

[Federal Register: May 14, 2007 (Volume 72, Number 92)]
[Notices]               
[Page 27116-27122]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14my07-36]                         


[[Page 27116]]

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ENVIRONMENTAL PROTECTION AGENCY

[EPA-HQ-OECA-2007-0291; FRL-8309-2]

 
Enhancing Environmental Outcomes From Audit Policy Disclosures 
Through Tailored Incentives for New Owners; Notice

AGENCY: Environmental Protection Agency.

ACTION: Notice; request for comment.

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SUMMARY: The Environmental Protection Agency (``EPA'' or ``the 
Agency'') requests comment on whether and to what extent the Agency 
should consider offering tailored incentives to encourage new owners of 
regulated entities to discover, disclose, correct, and prevent the 
recurrence of environmental violations. The Agency is considering 
whether actively encouraging such disclosures has the potential to 
yield significant environmental benefit, since new owners may be 
particularly well-situated and highly motivated to focus on, and invest 
in, making a clean start for their new facilities by addressing 
environmental noncompliance.
    Any tailored incentives for new owners would be beyond those 
offered as EPA is currently implementing EPA's April 11, 2000 policy on 
``Incentives for Self-Policing: Discovery, Disclosure, Correction and 
Prevention of Violations,'' commonly referred to as the ``Audit 
Policy'' (65 FR 19618). These incentives would be designed to enhance 
implementation of the Audit Policy and encourage its use in the new 
owner context, but would not constitute a change to the Policy overall.
    After the comment period closes, the Agency plans to review all 
comments and decide whether to develop a pilot program to test the 
policy of offering tailored incentives to encourage new owners to self-
audit and disclose under the Audit Policy. Should the Agency decide to 
proceed, EPA would then publish a second Federal Register notice to 
seek comment on a proposed pilot program. After a second round of 
public comment, the Agency would publish in the Federal Register: The 
final description of the pilot program; an announcement of its start 
date; and a description of how its success in achieving increased self-
auditing and disclosure and significant improvement to the environment 
will be evaluated.

DATES: EPA urges interested parties to comment in writing on the issues 
raised in this notice. Comments must be received by EPA at the address 
below no later than July 13, 2007. Comments may also be communicated 
orally at two public meetings EPA will hold during the comment period. 
The first meeting is scheduled for Washington, DC at the J.W. Marriott 
Hotel, 1331 Pennsylvania Ave., NW., on June 12, 2007. The second one is 
scheduled for San Francisco at the Palace Hotel, 2 New Montgomery St., 
on June 20, 2007. Both meetings will begin at 10 a.m. and end at 4 p.m.

ADDRESSES: Submit your comments, identified by Docket ID No. EPA-HQ-
OECA-2007-0291, by one of the following methods:
     http://www.regulations.gov: Follow the on-line instructions for 

submitting comments.
     E-mail: docket.oeca@epa.gov, Attention Docket ID No. EPA-
HQ-OECA-2007-0291.
     Fax: (202) 566-9744, Attention Docket ID No. EPA-HQ-OECA-
2007-0291.
     Mail: Enforcement and Compliance Docket Information 
Center, Environmental Protection Agency, Mailcode: 2822T, 1200 
Pennsylvania Ave., NW., Washington, DC 20460, Attention Docket ID No. 
EPA-HQ-OECA-2007-0291.
     Hand Delivery: Enforcement and Compliance Docket 
Information Center in the EPA Docket Center (EPA/DC), EPA West, Room B 
3334, 1301 Constitution Avenue, NW., Washington, DC. The EPA Docket 
Center Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday 
through Friday, excluding legal holidays. The telephone number for the 
Reading Room is (202) 566-1744, and the telephone number for the 
Enforcement and Compliance Docket is (202) 566-1927. Such deliveries 
are only accepted during the Docket's normal hours of operation, and 
special arrangements should be made for deliveries of boxed 
information.
    Instructions: Direct your comments to Docket ID No. EPA-HQ-OECA-
2007-0291. EPA's policy is that all comments received will be included 
in the public docket without change and may be made available online at 
http://www.regulations.gov, including any personal information provided, 

unless the comment includes information claimed to be Confidential 
Business Information (CBI) or other information whose disclosure is 
restricted by statute. Do not submit information that you consider to 
be CBI or otherwise protected through http://www.regulations.gov. The 

http://www.regulations.gov Web site is an ``anonymous access'' system, which 

means EPA will not know your identity or contact information unless you 
provide it in the body of your comment. If you send an e-mail comment 
directly to EPA without going through http://www.regulations.gov your e-mail 

address will be automatically captured and included as part of the 
comment that is placed in the public docket and made available on the 
Internet. If you submit an electronic comment, EPA recommends that you 
include your name and other contact information in the body of your 
comment and with any disk or CD-ROM you submit. If EPA cannot read your 
comment due to technical difficulties and cannot contact you for 
clarification, EPA may not be able to consider your comment. Electronic 
files should avoid the use of special characters, any form of 
encryption, and be free of any defects or viruses. For additional 
information about EPA's public docket, visit the EPA Docket Center 
homepage at http://www.epa.gov/epahome/dockets.htm.

    Docket: All documents in the docket are listed in the 
http://www.regulations.gov index. Although listed in the index, some 

information is not publicly available, e.g., CBI or other information 
whose disclosure is restricted by statute. Certain other material, such 
as copyrighted material, will be publicly available only in hard copy. 
Publicly available docket materials are available either electronically 
in http://www.regulations.gov or in hard copy at the Enforcement and 

Compliance Docket Information Center in the EPA Docket Center (EPA/DC), 
EPA West, Room B 3334, 1301 Constitution Avenue, NW., Washington, DC. 
The EPA Docket Center Public Reading Room is open from 8:30 a.m. to 
4:30 p.m., Monday through Friday, excluding legal holidays. The 
telephone number for the Reading Room is (202) 566-1744, and the 
telephone number for the Enforcement and Compliance Docket is (202) 
566-1927.

FOR FURTHER INFORMATION CONTACT: For further information, contact 
Caroline Makepeace of EPA's Office of Civil Enforcement, Special 
Litigation and Projects Division, at (202) 564-6012 or 
makepeace.caroline@epa.gov.


SUPPLEMENTARY INFORMATION:

I. General Information

A. Introduction

    On April 11, 2000, EPA issued its revised final policy on 
``Incentives for Self-Policing: Discovery, Disclosure, Correction and 
Prevention of Violations,'' commonly referred to as the ``Audit 
Policy'' (65 FR 19618). The purpose of the Audit Policy is to enhance 
protection of human health and the environment by encouraging regulated 
entities to voluntarily discover, disclose, correct and prevent

[[Page 27117]]

the recurrence of violations of Federal environmental law. Benefits 
available to entities that make disclosures under the terms of the 
Audit Policy include reductions in the amount of civil penalties and a 
determination not to recommend criminal prosecution of disclosing 
entities.
    The Audit Policy program has been a successful effort to date, 
resolving disclosed violations with over 3,000 entities. However, more 
than half of these disclosures have involved reporting violations 
which, while important for public information and safety purposes, may 
not produce significant reductions in pollutant emissions once the 
violations are corrected. Consistent with EPA's strategic plan, the 
Agency's goal is to increase the number of self-disclosures that have 
the potential to yield significant environmental benefits while 
effecting compliance with Federal environmental requirements. EPA's 
recent experience with corporate-wide auditing agreements following a 
corporate merger or acquisition has heightened the Agency's interest in 
exploring whether encouraging new owners of regulated facilities to 
discover, disclose, correct, and prevent the recurrence of 
environmental violations would help EPA meet this goal. New owners may 
be particularly well-situated and highly motivated to invest in making 
a ``clean start'' for their new facilities by: Doing thorough self-
audits of their new facilities; disclosing any violations found; 
promptly correcting the violations; and making the substantial 
improvements that will enhance their ability to remain in compliance 
going forward. Nevertheless, certain disincentives may stand in the way 
of new owners that may be interested in taking these steps, and there 
may be equitable reasons for considering particular incentives to 
encourage self-auditing and disclosure at the time a new owner takes 
control. The Agency is interested in developing this idea because of 
its potential to enhance EPA's efforts to effectively utilize scarce 
government resources by securing significant environmental improvement 
as quickly as possible. The Agency is also interested in whether 
offering tailored incentives in the new owner context may have 
unintended adverse consequences with respect to, for example, 
discouraging appropriate due diligence, timely compliance and a level 
playing field, or other negative effects. The Agency seeks comment on 
the potential for any positive or negative results that might come from 
providing such tailored incentives. The Agency also requests comment on 
how EPA could most efficiently determine who is a bona-fide new owner, 
and how the Agency should evaluate whether such incentives are 
successful in securing the prompt correction of environmental 
violations and significant improvement to the environment.
    While EPA does not intend to amend the Audit Policy, the Agency is 
considering ways to enhance its implementation and encourage its 
greater use in new owner situations, particularly with regard to the 
disclosure and correction of violations that may yield significant 
pollutant reductions. Today, EPA issues this Notice signaling its 
intent to consider offering tailored incentives to self-report under 
the current Audit Policy for new owners of regulated facilities.
    The purpose of this notice is to (1) solicit information to be used 
in helping EPA better understand and formulate decisions about key 
issues; and (2) provide notification of open meetings at which EPA 
hopes to hear from the public on these issues. Copies of the Agency's 
current Audit Policy may be found on the EPA's Web site at http://www.epa.gov/compliance/incentives/auditing/auditpolicy.html
.


B. Background and History of the Audit Policy

1. Overview of the Audit Policy
    The Audit Policy provides incentives for regulated entities to 
detect, promptly disclose, expeditiously correct, and prevent the 
recurrence of violations of federal environmental requirements. The 
Audit Policy contains nine conditions, and entities that meet all of 
them are eligible for 100% mitigation of any gravity-based civil 
penalties that otherwise could be assessed in settlement. (``Gravity-
based'' penalty refers to that portion of the civil penalty over and 
above the portion that represents the entity's economic gain from 
noncompliance, known as the ``economic benefit.'') Regulated entities 
that do not meet the first condition--systematic discovery of 
violations--but meet the other eight conditions are eligible for 75% 
mitigation of any gravity-based penalties. For criminal matters, EPA 
will generally elect not to recommend criminal prosecution by the 
Department of Justice (``DOJ'') or any other prosecuting authority for 
a disclosing entity that meets at least conditions two through nine 
(i.e., regardless of whether it meets the systematic discovery 
requirement) as long as its self-policing, discovery and disclosure 
were conducted in good faith and the entity adopts a systematic 
approach to preventing recurrence of the violation. The Audit Policy 
includes important safeguards to deter violations and protect the 
environment. For example, the Audit Policy requires entities to act to 
prevent recurrence of violations and to remedy any environmental harm 
that may have occurred. Repeat violations, those that result in actual 
harm to the environment, and those that may present an imminent and 
substantial endangerment are not eligible for relief under the Audit 
Policy. Entities and individuals also remain criminally liable for 
violations that result from conscious disregard of or willful blindness 
to their obligations under the law.
    The Audit Policy and related documents are available on the 
Internet at http://www.epa.gov/compliance/incentives/auditing/auditpolicy.html.
 Additional guidance for implementing the Policy in 

the context of criminal violations can be found at http://www.epa.gov/compliance/resources/policies/incentives/auditing/auditcrimvio-mem.PDF
.

2. How EPA Implements its Voluntary Disclosure Programs
    EPA's voluntary disclosure policies \1\ are designed to provide 
major incentives for regulated entities that voluntarily discover, 
promptly disclose, and expeditiously correct violations, rendering 
formal EPA investigation and enforcement action unnecessary in most 
instances. The policies safeguard human health and the environment by 
providing incentives for regulated entities to come into compliance 
with the federal environmental laws and regulations, and enable 
efficient use of scarce government resources.
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    \1\ Besides the Audit Policy, EPA also implements another 
voluntary disclosure policy: The Small Business Compliance Policy 
(65 FR 19630), published April 11, 2000.
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    Most self-disclosures come into the Agency on a single facility 
basis. However, the Agency sometimes enters into an audit agreement 
under which the disclosing entity commits to undertake a comprehensive 
multimedia audit that will be conducted at a number of its facilities 
over an agreed-upon time frame. Corporate auditing agreements allow 
companies to plan a corporate-wide audit with advance understanding 
between the company and EPA regarding the scope of the audit, schedules 
(audit, reporting, and correction of violations), whether resolution 
will be judicial or administrative, and any other

[[Page 27118]]

expectations. Such agreements also offer the potential for significant 
environmental benefit while providing greater certainty to companies 
about their environmental liabilities. Thus, EPA encourages companies 
with multiple facilities to take advantage of the Agency's Audit Policy 
through use of such corporate auditing agreements.
    Once a regulated entity notifies EPA, in writing, of potential 
violations, EPA evaluates the discovery, disclosure, and correction of 
the violations against the criteria set forth in the Audit Policy, or 
if applicable, the Small Business Compliance Policy, and determines the 
appropriate enforcement response. If the disclosure does not meet the 
conditions of the applicable policy or the disclosing entity does not 
provide sufficient information to EPA to allow the Agency to make this 
determination, then the matter is handled under the appropriate medium-
specific penalty policies, which often accommodate penalty mitigation 
for voluntary disclosures. The enforcement response for the vast 
majority of voluntary disclosures is a Notice of Determination 
(``NOD'') for cases involving no assessment of penalties. EPA retains 
its discretion to assess any economic benefit that may have been 
realized as a result of noncompliance. If the regulated entity has 
gained significant economic benefit, or if it failed to meet all the 
conditions of the applicable policy, then a civil penalty may be sought 
in an administrative or judicial action.
    Overall, the Agency's voluntary disclosure programs continue to 
have positive results. The Audit and Small Business Compliance Policies 
have encouraged voluntary self-policing while preserving fair and 
effective enforcement and their use has been widespread. As of October 
1, 2006, regulated entities and organizations have resolved actual or 
potential violations at 9,255 facilities.
    Thus, the solicitation of comments on tailored incentives for new 
owners does not signal any intention to shift course regarding the 
Agency's position on self-policing and voluntary disclosures, but 
instead represents an attempt to enhance implementation of the Audit 
Policy, and encourage its increased use in the new owner context.
    As mentioned in the Introduction, EPA's interest in exploring this 
approach stems in part from recent experiences in the Agency's current 
implementation of the Audit Policy. In the last few years, EPA has 
entered into corporate auditing agreements with several companies 
following a merger or acquisition valued at over $1 billion. These 
corporate auditing agreements provided a unique opportunity for 
companies to use self-disclosures to make a ``clean start'' with regard 
to environmental compliance. The Agency recognizes that taking steps to 
further encourage audit agreements in this context could offer the 
potential to garner significant environmental benefit.
3. How the Audit Policy Currently Applies to New Owners
    On April 30, 2007, EPA issued the ``Audit Policy: Frequently Asked 
Questions (2007)'' which recognizes that owners of newly acquired 
facilities are uniquely situated to examine and improve performance at 
newly acquired facilities. Specifically, the 2007 Frequently Asked 
Questions provides that:
     New owners may be eligible for penalty mitigation under 
the Audit Policy for violations at newly acquired facilities which are 
discovered as part of a compliance examination agreed to be undertaken 
prior to the 1st annual certification under Title V of the Clean Air 
Act, or which are disclosed before that time.
    Generally, Clean Air Act (CAA) violations discovered during 
activities supporting Title V certification requirements are not 
eligible for penalty mitigation under the Policy. Condition 2 of the 
Audit Policy requires that disclosed violations must not be discovered 
through a legally mandated monitoring or sampling requirement 
prescribed by statute or regulation; therefore, examination of CAA 
compliance accompanying a Title V annual certification is not 
voluntary.\2\ However, EPA wants to encourage new owners to examine 
facility operations to determine compliance, correct violations, and 
upgrade deficient equipment and practices. Thus, for new owners that in 
good faith undertake such efforts and inform the Agency of such 
actions, either by disclosure in writing or entry into an audit 
agreement with EPA prior to submission of the facility's first annual 
Title V certification under new ownership, the violations disclosed 
would be considered voluntarily discovered for purposes of the Audit 
Policy.
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    \2\ Under the regulations governing CAA Title V permit 
applications and annual compliance certifications, any application, 
form, report or compliance certification is required to contain a 
certification by a responsible official of the truth, accuracy and 
completeness of information contained in such documents. The 
regulations further provide that ``[t]his certification and any 
other certification required under this part shall state that, based 
on information and belief formed after reasonable inquiry, the 
statements and information in the document are true, accurate, and 
complete.'' 40 CFR 70.5(d).
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    The 2007 Frequently Asked Questions also provides that:
     New owners may be eligible for penalty mitigation under 
the Audit Policy for violations at newly acquired facilities 
irrespective of the disclosing entity's compliance history at other 
facilities.
    EPA's primary interest is to encourage owners of newly acquired 
facilities to undertake a comprehensive examination of and improvements 
to a facility's environmental compliance and its compliance management 
systems. Notwithstanding a new owner's history of violations at its 
other facilities, if its efforts to examine and improve upon an 
acquired facility's environmental operations are thorough and are 
likely to result in improved compliance, EPA's intent is to encourage 
such examinations. The Audit Policy: Frequently Asked Questions (2007) 
can be found on the Internet at http://www.epa.gov/compliance/incentives/auditing/auditpolicy.html
.


C. Role of Benefit Recapture in the Auditing Context

    The imposition of civil penalties that recapture the economic 
benefit of noncompliance is the cornerstone of the EPA's civil penalty 
program. Benefit recapture was adopted in 1984, and it has served the 
Agency and the public well. Benefit recapture has also been a part of 
the Audit Policy since it was first issued, on the premise that, even 
in self-audit and disclosure situations, penalties should not be 
reduced below the level necessary to recapture economic benefit when a 
violator has achieved an economic advantage over its complying 
competitors. Accordingly, the Audit Policy provides that EPA reserves 
the right to assess any economic benefit which may have been realized 
as a result of noncompliance, even where the entity meets all other 
Audit Policy conditions. The Audit Policy further provides that the 
Agency may also waive the economic benefit component of the penalty 
where the Agency determines that the economic benefit is insignificant 
(65 FR 19620).
    Violators obtain an economic benefit from violating the law by 
delaying compliance, avoiding compliance or obtaining an unfair 
competitive advantage. When violators delay compliance, they have the 
use of the money that should have been spent on compliance to put into 
profit-making investments. Put simply, violators ``gain'' the interest 
on the amount of money that should have been invested in pollution 
control equipment. A

[[Page 27119]]

typical example is where a factory delays installation of a required 
waste water treatment facility. If the waste water treatment facility 
costs $1,000,000 to install, and the violator waits three years past 
the required date to comply, the violator has saved about $236,000 by 
delaying compliance.\3\
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    \3\ This number was generated by the current version of the BEN 
computer model using the following assumptions: (1) The violator was 
in the average maximum tax bracket; (2) the violator's cost of money 
(i.e., the discount/compound rate) was 7.9%; and (3) inflation was 
based on the Plant Cost Index published in Chemical Engineering 
magazine. The BEN computer model can be found at http://www.epa.gov/compliance/civil/econmodels/index.html
.

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    A second type of economic benefit is derived when a violator not 
only delays but avoids the costs it would have incurred if it had 
complied in a timely manner. A typical example would be where a factory 
avoids the operation and maintenance costs for the above-mentioned 
waste water treatment plant for the three years the polluter was out of 
compliance. If the facility's annual operation and maintenance costs 
are $100,000, then the violator probably saved about $200,000 by 
avoiding the operation and maintenance costs for three years (again 
assuming the violator is in the top tax bracket).
    The third type of economic benefit is derived from the violator 
obtaining an unfair competitive advantage. For example, where a 
violator is selling banned products (e.g., DDT), any money made from 
the sale of this banned pesticide would be illegal.\4\
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    \4\ For a more detailed discussion of how economic benefit is 
created, see Federal Register Notice of August 25, 2005, entitled 
``Calculation of the Economic Benefit of Noncompliance in EPA's 
Civil Penalty Enforcement Cases'' (70 FR 50326).
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D. Why is EPA Currently Considering Tailoring Incentives for Audit 
Policy Disclosures for New Owners of Regulated Entities?

    As previously stated, one of EPA's main goals is to secure the 
prompt correction of environmental violations and achieve significant 
improvements to the environment as expeditiously as possible. A number 
of factors, including the Agency's recent experience with corporate 
auditing agreements following large mergers and acquisitions, have 
highlighted the promising opportunity presented by encouraging new 
owners of regulated facilities to discover, disclose, correct, and 
prevent the recurrence of environmental violations.
    It is reasonable to surmise that new owners may be particularly 
well-situated and highly motivated to focus on and invest in making a 
``clean start'' for their new facilities and thus may be willing to 
conduct thorough self-audits of their new facilities, disclose any 
violations found, promptly correct the violations, and make the 
significant improvements that will enhance compliance going forward. If 
former owners were not timely about a facility's compliance 
obligations, the new owners may want to make a clean break with the 
past and get their newly acquired facilities into compliance promptly. 
It is possible that new owners may see the benefits of quickly 
assessing and working to limit their company's liability, and a firm 
with a widely-respected compliance record may want to ensure that any 
new acquisition develops a similarly positive record. Although some 
anecdotal accounts suggest that, in recent years, new owners have often 
had to make purchasing decisions based upon more limited information 
about environmental compliance issues than may have been available in 
the past, there has likely been at least some opportunity for pre-
acquisition due diligence review. Even somewhat limited due diligence 
findings could help trigger a new owner's interest in more 
comprehensively assessing the facility's environmental status and 
exposure. New facility managers may also have access to new infusions 
of capital, which could enable the sort of improvements that yield 
significant benefit to the environment.
    The Agency recognizes, however, that certain disincentives may 
stand in the way of new owners who are interested taking advantage of 
the Audit Policy. New owners may still have to pay substantial civil 
penalties under the Audit Policy, as only the gravity portion of the 
penalty can currently be mitigated. It stands to reason that new owners 
may be uncomfortable about calling EPA's attention to compliance issues 
at their newly acquired facilities when they themselves may not be 
fully aware of all the compliance issues presented. Particularly when 
many and/or complex facilities are involved, it may indeed be difficult 
for new owners to have a reasonable idea of the full spectrum of 
compliance issues.
    In addition, the Agency's experience with implementing the Audit 
Policy, especially with regard to corporate auditing agreements, 
suggests that one of the major reasons a company may be hesitant to 
self-audit and disclose under the Audit Policy is uncertainty about how 
the Agency will treat such self-disclosures. One of the Agency's 
current goals is to provide greater overall certainty and consistency 
in the Audit Policy's implementation, and the recently-issued Audit 
Policy: Frequently Asked Questions (2007) should help to resolve such 
concerns generally. Nevertheless, there is likely still some hesitation 
on the part of new owners to self-disclose violations, because they 
worry about exactly how such disclosures will be handled by the Agency.
    Encouraging new owners with tailored incentives that help address 
some of their concerns or alleviate some of their costs, in the context 
of a well-defined program that provides greater certainty about the 
handling of disclosures, may make the difference in their willingness 
to come forward and to commit to improving their environmental 
compliance and reducing their environmental footprint. There is a 
strong equitable argument that a new owner should not be penalized for 
economic benefit relating to violations that arose when a facility was 
not under the new owner's control, if that new owner is willing to 
promptly address violations and make changes to ensure the facility 
stays in compliance in the future. The Agency is also interested in 
exploring the idea of tailored incentives because it may present an 
opportunity to enhance EPA's efforts to effectively utilize scarce 
government resources, by securing high quality environmental 
improvements and achieving the most significant environmental benefit 
more quickly than might otherwise occur. Nevertheless, the Agency is 
also aware that such incentives may have unintended adverse 
consequences with respect to, for example, discouraging appropriate due 
diligence, timely compliance and a level playing field, or other 
negative effects, and EPA intends to consider the potential for such 
negative results as well.

E. Objectives of Any Potential Pilot Program

    If, after review and consideration of all comments on this concept 
and on any draft incentive policy, the Agency decides it makes sense to 
test the approach of tailoring incentives to encourage new owners to 
utilize the Audit Policy, EPA would then develop a pilot program. Such 
a pilot program would be evaluated after three years and would be 
designed with four main objectives in mind:
    1. The program should increase the number of self-audits and 
disclosures that yield significant environmental benefits.
    2. The program should be transparent and straightforward. There 
should be clarity about the program's goals and how the Agency will 
handle those firms that self-audit and disclose violations, and the 
program should have sufficient

[[Page 27120]]

safeguards to ensure that only bona-fide new owners participate.
    3. The program should be efficient to administer. EPA must develop 
a program that can be effective with the limited resources available to 
administer it. For instance, EPA does not envision analyzing the 
various financial details of each merger or acquisition.
    4. The program should also have minimal transaction costs for the 
regulated entities participating in the program. While the compliance 
costs for the firms participating may be substantial, the actual 
participation in the program should be cost-effective.

II. Issues

    The Agency is seeking comment limited to: (1) Whether EPA should 
offer tailored incentives to encourage new owners of regulated entities 
to discover, disclose, correct and prevent environmental violations; 
(2) how should the Agency determine who is a new owner; (3) what 
incentives should the Agency consider offering in order to encourage 
new owners to self-audit and disclose; and (4) if such tailored 
incentives are offered, what measures should the Agency use in 
determining whether and to what extent self-audits and disclosures from 
new owners are achieving significant improvements to the environment.

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

    Are tailored incentives needed and/or appropriate to encourage 
self-audits and disclosures by new owners of regulated entities? Do the 
circumstances of new ownership warrant special consideration or 
handling, if the new owner was not responsible for creating a violation 
and there exists potentially significant environmental benefit that 
could result from new owners' disclosures and correction of violations? 
Or, does the Audit Policy as currently implemented already offer 
sufficient incentives to induce new owners to undertake self-audits and 
disclosures?
1. Due Diligence in Mergers and Acquisitions
    Anecdotal accounts suggest that, in today's merger and acquisition 
market, acquiring firms often have to make decisions about a target 
acquisition under tight deadlines and with relatively minimal 
information about an entity's environmental compliance status or 
problems. These accounts indicate that the traditional paradigm of 
assuming that due diligence review will yield full knowledge to the 
purchaser about any potential acquisition may not be accurate in many 
current mergers and acquisitions. EPA suspects that the amount of 
environmental compliance due diligence varies greatly depending on the 
industrial sector involved, or on whether a certain target facility's 
or company's environmental compliance is likely to present an important 
or material issue (e.g., environmental compliance would be more germane 
to the purchase of a chemical company than of a financial services 
firm). EPA seeks comment on the extent to which pre-acquisition due 
diligence reviews reveal environmental noncompliance (as opposed to 
environmental contamination and remedial liability).
    Providing tailored incentives to self-audit and disclose could 
potentially improve environmental compliance in these situations by 
encouraging in-depth auditing after purchase. On the other hand, 
providing such incentives could cause sellers to further delay or avoid 
compliance (i.e., a firm might be tempted to sell off a unit to another 
business in its noncompliant state rather than bring that unit into 
compliance), or could have the unintended effect of encouraging buyers 
to perform inadequate due diligence. EPA seeks comment on whether it 
would be appropriate to require that new owners have performed a 
certain level of pre-acquisition due diligence to qualify for tailored 
incentives, and if so, what that level should be? The Agency also seeks 
comment on the potential effects on environmental compliance and on due 
diligence reviews that might result from offering tailored incentives 
for new owners.
2. Purchase Price Calculation
    If, as the anecdotal reports mentioned above would indicate, the 
due diligence that potential buyers perform may have substantial gaps 
with regard to information about environmental compliance issues, what 
is the effect on acquisition negotiations? If an acquiring company had 
perfect information, presumably it would adjust its offered purchase 
price to account for any anticipated environmental liabilities 
associated with the target firm. But, without good information, the 
buyer's offer may not reflect adjustments for the cost of environmental 
noncompliance. EPA seeks comment on the extent to which environmental 
noncompliance liabilities (as distinguished from environmental 
remediation liabilities) are reflected in purchase price, and whether 
tailored incentives should take this into account.
3. Indemnification Agreements Between Purchaser and Seller
    The Agency is aware that, in acquisition situations, sellers may 
indemnify purchasers across a broad range of issues, including 
environmental liability. If a selling firm has indemnified the 
purchaser for violations which are ultimately disclosed by the new 
owner, are tailored incentives to self-report needed at all? On the 
other hand, the mere existence of an indemnification agreement does not 
insulate the purchaser from liability. Given the Agency's interest in 
encouraging appropriate accountability and buyer/seller agreements on 
environmental compliance issues, how should EPA take indemnification 
agreements into account in designing any tailored incentives? Should 
the existence or terms of an indemnification agreement have any bearing 
on a new owner's eligibility for tailored incentives and, if so, how? 
The Agency seeks comment on all the questions above.
4. Other Requirements for Incentives
    Should the Agency consider other eligibility criteria or 
participation requirements if a program to offer tailored incentives is 
developed?

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

    If EPA develops a pilot program offering incentives to new owners, 
the Agency's goal would be to ensure that only bona-fide new owners can 
participate. There should be no possibility that a firm could evade 
significant environmental liabilities by making superficial changes 
designed to make it appear as if the regulated entity has a new owner. 
The Agency believes that, in the context of eligibility for tailored 
incentives, only ``arm's length'' transactions can produce ``new 
owners.''
    However, the Agency does not have the resources necessary to delve 
into complex corporate structures and histories to make determinations 
about the authenticity of new ownership in the context of such Audit 
Policy self-disclosures. The Agency seeks comment on a clear, 
straightforward and easily administered approach to determining ``new 
ownership'' and eligibility for tailored incentives, and on the 
specific questions posed below.
1. What should a company need to provide to demonstrate to the Agency 
that it is a bona-fide ``new owner?''
    What should the standard be, to demonstrate ``new ownership'' in 
this

[[Page 27121]]

context? Should the Agency require each company to self-certify to the 
government that it is indeed a bona-fide new owner, and eligible for 
tailored incentives? If a self-certification is appropriate in this 
situation, what should it contain? Should other proof be offered along 
with the self-certification?
2. How long after an acquisition is an owner still ``new'' for the 
purpose of being offered tailored incentives?
    The Agency is seeking a clear approach to use in making such 
determinations. While EPA wants to encourage new owners to avail 
themselves of this process, there must be a time limit for the new 
owners to address environmental violations that began prior to their 
assuming ownership. Otherwise, the Audit Policy's goal of encouraging 
regulated entities to self-audit and promptly correct noncompliance 
could be undermined.
3. How should the Agency treat different acquisition transactions?
    Should the Agency make any distinctions between acquisitions and 
mergers? How should EPA handle disclosures by reorganized companies 
that emerge from Chapter 11 bankruptcy? Should companies in which the 
controlling interest is purchased by a new firm with no plans to 
participate in management or operations be eligible for incentives? How 
should the Agency treat companies that are purchased by their 
employees, who were employed by the company when noncompliance began?

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

    EPA is also inviting comment on what tailored incentives might be 
appropriate to encourage self-auditing and disclosures from new owners. 
EPA has identified three major potential incentives: (1) Reducing civil 
penalties beyond what the current Audit Policy provides, by reducing 
any economic benefit portion of the penalty; (2) allowing Audit Policy 
consideration of violations which would otherwise be ineligible, 
because their discovery is legally mandated and thus not discovered 
voluntarily; and (3) providing recognition from the Agency to new 
owners who self-audit and disclose under the Audit Policy.
    EPA is seeking comment on these three possible incentives as well 
as on any alternative approaches that might be effective. Commenters 
suggesting other incentives are requested to clearly describe those 
incentives and how they would function in the Audit Policy context.
    In addition, there are some specific questions associated with the 
three potential incentives suggested above on which EPA is seeking 
comment:
1. How should economic benefit be calculated for disclosures by new 
owners?
    a. When should the clock start running when calculating economic 
benefit?
    The current practice is to calculate economic benefit forward from 
the date a violation first occurred. This method can result in benefit 
calculations so large that they serve as a disincentive to self-report, 
especially in the context of certain types of statutory violations, 
which may be longstanding and require multi-million dollar capital and 
operating cost expenditures to remedy. Additionally, most new owners 
would be averse to paying significant economic benefit amounts when 
they were not in control of the facility when the violations occurred 
and had little or no knowledge of them at the time of purchase. An 
alternative method of calculating benefit in the new owner context 
would be to commence calculating economic benefit from the date the 
facility was acquired; another possibility might be to use the date the 
post-acquisition audit was completed. If the latter, how long should a 
new owner be given to complete the audit? Another approach might be to 
give the new owner a reasonable time after acquisition to put on 
controls, particularly where those controls are complex, and to 
calculate benefits for delays beyond the reasonable period.
    b. Should the economic benefit calculation take into account 
whether and the extent to which the seller has indemnified the buyer?
    As discussed above, in Section II.A.3.of this Notice, the Agency is 
aware that, in many acquisition situations, the seller has indemnified 
the new owner from liability from a whole host of issues, often 
including certain environmental liabilities. The Agency seeks comment 
specifically on whether such indemnification arrangements should have 
any bearing on the calculation of penalties for economic benefit, as a 
potential incentive.
    c. In calculating economic benefit, should the Agency allow the new 
owner to offset the cost of the audit?
    Some self-audits can be expensive, particularly for large, complex 
facilities. One incentive might be to offset the cost of the audit from 
the economic benefit calculation. A fair, objective and efficient way 
of establishing the cost of the audit would be critical to this 
approach, especially when an audit has been performed by the company 
itself, rather than by an outside third-party auditor.
2. Should EPA allow consideration under the Audit Policy of violations 
which might otherwise be excluded, when the disclosures come from new 
owners?
    As described in Section I.B.3.of this Notice, EPA's recently issued 
Audit Policy: Frequently Asked Questions (2007) makes new owners 
eligible for Audit Policy penalty mitigation for violations at newly 
acquired facilities, when the violations are discovered as part of a 
compliance examination agreed to be undertaken prior to the first 
annual certification under Title V of the Clean Air Act, or are 
disclosed to EPA before that time. An additional suggested incentive is 
to allow consideration under the Audit Policy of certain other 
violations (e.g., Risk Management Program (RMP) under CAA 112(r)(7)) 
which may otherwise be ineligible for Audit Policy penalty mitigation. 
As noted above, Condition 2 of the Audit Policy requires that disclosed 
violations must not be discovered through a legally mandated monitoring 
or sampling requirement prescribed by statute or regulation. Therefore, 
for example, examination pursuant to a RMP Triennial Audit would not 
normally be considered voluntary. Since EPA wants to encourage new 
owners to examine compliance and operations at their newly-acquired 
facilities, correct violations and upgrade deficient equipment and 
practices, should new owners that in good faith undertake a RMP 
triennial Audit and inform the Agency of violations, which existed 
prior to acquisition and are discovered through the audit, be eligible 
for Audit Policy consideration? Are there other similar categories of 
violations disclosed by new owners that should be eligible for Audit 
Policy consideration?
3. Should the Agency provide recognition to new owners who self-audit 
and disclose under the Audit Policy?
    Would positive recognition by the Agency, commending a new owner's 
willingness to voluntarily audit and disclose, encourage a company to 
undertake such actions? One suggestion has been to create and publicize 
a list that recognizes companies that have stepped forward to examine 
compliance and operations at their newly acquired facilities, correct 
violations and upgrade

[[Page 27122]]

deficient equipment and practices. What sort of recognition, if any, 
would be most desirable?

D. Measures of Success

    If the Agency decides to develop a policy for tailored incentives 
for new owners, EPA intends to develop a three-year pilot program to 
test the effectiveness of such incentives. In order to objectively, 
effectively and promptly evaluate the pilot program and this approach, 
EPA must have already identified clearly measurable outcomes and 
efficient assessment methodologies. The main goal of this program, and 
the most important measure of success, would be to show that compliance 
with environmental laws and regulations has improved, and that 
significant environmental benefit has been attained. However, there are 
different approaches for determining how well these goals have been 
met.
    What measures of success should the Agency adopt for the evaluation 
of a pilot program? Important outcomes to consider could be the number 
of disclosures made under the pilot program, the significance of the 
violations involved, and the significance of the pollutant reductions 
that can be attributed to or associated with these disclosures. 
Transparency of the program, efficiency in administration, and low 
transaction costs are also issues to be considered in evaluating the 
tailored incentive approach. EPA is seeking comment on any potential 
measures, and on the methodologies necessary to accurately measure 
them.

III. Public Process

    As part of EPA's effort to obtain input on whether to offer 
tailored incentives for new owners self-disclosing under the Audit 
Policy, the Agency is planning to hold two public comment sessions. At 
those two meetings, interested parties may attend and provide oral and 
written comments on the issues. The first meeting is scheduled for 
Washington, DC at the J.W. Marriott Hotel, 1331 Pennsylvania Ave., NW., 
on June 12, 2007. The second one is scheduled for San Francisco at the 
Palace Hotel, 2 New Montgomery St., on June 20, 2007. Both meetings 
will begin at 10 a.m. and end at 4 p.m.
    The Agency is especially interested in comments relating to the 
issues specified in this Notice. After the comment period closes, the 
Agency plans to review and consider all comments. If EPA decides to 
develop a pilot program offering tailored incentives to new owners 
beyond those currently available under the Audit Policy, the Agency 
would then publish a second Federal Register notice to seek comment on 
such a proposed pilot program. After a second round of public comment, 
the Agency would publish in the Federal Register: The final description 
of the pilot program; an announcement of its start date; and a 
description of how its success in achieving increased self-auditing and 
disclosure and significant improvement to the environment will be 
evaluated. EPA encourages parties of all interests, including State and 
local government, industry, not-for-profit organizations, 
municipalities, public interest groups and private citizens to comment, 
so that the Agency can hear from as broad a spectrum as possible.

IV. What Should I Consider as I Prepare My Comments for EPA?

    1. Submitting CBI. Do not submit this information to EPA through 
http://www.regulations.gov or e-mail. Clearly mark the part or all of the 

information that you claim to be CBI. For CBI information in a disk or 
CD ROM that you mail to EPA, mark the outside of the disk or CD ROM as 
CBI and then identify electronically within the disk or CD ROM the 
specific information that is claimed as CBI. In addition to one 
complete version of the comment that includes information claimed as 
CBI, a copy of the comment that does not contain the information 
claimed as CBI must be submitted for inclusion in the public docket. 
Information so marked will not be disclosed except in accordance with 
procedures set forth in 40 CFR Part 2.
    2. Tips for Preparing Your Comments. When submitting comments, 
remember to:
     Identify the Notice; Request for Comments by docket number 
and other identifying information (subject heading, Federal Register 
date and page number).
     Follow directions--The Agency may ask you to respond to 
specific questions.
     Explain why you agree or disagree; suggest alternatives 
and language.
     Describe any assumptions and provide any technical 
information and/or data that you used.
     If possible, provide any pertinent information about the 
context for your comments (e.g., the size and type of acquisition 
transaction you have in mind).
     If you estimate potential costs or burdens, explain how 
you arrived at your estimate in sufficient detail to allow for it to be 
reproduced.
     Provide specific examples to illustrate your concerns, and 
suggest alternatives.
     Explain your views as clearly as possible.
     Submit your comments on time.

    Dated: April 30, 2007.
Granta Y. Nakayama,
Assistant Administrator, Office of Enforcement and Compliance 
Assurance.
[FR Doc. E7-9197 Filed 5-11-07; 8:45 am]

BILLING CODE 6560-50-P
