Expanding the use of supplemental environmental projects.

• Author: Robertson, Brooke E.

Introduction

On June 11, 2003, the Environmental Protection Agency (EPA) released a memorandum announcing its goal to encourage and expand the use of Supplemental Environmental Projects (SEPs) in settlements. (1) SEPs are "environmentally beneficial projects which a defendant ... agrees to undertake in settlement of an enforcement action, but which the defendant ... is not otherwise legally required to perform." (2) In settlements of environmental enforcement actions, the EPA generally requires alleged violators to comply with federal environmental regulations and to pay a monetary penalty. (3) The EPA will reduce the required payment in certain enforcement actions if the alleged violator agrees to perform a Supplemental Environmental Project as part of the settlement. (4) The inclusion of SEPs in settlements furthers the "EPA's goals to protect and enhance public health and the environment." (5) In its June 2003 memorandum, the EPA noted that SEPs are being underutilized (6) and that there is tremendous potential to achieve even greater benefits for the environment with the increased use of SEPs in settlements. (7)

In order for an SEP to be included as part of the settlement, the defendant must propose and agree to carry out a project that the EPA determines qualifies as an SEP. (8) The project must meet several requirements to qualify. (9) One of the most limiting of these requirements is the nexus requirement, which states that there must be an adequate "relationship between the violation and the proposed project." (10) In some situations, there is simply no feasible project that meets this nexus requirement; therefore, an SEP cannot be included in the settlement. After the EPA accepts the proposed project, it determines the appropriate percentage to lower the penalty. (11) The current SEP policy does not allow the mitigation percentage to exceed 80% of the SEP cost; (12) therefore, a defendant who agrees to perform an SEP will end up paying more than it would have if it had simply paid the penalty. (13) The EPA's current SEP policy fails to maximize the benefits that could be realized from the use of SEPs in settlements. This Note argues that the EPA's current SEP policy could be improved by creating and managing an Environmental Trust that would be used to complete SEPs, increasing the mitigation percentage to 100% and relaxing the nexus requirement, and allowing third-party contractors to bid on and carry out SEP contracts.

This Note consists of five parts. Part I provides a brief historical overview of SEPs and explains the current SEP policy in greater detail. (14) Part II explores the reasons for the underutilization of SEPs in settlements despite the EPA's policy on expanding the use of SEPs. (15) Part III suggests that the EPA should alter the SEP policy by creating an Environmental Trust, increasing the mitigation percentage, relaxing the nexus requirement, and allowing third-party contractors to bid on SEP contracts in order to increase the utilization of SEPs. (16) Part IV focuses on whether or not the EPA has the authority to make the alterations suggested in Part III. (17) Part V of this Note highlights how creation of the Environmental Trust, changes to the mitigation percentage and nexus requirement, and use of third-party contractors improve the EPA's current SEP policy and discusses some of the weaknesses of the proposal. (18)

1. THE DEVELOPMENT OF SEPS

   1. Historical Overview of SEPs

      SEPs were first used in the settlement of environmental enforcement actions in the 1980s. (19) The first written reference to SEPs was in the EPA's 1980 Penalty Policy. (20) From the beginning, the EPA has been cautious with the use of SEPs and has placed several restrictions on their use. (21) The Department of Justice (DOJ) objected to the EPA's use of SEPs. (22) The DOJ claimed, among other things, that the use of SEPs violated the appropriations process by allowing penalties that should be paid into the United States Treasury to be used by defendants to carry out SEPs. (23) The United States Comptroller General, head of the General Accounting Office (GAO), has also been an outspoken opponent of SEPs. (24) In 1992, the Comptroller General issued an opinion stating that the EPA did not have the authority to use SEPs in settlements, (25) because this practice violated the Miscellaneous Receipts Act (MRA). (26)

      Despite the opposition by the DOJ and GAO, courts have found that payments do not have to be paid to the Treasury as long as they are not defined as "penalties" and are made before the defendant is found liable. (27) Settlements are made before a finding of liability; therefore, SEP payments do not fall under the MRA. (28) The Clean Air Act is the only environmental statute in which Congress has explicitly mentioned the use of SEPs. (29) However, SEPs have been used extensively and Congress has not imposed any restrictions on the EPA's use of SEPs. (30) "Congress is aware of the use of SEPs by the EPA, and has, through legislative history and proposed bills," displayed congressional acquiescence to the EPA's use of SEPs. (31)

      The EPA created the first SEP policy in 1991. (32) The 1991 SEP Policy identified five categories that a proposed project could fall under to qualify as an SEP; it also contained a requirement that the SEP be related to the violation (nexus requirement) and allowed the cost of the SEP to mitigate the monetary penalty by 100%. (33) In 1995, the EPA revised the SEP policy. (34) The 1995 SEP Policy created a five-step process, which is still used today, for EPA officials to use in determining whether a proposed project qualifies as an SEP. (35) The 1995 SEP Policy created a more strict nexus requirement and placed a ceiling on the mitigation percentage at 80%.36 The EPA again revised the SEP policy in 1998 and deemed it the final SEP policy. (37)

   2. EPA's 1998 Final SEP Policy

      On May 5, 1998, the EPA issued the Final EPA Supplement Environmental Projects Policy. (38) The stated purpose of the 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." (39) The policy explains a five-step process that agency officials should use to determine if a proposed project qualifies as an SEP and to determine the appropriate mitigation percentage. (40) The five-step process is:

      (1) Ensure that the project meets the basic definition of a SEP.

      (2) Ensure that all legal guidelines, including nexus, are satisfied.

      (3) Ensure that the project fits within one (or more) of the designated categories of SEPs.

      (4) Determine the appropriate amount of penalty mitigation.

      (5) Ensure that the project satisfies all of the implementation and other criteria. (41)

      1. Ensure the Project Meets the Definition of an SEP

         In order for a proposed project to qualify as an SEP, it must meet the basic definition of an SEP. (42) The current SEP policy defines SEPs 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." (43) The SEP policy breaks this definition down into three parts and gives further explanation as to what each part means. (44) The SEP policy explains that an SEP must "improve, protect, or reduce risks to public health, or the environment at large" in order to be characterized as "environmentally beneficial." (45) "In settlement of an enforcement action" means that the EPA helps "shape the scope of the project before it is implemented," and the project is not commenced until after the EPA has issued a notice of violation. (46) Lastly, "not otherwise legally required to perform" means that the defendant cannot be "required by any federal, state, or local law or regulation" to complete the project. (47) If the proposed project meets this basic definition, the agency official proceeds to step two.

      2. Ensure that All Legal Guidelines Are Satisfied

         The 1998 SEP Policy uses five legal guidelines to ensure that the SEPs are within the EPA's authority and do not conflict with any statutory or constitutional requirements. (48) First, a project must be consistent with the provisions of the statute forming the basis for the enforcement action. (49) Second, a project must meet at least one of the stated goals of the environmental statutes that the enforcement action is based on, and the project must have adequate nexus. (50) Third, the EPA may not manage or control funds that will be used to carry out the performance of an SEP. (51) The EPA may monitor the performance of the project and take legal action if the SEP is not adequately implemented. (52) Fourth, the type and scope of the SEP must be explained in the settlement agreement. (53) Lastly, the SEP cannot be used to satisfy any federal agency's statutory obligation, nor can an SEP give any federal agency resources to perform a project for which Congress has specifically appropriated funds. (54)

      3. Ensure that the Project Fits Within One of the Categories of SEPs

         The 1998 SEP Policy includes seven specific categories under which a proposed project must fall in order to qualify as an SEP. (55) The Policy also includes an eighth category for projects that do not fall under one of the seven specific categories but have been determined to have environmental merit and meet the other provisions of the SEP policy. (56) The seven specific categories are as follows: public health, (57) pollution prevention, (58) pollution reduction, (59) environmental restoration and protection, (60) assessments and audits, (61) environmental compliance promotion, (62) and emergency planning and preparedness. (63)

      4. Determine the Amount of Penalty Mitigation

         When an environmental regulation is violated, the EPA uses monetary penalties to deter future violations and ensure that violators are not...