and public health protection and improvements that may 
not otherwise have occurred without the settlement incentives provided 
by this Policy. The revised Policy, issued today, establishes a 
framework for determining whether a proposed project can be considered 
in establishing an appropriate settlement penalty. In addition, this 
Policy sets out clear legal guidelines, well-defined categories of 
acceptable projects and simple easy to apply rules for calculating and 
applying the cost of a SEP in determining an appropriate settlement 
penalty.

    Dated: May 1, 1995
Steven A. Herman,
Assistant Administrator, Office of Enforcement and Compliance 
Assurance, United States Environmental Protection Agency.

A. Introduction

1. Background

    In settlements of environmental enforcement cases, the U.S. 
Environmental Protection Agency (EPA) will require the alleged 
violators to achieve and maintain compliance with Federal environmental 
laws and regulations and to pay a civil penalty. To further EPA's goals 
to protect and enhance public health and the environment, in certain 
instances environmentally beneficial projects, or Supplemental 
Environmental Projects (SEPs), may be included in the settlement. This 
Policy sets forth the types of projects that are permissible as SEPs, 
the penalty mitigation appropriate for a particular SEP, and the terms 
and conditions under which they may become part of a settlement. The 
primary purpose of this Policy is to encourage and obtain environmental 
and public health protection and improvements that may not otherwise 
have occurred without the settlement incentives provided by this 
Policy.
    In settling enforcement actions, EPA requires alleged violators to 
promptly cease the violations and, to the extent feasible, remediate 
any harm caused by the violations. EPA also seeks substantial monetary 
penalties in order to deter noncompliance. Without penalties, companies 
would have an incentive to delay compliance until they are caught and 
ordered to comply. Penalties promote environmental compliance and help 
protect public health by deterring future violations by the same 
violator and deterring violations by other members of the regulated 
community. Penalties help ensure a national level playing field by 
ensuring that violators do not obtain an unfair economic advantage over 
their competitors who made the necessary expenditures to comply on 
time. Penalties also encourage companies to adopt pollution prevention 
and recycling techniques, so that they minimize their pollutant 
discharges and reduce their potential liabilities.
    Statutes administered by EPA generally contain penalty assessment 
criteria that a court or administrative law judge must consider in 
determining an appropriate penalty at trial or a hearing. In the 
settlement context, EPA generally follows these criteria in exercising 
its discretion to establish an appropriate settlement penalty. In 
establishing an appropriate penalty, EPA considers such factors as the 
economic benefit associated with the violations, the gravity or 
seriousness of the violations, and prior history of violations. 
Evidence of a violator's commitment and ability to perform a SEP is 
also a relevant factor for EPA to consider in establishing an 
appropriate settlement penalty. All else being equal, the final 
settlement penalty will be lower for a violator who agrees to perform 
an acceptable SEP compared to the violator who does not agree to 
perform a SEP.
    The Agency encourages the use of SEPs. While penalties play an 
important role in environmental protection by deterring violations and 
creating a level playing field, SEPs can play an additional role in 
securing significant environmental or public health 
[[Page 24857]] protection and improvements.<SUP>1 SEPs may not be 
appropriate in settlement of all cases, but they are an important part 
of EPA's enforcement program. SEPs may be particularly appropriate to 
further the objectives in the statutes EPA administers and to achieve 
other policy goals, including promoting pollution prevention and 
environmental justice.

    \1\Depending on circumstances and cost, SEPs also may have a 
deterrent impact.
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2. Pollution Prevention and Environmental Justice

    The Pollution Prevention Act of 1990 (42 U.S.C. 13101 et seq., 
November 5, 1990) identifies an environmental management hierarchy in 
which pollution ``should be prevented or reduced whenever feasible; 
pollution that cannot be prevented should be recycled in an 
environmentally safe manner whenever feasible; pollution that cannot be 
prevented or recycled should be treated in an environmentally safe 
manner whenever feasible; and disposal or other release into the 
environment should be employed only as a last resort * * *'' (42 U.S.C. 
13103). In short, preventing pollution before it is created is 
preferable to trying to manage, treat or dispose of it after it is 
created.
    Selection and evaluation of proposed SEPs should be conducted in 
accordance with this hierarchy of environmental management, i.e., SEPs 
involving pollution prevention techniques are preferred over other 
types of reduction or control strategies, and this can be reflected in 
the degree of consideration accorded to a defendant/respondent before 
calculation of the final monetary penalty.
    Further, there is an acknowledged concern, expressed in Executive 
Order 12898 on environmental justice, that certain segments of the 
nation's population are disproportionately burdened by pollutant 
exposure. Emphasizing SEPs in communities where environmental justice 
issues are present helps ensure that persons who spend significant 
portions of their time in areas, or depend on food and water sources 
located near, where the violations occur would be protected. Because 
environmental justice is not a specific technique or process but an 
overarching goal, it is not listed as a category of SEP; but EPA 
encourages SEPs in communities where environmental justice may be an 
issue.

3. Using This Policy

    In evaluating a proposed project to determine if it qualifies as a 
SEP and then determining how much penalty mitigation is appropriate, 
Agency enforcement and compliance personnel should use the following 
five-step process:
    (1) Ensure that the project meets the basic definition of a SEP. 
(Section B)
    (2) Ensure that all legal guidelines, including nexus, are 
satisfied. (Section C)
    (3) Ensure that the project fits within one (or more) of the 
designated categories of SEPs. (Section D)
    (4) Calculate the net-present after-tax cost of the project and 
then determine the appropriate amount of penalty mitigation. (Section 
E)
    (5) Ensure that the project satisfies all of the implementation and 
other criteria. (Sections F, G, H and I)

4. Applicability

    This Policy revises and hereby supersedes the February 12, 1991 
Policy on the Use of Supplemental Environmental Projects in EPA 
Settlements. This Policy applies to settlements of all civil judicial 
and administrative actions filed after the effective date of this 
Policy, and to all pending cases in which the government has not 
reached agreement in principle with the alleged violator on the 
specific terms of a SEP.
    This Policy applies to all civil judicial and administrative 
enforcement actions taken under the authority of the environmental 
statutes and regulations that EPA administers. It also may be used by 
EPA and the Department of Justice in reviewing proposed SEPs in 
settlement of citizen suits. This Policy also applies to federal 
agencies that are liable for the payment of civil penalties. This 
Policy does not apply to settlements of claims for stipulated penalties 
for violations of consent decrees or other settlement agreement 
requirements.<SUP>2

    \2\ The Agency is evaluating whether SEPs should be used, and if 
so, how, in evaluating claims for stipulated penalties.
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    This is a settlement Policy and thus is not intended for use by 
EPA, defendants, respondents, courts or administrative law judges at a 
hearing or in a trial. Further, whether the Agency decides to accept a 
proposed SEP as part of a settlement is purely within EPA's discretion. 
Even though a project appears to satisfy all of the provisions of this 
Policy, EPA may decide, for one or more reasons, that a SEP is not 
appropriate (e.g., the cost of reviewing a SEP proposal is excessive, 
the oversight costs of the SEP may be too high, or the defendant/
respondent may not have the ability or reliability to complete the 
proposed SEP).
    This Policy establishes a framework for EPA to use in exercising 
its enforcement discretion in determining appropriate settlements. In 
some cases, application of this Policy may not be appropriate, in whole 
or part. In such cases, the litigation team may, with the advance 
approval of Headquarters, use an alternative or modified approach.

B. Definition and Key Characteristics of a SEP

    Supplemental environmental projects are defined as environmentally 
beneficial projects which a defendant/respondent agrees to undertake in 
settlement of an enforcement action, but which the defendant/respondent 
is not otherwise legally required to perform. The three bolded key 
parts of this definition are elaborated below.
    ``Environmentally beneficial'' means a SEP must improve, protect, 
or reduce risks to public health, or the environment at large. While in 
some cases a SEP may provide the alleged violator with certain 
benefits, there must be no doubt that the project primarily benefits 
the public health or the environment.
    ``In settlement of an enforcement action'' means: (1) EPA has the 
opportunity to help shape the scope of the project before it is 
implemented; and (2) the project is not commenced until after the 
Agency has identified a violation (e.g., issued a notice of violation, 
administrative order, or complaint).<SUP>3

    \3\Since the primary purpose of this Policy is to obtain 
environmental or public health benefits that may not have occurred 
``but for'' the settlement, projects which have been started before 
the Agency has identified a violation are not eligible as SEPs. 
Projects which have been committed to or started before the 
identification of a violation may mitigate the penalty in other 
ways. Depending on the specifics, if a company had initiated 
environmentally beneficial projects before the enforcement process 
commenced, the initial penalty calculation could be lower due to the 
absence of recalcitrance, no history of other violations, good faith 
efforts, less severity of the violations, or a shorter duration of 
the violations.
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    ``Not otherwise legally required to perform means'' the SEP is not 
required by any federal, state or local law or regulation. Further, 
SEPs cannot include actions which the defendant/respondent may be 
required to perform: as injunctive relief in the instant case; as part 
of a settlement or order in another legal action; or by state or local 
requirements. SEPs may include activities which the defendant/
respondent will become legally obligated to undertake two or more years 
in the future. Such ``accelerated compliance'' projects are not 
allowable, however, if the regulation or statute provides a benefit 
(e.g., a higher [[Page 24858]] emission limit) to the defendant/
respondent for early compliance.
    Also, the performance of a SEP reduces neither the stringency nor 
timeliness requirements of Federal environmental statutes and 
regulations. Of course, performance of a SEP does not alter the 
defendant/respondent's obligation to remedy a violation expeditiously 
and return to compliance.

C. Legal Guidelines

    EPA has broad discretion to settle cases, including the discretion 
to include SEPs as an appropriate part of the settlement. The legal 
evaluation of whether a proposed SEP is within EPA's authority and 
consistent with all statutory and Constitutional requirements may be a 
complex task. Accordingly, this Policy uses five legal guidelines to 
ensure that our SEPs are within the Agency's and a federal court's 
authority, and do not run afoul of any Constitutional or statutory 
requirements.<SUP>4

    \4\These legal guidelines are based on federal law as it applies 
to EPA; States may have more or less flexibility in the use of SEPs 
depending on their laws.
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    1. All projects must have adequate nexus. Nexus is the relationship 
between the violation and the proposed project. This relationship 
exists only if the project remediates or reduces the probable overall 
environmental or public health impacts or risks to which the violation 
at issue contributes, or if the project is designed to reduce the 
likelihood that similar violations will occur in the future. SEPs are 
likely to have an adequate nexus if the primary impact of the project 
is at the site where the alleged violation occurred or at a different 
site in the same ecosystem or within the immediate geographic<SUP>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.<SUP>6

    \5\The immediate geographic area will generally be the area 
within a 50 mile radius of the site on which the violations 
occurred.
    \6\All projects which would include activities outside the U.S. 
must be approved in advance by Headquarters and/or the Department of 
Justice. See section I.
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    2. A project must advance at least one of the declared objectives 
of the environmental statutes that are the basis of the enforcement 
action. Further, a project cannot be inconsistent with any provision of 
the underlying statutes.
    3. EPA or any other federal agency may not play any role in 
managing or controlling funds that may be set aside or escrowed for 
performance of a SEP. Nor may EPA retain authority to manage or 
administer the SEP. EPA may, of course, provide oversight to ensure 
that a project is implemented pursuant to the provisions of the 
settlement and have legal recourse if the SEP is not adequately 
performed.
    4. The type and scope of each project are determined in the signed 
settlement agreement. This means the ``what, where and when'' of a 
project are determined by the settlement agreement. Settlements in 
which the defendant/respondent agrees to spend a certain sum of money 
on a project(s) to be determined later (after EPA or the Department of 
Justice signs the settlement agreement) are generally not allowed.
    5. A project may not be something that EPA itself is required by 
its statutes to do. And a project may not provide EPA with additional 
resources to perform an activity for which Congress has specifically 
appropriated funds. In addition, a SEP should not appear to be an 
expansion of an existing EPA program. For example, if EPA has developed 
a brochure to help a segment of the regulated community comply with 
environmental requirements, a SEP may not directly, or indirectly, 
provide additional resources to revise, copy or distribute the 
brochure.

D. Categories of Supplemental Environmental Projects

    EPA has identified seven categories of projects which may qualify 
as SEPs. In order for a proposed project to be accepted as a SEP, it 
must satisfy the requirements of at least one category plus all the 
other requirements established in this Policy.

1. Public Health

    A public health project provides diagnostic, preventative and/or 
remedial components of human health care which is related to the actual 
or potential damage to human health caused by the violation. This may 
include epidemiological data collection and analysis, medical 
examinations of potentially affected persons, collection and analysis 
of blood/fluid/ tissue samples, medical treatment and rehabilitation 
therapy.
    Public health SEPs are acceptable only where the primary benefit of 
the project is the population that was harmed or put at risk by the 
violations.

2. Pollution Prevention

    A pollution prevention project is one which reduces the generation 
of pollution through ``source reduction,'' i.e., any practice which 
reduces the amount of any hazardous substance, pollutant or contaminant 
entering any waste stream or otherwise being released into the 
environment, prior to recycling, treatment or disposal. (After the 
pollutant or waste stream has been generated, pollution prevention is 
no longer possible and the waste must be handled by appropriate 
recycling, treatment, containment, or disposal methods.)
    Source reduction may include equipment or technology modifications, 
process or procedure modifications, reformulation or redesign of 
products, substitution of raw materials, and improvements in 
housekeeping, maintenance, training, inventory control, or other 
operation and maintenance procedures. Pollution prevention also 
includes any project which protects natural resources through 
conservation or increased efficiency in the use of energy, water or 
other materials. ``In-process recycling,'' wherein waste materials 
produced during a manufacturing process are returned directly to 
production as raw materials on site, is considered a pollution 
prevention project.
    In all cases, for a project to meet the definition of pollution 
prevention, there must be an overall decrease in the amount and/or 
toxicity of pollution released to the environment, not merely a 
transfer of pollution among media. This decrease may be achieved 
directly or through increased efficiency (conservation) in the use of 
energy, water or other materials. This is consistent with the Pollution 
Prevention Act of 1990 and the Administrator's ``Pollution Prevention 
Policy Statement: New Directions for Environmental Protection,'' dated 
June 15, 1993.

3. Pollution Reduction

    If the pollutant or waste stream already has been generated or 
released, a pollution reduction approach--which employs recycling, 
treatment, containment or disposal techniques--may be appropriate. A 
pollution reduction project is one which results in a decrease in the 
amount and/or toxicity of any hazardous substance, pollutant or 
contaminant entering any waste stream or otherwise being released into 
the environment by an operating business or facility by a means which 
does not qualify as ``pollution prevention.'' This may include the 
installation of more effective end-of-process control or treatment 
technology. This also includes ``out-of-process recycling,'' wherein 
industrial waste collected after the manufacturing process and/or 
consumer waste materials are used as raw materials for production off-
site, reducing the need for treatment, [[Page 24859]] disposal, or 
consumption of energy or natural resources.

4. Environmental Restoration and Protection

    An environmental restoration and protection project is one which 
goes beyond repairing the damage caused by the violation to enhance the 
condition of the ecosystem or immediate geographic area adversely 
affected.<SUP>7 These projects may be used to restore or protect 
natural environments (such as ecosystems) and man-made environments, 
such as facilities and buildings. Also included is any project which 
protects the ecosystem from actual or potential damage resulting from 
the violation or improves the overall condition of the ecosystem. 
Examples of such projects include: Reductions in discharges of 
pollutants which are not the subject of the violation to an affected 
air basin or watershed; restoration of a wetland along the same avian 
flyway in which the facility is located; or purchase and management of 
a watershed area by the defendant/respondent to protect a drinking 
water supply where the violation, e.g., a reporting violation, did not 
directly damage the watershed but potentially could lead to damage due 
to unreported discharges. This category also includes projects which 
provide for the protection of endangered species (e.g., developing 
conservation programs or protecting habitat critical to the well-being 
of a species endangered by the violation).

    \7\If EPA lacks authority to require repair, then repair itself 
may constitute a SEP.
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    With regards to man-made environments, such projects may involve 
the remediation of facilities and buildings, provided such activities 
are not otherwise legally required. This includes the removal/
mitigation of contaminated materials, such as soils, asbestos and 
leaded paint, which are a continuing source of releases and/or threat 
to individuals.

5. Assessments and Audits

    Assessments and audits, if they are not otherwise available as 
injunctive relief, are potential SEPs under this category. There are 
four types of projects in this category:
    a. Pollution prevention assessments; b. site assessments; c. 
environmental management system audits; and d. compliance audits.
    a. Pollution prevention assessments are systematic, internal 
reviews of specific processes and operations designed to identify and 
provide information about opportunities to reduce the use, production, 
and generation of toxic and hazardous materials and other wastes. To be 
eligible for SEPs, such assessments must be conducted using a 
recognized pollution prevention assessment or waste minimization 
procedure to reduce the likelihood of future violations.
    b. Site assessments are investigations of the condition of the 
environment at a site or of the environment impacted by a site, and/or 
investigations of threats to human health or the environment relating 
to a site. These include but are not limited to: Investigations of 
levels and/or sources of contamination in any environmental media at a 
site; investigations of discharges or emissions of pollutants at a 
site, whether from active operations or through passive transport 
mechanisms; ecological surveys relating to a site; natural resource 
damage assessments; and risk assessments. To be eligible for SEPs, such 
assessments must be conducted in accordance with recognized protocols, 
if available, applicable to the type of assessment to be undertaken.
    c. An environmental management system audit is an independent 
evaluation of a party's environmental policies, practices and controls. 
Such evaluation may encompass the need for: (1) A formal corporate 
environmental compliance policy, and procedures for implementation of 
that policy; (2) educational and training programs for employees; (3) 
equipment purchase, operation and maintenance programs; (4) 
environmental compliance officer programs; (5) budgeting and planning 
systems for environmental compliance; (6) monitoring, record keeping 
and reporting systems; (7) in-plant and community emergency plans; (8) 
internal communications and control systems; and (9) hazard 
identification, risk assessment.
    d. An environmental compliance audit is an independent evaluation 
of a defendant/respondent's compliance status with environmental 
requirements. Credit is only given for the costs associated with 
conducting the audit. While the SEP should require all violations 
discovered by the audit to be promptly corrected, no credit is given 
for remedying the violation since persons are required to achieve and 
maintain compliance with environmental requirements. In general, 
compliance audits are acceptable as SEPs only when the defendant/
respondent is a small business.<SUP>8,9

    \8\For purposes of this Policy, a small business is owned by a 
person or another entity that employs 100 or fewer individuals. 
Small businesses could be individuals, privately held corporations, 
farmers, landowners, partnerships and others.
    \9\Since most large companies routinely conduct compliance 
audits, to mitigate penalties for such audits would reward violators 
for performing an activity that most companies already do. In 
contrast, these audits are not commonly done by small businesses, 
perhaps because such audits may be too expensive.
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    These two types of assessments and environmental management system 
audits are allowable as SEPs without an implementation commitment by 
the defendant/respondent. Implementation is not required because 
drafting implementation requirements before the results of the study 
are known is difficult. Further, for pollution prevention assessments 
and environmental management systems audits, many of the implementation 
recommendations from these studies may constitute activities that are 
in the defendant/respondent's own economic interest.
    These assessments and audits are acceptable where the primary 
impact of the project is at the same facility, at another facility 
owned by the violator, or at a different facility in the same ecosystem 
or within the immediate geographic area (e.g., a publicly owned 
wastewater treatment works and its users). These assessments and audits 
are only acceptable as SEPs when the defendant/respondent agrees to 
provide EPA with a copy.

6. Environmental Compliance Promotion

    An environmental compliance promotion project provides training or 
technical support to other members of the regulated community to: (1) 
Identify, achieve and maintain compliance with applicable statutory and 
regulatory requirements; (2) avoid committing a violation with respect 
to such statutory and regulatory requirements; or (3) go beyond 
compliance by reducing the generation, release or disposal of 
pollutants beyond legal requirements. For these types of projects, the 
defendant/respondent may lack the experience, knowledge or ability to 
implement the project itself, and, if so, the defendant/respondent 
should be required to contract with an appropriate expert to develop 
and implement the compliance promotion project. Acceptable projects may 
include, for example, producing or sponsoring a seminar directly 
related to correcting widespread or prevalent violations 
[[Page 24860]] within the defendant/ respondent's economic sector.
    Environmental compliance promotion SEPs are acceptable only where 
the primary impact of the project is focused on the same regulatory 
program requirements which were violated and where EPA has reason to 
believe that compliance in the sector would be significantly advanced 
by the proposed project. For example, if the alleged violations 
involved Clean Water Act pretreatment violations, the compliance 
promotion SEP must be directed at ensuring compliance with pretreatment 
requirements.

7. Emergency Planning and Preparedness

    An emergency planning and preparedness project provides 
assistance--such as computers and software, communication systems, 
chemical emission detection and inactivation equipment, HAZMAT 
equipment, or training--to a responsible state or local emergency 
response or planning entity. This is to enable these organizations to 
fulfill their obligations under the Emergency Planning and Community 
Right-to-Know Act (EPCRA) to collect information to assess the dangers 
of hazardous chemicals present at facilities within their jurisdiction, 
to develop emergency response plans, to train emergency response 
personnel and to better respond to chemical spills.
    EPCRA requires regulated sources to provide information on chemical 
production, storage and use to State Emergency Response Commissions 
(SERCs), Local Emergency Planning Committees (LEPCs) and Local Fire 
Departments (LFDs). This enables states and local communities to plan 
for and respond effectively to chemical accidents and inform 
potentially affected citizens of the risks posed by chemicals present 
in their communities, thereby enabling them to protect the environment 
or ecosystems which could be damaged by an accident. Failure to comply 
with EPCRA impairs the ability of states and local communities to meet 
their obligations and places emergency response personnel, the public 
and the environment at risk from a chemical release.
    Emergency planning and preparedness SEPs are acceptable where the 
primary impact of the project is within the same emergency planning 
district or state affected by the violations. Further, this type of SEP 
is allowable only when the SEP involves non-cash assistance and there 
are violations of EPCRA or reporting violations under CERCLA Section 
103 alleged in the complaint.

8. Projects Which Are Not Acceptable as SEPs

    Except for projects which meet the specific requirements of one of 
the categories enumerated in Sec. D. above, the following are examples 
of the types of projects that are not allowable as SEPs:
    a. General educational or public environmental awareness projects, 
e.g., sponsoring public seminars, conducting tours of environmental 
controls at a facility, promoting recycling in a community;
    b. Contribution to environmental research at a college or 
university;
    c. Conducting a project, which, though beneficial to a community, 
is unrelated to environmental protection, e.g., making a contribution 
to charity, or donating playground equipment;
    d. Studies or assessments without a commitment to implement the 
results (except as provided for in Section D.5 above);
    e. Projects which are being funded by low-interest federal loans, 
federal contracts, or federal grants.

E. Calculation of the Final Penalty

    As a general rule, the costs to be incurred by a violator in 
performing a SEP may be considered in determining an appropriate 
settlement amount. Calculating the final penalty in a settlement which 
includes a SEP is a three-step process. First, the Agency's penalty 
policies are used as applicable to calculate all of the other parts of 
the settlement penalty (including economic benefit and gravity 
components). Second, calculate the net-present after-tax cost of the 
SEP. Third, evaluate the benefits of the SEP, based on specific 
factors, to determine what percentage of the net-present after-tax cost 
will be considered in determining an appropriate final settlement 
penalty.

1. Penalty

    Penalties are an important part of any settlement. A substantial 
penalty is generally necessary for legal and policy reasons. Without 
penalties there would be no deterrence as regulated entities would have 
little incentive to comply. Penalties are necessary as a matter of 
fairness to those companies that make the necessary expenditures to 
comply on time: violators should not be allowed to obtain an economic 
advantage over their competitors who complied. Except in extraordinary 
circumstances, if a settlement includes a SEP, the penalty should 
recover, at a minimum, the economic benefit of noncompliance plus 10 
percent of the gravity component, or 25 percent of the gravity 
component only, whichever is greater.
    In cases involving government agencies or entities, such as 
municipalities, or non-profit organizations, where the circumstances 
warrant, EPA may determine, based on the nature of the SEPs being 
proposed, that an appropriate settlement could contain a cash penalty 
less than the economic benefit of non-compliance. The precise amount of 
the cash penalty will be determined by the applicable penalty policy.

2. Calculation of the Cost of the SEP

    To ensure that a proposed SEP is consistent with this Policy, the 
net present after-tax cost of the SEP, hereinafter called the ``SEP 
Cost,'' is calculated. In order to facilitate evaluation of the SEP 
Cost of a proposed SEP, the Agency has developed a computer model 
called PROJECT. To use PROJECT, the Agency needs reliable estimates of 
the costs and savings associated with a defendant/respondent's 
performance of a SEP. Often the costs will not be estimates but known 
amounts based on a defendant/respondent's agreement to expend a fixed 
or otherwise known dollar amount on a project.
    There are three types of costs that may be associated with 
performance of a SEP (which are entered into the PROJECT model): 
capital costs (e.g., equipment, buildings); one-time nondepreciable 
costs (e.g., removing contaminated materials, purchasing land, 
developing a compliance promotion seminar); and annual operation costs 
or savings (e.g., labor, chemicals, water, power, raw 
materials).<SUP>10

    \10\PROJECT does not evaluate the potential for market benefits 
which may accrue with the performance of a SEP (e.g., increased 
sales of a product, improved corporate public image, or improved 
employee morale). Nor does it consider costs imposed on the 
government, such as the cost to the Agency for oversight of the SEP, 
or the burden of a lengthy negotiation with a defendant/respondent 
who does not propose a SEP until late in the settlement process.
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    In order to run the PROJECT model properly (i.e., to produce a 
reasonable estimate of the net present after-tax cost of the project), 
the number of years that annual operation costs or savings will be 
expended in performing the SEP must be specified. At a minimum, the 
defendant/respondent must be required to implement the project for the 
same number of years used in the PROJECT model calculation. If certain 
costs or savings appear speculative, they should not be entered into 
the PROJECT model. The PROJECT model is the primary method to determine 
the SEP cost for purposes of negotiating settlements.<SUP>11

    \11\See PROJECT User's Manual, January 1995. If the PROJECT 
model appears inappropriate to a particular fact situation, EPA 
Headquarters should be consulted to identify an alternative 
approach. For example, the December 1993 version of PROJECT does not 
readily calculate the cost of an accelerated compliance SEP. The 
cost of such a SEP is the additional cost associated with doing the 
project early (ahead of the regulatory requirement) and it needs to 
be calculated in a slightly different manner. [[Page 24861]] 
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    EPA does not offer tax advice on whether a company may deduct SEP 
expenditures from its income taxes. If a defendant/respondent states 
that it will not deduct the cost of a SEP from its taxes and it is 
willing to commit to this in the settlement document, and provide the 
Agency with certification upon completion of the SEP that it has not 
deducted the SEP expenditures, the PROJECT model calculation should be 
adjusted to calculate the SEP Cost without reductions for taxes. This 
is a simple adjustment to the PROJECT model: just enter a zero for 
variable 7, the marginal tax rate. If a business is not willing to make 
this commitment, the marginal tax rate in variable 7 should not be set 
to zero; rather the default settings (or a more precise estimate of the 
business' marginal tax rates) should be used in variable 7.
    If the PROJECT model reveals that a project has a negative cost, 
this means that it represents a positive cash flow to the defendant/
respondent and as a profitable project thus, generally, is not 
acceptable as a SEP. If a project generates a profit, a defendant/
respondent should, and probably will, based on its own economic 
interests implement the project. While EPA encourages companies to 
undertake environmentally beneficial projects that are economically 
profitable, EPA does not believe violators should receive a bonus in 
the form of penalty mitigation to undertake such projects as part of an 
enforcement action. EPA does not offer subsidies to complying companies 
to undertake profitable environmentally beneficial projects and it 
would thus be inequitable and perverse to provide such subsidies only 
to violators. In addition, the primary goal of SEPs is to secure a 
favorable environmental or public health outcome which would not have 
occurred but for the enforcement case settlement. To allow SEP penalty 
mitigation for profitable projects would thwart this goal.<SUP>12

    \12\The penalty mitigation guidelines in subsection E.3 provide 
that the amount of mitigation should not exceed the net cost of the 
project. To provide penalty mitigation for profitable projects would 
be providing a credit in excess of net costs.
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3. Penalty Mitigation

    After the SEP Cost has been calculated, EPA should determine what 
percentage of that cost may be applied as mitigation against the 
preliminary total calculated gravity component before calculation of 
the final penalty. The SEP should be examined as to whether and how 
effectively it achieves each of the following five factors listed 
below.
    <bullet> 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).
    <bullet> Innovativeness. SEPs which perform well on this factor 
will further the development and implementation of innovative 
processes, technologies, or methods which more effectively: reduce the 
generation, release or disposal of pollutants; conserve natural 
resources; restore and protect ecosystems; protect endangered species; 
or promote compliance. This includes ``technology forcing'' techniques 
which may establish new regulatory ``benchmarks.''
    <bullet> 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.
    <bullet> Multimedia Impacts. SEPs which perform well on this factor 
will reduce emissions to more than one medium.
    <bullet> Pollution Prevention. SEPs which perform well on this 
factor will develop and implement pollution prevention techniques and 
practices.
    The better the performance of the SEP under each of these factors, 
the higher the mitigation percentage may be set. As a general 
guideline, the final mitigation percentage should not exceed 80 percent 
of the SEP Cost. For small businesses, government agencies or entities, 
and non-profit organizations, this percentage may be set as high as 100 
percent. For any defendant/respondent, if one of the five factors is 
pollution prevention, the percentage may be set as high as 100 percent. 
A lower mitigation percentage may be appropriate if the government must 
allocate significant resources to monitoring and reviewing the 
implementation of a project.
    In administrative enforcement actions in which there is a statutory 
limit on administrative penalties, the cash penalty obtained plus the 
amount of penalty mitigation credit due to the SEPs shall not exceed 
the statutory administrative penalty limit.

F. Performance by a Third Party

    SEPs are generally performed either by the defendant/respondent 
itself (using its own employees) and/or by contractors or 
consultants.<SUP>13 In the past in a few cases, a SEP has been 
performed by someone else, commonly called a third party. Because of 
legal concerns and the difficulty of ensuring that a third party 
implements the project as required (since by definition a third party 
has no legal or contractual obligation to implement the project as 
specified in the settlement document), performance of a SEP by a third 
party is not allowed.

    \13\ Of course, non-profit organizations, such as universities 
and public interest groups, may function as contractors or 
consultants.
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G. Oversight and Drafting Enforceable SEPS

    The settlement agreement should accurately and completely describe 
the SEP. (See related legal guideline 4 in Section C above.) It should 
describe the specific actions to be performed by the defendant/
respondent and provide for a reliable and objective means to verify 
that the defendant/respondent has timely completed the project. This 
may require the defendant/respondent to submit periodic reports to EPA. 
If an outside auditor is necessary to conduct this oversight, the 
defendant/respondent should be made responsible for the cost of any 
such activities. The defendant/respondent remains responsible for the 
quality and timeliness of any actions performed or any reports prepared 
or submitted by the auditor. A final report certified by an appropriate 
corporate official, acceptable to EPA and evidencing completion of the 
SEP, should be required.
    To the extent feasible, defendant/respondents should be required to 
quantify the benefits associated with the project and provide EPA with 
a report setting forth how the benefits were measured or estimated. The 
defendant/respondent should agree that whenever it publicizes a SEP or 
the results of the SEP, it will state in a prominent manner that the 
project is being undertaken as part of the settlement of an enforcement 
action.
    The drafting of a SEP will vary depending on whether the SEP is 
being performed as part of an administrative or judicial enforcement 
action. SEPs with long implementation schedules (e.g., 18 months or 
longer), SEPs which require EPA review and comment on 
[[Page 24862]] interim milestone activities, and other complex SEPs may 
not be appropriate in those administrative enforcement actions where 
EPA lacks injunctive relief authority or is subject to a penalty 
ceiling. Specific guidance on the proper drafting of SEPs will be 
provided in a separate guidance document.

H. Failure of a SEP and Stipulated Penalties

    If a SEP is not completed satisfactorily, the defendant/respondent 
should be required, pursuant to the terms of the settlement document, 
to pay stipulated penalties for its failure. Stipulated penalty 
liability should be established for each of the scenarios set forth 
below as appropriate to the individual case.
    1. Except as provided in paragraph 2 immediately below, if the SEP 
is not completed satisfactorily, a substantial stipulated penalty 
should be required. Generally, a substantial stipulated penalty is 
between 50 and 100 percent of the amount by which the settlement 
penalty was mitigated on account of the SEP.
    2. If the SEP is not completed satisfactorily, but the defendant/
respondent: (a) made good faith and timely efforts to complete the 
project; and (b) certifies, with supporting documentation, that at 
least 90 percent of the amount of money which was required to be spent 
was expended on the SEP, no stipulated penalty is necessary.
    3. If the SEP is satisfactorily completed, but the defendant/
respondent spent less than 90 percent of the amount of money required 
to be spent for the project, a small stipulated penalty should be 
required. Generally, a small stipulated penalty is between 10 and 25 
percent of the amount by which the settlement penalty was mitigated on 
account of the SEP.
    4. If the SEP is satisfactorily completed, and the defendant/
respondent spent at least 90 percent of the amount of money required to 
be spent for the project, no stipulated penalty is necessary.
    The determinations of whether the SEP has been satisfactorily 
completed (i.e., pursuant to the terms of the agreement) and whether 
the defendant/respondent has made a good faith, timely effort to 
implement the SEP is in the sole discretion of EPA.

I. EPA Procedures

1. Approvals

    The authority of a government official to approve a SEP is included 
in the official's authority to settle an enforcement case and thus, 
subject to the exceptions set forth here, no special approvals are 
required. The special approvals apply to both administrative and 
judicial enforcement actions as follows:<SUP>14

    \14\In judicial cases, the Department of Justice must approve 
the SEP.
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    a. Regions in which a SEP is proposed for implementation shall be 
given the opportunity to review and comment on the proposed SEP.
    b. In all cases in which a SEP may not fully comply with the 
provisions of this Policy, the SEP must be approved by the EPA 
Assistant Administrator for Enforcement and Compliance Assurance.
    c. In all cases in which a SEP would involve activities outside the 
United States, the SEP must be approved in advance by the Assistant 
Administrator and, for judicial cases only, the Assistant Attorney 
General for the Environment and Natural Resources Division of the 
Department of Justice.
    d. In all cases in which a SEP includes an environmental compliance 
promotion project, the SEP must be approved by the Office of Regulatory 
Enforcement in OECA. With time, this approval requirement may be 
delegated to Regional officials.

2. Documentation and Confidentiality

    In each case in which a SEP is included as part of a settlement, an 
explanation of the SEP with supporting materials (including the PROJECT 
model printout, where applicable) must be included as part of the case 
file. The explanation of the SEP should demonstrate that the five 
criteria set forth in Section A.3 above are met by the project and 
include a description of the expected benefits associated with the SEP. 
The explanation must include a description by the enforcement attorney 
of how nexus and the other legal guidelines are satisfied.
    Documentation and explanations of a particular SEP may constitute 
confidential settlement information that is exempt from disclosure 
under the Freedom of Information Act, is outside the scope of 
discovery, and is protected by various privileges, including the 
attorney-client privilege and the attorney work-product privilege. 
While individual Agency evaluations of proposed SEPs are confidential 
documents, this Policy is a public document and may be released to 
anyone upon request.

    This Policy is primarily for the use of U.S. EPA enforcement 
personnel in settling cases. EPA reserves the right to change this 
Policy at any time, without prior notice, or to act at variance to 
this Policy. This Policy does not create any rights, duties, or 
obligations, implied or otherwise, in any third parties.

[FR Doc. 95-11501 Filed 5-9-95; 8:45 am]
BILLING CODE 6560-50-P