January 01, 2016

A Few Thoughts on EPA’s Updated SEP Policy

Colin G. Van Dyke

Earlier this year, the U.S. Environmental Protection Agency (EPA) issued an “update” to its 1998 Supplemental Environmental Project (SEP) Policy. According to EPA, the updated SEP Policy (Updated Policy), available at www2.epa.gov/sites/production/files/2015-04/documents/sepupdatedpolicy15.pdf, “reflects and incorporates” the numerous guidance documents published and practices developed subsequent to its 1998 Policy. The Updated Policy is intended to “facilitate and streamline” the use of SEPs in settlements. This article reviews the role of SEPs in settlements with EPA, summarizes a few key features of the Updated Policy, and observes that EPA’s primary objective in updating its SEP Policy likely is to promote consistency. A focus on consistency should benefit settlement negotiations by leading to earlier and more organized evaluations of whether to include a SEP. It could, however, lead to more rigid evaluations by EPA enforcement lawyers and that, in turn, could discourage consideration and approval of more creative, but equally beneficial, projects.

Who is affected by the Updated Policy? In short, potentially any party subject to an EPA civil enforcement action. In addition to any costs associated with regaining compliance, parties should expect EPA to impose financial penalties based on a measure of the economic benefit the party derived from noncompliance, an assessment of the gravity of the violation, and consideration of any history of noncompliance. To reduce the size of the penalty, a party can agree to perform a SEP. In turn, EPA will agree to “mitigate” its penalty demand—typically by up to 80 percent of the cost of the agreed-upon SEP. Because a party is likely to pay some amount of penalty even if it agrees to perform a SEP, the overall cost of a settlement that includes a SEP may be greater than a settlement that simply entails payment of the penalty. Yet, some parties prefer the optics of engaging in a beneficial project (even though any publicity of the project must acknowledge that the project was undertaken as part of a settlement with EPA), while others object to paying the government more than is absolutely required and, therefore, they prefer to allocate as many dollars as possible to a SEP.

One feature of the Updated Policy that jumps out is how little it changes from or adds to the substance of the existing SEP Policy. In approximately three dozen pages, EPA mainly reiterates long-standing principles about what a SEP is and is not. Accordingly, the definitional characteristics of SEPs remain the same: it must (1) improve, protect, or reduce risks to public health or the environment; (2) be undertaken pursuant to a settlement with EPA; and (3) be in addition to any acts required by law, including any injunctive relief or mitigation project otherwise required by the same settlement, or industry standard practices even if not required by the settlement. Likewise, the Updated Policy does not alter EPA’s position regarding restrictions on its authority to approve of proposed SEPs: the SEP must feature a sufficient nexus with the alleged violations (which EPA reiterates is most easily shown if the project will be implemented within fifty miles of where the alleged violations occurred) and it may not augment EPA’s budget by supplementing existing EPA appropriations or activities.

The other key feature of the Updated Policy is the recurring discussion of EPA priorities it wants to advance through SEPs. Though no single type or focus of a project is mandated by the Updated Policy, EPA appears to have a strong preference for projects that promote environmental justice, address climate change, and/or promote technological advances in pollution reduction or compliance assurance. Of those, only the express inclusion of climate change as a SEP target area represents a new development; EPA has long emphasized SEPs as a means of addressing environmental justice concerns and of proving up and expanding the use of pollution reduction and compliance tools.

Given how little EPA’s SEP policy changes, it is possible to view EPA’s production of the Updated Policy as mostly nonconsequential. But, in at least three respects, the Updated Policy merits attention. First, for parties willing to consider performing a SEP (or multiple SEPs, as the case may be), the Updated Policy should be a welcome development. The single Updated Policy is immeasurably more user friendly than the documents, both disparate and overlapping, that preceded it. The Updated Policy promises a sort of one-stop shopping that was impossible for parties forced to sift through the myriad iterations that preceded it.

Second, when one considers the substantial time and resources EPA invested in this project despite otherwise having plenty on its agenda, the Updated Policy appears to send a clear signal to enforcement staff that SEPs should be considered more often and earlier on in negotiations. If that happens, it should reduce the types of delays and confusion (especially among less experienced parties) that arise when SEPs are not proposed early on or where the enforcement staff has not weighed the types of projects that might be appropriate in a particular enforcement context. Overall, that should speed up some settlements (which in turn would keep some administrative cases from becoming civil cases) and should lead to implementation of more projects across all EPA regions. That’s the potential upside of consistency.

Third, there’s a potential downside too. Because parties may be more or less willing to pursue a particular type of project, possibly because of the degree to which such a project aligns with its experience and know-how, flexibility can be key to reaching agreement on a SEP that suits the settling party and satisfies EPA’s requirements. In the absence of a single, consolidated SEP policy document, EPA enforcement lawyers may have had more flexibility in negotiating and approving SEPs than they will going forward. So, it is possible that SEP negotiations will become more protracted as settling parties confront more inflexible positions or narrower arrays of acceptable projects. If that happens, fewer parties will entertain the option of performing a SEP. If that happens, what should be a win-win-win for EPA, settling parties and the environment would be a lose-lose-lose.

Colin G. Van Dyke

Mr. Van Dyke practices in the Boston, Massachusetts, office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC. He can be reached at cgvandyke@mintz.com.