Issuance of Final Supplemental Environmental Projects Policy

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WSG 105
Date Signed: April 10, 1998

MEMORANDUM

SUBJECT: Issuance of Final Supplemental Environmental Projects Policy

FROM: Steven A. Herman
Assistant Administrator

TO: Regional Administrators
I am pleased to issue the final Supplemental Environmental Projects (SEP) Policy, the
product of almost three years of experience implementing and fine-tuning the 1995 Interim
Revised SEP Policy. It is also the product of the cooperative effort of the SEP Workgroup,
comprised of representatives of the Regions, various OECA offices, OGC and DOJ. This Policy
is effective May 1, 1998 and supersedes the Interim SEP Policy.

Most of the changes made to the Interim SEP Policy are clarifications to the existing
language. There are no radical changes and the basic structure and operation of the SEP Policy
remains the same. The major changes to the SEP Policy include:

1. Community Input. The final SEP Policy contains a new section to encourage the
use of community input in developing projects in appropriate cases and there is a
new penalty mitigation factor for community input. We are preparing a public
pamphlet that explains the Policy in simple terms to facilitate implementation of
this new section.

2. Categories of Acceptable Projects. The categories of acceptable projects have
remained largely the same, with some clarifications and a few substantive
changes. There is now a new "other" category under which worthwhile projects
that do not fit within any of the defined categories, but are otherwise consistent
with all other provisions of the SEP Policy, may qualify as SEPs with advance
OECA approval. The site assessment subcategory has been revised and renamed
to "environmental quality assessments." The environmental management system
subcategory has been eliminated.

3. Use of SEPS to Mitigate Stipulated Penalties. The final SEP Policy prohibits the
use of SEPs to mitigate claims for stipulated penalties, but does indicate that in
defined extraordinary circumstances, I may approve a deviation from this
prohibition.

4. Penalty Calculation Methodology. The penalty calculation steps have been better
defined and broken into five steps rather than three. A calculation worksheet,
keyed to the text of the Policy, has been added. The penalty mitigation
guidelines, have not been substantively changed, only clarified.

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       5.     Legal Guidelines.  The legal guidelines have been revised to improve clarity and
             provide better guidance. The nexus legal guideline has been revised to make it
             easier to apply. The fifth legal guideline concerning appropriations has been
             revised and subdivided into four sections.

       Questions regarding the final SEP Policy should be directed to Ann Kline (202-564-0-
119) in the Multimedia Enforcement Division.

Attachment

cc: (w/attachment)
 OECA Office Directors
 Regional Counsels, Regions IX
 Director, Office of Environmental Stewardship, Region I
 Director, Division of Enforcement and Compliance Assurance, Region II
 Director, Compliance Assurance and Enforcement Division, Region VI
 Director, Office of Enforcement Compliance and Environmental Justice, Region VIII
 Regional Enforcement Coordinators, Regions I - X
 Chief, DOJ, EES
SEP Workgroup Members
David Hindin, Chair, EPTDD
Leon Acierto, V
Christopher Day, III
Joe Boyle, V
Lourdes Bufill, WED
Becky Dolph, VII
Karen Dworkin, DOJ, EES
Gwen Fitz-Henley, IV
Melanie Garvey, FFEO
Mark Haag, DOJ, PSLS
Tanya Hill, OGC
Leslie Jones, OSRE
Maureen Katz, DOJ, EES
Amelia Katzen, I
Ann Kline, MED
Gerard Kraus, MED
Sylvia Liu, DOJ, PSLS
Amy Miller, IX
Peter Moore, MED
Mike Northridge, OSRE
Reginald Pallesen, V
Rudy Perez, II
Erv Pickell, AED
JoAnn Semones, IX
Efren Ordonez, VI
Lawrence Wapensky, VIII

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WSG 105

EPA SUPPLEMENTAL ENVIRONMENTAL PROJECTS POLICY
Effective May 1,1998
A. INTRODUCTION

1. Background

In settlements of environmental enforcement cases, the U.S. Environmental Protection
Agency (EPA) requires the alleged violators to achieve and maintain compliance with Federal
environmental laws and regulations and to pay a civil penalty. To further EPA s goals to protect
and enhance public health and the environment, in instances environmentally beneficial
projects, or Supplemental Environmental Projects (SEPs), may be part of the settlement. This
policy sets forth the types of projects that are permissible as SEPS, the penalty mitigation
appropriate for a particular SEP, and the terms and conditions under which they may become
part of a settlement. The Primary purpose of this Policy is to encourage and obtain
environmental and Public health protection and improvements that may not otherwise have
occurred without the settlement incentives provided by this Policy.

In settling enforcement actions, EPA requires alleged violators to promptly cease the
violations and, to the extent feasible, remediate any harm caused by the violations. EPA also
seeks substantial monetary penalties in order to deter noncompliance. Without penalties,
regulated entities would have an incentive to delay compliance until they are caught and ordered
to comply. Penalties promote environmental compliance and help protect public health by
deterring future violations by the same violator and deterring violations by other members of the
regulated community. Penalties help ensure a national level playing field by ensuring that
violators do not obtain an unfair economic advantage over their competitors who made the
necessary expenditures to comply on time. Penalties also encourage regulated entities to adopt
pollution prevention and recycling techniques in order to minimize their pollutant discharges and
reduce their potential liabilities.

Statutes administered by EPA generally contain penalty assessment criteria that a court or
administrative law judge must consider in determining an appropriate penalty at trial or a
hearing. In the settlement context, EPA generally follows these criteria in exercising its
discretion to establish an appropriate settlement penalty. In establishing an appropriate penalty,
EPA considers such factors as the economic benefit associated with the violations, the gravity or
seriousness of the violations, and prior history of violations. Evidence of a violators
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.

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The Agency encourages the use of SEPs that are consistent with this Policy. SEPs may
not be appropriate in settlement of all cases, but they are an important part of EPA's enforcement
program. While penalties play an important role in environmental protection by deterring
violations and creating a level playing field, SEPs can play an additional role in securing
significant environmental or public health protection and improvements. SEPs may be
particularly appropriate to further the objectives in the statutes EPA administers and to achieve
other policy goals, including promoting pollution prevention and environmental justice.

2. Pollution Prevention and Environmental Justice

The Pollution Prevention Act of 1990 (42 U.S.C. §13101 et seq., November 5, 1990)
identifies an environmental management hierarchy in which pollution "should be prevented or
reduced whenever feasible; pollution that cannot be prevented should be recycled in an
environmentally safe manner whenever feasible; pollution that cannot be prevented or recycled
should be treated in an environmentally safe manner whenever feasible; and disposal or other
release into the environment should be employed only as a last resort..." (42 U.S.C. §13103).
Selection and evaluation of proposed SEPs should be conducted generally in accordance with
this hierarchy of environmental management, i.e., SEPs involving pollution prevention
techniques are preferred over other types of reduction or control strategies, and this can be
reflected in the degree of consideration accorded to a defendant/respondent before calculation of
the final monetary penalty.

Further, there is an acknowledged concern, expressed in Executive Order, 12898 on
environmental justice, that segments of the nation's population, i.e., low income and/or minority
populations, are disproportionately burdened by pollutant exposure. Emphasizing SEPs in
communities where environmental justice concerns are present helps ensure that persons who
spend significant portions of their time in areas, or depend on food and water sources located
near, where the violations occur would be protected. Because environmental justice is not a
specific technique or process but an overarching goal, it is not listed as a particular SEP
category; but EPA encourages SEPs in communities where environmental justice may be an
issue.

3. Using this Policy

In evaluating a proposed project to determine if it qualifies as a SEP and then
determining how much penalty mitigation is appropriate, Agency enforcement and compliance
personnel should use the following five step process:

(1) Ensure that the project meets the basic definition of a SEP. (Section B)
(2) Ensure that all legal guidelines, including nexus, are satisfied. (Section C)
(3) Ensure that the project fits within one (or more) of the designated categories of SEPS.
(Section D)
(4) Determine the appropriate amount of penalty mitigation. (Section E)
(5) Ensure that the project satisfies all of the implementation and other criteria. (Sections F,
G, H, I and J)

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4.     Applicability

       This Policy revises and hereby supersedes the February 12, 1991 Policy on the Use of
Supplemental Environmental Projects in EPA Settlements and the May 1995 Interim Revised
Supplemental Environmental Projects Policy. This Policy applies to settlements of all civil
judicial and administrative actions filed after the effective date of this Policy (May 1, 1998), and
to all pending cases in which the government has not reached agreement in principle with the
alleged violator on the specific terms of a SEP.

       This Policy applies to all civil judicial and administrative enforcement actions taken
under the authority of the environmental statutes and regulations that EPA administers. It also
may be used by EPA and the Department of Justice in reviewing proposed SEPs in settlement of
citizen suits. This Policy also applies to federal agencies that are liable for the payment of civil
penalties. Claims for stipulated penalties for violations consent  decrees or other settlement
agreements may not be mitigated by the use of SEPs.1

       This is a settlement Policy and thus is not intended for use by EPA, defendants,
respondents, courts or administrative law judges at a hearing or in a trial. Further, whether the
Agency decides  to accept a proposed SEP as part of a  settlement, and the amount of any penalty
mitigation that may be given for a particular SEP, is purely within EPA s discretion.  Even
though a project appears to satisfy all of the provisions of this Policy, EPA may decide, for one
or more reasons, that a SEP is not appropriate (e.g., the cost of reviewing a SEP proposal is
excessive, the oversight costs of the SEP may be too high, the defendant/respondent may not
have the ability or reliability to complete the proposed SEP, or the deterrent value of the higher
penalty amount outweighs the benefits of the proposed SEP).

       This Policy establishes a framework for EPA to use in exercising its enforcement
discretion in determining appropriate settlements.  In some cases, application of this Policy may
not be appropriate, in whole  or part. In such cases, the litigation team may, with the advance
approval of Headquarters, use an alternative or modified approach.
       1 In extraordinary circumstances, the Assistant Administrator may consider mitigating
potential stipulated penalty liability using SEPs where: (1) despite the circumstances giving rise
to the claim for stipulated penalties, the violator has the ability and intention to comply with a
new settlement agreement obligation to implement the SEP; (2) there is no negative impact on
the deterrent purposes of stipulated penalties; and (3) the settlement agreement establishes a
range for stipulated penalty liability for the violations  at issue.  For example, if a
respondent/defendant has violated a settlement agreement which provides that a violation of X
requirement subjects it to a stipulated penalty between $1,000 and $5,000, then the Agency may
consider SEPs in determining the specific penalty amount that should be demanded.

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B.     DEFINITION AND KEY CHARACTERISTICS OF A SEP


NASA satellites allow USDA to see water levels rise and fall

       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 benefits, there must be no doubt that the project primarily benefits the public
health or the environment.

       "in settlement of an enforcement action" means:  1) EPA has the opportunity to help
shape the scope of the project before it is implemented; and 2) the project is not commenced
until after the Agency has identified a violation (e.g., issued a notice of violation, administrative
order, or complaint).2

       "Not otherwise legally required to perform" means that the project or activity is not
required by any federal, state or local law or regulation. Further, SEPs cannot include actions
which the defendant/respondent is likely to be required to perform:

       (a)     as injunctive relief3 in the instant case;
       (b)    as injunctive relief in another legal action EPA, or another regulatory agency
              could bring;
       (c)     as part of an existing  settlement or order in another legal action; or,
       (d)    by a  state or local requirement.
       2 Since the primary purpose of this Policy is to obtain environmental or public health
benefits that may not have occurred "but for" the settlement projects which the defendant has
previously committed to perform or have been started before the Agency has identified a
violation are not eligible as SEPS. Projects which have been committed to or started before the
identification of a violation may mitigate the penalty in other ways.  Depending on the specifics,
if a regulated entity had initiated environmentally beneficial projects before the enforcement
process commenced, the initial penalty calculation could be lower due to the absence of
recalcitrance, no history of other violations, good faith efforts, less severity of the violations, or a
shorter duration of the violations.

       3 The statutes EPA administers generally provide a court with broad authority to order a
defendant to cease its violations, take necessary steps to prevent future violations, and to
remediate any harm caused by the violations.  If a court is likely to order a defendant to perform
a specific activity in a particular time, such an activity does not qualify a s a SEP.

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SEPs may include activities which the defendant/respondent will be come legally obligated to
undertake two or more years in the future, if the project will result in the facility coming into
compliance earlier than the deadline. Such "accelerated compliance" projects are not allowable,
however, if the regulation or statute provides a benefit (e.g., a higher emission limit) to the
defendant/respondent for early compliance.

       Also, the performance of a SEP reduces neither the stringency nor timeliness
requirements of Federal environmental statutes and regulations. Of course, performance of a
SEP does not alter the defendant/respondent's obligation to remedy a violation expeditiously and
return to compliance.
C.     LEGAL GUIDELINES

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

       1. A project cannot be inconsistent with any provision of the underlying statutes.

       2. All projects must advance at least one of the objectives of the environmental statutes
       that are the basis of the enforcement action and must have adequate nexus. Nexus is the
       relationship  between the violation and the proposed project. This relationship exists only
       if:

              a.  the project is designed to reduce the likelihood that similar violations will
              occur in the future; or

              b. the project reduces the adverse impact to public health or the environment to
              which the violation at issue contributes; or

              c.  the project reduces the overall risk to public health or the environment
              potentially affected by the violation at issue.

       Nexus is easier to establish, if the primary impact of the project is at the site where the
       alleged violation occurred or at a different site in the same ecosystem or within the
       immediate geographic5 area. Such SEPs may have sufficient nexus even if the SEP
       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.

       5 The immediate geographic area will generally be the area within a 50 mile radius of the
site on which the violations occurred. Ecosystems or geographic proximity is not by itself a

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addresses a different pollutant in a different medium. In limited cases, nexus may exist
even though a project will involve activities outside of the United States.6 The cost of a
project is not relevant to whether there is adequate nexus.

3. EPA may not play any role in managing or controlling funds that may be set aside or
escrowed for performance of a SEP. Nor may EPA retain authority to manage or
administer the SEP. EPA may, of course, perform oversight to ensure that a project is
implemented pursuant to the provisions of the settlement and have legal recourse if the
SEP is not adequately performed.

4. The type and scope of each project are defined in the signed settlement agreement.
This means the "what, where and when" of a project are defined by the settlement
agreement. Settlements in which the defendant/respondent agrees to spend a sum of
money on a project(s) to be defined later (after EPA or the Department of Justice signs
the settlement agreement) are not allowed.

5. a. A project cannot be used to satisfy EPA's statutory obligation or another
federal agency's obligation to perform a particular activity. Conversely, if a
federal statute prohibits the expenditure of federal resources on a particular
activity, EPA cannot consider projects that would appear to circumvent that
prohibition.

b. A project may not provide EPA or any federal agency with resources to
perform a particular activity for which Congress has specifically appropriated
funds. A project may not provide EPA with additional resources to perform a
particular activity for which Congress has earmarked funds in an appropriations
committee report.7 Further, a project cannot be used to satisfy EPA's statutory
obligation or another federal agency's statutory obligation, to spend funds on a
particular activity. A project, however, may related to a particular activity for
which Congress has specifically appropriated or earmarked funds.

c. A project may not provide additional resources to support specific activities
performed by EPA employees or EPA contractors. For example, if EPA has
developed a brochure to help a segment of the regulated community comply with
sufficient basis for nexus; a project must always satisfy subparagraph a, b, or c in the definition
of nexus. In some cases, a project may be performed at a facility or site not owned by the
defendant/respondent.

6 All projects which would include activities outside the U.S. must be approved in
advance by Headquarters and/or the Department of Justice. See section J.

7 Earmarks are instructions for changes to EPA's discretionary budget authority made by
appropriations committee in committee reports that the Agency generally honors as a matter of
policy.

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environmental requirements, a project may not directly, or indirectly, provide
additional resources to revise, copy or distribute the brochure.

d. A project may not provide a federal grantee with additional funds to perform a
specific task identified within an assistance agreement.
D. CATEGORIES OF SUPPLEMENTAL ENVIRONMENTAL PROJECTS

EPA has identified seven specific categories of projects which way 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 healthcare 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/fiuid/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, 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, 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

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consistent with the Pollution Prevention Act of 1990 and the Administrator's "Pollution
Prevention Policy Statement:  New Directions for Environmental Protection," dated June 15,
1993

3.     Pollution Reduction

       If the pollutant or waste stream already has been generated or released, a pollution
reduction approach — which employs recycling, treatment, containment or disposal techniques -
may be appropriate.  A pollution reduction project is one which results in a decrease in the
amount and/or toxicity of any hazardous substance, pollutant or contaminant entering any waste
stream or otherwise being released into the environment by an operating business or facility by a
means which does not qualify as "pollution prevention." This may include the installation of
more effective end-of-process control or treatment technology, or improved containment, or
safer disposal of an existing pollutant source.  Pollution reduction also includes "out-of-process
recycling," wherein industrial waste collected after the manufacturing process and/or consumer
waste materials are used as raw materials for production offsite.

4.     Environmental Restoration and Protection
       An environmental restoration and protection project is one which enhances the condition
of the ecosystem or immediate geographic  area adversely affected.8  These projects may be used
to restore or protect natural environments (such as ecosystems) and, manmade environments,
such as facilities and buildings. This category also any project which protects the ecosystem
from actual or potential damage resulting from the violation or improves the overall condition of
the ecosystem.9 Examples of such projects include: restoration of a wetland in the same
ecosystem along the same avian fiyway 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).

       In some projects where a defendant/respondent has agreed to restore and then protect
lands, the question arises as to whether the project may include the creation or maintenance of
recreational  improvements, such as hiking  and bicycle trails. The costs associated with such
recreational  improvements may be included in the total SEP cost provided they do not impair the
environmentally beneficial purposes of the project and they constitute only an incidental portion
of the total resources spent on the  project.
       8 If EPA lacks the authority to require repair of the damage caused by the violation, then
repair itself may constitute a SEP.

       9 Simply preventing new discharges into the ecosystem, as opposed to taking affirmative
action directly related to preserving existing conditions at a property, would not constitute a
restoration and protection project, but may fit into another category, such as pollution prevention
or pollution reduction.

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In some projects where the parties intend that the property be protected so that the
ecological and pollution reduction purposes of the land are maintained in perpetuity, the
defendant/respondent may sell or transfer the land to another party with the established resources
and expertise to perform this function such as a state park authority. In some cases, the U.S. Fish
and Wildlife Service or the National Park Service may be able to perform this function.10

With regard to manmade environments, such projects may involve the remediation of
facilities and buildings, provided such activities are not otherwise legally required. This includes
the removal/mitigation of contaminated materials, such as soils, asbestos and lead paint which
are a continuing source of releases and/or threat to individuals.

5. Assessments and Audits

Assessments and audits, if they are not otherwise available as injunctive relief, are
potential SEPs under this category. There are three types of projects in this category: a.
pollution prevention assessments; b. environmental quality assessments; and c. compliance
audits. These assessments and audits are only acceptable as SEPs when the
defendant/respondent agrees to provide EPA with a copy of the report. The results may be made
available to the public, except to the extent they constitute confidential business information
pursuant to 40 CFR Part 2, Subpart B.

a. Pollution prevention assessments are systematic, internal reviews of specific processes
and operations that provide information about opportunities to reduce the use, production, and
generation of toxic and hazardous materials and other wastes. To be eligible for SEPs, such
assessments must be conducted using a recognized pollution prevention assessment or waste
minimization procedure to reduce the likelihood of future violations. Pollution prevention
assessments are acceptable as SEPs without implementation commitment by the
defendant/respondent. Implementation is not required because drafting implementation
requirements before the results of an assessment are known is difficult. Further, many of the
implementation recommended may constitute activities that are in the defendant/respondent's
own economic interest.

b. Environmental quality assessments are investigations of: the condition of the
environment at a site not owned or operated by the defendant/respondent; the environment
impacted by a site or a facility regardless of whether the site or facility is owned or operated by
the defendant/respondent; or threats to human health or the environment relating to a site or a
facility regardless of whether the site or facility is owned or operated by the
defendant/respondent. These include, but are not limited to: investigations of levels or sources
of contamination in any environmental media at a site; or monitoring of the air, soil or water
quality surrounding a site or facility. To be eligible as SEPS, such assessments must be
conducted in accordance with recognized protocols, if available, applicable to the type of
10 These federal agencies have explicit authority to accept gifts of land and money in
circumstances. All projects with these federal agencies must be reviewed and approved in
advance by legal council in the agency, usually in the Solicitor's Office in the Department of the
Interior.

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assessment to be undertaken. Expanded sampling or monitoring by a defendant/respondent of its
own emissions or operations do does not qualify as a SEP to the extent it is ordinarily available
as injunctive relief.

Environmental quality assessment SEPs may not be performed on the following types of
sites: sites that are on the National Priority List under CERCLA § 105, 40 CFR Part 300,
Appendix B; sites that would qualify for an EPA removal action pursuant to CERCLA §104(a)
and the National Oil and Hazardous Substances Pollution Contingency Plan, 40 CFR §300.415;
and sites for which the defendant/respondent or another party would likely be ordered to perform
a remediation activity pursuant to CERCLA §106, RCRA §7003, RCRA 3008(h), CWA §311, or
another federal law.

c. Environmental compliance audits are independent evaluations of a
defendant/respondents compliance status with environmental requirements. Credit is only given
for the costs associated with conducting the audit. While the SEP should require all violations
discovered by the audit to be promptly corrected, no credit is given for remedying the violation
since persons are required to achieve and maintain compliance with environmental requirements.
In general, compliance audits are acceptable as SEPs only when the defendant/respondent is a
small business or small community.11'12

6. Environmental Compliance Promotion

An environmental compliance promotion project provides training or technical support to
other members of the regulated community to: 1) identify, achieve and maintain compliance
with applicable statutory and regulatory requirements or 2) go beyond compliance by reducing
the generation, release, or disposal of pollutants beyond legal requirements. For these types of
projects, the defendant/respondent may lack the experience, knowledge, or ability to implement
the project itself, and, if so, the defendant/respondent should be required to contract with an
appropriate expert to develop and implement the compliance promotion project. Acceptable
projects may include, for example, producing a seminar directly related to correcting widespread
or prevalent violations within the defendant/ respondents 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
11 For purposes of this Policy, a small business is owned by a person or another entity that
employs 100 or fewer individuals. Small business could be individuals, privately held
corporations, farmers, landowners, partnerships, and others. A small community is one
comprised of fewer than 2,500 persons.

12 Since most large companies routinely conduct compliance audits, to mitigate penalties
for such audits would reward violators for performing an activity that most companies already
do. In contrast, these audits are not commonly done by small businesses, perhaps because such
audits may be too expensive.

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Clean Water Act pretreatment violations, the compliance promotion SEP must be directed at
ensuring compliance with pretreatment requirements.  Environmental compliance promotion
SEPs are subject to special approval requirements per Section J below.

7.     Emergency Planning and Preparedness

       An emergency planning and preparedness project provides assistance — such as
computers and software, communication systems, chemical emission detection and inactivation
equipment, HAZMAT equipment, or training — to a responsible state or local emergency
response or planning entity. This is to enable these organizations to fulfill their obligations
under the Emergency Planning and Community Right-to-Know Act (EPCRA) to collect
information to assess the dangers of hazardous chemicals present at facilities within their
jurisdiction, to develop emergency response plans, to train emergency response personnel and to
better respond to chemical spills.

       EPCRA requires regulated sources to provide information on chemical production,
storage and use to State Emergency Response Commissions (SERCs), Local Emergency
Planning Committees (LEPCs) and Local Fire Departments (LFDs). This enables states and
local communities to plan for and respond effectively to chemical accidents and inform
potentially affected citizens of the risks posed by chemicals present in their communities,
thereby enabling them to protect the environment or ecosystems which could be damaged by an
accident. Failure to comply with EPCRA impairs the ability of states and local communities to
meet their obligations and places emergency response personnel, the public and the environment
at risk from a chemical release.

       Emergency planning and preparedness SEPs are acceptable where the Project is within
the same emergency planning district or state affected by the violations and EPA has not
previously provided the entity with financial assistance for the same purposes as the proposed
SEP. Further, this type  of SEP is allowable only when the SEP involves non-cash assistance and
there are violations of EPCRA, or reporting violations under CERCLA §103, or CAA §112(r), or
violations of other emergency planning, spill or release requirements alleged in the complaint.
8.     Other Types of Projects

       Projects determined by the case team to have environmental merit which do not fit within
at least one of the seven categories above but that are that are otherwise fully consistent with all
other provisions of this Policy, may be accepted with the advance approval of the Office of
Enforcement and Compliance Assurance.
                                           13

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9.     Projects Which are Not Acceptable as SEPs




      The following are examples of the types of projects that are not allowable as SEPS:
                                          14

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       a. General public educational or public environmental awareness projects, e.g.,
       sponsoring public seminars, e.g., sponsoring public seminars, conducting tours of
       environmental controls at a facility, promoting recycling in a community;

       b. Contributions to environmental research at a college or university;

       c. Conducing a project which, though beneficial to a community, is unrelated to
       environmental protection, e.g., making contributions to a non-profit, public interest,
       environmental, or other charitable organization, or donating playground equipment;

       d. Studies or assessments without a requirement to address the problems identified in the
       study (except as provided for in § D.5 above);

       e. Projects which the defendant/respondent will undertake, in whole or part, with low-
       interest federal loans, federal contracts, federal grants, or other forms of federal financial
       assistance or non-federal assistance (e.g., loan guarantees).
E.     CALCULATION OF THE FINAL PENALTY

       Substantial penalties are an important part of any settlement for legal and policy reasons.
Without penalties there would be no deterrence, as regulated entities would have little incentive
to comply.  Additionally, penalties are necessary as a matter of fairness to those regulated
entities that make the necessary expenditures to comply on time: violators should not be allowed
to obtain an economic advantage over their competitors who complied.

       As a general rule, the net costs to be incurred by a violator in performing a SEP may be
considered as one factor in determining an appropriate settlement amount.  In settlements in
which defendant/respondents commit to conduct a SEP, the final settlement penalty must
equal or exceed either: a) the economic benefit of noncompliance plus 10 percent of the
gravity component; or b) 25 percent of the gravity component only; whichever is greater.

       Calculating the final penalty in a settlement which includes a SEP is a five step process.
Each of the five steps is explained below. The five steps are also summarized in the penalty
calculation worksheet attached to this Policy.

Step 1: Settlement Amount Without a SEP

       a. The applicable EPA penalty policy is used to calculate the economic benefit of
noncompliance.

       b. The applicable EPA penalty policy is used to calculate the gravity component of the
penalty. The gravity component is all of the penalty other than the identifiable economic benefit
amount, after gravity has been adjusted by all other factors in the penalty policy (e.g., audits,
good faith,  litigation considerations), except  for the SEP.
                                           15

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c. The amounts in steps la and b are added. This sum is the minimum amount that
would be necessary to settle the case without a SEP.

Step.2: Minimum Penalty Amount With a SEP

The minimum penalty amount must equal or exceed the economic benefit of
noncompliance plus 10 percent of the gravity component, or 25 percent of the gravity component
only, whichever is greater. The minimum penalty amount is calculated as follows:

a. Calculate 10 percent of gravity (multiply amount in step 1 .b by 0.1).
b. Add economic benefit (amount in step 1 .a) to amount in step 2.a.
c. Calculate 25 percent of gravity (multiply amount in step 1 .b by 0.25).
d. Identify the minimum penalty amount: the greater of step 2.c or step 2b.13

Step 3. Calculate the SEP Cost

The net present after-tax cost of the SEP, hereinafter called the "SEP COST,: is the
maximum amount that EPA may take into consideration in determining an appropriate penalty
mitigation for performance of a SEP. In order to facilitate evaluation of the SEP COST of a
proposed project, the Agency has developed a computer model called PROJECT.14 There are
three types of costs that may be associated with performance of a SEP (which are entered into
the PROJECT model): capital costs (e.g., equipment, buildings); one-time nondepreciable costs
(e.g., removing contaminated materials, purchasing land, developing a compliance promotion
seminar); and annual operation costs and savings (e.g., labor, chemicals, water, power, raw
materials).15

To use PROJECT, the Agency needs reliable estimates of the costs associated with a
defendant/respondent's performance of a SEP, as well as an savings due to such factors as
energy efficiency gains, reduced materials costs, reduced waste disposal costs, or increases in
13 Pursuant to the February 1995 Revised Interim Clean Water Act Settlement Penalty
Policy, section V, a smaller minimum penalty amount may be allowed for a municipality.

14 A copy of the PROJECT compute program software and PROJECT User's Manual
may be purchased by calling the National Technology Information Service at (800) 553-6841,
and asking for Document #PB 98-500408GEI, or they may be downloaded from the World Wide
Web at "http://www.epa.gov/oeca/models/."

15 The PROJECT calculated SEP Cost is a reasonable estimate, and not an exact after-tax
calculation. PROJECT does not evaluate the potential for market benefits which may accrue
with the performance of a SEP (e.g., increased sales of a product, improved corporate public
image, or improved employee morale). Nor does it consider costs imposed on the government,
such as the cost to the Agency for oversite of the SEP, or the burden of a lengthy negotiation
with a defendant/respondent who does not propose a SEP until late in the settlement process;
such factors may be considered in determining a mitigation percentage rather than in calculating
after-tax cost.

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productivity. For example, if the annual expenditures in labor and materials of operating a new
waste recycling process is $100,000 per year, but the new process reduces existing hazardous
waste disposal expenditures by $30,000 per year, the net cost of $70,000 is entered into the
PROJECT model (variable 4).

In order to run the PROJECT model properly (i.e., to produce a reasonable estimate of
the net present after tax cost of the project), the number of years that annual operation costs or
savings will be expended in performing the SEP mus be specified. At a minimum, the
defendant/respondent must be required to implement the project for the same number of years
used in the PROJECT model calculation. (For example, if the settlement agreement requires the
defendant/respondent to operate the SEP equipment for two years, two years should be entered
as the input for number of years of annual expense in the PROJECT model.) If costs or savings
appear speculative they should not be entered into the PROJECT model. The PROJECT model
is the primary method to determine the SEP COST for purposes of negotiating settlements.16

EPA does not offer tax advice on whether a regulated entity may deduct SEP
expenditures from its income taxes. If a defendant/respondent states that it will not deduct the
cost of a SEP from it's 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 reduction for taxes. This is a simple adjustment to the PROJECT model: just enter a
zero for variable 7, the marginal tax rate. If a business is not willing to make this commitment,
the marginal tax rate in variable 7 should not be set to zero; rather the default settings (or a more
precise estimate of the business' marginal tax rates) should be used in variable 7.

If the PROJECT model reveals that a project has a negative cost during the period of
performance of the SEP, this means that it represents a positive cash flow to the
defendant/respondent and is a profitable project. Such a project is generally not acceptable as a
SEP. If a project generates a profit, a defendant/respondent should, and probably will, based on
its own economic interests, implement the project. While EPA encourages regulated entities to
undertake environmentally beneficial projects that are economically profitable, EPA does not
believe violators should receive a bonus in the form of penalty mitigation to undertake such
projects as part of an enforcement action. EPA does not offer subsidies to complying companies
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
16 See PROJECT User's Manual, January 1995. If the PROJECT model appears
inappropriate to a particular fact situation, EPA Headquarters should be consulted to identify an
alternative approach. For example, PROJECT does not readily calculate the cost of an
accelerated compliance SEP. The cost of such a SEP is only the additional cost associated with
doing the project early (ahead of the regulatory requirement) and it needs to be calculated in a
slightly different manner. Please consult with the Office of Regulatory Enforcement for
directions on how to calculate the cost of such projects.

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outcome which would not have occurred but for the enforcement case settlement. To allow SEP
penalty mitigation for profitable projects would thwart this goal.17

Step 4: Determine the SEP Mitigation Percentage and then the Mitigation Amount.

Step 4.a: Mitigation Percentage. After the SEP COST has been calculated, EPA should
determine what percentage of that cost may be applied as mitigation against the amount EPA
would settle for but for the SEP. The quality of the SEP should be examined as to whether and
how effectively it achieves each of the following six factors listed below. (The factors are not
listed in priority order.)

• Benefits to the Public or Environment at Large. While all SEPs benefit public health or
the environment, SEPs which perform well on this factor will result in significant and
quantifiable reduction in discharges of pollutants to the environment and the reduction in
risk to the general public. SEPs also will perform well on this factor to the extent they
result in significant and, to the extent possible, measurable progress in protecting and
restoring ecosystems (including wetlands and endangered species habitats

• Innovativeness. SEP s which perform well on this factor will further the development,
implementation, or dissemination of innovative processes, technologies, or methods
which more effectively reduce the generation, release or disposal of pollutants; conserve
natural resources; restore and protect ecosystems; protect endangered species; or promote
compliance. This includes "technology forcing" techniques which may establish new
regulatory "benchmarks."

• Environmental Justice. SEPs which perform well on this factor will mitigate damage or
reduce risk to minority or low income populations which may have been
disproportionately exposed to pollution or are at environmental risk.

• Community Input SEPs which perform well on this factor will have been developed
taking into consideration input received from the affected community. No credit should
be given for this factor if the defendant/respondent did not actively participate in
soliciting and incorporating public input into the SEP.

• Multimedia Impacts. SEPs which perform well on this factor will reduce emissions to
more than one medium.

• Pollution Prevention. SEPs which perform well on this factor will develop and
implement pollution prevention techniques and practices.

The better the performance of the SEP under each of these factors, the higher the
appropriate mitigation percentage. The percent of penalty mitigation is within EPA's discretion;
17 The penalty mitigation guidelines provide that the amount of mitigation should not
exceed the net cost of the project. To provide penalty mitigation for profitable projects would be
providing a credit in excess of net costs.

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there is no presumption as to the correct percentage of mitigation. The mitigation percentage
should not exceed 80 percent of the SEP COST, with two exceptions:

(1) For small businesses, government agencies or entities, and nonprofit organizations,
the mitigation percentage of the SEP COST may be set as high as 100 percent if the
defendant/respondent can demonstrate the project is of outstanding quality.

(2) For any defendant/respondent, if the SEP implements pollution prevention, the
mitigation percentage of the SEP COST may be set as high as 100 percent if the
defendant/respondent can demonstrate that the project is of outstanding quality.

If the government must allocate significant resources to monitoring and reviewing the
implementation of a project, a lower mitigation percentage of the SEP COST may be
appropriate.

In administrative enforcement actions in which there is a statutory limit (commonly
called "caps") on the total maximum penalty that may be sought in a single action, the cash
penalty obtained plus the amount of penalty mitigation credit due to the SEPs shall not exceed
the limit.

Step 4.b: SEP Mitigation Amount. The SEP COST (calculated pursuant to step 3) is
multiplied by the mitigation percentage (step 4.a) to obtain the SEP mitigation amount, which is
the amount of the SEP cost that may be used in potentially mitigating the preliminary settlement
penalty.

Step 5: Final Settlement Policy

5.a. The SEP mitigation amount (step 4.b) is then subtracted from the settlement amount
without a SEP (step l.c).

5.b. The greater of step 2.d or step 5.a is the minimum final settlement penalty allowable
based on the performance of the SEP.

F. LIABILITY FOR PERFORMANCE

Defendants/respondents (or their successors in interest) are responsible and legally liable
for ensuring that a SEP is completed satisfactorily. A defendant/respondent may not transfer this
responsibility and liability to someone else, commonly called a third party. Of course, a
defendant/respondent may use contractors or consultants to assist it in implementing a SEP.18

G. OVERSIGHT AND DRAFTING ENFORCEABLE SEPS
18 Non-profit organizations, such as universities and public interest groups, may function
as contractors or consultants.

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T he settlement agreement should accurately and completely describe the SEP. (See,
related legal guideline 4 in § C above.) It should describe the specific actions to be performed
by the defendant/respondent and provide for a reliable and objective means to verify that the
defendant/respondent has timely completed the project. This may require the
defendant/respondent to submit periodic reports to EPA. The defendant/respondent may utilize
an outside auditor to verify performance, and the defendant/respondent should be made
responsible for the cost of any such activities. The defendant/respondent remains responsible for
the quality and timeliness of any actions performed or any reports prepared or submitted by the
auditor. A final report certified by an appropriate corporate official, acceptable to EPA, and
evidencing completion of the SEP and documenting SEP expenditures, should be required.

To the extent feasible, defendant/respondents should be required to quantify the benefits
associated with the project and provide EPA with a report setting forth how the benefits were
measured or estimated. The defendant/respondent should agree that whenever it publicizes
a SEP or the results of a SEP, it state in a prominent manner that the project is being
undertaken, as part of the settlement of an enforcement action.

The drafting of a SEP will vary depending on whether the SEP is being performed as part
of an administrative or judicial enforcement action. SEPs with long implementation schedules
(e.g., 18 months or longer), SEPs which require EPA review and comment on interim milestone
activities, and other complex SEPs may not be appropriate in administrative enforcement
actions. Specific guidance on the proper drafting of settlement documents requiring SEPs is
provided in a separate document.
H. FAILURE OF A SEP AND STIPULATED PENALTIES

If a SEP is not completed satisfactorily, the defendant/respondent should be required,
pursuant to the terms of the settlement document, to pay stipulated penalties for its failure.
Stipulated penalty liability should be established for each of the scenarios set forth below as
appropriate to the individual case.

1. Except as provided in paragraph 2 immediately below, if the SEP is not completed
satisfactorily, a substantial stipulated penalty should be required. Generally, a substantial
stipulated penalty is between 75 and 150 percent of the amount by which the settlement
penalty was mitigated on account of the SEP.

2. If the SEP is not completed satisfactorily, but the defendant/respondent: a) made good
faith and timely effort 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
20

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percent of the amount by which the settlement penalty was mitigated on account of the
SEP.

4. If the SEP is satisfactorily completed, and the defendant/respondent spent at least 90
percent of the amount of money required to be spent for the project, no stipulated penalty
is necessary.

The determinations of whether the SEP has been satisfactorily completed (i.e., pursuant
to the terms of the agreement) and whether the defendant/respondent has made a good faith,
timely effort to implement the SEP should be reserved to the sole discretion of EPA, especially
in administrative actions in which there is often no formal dispute resolution process.
I. COMMUNITY INPUT

In appropriate cases, EPA should make special efforts to seek input on project proposals
from the local community that may have been adversely impacted by the violations.19 Soliciting
community input into the SEP development process can: result in SEPs that better address the
needs of the impacted community; promote environmental justice; produce better community
understanding of EPA enforcement; and improve relations between the community and the
violating facility. Community involvement in SEPs may be most appropriate in cases where the
range of possible SEPs is great and/or multiple SEPs may be negotiated.

When soliciting community input, the EPA negotiating team should follow the four
guidelines set forth below:

1. Community input should be sought after EPA knows that the defendant/respondent is
interested in doing a SEP and is willing to seek community input, approximately how
much money may be available for doing a SEP, and that settlement of the enforcement
action is likely. If these conditions are not satisfied, EPA will have very little
information to provide communities regarding the scope of possible SEPs.

2. The EPA negotiating team should use both informal and formal methods to contact
the local community. Informal methods may involve telephone calls to local community
organizations, local churches, local elected leaders, local chambers of commerce or other
groups. Since EPA may not be able to identify all interested community groups, a public
notice in a local newspaper may be appropriate.

3. To ensure that communities have a meaningful opportunity to participate, the EPA
negotiating team should provide information to communities about what SEPs are, the
opportunities and limits of such projects, the confidential nature of settlement
19 In civil judicial cases, the Department of Justice already seeks public comment on
lodged consent decrees through a Federal Register notice. See 20 CFR §50.7. In administrative
enforcement actions, there are also public notice requirements that are followed before a
settlement is finalized. See 40 CFR Part 22.

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negotiations, and the reasonable possibilities and limitations of the current enforcement
action. This can be done by holding a public meeting, usually in the evening, at a local
school or facility. The EPA negotiating team may wish to use community outreach
experts at EPA or the Department of Justice in conducting this meeting. Sometimes the
defendant/respondent may play an active role at this meeting and have its own experts
assist in the process.

4. After the initial public meeting, the extent of community input and participation in the
SEP development process will have to be determined. The amount of input and
participation likely to vary with each case. Except in extraordinary circumstances and
with agreement of the parties, representatives of community groups will not participate
directly in the settlement negotiations. This restriction is necessary because of the
confidential nature of settlement negotiations and because there is often no equitable
process to determine which community group should directly participate in the
negotiations.
J. EPA PROCEDURES

1. Approvals

The authority of a government official to approve a SEP is included in the officials
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:

a. Regions in which a SEP is proposed for implementation shall be given the
opportunity to review and comment on the proposed SEP.

b. In all cases in which a project may not fully comply with the provisions of this
Policy, (e.g., see footnote 1), the SEP must be approved by the EPA Assistant
Administrator for Enforcement and Compliance Assurance. If a project does not
fully comply with all of the legal guidelines in this Policy, the request for
approval must set forth a legal analysis supporting the conclusion that the project
is within EPA's authority and is not otherwise inconsistent with law.

c. In all cases in which a SEP would involve activities outside the United States, the
SEP must be approved in advance by the Assistant Administrator and, for judicial
cases only, the Assistant Attorney General for the Environment and Natural
Resources Division of the Department of Justice.

d. In all cases in which an environmental compliance promotion project (section
D.6) or a project in the "other" category (section D. 8) is contemplated, the
project must be approved in advance by the appropriate office in OECA, unless
otherwise delegated.
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2. Documentation and Confidentiality

In each case in which a SEP is included as part of a settlement, an explanation of the SEP
with supporting materials (including the PROJECT model printout where applicable) must be
included as part of the case file. The explanation of the SEP should explain how the five steps
set forth in Section A.3 above have been used to evaluate the project and include a description of
the expected benefits associated with the SEP. The explanation must include a description by
the enforcement attorney of how nexus and the other legal guidelines are satisfied.

Documentation and explanations of a particular SEP may constitute confidential
settlement information that is exempt from disclosure under the Freedom of Information Act, is
outside the scope of discovery, and is protected by various privileges, including the attorney -
client privilege and the attorney work-product privilege. While individual Agency evaluations
of proposed SEPs are confidential, privileged documents, this Policy is a pub lie 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.
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                              ATTACHMENT

               SEP PENALTY CALCULATION WORKSHEET

          This worksheet should be used pursuant to section E of the Policy.
Specific Applications of this Worksheet in a Case are Privileged, Confidential Documents.
STEP
AMOUNT
STEP 1: CALCULATION OF SETTLEMENT WITHOUT A SEP.
1 .a. BENEFIT: The applicable penalty policy is used to calculate the
economic benefit of noncompliance
1 .b. GRAVITY: The applicable penalty policy is used to calculate the
gravity component of the penalty; this is gravity after all adjustments
in the applicable policy.
1 .c. SETTLEMENT AMOUNT without SEP: Sum of step 1 .a plus 1 .b.
$
$
$
STEP 2: CALCULATION OF THE MINIMUM PENALTY AMOUNT WITH A SEP
2. a. 10% of GRAVITY: Multiply amount in step l.a. plus step 2.a.
2.b. BENEFIT PLUS 10% of GRAVITY: Sum of step 1 .a. plus step 2.a.
2.c. 25% of GRAVITY: Multiply amount in step 1 .b. by 0.25.
2.d. MINIMUM PENALTY AMOUNT: Select greater of step 2.c or step
2.b
STEP 3: CALCULATION OF THE SEP COST USING PROJECT MODEL
$
$
$
$
$
STEP 4: CALCULATION OF MITIGATING PERCENTAGE AND MITIGATION
AMOUNT
4. a. SEP Cost Mitigation Percentage. Evaluate the project pursuant to the
6 mitigation factors in the Policy. Mitigation percentage should not
exceed 80% unless one of the exceptions applies.
4.b. SEP Mitigation Amount. Multiply step 4 by step 4. a.
%
$
STEP 5: CALCULATION OF THE FINAL SETTLEMENT PENALTY.
5. a. Subtract step 4.b. from step I.e.
5.b. Final Settlement Penalty: Select greater of step 2.d. or step 5. a.
$
$
                                     24

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